By Blake Gattuso, VI Form
Decades of Deceit: Bernie Madoff’s Effect on SEC Regulation
Editor’s Note: This paper was completed as a part of the History Research Fellowship, a one-semester course available to sixth form students.
Seventeen billion dollars lost. Decades of deceit. Bernie Madoff’s fraud forever changed the lives of thousands and impacted the lives of millions.
“It’s a proprietary strategy, I can’t go into great detail,” said Bernie Madoff when he was asked to explain how he made such strong and consistent returns for his investors. This quote from his 2001 interview with Barron’s Magazine held true. Madoff would never go into “great detail” on this topic with anyone. Madoff did not tell investors about the strategy. Not even the Securities and Exchange Commission (SEC) examiners would get “great detail” about Madoff’s multibillion-dollar hedge fund. For more than thirty years, Madoff ran this scheme. And for more than thirty years, Madoff never went into “great detail” with anyone because his hedge fund was a sixty-five billion-dollar Ponzi scheme, not the top-performing hedge fund which it claimed to be.
Trusted capital markets are fundamental to the functioning of the American economy. Stock markets are places where companies raise capital from investors who buy corporate shares. Without these markets, it would be difficult, if not impossible, for the American economy to efficiently allocate capital to productive uses represented in many American, world-leading companies, such as Apple, Google, General Motors, and Boeing. If investors lose faith in these markets and see them as fraudulent, the American economy will suffer.
The complexity of the market makes it vulnerable to manipulation. Financial crime has existed since the origins of markets. Charles Ponzi’s 1920 swindle, dubbed the “Ponzi Scheme,” is well-known amongst investors and non-investors alike. Many people think of it as the first example of financial crime when, in reality, it was just the largest manipulation of the market at the time. Regardless, it was and is well-known. So, when the news broke in 2008 that Bernie Madoff – a leading figure on Wall Street – was running a Ponzi Scheme, the significance of the crime swept across the country, headlining every major newspaper and torching American trust in the markets.
The Securities and Exchange Commission is the regulating body for American capital markets. Its main goal is to provide a blanket of faith in the market so that investors feel safe knowing that they are investing in a trustworthy system. In the case of Bernie Madoff, mishaps, poor practices, and Madoff’s influence prevented the SEC from fulfilling this mission. That being said, the SEC has made sufficient reforms to uncover more financial crimes post-Madoff and prevent the next Madoff-like scheme. It has revamped its Enforcement Division to create a more centralized, communicative organization. It hired specialists to run the examination teams, employees with experience in and understanding of finance, not just law. The first section of this paper addresses the history of financial crime in the United States and the creation of the SEC to combat these crimes. The balance between Laissez-faire policy and the need for change as a result of the Great Depression in 1929 slowed the creation process. The second section discusses Bernie Madoff’s upbringing, company, and his rise to influence on Wall Street. These aspects of his life, in particular, enabled him to have the amount of “success” he had in his Ponzi scheme. The third section discusses the relationship between the SEC and Madoff. In addition, it addresses the SEC’s mistakes throughout the Madoff scheme. Finally, the conclusion provides evidence to support that the SEC has made the necessary changes to catch future Ponzi Schemers and prevent future Madoffs, but questions the SEC’s ability to tackle next-generation fraudsters.
To continue reading, click here for a full PDF version.
Blake Gattuso is a VI form day student from Southborough, Massachusetts. He enjoys Government and Economics classes. His favorite memories from St. Mark’s are with the cross-country team and his friends.