The Madoff Affair
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Madoff was a well established and respect financier who engaged in a Ponzi Scheme, an extremely large one. That means that he promised investors a large return (although not so large to immediately raise suspicions). The “profits” he showed his clients were actually money given to him by other clients, so continuing the scheme required him to keep getting new clients. That’s why Ponzi Schemes have no out. Eventually you run out of new clients.
The more interesting thing is how Madoff was able to keep this going so long. Madoff was highly respected in the community, with a long track record, so the thought that it was all a big scam didn’t cross most people’s mind. Madoff claimed that he was using a proprietary, secret model. This is not especially unusual in the field, so it wasn’t that weird. On the other hand, financial analyst Harry Markopolos claimed he was able to mathematically prove Madoff was a fraud with a few hours of work as early of 1999, but that he was ignored when he reported it.
So it seems that it was a combination of his reputation, the unwillingness of people who were theoretically making money from this to question it, and warning about it falling through the cracks.
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