Since the Bernard Madoff scandal broke a year ago, thousands of investors who lost their livelihoods have been left outraged as to how Madoff — a former chairman of the NASDAQ stock market who ran Bernard L. Madoff Investment Securities (BMIS) — was able to commit such a fraud, and over such a long period of time.

Madoff, 71, is serving a 150- year sentence for theft, fraud and money laundering at a North Carolina prison after pleading guilty to charges that his secretive operation was a multibillion-dollar Ponzi scheme — an investment scam that appeared to be generating consistently high returns from investments but actually did not involve any investment, generating returns from initial deposits of new investors.

This destroyed thousands of people’s life savings and wrecked dozens of charities. Victims included film director Steven Spielberg, HSBC, Bramdean Alternatives and Yeshiva University.

According to Mark Berman, a London-based former US Securities and Exchange Commission (SEC) and LSE lawyer: “We know what happened, but we still don’t know why.” Mr Berman, the founder and CEO of CompliGlobe Ltd, a global regulatory consultancy that advises and conducts training programmes for hedge funds, investment managers, issuers, regulators and multi-national banks and brokers in Europe and Asia, offered his thoughts on the scandal as guest speaker at a recent WIZO business networking breakfast.

Complaints filed in court show that Madoff’s scheme began in the 1980s, possibly farther back, when he encouraged brokers and fund managers to solicit funds for him to manage. It was often the case that these entities issued promissory notes to these investors in return for the funds –— many of which were unregistered securities.

Halachically, Madoff was a robber, not a thief

SEC enforcement actions in the early 1990s rooted out some of these and the investors involved got their funds back. However, many of them promptly opened accounts directly with Madoff, due, in part, to the returns that he provided. Emboldened, Madoff expanded his US activities and began to solicit funds from outside the US.

The ponzi scheme grew because Madoff and a lieutenant used a computer called “House 17” to falsify their books, records, account statements and trading data. A bank account was opened into which funds were deposited. Funds were moved to sub-accounts to withdraw converted funds for personal use or to pay investors “dividends”.

Madoff and his lieutenant, and two computer programmers, ran the ponzi scheme with the aid of the House 17 computer and the bank accounts. When prospective investors came to meet Madoff or regulators visited, a sampling of accounts from each type of investor was produced. Discrepancies were explained away or ignored.

On November 13 this year, the SEC sued the two BMIS computer programmers for their help in enabling Madoff to “cover up the fraud … for more than 15 years”. According to the SEC’s complaint, the individuals involved “provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going”. At one point, according to the complaint, the two had a “crisis of confidence” and attempted to cover their tracks by trying to delete certain of the House 17 special programs. It was noted in the SEC press release announcing this enforcement action that, when they confronted Madoff, they were offered money to “not expose” things. Madoff’s “investment strategy” involved “buying” a several stocks at once, a “basket”, that were included in the S&P 100 Index, the performance of which was to correlate with the performance of the overall Index. The “goal” was to “market time” the market by buying a basket before a run-up in the S&P 100 Index and selling the basket after the Index increased.

According to the SEC: “When Madoff sold a basket and was not “in the market,” he purportedly invested the money in US Treasuries and money market funds while awaiting the next trading opportunity.” BMIS also employed a fictitious hedging strategy. To hedge the downside risk of the phantom positions, Madoff “bought” put options on the S&P 100 that were supposedly funded by the “sale” of call options on the S&P 100. This strategy was termed a “split-strike conversion”.

Nothing was real. No trades were made. Proper records were not maintained. US regulators were told that trades were done prior to market opening in Europe. European regulators were told that trades were done in the States. Anyone making an enquiry was given falsified documents.

“While at first no one could really believe what had happened”, says Mr Berman, “the facts that have come to light point to the conclusion that the acts were calculated. Madoff fooled people into investing.

“Halachically, Madoff was a robber, not a thief. He knew his victims. He deceived them. His crimes were particularly severe because of the fact that deception involves the act of turning one’s back on God.” He says there are still facts that we do not know. “It is not clear when Madoff became dishonest, or why. It will take years to piece that together. He will probably never give his side of the story. It will take years to sort out and recover from — if at all”.