Madoff was a former chairman of NASDAQ stock exchange and had a rich experience in the financial
industry. He started a huge unregistered hedge funds firm which promised incredible returns. He was
reported to generate phenomenal 40 - 50% returns within a period of 90 days. Markopolos, who had a
fair knowledge in the area of statistical mathematics and was working for a Boston investment firm, was
instructed by his manager to reverse engineer the trading strategy of Madoff so that the firm can
replicate the same strategy to revitalize their turbulent business. Madoff was also a philanthropist, so
hardly anyone suspected him.
Markopolos observed that there was no correlation between the market's return and Madoff's return.
Markets incessantly had regular ups and downs but the trend of the returns of Madoff's firm was always
upwards [Except on a few occasions]. He then concluded that either he was using insider information to
rack up huge profits or he was running a ponzi scheme. Using an insider is illegal because it deprives the
other investors to earn their actual returns from their investments. Ponzi scheme is even more
horrendous where the operator reciprocates high returns by paying dividends or returns from the
principal amount collected from the subsequent investors. Either way, he was doing something illegal.
Markopolos proved that in order to execute the trading strategy, Madoff would have to buy more
options than what actually existed in Chicago Board Options Exchange. His doubt was even clearer when
he was unable to find any firm where Madoff had any investments which were a lagging indicator that
he was actually not involved in any trades. He informed SEC[Securities and Exchange Commission]
several times which always went unheard. Finally in 2008, he was noticed for generating high returns
even the times of recession. In the turbulent times, when people grew skeptical of the bull market
started demanding redemption of their money which hardly existed and was hard to come by, the
operations collapsed and the fraud of 65 billion dollars was confirmed in the first week of December,
2008.
Madoff has left millions of his clients clueless. US was said to be hit with another tsunami when it was
yet to recover from its sub-prime lending crisis. Thousands of firms including various hospitals, schools
and missionaries who invested with Madoff had to declare bankruptcy. Markopolis today criticizes SEC
for being deaf to his earlier appeals. He interestingly proclaims that it took five minutes for him to know
that there was a fraud and another four hours of mathematical modeling to prove that it was a fraud.
Madoff who ages 71 now, has been awarded 150 years of imprisonment.
This scam has triggered immediate intervention from the government side which asks the hedge funds
industry to disclose their strategies. Now, as the industry banks entirely on their strategies, it will
horribly abate the business of firms like bridgestone, D E Shaw & Co, Fortress investment groups, Citadel
investment groups and many more such firms.
