Upon getting a few more complaints about the illegal scheme of
Madoff, SEC decided to investigate on the matter in 2004. Madoff’s statements
were contradictory in nature but stood with his ground that he had less than 15
clients which was supported by the records falsified by Pascali Jr. Madoff even
tried to manipulate SEC officials by claiming that he was among the selected
few people under consideration to be the next chairman of SEC. The investigating
team upon receiving the falsified documents decided not to pursue the case
In 2005, Madoff survived a scare as he faced a major liquidity
problem. For the first time, his account had more redemption claim than what
was in his account at that time. This problem was solved to an extent by
borrowing money from the European banks. This was found by the rival firms and
further complaints were filed in the SEC claiming that the instance itself is a
proof that the scheme is none other than a Ponzi one.
By 2006, a new rule was implemented by SEC. Under this rule, it
was stated that all the hedge fund would not be counted as one, instead it will
be counted based on the number of investors in the fund. With the change in
rule, it meant that Madoff could not operate as an unregistered investment
advisor anymore as the client list would be more than 15. He registered with
SEC and this was the beginning of the end of Bernard Madoff.
When the stock market started to collapse in 2007 due to growing recession,
every investment fund other than Madoff’s showed losses. This resulted in the
financial fluctuations for Madoff. On one side, some of the hedge fund managers
and other clients who suffered losses started to invest in Madoff’s scheme
while on the other side, many started to redeem their funds as their stocks
declined in value elsewhere.
As a result, Madoff had to reduce the guaranteed payout rate to a
mere 4.5 percentage. Despite his last-minute efforts, during the unfavorable
period, many major clients including JP Morgan chase withdrew huge amounts from
the investment fund. By the tail end of 2008, the redemption request was so
high that Madoff’s account didn’t have enough money to cope with the demand. It
was then Madoff admitted finally that he was indeed running a Ponzi scheme and
many including his sons were in disbelief as it turned out to be the biggest
Ponzi scheme till date.