The Path of Financial Destruction in Madoff's 20-year Ponzi scheme

No transparency, unexplainable returns, no direct due diligence, inability to reconcile returns, non independent auditor, restricted access to information, failed KYC, disastrous activity monitoring from banks and oversight authorities, unusual business model with extreme high returns, are a few of the Good Governance failures. Let's review a few others in the Fraud scheme.

On the eve of the fraud’s collapse in 2008 the total shown on Madoff investor account statements was nearly $65 billion. Mr. Madoff's victims in the United States, has collected to date about $10 billion through settlements and asset sales. In May 2010, about 720,000 Madoff investors outside the United States settled with their banks, receiving about $15.5 billion in all.

  1. Ill-trained and inexperienced clerical staff, directed them to "generate false and fraudulent documents," told lies and supplied false records to regulators, and shuffled hundreds of millions of dollars from bank to bank to create the illusion of active trading.
  2. One of the more prominent investors, paid more than 11 percent interest each year through its 15-year track record. The fund had built profitable businesses through providing access to the investment vehicle, without perform proper due diligence. Selected clients had extraordinarily high returns, as much as 46 percent.
  3. Multimillion-dollar bank transfers in part to give the appearance that he was conducting securities transactions in Europe on behalf of the investors, when, in fact, he was not.
  4. Unidentified banks and hedge funds were somehow "complicit" in his elaborate fraud. Some of the money he gathered through the Ponzi scheme to support the supposedly legitimate wholesale stock trading operation that made his name on Wall Street by to be directed, through a series of wire transfers, to the operating accounts that funded the operations of these businesses.
  5. Frank DiPascali, a longtime aide admitted that for at least 20 years, he helped carry out the fraud by using historical stock data from the Internet to create fake trade blotters, sending out fraudulent account statements to clients and arranging wire transfers between Mr. Madoff's London and New York offices -- to create the impression that the firm was earning commissions from stock trades.
  6. To give the appearance that the firm had mastered the markets; his employees would track stock prices and then simply pretend to buy stocks whose trajectories matched the firm's investment goals.
  7. Clients were sorted into categories, each with its own pattern of fictional but plausible trading. A subset of "special accounts" was identified for which extensive paper documents with trail suitable for regulatory inspection and communication with large investors and feeder funds.
  8. S.E.C had received six substantive complaints since 1992 - and botched the investigation of every one of them. There was no evidence of any bribery, collusion or deliberate sabotage of those investigations.
  9. Some oversight body should have just checked basics like his account with Wall Street's central clearinghouse and his dealings with the firms that were supposedly handling his trades.
  10. Investigators actually asked for his clearinghouse account number on a Friday afternoon, but then never followed up on Monday and nothing happened. They might have decided against doing so because of his stature in the industry.
  11. The Auditor Mr. Friehling admitted that he had never adequately audited the operation and, as an investor in the scheme, had never been a truly independent auditor. Nevertheless, he produced the supposedly professional and independent audits that sustained the fraud year in and year out.
  12. Would not have been able to commit the massive Ponzi scheme without Chase. Internal bank documents showed that senior executives were suspicious of the Madoff enterprise. A top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his "Oz-like signals" were too difficult to ignore.
  13. Chase risk analyst looked at the feeder fund, in 2006, and reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.
  14. Despite many more suspicions, Mr. Madoff was allowed to move billions of dollars of investors' cash in and out of his bank accounts right until the day of his arrest in December 2008 - although by then, the bank had withdrawn all but $35 million of the $276 million it had invested in Madoff-linked hedge funds.

  15. The dealings with various banks and hedge funds, pointing to their "willful blindness" and their failure to examine discrepancies between his regulatory filings and other information available to them. "They had to know," Mr. Madoff claimed.

    Source: NY Times/The Economist and others