Madoff's Mendacious Scandal

Madoff’s Ponzi Scheme

Introduction

Bernard Madoff was charged on March 29th 2013 for operating the largest Ponzi scheme in the US history. Madoff was convicted of defrauding clients of $50 billions in a massive Ponzi scheme over two decades. What’s striking about Madoff’s Ponzi scheme is not just its sheer scale, but also more its duration: Ponzi schemes usually collapse after a few years, but Madoff’s lasted for more than twenty years. Undoubtedly, Madoff architected this scheme with lies. This paper aims to explore the techniques Madoff used to make his lies so enduring. Understanding the architect of this financial mendacity will help us better understand the nature of lies, and hopefully assist us to identify and prevent falling victims to such devastating lies in the future.

Madoff’s Ponzi Scheme

Bernard Madoff founded one of the most successful broker-dealers on Wall Street, Madoff Investment Securities LLC in 1960. Madoff Securities was a well-known market maker, meaning he both bought and sold stocks, making his profit by selling for a few cents more per share than his purchase price (Markopolos). Madoff was able to set his firm apart from other market makers by paying client firms rather than charging them for this service. As a result, Madoff Securities greatly increased trading volume and was reputed to be responsible for almost 10 percent of the daily trading of New York Stock Exchange (NYSE) (Henriques). Thanks to the achievement of his firm, Madoff became a non-executive chairman of NASDAQ, which he marketed ardently, a strong source for winning clients in his Ponzi scheme.

Madoff’s Ponzi scheme centers on his firm’s promise to deliver consistently high returns with very low volatility over a long period. He claimed to use a “split-strike conversion strategy” to obtain these low risk returns. This strategy involves taking a long position in equities coupled with both a short call and a long put on an equity index to lower the...