• Bernard Madoff enters the Manhattan federal court house in New York (X90052)
When the head of America’s biggest hedge fund was revealed as a con artist, it cost billions of dollars, destroyed hundreds of lives – and became the story behind The Good Fight.
By
Tony Morris

13 Jul 2017 - 2:26 PM  UPDATED 3 Aug 2017 - 12:14 PM

When Diane Lockhart (Christine Baranski) loses her savings in a financial scam orchestrated by a close friend at the start of The Good Fight, it wasn't just a convenient plot created by the show’s writers to force her character back to work. This is a show that thrives on plucking real-world stories from the headlines.

The scam that drains Lockhart’s funds, ruins her reputation, and casts a dark shadow over the life of her protégé, Maia Rindell (Rose Leslie, AKA Ygritte from Game of Thrones) is a thinly disguised version of a real scandal that rocked America’s elite during the global financial crisis, ruining lives and draining billions of dollars from charities and private individuals. The man responsible has since become a symbol of greed and financial excess in the United States. His name? Bernie Madoff.

 

Madoff

Bernard “Bernie” Madoff was New York’s financial wizard, running a Wall Street hedge fund that delivered 10% returns year after year without fail. While other funds had their ups and down, his was steady as a rock – and if outsiders had questions, they clearly couldn’t argue with success. Not just anyone could sign up: Madoff’s fund was only for those in the know, mostly members of New York’s Jewish community recruited thought word-of-mouth.

And Madoff himself kept a low profile, furthering the idea that his was an exclusive club. It’s no surprise his clients invested heavily with him; with that kind of steady return on your money, who wouldn’t give him everything?

 

The Scam

Behind all this secrecy, Madoff was running a Ponzi scheme: that’s where, rather than making money through legitimate means, you pay returns to your early investors using the money you get from later investors. The way you attract new investors, which you need to if the scheme is even going to get off the ground, is by offering amazing returns on the investment. But that means you need to pull in a lot of people very quickly – if you’re advertising a scheme where people pay in $10 and get back $30, you’re going to need to find two new investors just to pay out the first guy. And if you’re taking your own cut (which is why you’re running the scheme in the first place), you’re going to need even more investors up front.

 

Obviously, the second that the amount of money going out is more than the money coming in the whole thing collapses, and usually the amazing returns being offered to lure investors in is enough of a warning sign to prevent the scheme dragging in too many people. The big difference with what Madoff was running, and why its collapse surprised so many people, is that he kept the number of people involved relatively small and the rate of paying out relatively low. He was running a scam that didn’t look like a scam.

  

How’d he get away with it for so long?

For a long while Madoff actually was running a legitimate hedge fund. He founded Bernard L. Madoff Investment Securities LLC in 1960, and in his guilty plea he claimed he’d only gone off the rails in the early 90s, though some suspect the rot set in well before that. His firm was huge – at one stage around 15% of all trades going through the New York Stock Exchange went through his business, and he was in charge of the largest hedge fund in the world, managing between $US3 billion and $US6 billion in 2000. Because he mostly managed money for charities who didn’t keep a close eye on things, he was able to skim money from them and pass it on to investors without anyone realising.

Until they did.

There had been rumours and suspicions floating around for decades. How could a fund based on the stock market keep coming up with consistent 10% returns year after year? Why would someone able to bring in such consistent returns make a (relative) pittance running a hedge fund when they could invest for themselves and make a killing? Some suspect the scam was running low on cash around 2005, with Madoff taking out bank loans to keep the cash flow going. But it was the Global Financial Crisis in 2008 that sunk him.

 

The Sinking Ship

With the financial markets in meltdown, many of Madoff’s investors wanted their money out. There were still plenty of people willing to give him cash – he was still offering a good return right until the end – but in a Ponzi scheme once people start pulling out it’s all over. In the final weeks Madoff was still fooling people: Carl J Shapiro, a 95 year-old entrepreneur and one of Madoff's oldest friends, gave him around US$250 million a week before it all collapsed. But with investors seeking to withdraw around US$7 billion from the fund, that was a drop in the ocean. According to Madoff’s sons Mark and Andrew, when they confronted him about the firms finances in December 2008, he admitted it was all a scam. They went to the authorities; their dad went to jail.

 

The aftermath

After his arrest, Madoff initially co-operated with prosecutors, but his later actions – refusing to point the finger at co-conspirators or reveal the location of assets, the discovery that he’d transferred millions of dollars from his business to his wife’s account before confessing – soon put them offside. While Madoff consistently told the authorities he was the only one responsible for the scam, the sheer size of the operation had many convinced there had to have been others aware of what he was doing.

Suspicion fell on his wife and sons, though no-one aside from Madoff faced criminal charges. His wife didn’t attend his sentencing, his sons became estranged from the family, and no friends or family wrote letters testifying to his good character during his trial. Madoff was eventually sentenced to 150 years in jail, and was ordered to repay $US17 billion out of the US$65 billion it’s estimated he defrauded from his clients. As he only had assets of just under US$1 billion at the time of his arrest, it’s somewhat unlikely he’ll be making good on that.

In the wake of Madoff’s scam charities collapsed, people lost their life savings, and communities were devastated. After being sentenced, he said “I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren.” He left behind worse than that: in the wake of the collapse there were a string of high-profile suicides, including that of his son Mark. Bernie is currently serving his sentence at a medium-security prison in North Carolina; in a letter to his daughter, he said the inmates there treat him “like a Mafia Don”.

 

A Madoff-like scheme is the launching-point for the high drama of The Good Fight. The series airs every Wednesday at 9:30pm on SBS. Episodes are also available on SBS On Demand after each episode airs. 

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