Bernie Madoff was back in the news due to his son’s suicide. Made me wonder this: where is all the money he cheated people out of? It was supposedly in the billions.
That money never existed.
Madoff ran a Ponzi scheme (the biggest ever, in fact.) In such a scheme, people invest their money and are sent false statements showing high returns on their investments. But these returns don’t actually exist. Instead, if anyone wants to withdraw their money, then funds from newer investors are used to pay off older ones. This works fine until a critical mass of investors wishes to withdraw their funds and not enough new investors are available to cover it.
A lot of the money did exist but Madoff spent it. Some of it was on food or vacations and can never be recovered. Some was on cars, boats, art, etc which can be partially recovered but the items have depreciated.
Some of the money went to people that pulled their money out before the scheme broke. I recall a radio interview a while back that talked to some of the people that invested with Madoff, and there was a certain amount of awkwardness between people that had lost their savings and people that had inadvertently gotten wealthy off the other investors money because they retired many years before Madoff went broke and pulled most of their money out. Especially tense as many of the investors were living in the same jewish communities in FL and NY, and thus knew each other.
Wasn’t there some notion that the feds might go after the money that was paid out (since in fact it was in no way validly earned and instead came at the expense of other investors)?
Best Madoff scam quote (from one of the investors): “We knew he was cheating - we just didn’t think he was cheating us.”
Irving Picard (trustee of the Madoff bankruptcy estate) has filed suits against some personal and institutional investors who withdrew their funds prior to the collapse.
Still, the potential amount of money that could be recovered (if the suits are successful) is a tiny fraction of the amount purported to exist.
Remember that most of the billion of dollars in the fund never existed. Here’s how it worked:
I invested $20 in with Madoff.
My friend then invested $12.
Madoff says I now have $40 in my account. Great, I’ll withdraw $20 and leave the rest.
According to Madoff’s books, there are $32 in his fund. I still have $20, plus my friend’s $12. However, there are only $12 in the fund. If Madoff got exposed at this juncture, my friend would have lost $12 while I would be out $20 – almost twice the loss of my friend. After all, that’s what it said I had on my monthly statement!
Yes, there was money paid out for employees, business expenses, and Madoff’s rather extravagant lifestyle, but most of the money never existed except in the form of monthly statements that showed an ever growing account balance.
You also paid capital gains tax on that $20 you withdrew, even though there were no gains.