The Madoff Investment Scandal: Review and Analysis

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The Madoff investment scandal is among the biggest financial scandals to have been reported in recent times. The scandal involved an investment banker, Bernard Madoff, who was the former chairman of NASDAQ and the founder of Madoff Investment Limited. He admitted to operating a Ponzi scheme with his investor’s money. The scam was estimated to be worth close to $65 billion (Anderson, 2011, p. 205). The Madoff scandal was characterized by a well-orchestrated scheme that involved the dividend payoff of one investor with another investor’s money.

The Madoff scandal was very interesting to many analysts because it happened when there were rigorous policy checks by the Security Exchange Commission (SEC). Therefore, many people wondered how the scandal occurred under the watch of the SEC (Sinn, 2010). Observers suggest that since the scandal was orchestrated by an individual of immense respect in the financial market, it was very difficult to think that there were any irregular transactions taking place. Bernard Madoff was known as a shrewd and straight-talking investor who gained a lot of trusts especially among the wealthy and powerful people in the financial world. This respect also saw him receive wide acclaim for his past financial success on Wall Street (Henriques, 2011, p. 1).

Among the most interesting things about the Madoff scandal was that the whistleblowers were Madoff’s children. As interesting as this fact may be, this paper seeks to investigate the environmental factors that prevailed at the time of the fraud, how the fraud was accomplished and how the scam was discovered. After an analysis of these factors, this paper will provide a set of recommendations that are aimed at ensuring such types of fraud do not occur in the future.

Environmental Factors Prevailing at the Time of the Scandal

Legally, many loopholes enabled Bernard Madoff to defraud his investors for a long time without being detected. Among the greatest legal pitfall was the 5% payout rule which required all privately-owned organizations to pay 5% of their revenue to charitable organizations (Anderson, 2011). A professor of journalism at Boston University suggests that this legal provision was an open window for Madoff to channel money out of the organization (Anderson, 2011). Anderson (2011) further reports that “For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he was not making real investments, at that rate the principal would last 20 years” (p. 205). From the above statement, we can see how easy it was for Madoff to avoid the risk of being detected if he made any sudden or “big” withdrawals (because he maintained many charities and he could channel money through such organizations).

Another factor that facilitated the occurrence of the Madoff fraud was the immense trust bestowed upon one individual to manage investors’ money. As mentioned in earlier sections of this paper, Madoff was widely respected and trusted in the US financial market. He had a lot of wealthy and friends and executives who used to give him large sums of money to manage. For example, it is reported that one friend, Ezra Merkin, who managed a trust, wired close to two billion dollars to Madoff’s firm (Henriques, 2011). Many similar transactions were discovered after the scandal was uncovered. The high level of trust bestowed on Madoff is perceived by some people as an example of affinity fraud because Madoff was closely guarded by an elite group of Jews who bankrolled his operations. However, such colossal amounts of money were traded in absolute secrecy. Finally, another notable and key factor that contributed to the Madoff scandal was the access Madoff had to lawmakers in Washington. The relationship between Madoff and Washington was termed by many observers as unusual because Madoff had access to the highest industry top trade group (Anderson, 2011). Madoff also had an influence on the Security Industry Association because he operated as one of the board of directors of the company. Anderson (2011) also reports that Madoff’s family had a strong tie with the Securities Industry and Financial Markets Association (SIFMA) and therefore, he was able to influence financial policies at a very high level. In fact, it is reported that some of Madoff’s family members sat on the organization’s board. The relationship between Madoff’s family and SIFMA was largely financial because tens of thousands of dollars were exchanged between the two entities in sponsorship and other agreements (Anderson, 2011). Furthermore, Madoff’s niece also sat in SIFMA’s compliance division board and she influenced policy at a very high level. Her resignation on the board only occurred after the scandal broke out. To compound Madoff’s family influence on the policy division wing of the financial market, one of Madoff’s (extended) family members also worked at the board of the SEC compliance division (Sinn, 2010). Comprehensively, it can be seen that Madoff and his family had a lot of influence on policy compliance.

How the Fraud Was Accomplished

Not many people have the precise conceptualization of how the Madoff Ponzi scheme was accomplished but it is reported that Madoff received help from third parties in accomplishing his financial scheme. However, Madoff has been largely dismissive of this fact and has stated on record that he is solely responsible for the scam (Sinn, 2010). Nonetheless, investigators state several organizations that aided Madoff to accomplish the scam. Some of the organizations mentioned include Cohmad securities, Brighton Company and Madoff Securities International (among others) (Anderson, 2011). Some of the organizations mentioned were accused of creating the impression that Madoff had impressive returns (which fooled many investors to channel their funds to his firm). Other companies were accused of buying and selling stocks on behalf of Madoff while others were accused of forging books and filing fraudulent reports.

Henriques (2011) suggests that Madoff’s lying personality also had a significant role in fooling investors to take part in his scheme. After doing several interviews on Madoff during his first year of incarceration, Henriques (2011) reported that Madoff was a very fluent liar. Here, she stated that “The magic of his personality is how easy it is to believe him — almost how much you want to believe him” (Henriques, 2011, p. 1). It is because of Madoff’s convincing allure that shocked many people when they realized that the investment banker was running a Ponzi scheme. It is reported that Madoff’s personality convinced even the shrewdest investors that the man was running a legitimate business. In fact, it is reported that some of the investors were afraid to withdraw their money from his firm because they feared losing readmission. One investor was quoted as saying that “The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned” (Henriques, 2011, p. 1). Comprehensively, we can see that Madoff’s demeanor fooled his investors into trusting him. It was not until the discovery of the fraud that this perception changed.

How the Fraud was Discovered

Unlike other financial frauds, the Madoff scam was a shock to many people. Its discovery could not have been realized if it were not for Madoff’s sons who turned on their father. Nobody had any idea that the respected financial investor was engaged in irregular financial activities. Madoff was arrested in 2008 and eluded committing close to a dozen federal crimes (Henriques, 2011).


This paper identifies two recommendations that should prevent the occurrence of future financial frauds of Madoff’s nature. Indeed, this paper identifies the excessive control and trust given to one individual and the close ties that Madoff had with lawmakers as the two greatest loopholes used to perpetrate the scam. Therefore, to prevent future occurrences of similar financial scams, it is important to introduce legislation that prevents fund managers (or their relatives) from sitting in oversight financial bodies. The fact that Madoff had an influence on the SEC may have contributed to the failure of the SEC to detect the financial scam. It is, therefore, crucial to ensure that there is no conflict of interest among fund managers and oversight bodies. Lastly, it is important to introduce checks and balances for fund managers (Crumbley, Heitger and Smith, 2009). The operations of fund managers should therefore be reviewed by third parties to reduce the control that an individual may have on the entire process. Madoff had a lot of control over his operations and therefore, it was very difficult to question his actions. These factors contributed to the occurrence of fraud. It is therefore important to adopt the above recommendations to prevent the possibility of similar frauds occurring in the future.


Anderson, M. (2011). Ladies, Front & Center! Elevate Humanity Through Self Discovery. New York: See It Through Publishing.

Crumbley, D., Heitger, L. & Smith, G. (2009). Forensic and Investigative Accounting (5th ed.). Chicago: CCH.

Henriques, D. (2011). Examining Bernie Madoff, ‘The Wizard Of Lies’. Web.

Sinn, H. (2010). Casino Capitalism: How the Financial Crisis Came About and What Needs to be Done Now. Oxford: Oxford University Press.

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BusinessEssay. "The Madoff Investment Scandal: Review and Analysis." December 13, 2022.