The story goes like this: A revered financial genius on Wall Street starts his own advisory company. Many people invest with his fund and reap great returns. This attracts many large investors, including renowned global banks. For decades, the company rewards its investors with larger-than-life returns. One day, his company is exposed as the biggest fraud in the history of finance, and everyone associated with his fund has been wiped out clean.
This could be an old tale of what happens when greed takes over. Or a lesson in why you shouldn't jump on the stock market bandwagon. But it's actually a tragedy based on real life fraud events in the life of Bernard "Bernie" Madoff, one that has affected millions of investors, big and small, from all over the world.
When most people think of identity fraud, things like credit card theft and internet security spring to mind. We know that you can never be too careful with our personal information and what we share over the internet. But how often do we consider the potential dangers of trusting accounting agencies, law firms and investment banks? Very rarely. We hand over our personal information and our life savings without thinking twice because we know they're backed by government agencies such as the SEC (Securities Exchange Commission) and FDIC (Federal Deposit Insurance Corporation).
In the case of Madoff's company, Bernard L. Madoff Investment Securities, LLC, a façade for his private advisory fund, that's exactly what happened. Echoing fraudulent high profile companies of the past such as Enron and ImClone, Madoff essentially ran a Ponzi scheme, in which new investors, rather than actual profits, pay off old investors. With this scam, he was able to reap large returns for his wealthy clients since the 1960s. Over time, his amazing golden goose of a fund caught the attention of high profile investors, including global banks such as HSBC Holdings LLC, Royal Bank of Scotland, reputable hedge funds and even charitable foundations. When asked about his fund, he famously replied, "It's a proprietary strategy. I can't go into it in great detail."
The later decades of the 80s and 90s would prove to be an even greater growth period for Madoff's company in terms of "profits" as well as an eager following of big ticket investors. Nobody knew what was going on behind the scenes; money was being made and that was all they needed to know. For years, the fraud he was committing was masked ingeniously through various ways that would never have aroused any suspicion.
1.    The annual returns of 10-12% were excellent, but not outrageous enough to arouse suspicion.
2.    Referrals from other investors added to his company's credibility.
3.    Decades of financial experience and expertise, including acting as a former board member of NASDAQ, made his advice all the more reliable.
4.    Some investors were actually turned away from his fund, adding to the allure and exclusivity of his business.
5.    He served on the boards of several prominent companies.
6.    He was an active philanthropist to many charities and foundations.
By not regularly looking over their portfolios, every single client exposed themselves to the risk of fraud. When the money's rolling in, it's difficult to stop and scrutinize the how's and why's of what's happening. Which is what many of investors did, despite the fact that some signs of suspicious activity were present all along.
1.    Clients were to never talk about the fund with anyone.
2.    Strategies were never transparent and investing methods were elusive.
3.    The SEC raised some flags about his business activities, but the questions weren't investigated further.
4.    Incredibly, Madoff's hedge fund acted as its own broker/dealer, thus allowing for no outside accountability.
5.    Unusual for a brokerage, clients weren't allowed online access to their accounts and were instead mailed statements.
6.    The company had the impossible year-after-year of great returns for decades at a time, even during stock market downturns.
7.    The company avoided filing disclosures of holdings with the SEC by unloading assets for cash at the end of each quarter.
As with most things, if it sounds too good to be true, it probably is. Earlier this year, clients requested the withdrawal of several billions of dollars from the fund, which was money Madoff's company didn't have. While its investors weren't able to be paid, its senior executives were nevertheless given bonuses. This was the final act that exposed Madoff's scheme to the world.
All in all, the amount defrauded from investors is alleged to be more than $50 billion, making it the biggest fraud case in history. The Wall Street Journal purports that among Madoff's investors, the following are those with the biggest potential losses:
•    Fairfield Greenwich Advisors, $7.50 billion
•    Tremont Capital Management, $3.30 billion
•    Banco Santander, $2.87 billion
•    Bank Medici, $2.10 billion
•    Ascot Partners, $1.80 billion
•    Access International Advisors, $1.40 billion
•    Fortis, $1.35 billion
•    Union Bancaire Privee, $1.00 billion
•    HSBC, $1.00 billion
Many others totaling hundreds of millions in losses were listed, including notable charity organizations such as Stephen Spielberg's Wunderkinder Foundation.
Madoff admitted to his guilt by saying he had "no plausible explanation" for his actions. Charged with one single count of securities fraud, he recently posted bail for $10 million. Because of the extreme magnitude of his crime, he may face the maximum fraud sentence of 20 years in prison and up to $5 million in fines if found guilty.
Though Madoff claims that the money has gone, the losses have already begun to trickle down from the direct investors to those who were merely banking with those institutions. What this case tells us is that no one is immune to fraudulent activity, be it financial institutions or wealthy individuals or average middle class citizens. And although the losses can be calculated in dollars, the personal and psychological problems that will result are immeasurable.