The Empty Firm
Bernard L. Madoff Investment Securities LLC was founded in 1960 following Bernie Madoff's brush with law school. The 22-year-old Wall Street hopeful would remain the chairman of the firm until his arrest in 2008 and the subsequent dissolving of BLMIS. During the life of the business, Madoff would employ his brother Peter as senior managing director, his two sons Andrew and Mark in the legitimate trading arm of the firm's New York office, and Peter’s daughter Shana Madoff as both a rules and compliance officer and an attorney.
The Firm began as a penny stock trader and was originally funded by Bernie's savings from his small jobs in sprinkler installation and lifeguarding. With the help of his father-in-law Saul Alpern, an accountant, he was able to coax a close circle of family and friends into investing. The business expanded steadily into the late 60's and early 70's by originally making markets using the National Quotations Bureau's Pink Sheets. BLMIS became one of the first firms to utilize innovative computer information technology to compete with the fast-paced floor of the New York Stock Exchange. By 1971, the NASDAQ was formed. BLMIS would continue to ride near the top of this new tech branch of Wall Street for the rest of its existence becoming at one point the largest market maker within the NASDAQ. Madoff would become the non-executive chairman of NASDAQ as well as the chairman of the board of the directors and the board of governors for the National Association of Securities Dealers.
By the 1980's, BLMIS's market-maker division was trading one twentieth of the New York Stock Exchange. The firm came to occupy three floors of the Lipstick Building in Manhatten with a separate branch in London. Nearly fifty people were employed within the firm between the U.S. and U.K. Madoff became a well-recognized wealth manager to high profile clientele, especially within the so-called 'Jewish circuit.' Madoff himself being a Jew was able to network through prominent country clubs in New York City and Palm Spring, Florida targeting wealthy Jewish executives and establishing what would eventually become affinity fraud, —though he would continue to fly under the table with the help of the "5% payout rule." This federal law required private firms to pay out 5% of their funds in returns annually making the BLMIS scheme undetectable as it continued to fulfill these returns for decades. While its sole proprietorship lasted for over forty years, the firm was eventually converted to an LLC in 2001, Madoff being its only shareholder.
Madoff's masquerading strategy, as he outlined in 1992, claimed his returns were lackluster where he had matched the Standard & Poors 500 over the course of the 10 years prior. The S&P 500 Index measures the integrity of the stock market by tracking the performance of 500 of the largest companies in the United States stock exchange. Most money managers actually fell short of the S&P during the 1980's. This was shrugged off by The Wall Street Journal in observation of Madoff's use of future contracts, wherein he would agree to buy or sell something at a predetermined price at a predetermined date, and option contracts where he gave the buyer the option to buy or sell assets at a fixed price. This gave the illusion of a cushion to Madoff's operation and security, though in hindsight it is likely this was used as a cover up.
Behind the Scenes
In truth, by the 1990's Madoff had been funneling funds out of the pockets of new investors and into the returns of his early investors, including close friends and family members. New funds would be shoveled into a private Chase Bank account under Madoff's name wherein he controlled the flow of returns to his investors instead of actually investing their money. While he claimed in a 2009 interview that BLMIS became an illegal enterprise in the 90's, SEC investigators believe the firm lost legitimacy as early as the 1970's. There is also evidence the firm was never legitimate. In 1962, a feeder fund under the alias Avellino and Bienes began advising its clients to invest all of their money with Madoff and BLMIS, Madoff having little to no reputation in Wall Street at the time. While this sparked an investigation, the case was quickly closed and no major query into BLMIS would be had until an SEC investigation in 1999.
Unanswered Inquiries
Harry Markopolos of Rampart Investment Management originally raised the alarm with the SEC in 1999 and 2000. The first of many to cite the many red flags surrounding BLMIS, he would remain an outspoken voice against Madoff's dealings until the scheme ended in 2008. Markopolos surmised it was mathematically impossible for Madoff and his firm to see the steady earnings they had gained in the twelve decade prior with little to no downticks in their progress. While the SEC conducted two separate investigations into BLMIS in 1999 and 2000, the query eventually subsided. Markopolos would continue to publish memos and approach publications like The Wall Street Journal for the eight years following accusing BLMIS of being a Ponzi scheme or a front running operation. Unfortunately, his claims would remain unaddressed until 2008.
Collapse
In the wake of the 2008 Financial Crisis, BLMIS struggled to satisfy its returns. With the collapse of Bear Stearns in March of '08 and the bankruptcy of Lehman Brothers that September, redemption requests skyrocketed dropping BLMIS's actual holdings from 8 billion to less than $200 million, a fraction of a percent of the 68-billion-dollar value the firm had claimed. By November, redemptions requests were nearing 200 million, yet Madoff only held 13 million in his Chase account. The following month, Bernie Madoff confessed to fraud, stepped down as the sole shareholder of the firm, and Bernard L. Madoff Investment Securities LLC was subsequently dissolved.
