Madoff Ponzi Scam Caused Investors to Pull $363B in Investments, Reports Study

According to a new study recently published in The Review of Financial Studies, the Bernie Madoff Ponzi Scam not only bilked over 10,000 investors of billions of dollars, but it also caused many in the investing public to stop trusting the financial industry. The study is called Trust Busting: The Effect of Fraud on Investor Behavior.

Researchers were able to track the impact of the Madoff fraud outside of the investors who were directly impacted because Madoff, who is Jewish, worked primarily with rich, older Jewish investors. Assistant Professor of Applied Economics and Management at Cornell Scott Yonker, who is a co-author of the study, describes the Madoff Ponzi Scam as an affinity scam in that it targeted investors who had similar backgrounds. That said, his victims included retail investors, wealthy investors, famous investors, celebrities, and various entities and financial funds.

The study found that once the Madoff Ponzi scheme became public knowledge, investors who either personally knew his victims or lived in the areas where his victims lived withdrew $363B from their financial advisers and placed their funds in banks instead—that’s almost 20 times more than the $17B that Madoff has been ordered to pay in restitution to his investors.

The mass withdrawals caused many of these advisers to go out of business. The study notes that firms in the affected areas had a 40% greater chance of shuttering in the wake of the Madoff Ponzi fraud. When, two years, later, the S & P 500 index rose 40%, these same investors lost out on the returns they would have received had they not pulled out their funds in the wake of the Madoff fraud.

News reports, including local media in the affected areas, along with word-of-mouth of about this loss of faith in the financial industry, helped to spread worry among other investors. As Dr. Umit Gurun of the University of Texas, Dallas, also a co-author of the study, noted, although typically people don’t talk about their investment mistakes that lead to losses, they will talk about losses from a Ponzi scam because it was fraud and not investor error. Gurun noted that it is common to want to warn others, especially people in your community.

Madoff, who spent decades bilking investors, would deposit their funds in his own account instead of investing their money, as they had entrusted him to do. It wasn’t until 2008, when his own sons turned him in, that the fraud became public knowledge. Previous to that the US Securities and Exchange Commission had investigated him on numerous occasions. Madoff is serving 150 years in prison, which means he will be behind bars for the rest of his life.

Securities Fraud
As this report shows, securities fraud can cause serious and widespread harm. At Shepherd Smith Edwards and Kantas, LTD LLP, we represent investors in fighting to recover their losses sustained because of financial fraud. Please contact us today for your free, no obligation consultation so we can help you determine whether you have grounds for a securities claim.

Trust Busting: The Effect of Fraud on Investor Behavior