This week marked 15 years since Bernie Madoff – declared ‘the monster of Wall Street’ by a harrowing Netflix documentary on his demise – pled guilty to masterminding the largest known Ponzi scheme in history, worth an eye-watering $65bn. Formerly one of the most revered and respected figures on Wall Street, the one-time chairman of the Nasdaq stock exchange was sentenced to 150 years in federal prison, eventually dying three years to the day on April 14, next month.

‍

One of the most frightening aspects of the scam – other than its scale – was its relative simplicity. The cash sent him by new investors was used to pay existing ones, as well as any redemptions, which were honoured in full and on time. With this system, Madoff was able to deliver his exclusive roster of private clients average annual returns of around 15% – without placing a single trade.

‍

Any prospective investors who questioned how Madoff could deliver such resilient and compelling returns were essentially told the strategy was proprietary, and to trust Madoff’s market expertise. Of course, placing trust in this man was easily done. Madoff was, after all, practically a household name. He was famous on Wall Street for founding Madoff Securities, one of the most prominent market making institutions in the world, as well as for pioneering computerised trading technology. The latter was fundamental to the launch of the Nasdaq and helped revolutionise the way trading operations are conducted across the world.

‍

If that wasn’t enough, the watchdogs themselves trusted Madoff. Likely due to the regulator’s familiarity and fondness of Madoff’s achievements, the Securities and Exchange Commission found nothing untoward in the five investigations it launched against him in the early 2000s. He was even asked to provide advice and guidance on several of the SEC’s forthcoming market operations, providing an indisputable stamp of credibility to his name.

‍

Viewers of the Netflix documentary may recall the final episode was titled ‘the price of trust’ – and for good reason. Even more chilling than the simplicity and scale of the fraud was its total dependency on trust, be it from regulators, investors or even Madoff’s family. The sobering lesson he taught the world was essentially to think twice before placing your trust in another, that ‘bull’ isn’t always followed by ‘market’ on Wall Street. This lesson remains relevant 15 years on, and it mustn’t be ignored by financial institutions, whether large or small, today. To quote forensic accountant and Madoff trial expert witness Bruce Dubinsky, ‘There will be another Bernie Madoff in the future. That will happen. Mark my words.’

‍

While the possibility that a colossal fraud the size of Madoff’s could emerge in the modern day may seem remote, there are nevertheless few drawbacks in taking sophisticated precautions against potential wrongdoers. After all, even the most reputable businesses can be implicated in fraudulent behaviour, just as Madoff’s legitimate and successful market making firm was destroyed by his private investment business.

‍

Ensuring verbal communications with external institutions are captured and recorded is one basic precaution many firms still fail to take. They subsequently run the risk of having little or no evidence to present to authorities should the promises made by another firm fail to materialise. The lengthy conversations between private equity firms and their investors offer a good example of this risk.

‍

Say, for instance, a private equity manager is in the process of drumming up investment into their fund via a telephone conversation with a prospective investor, or more specifically, their limited partner. The latter might argue the promised returns failed to meet the PE manager’s guarantees. Should this happen, it would be near impossible for the investor to bring the case before regulators without any evidence of the initial guarantees made. Conversely, a PE firm could struggle to refute such a claim should they possess no recording or transcription of the initial conversation. By simply ensuring all intercompany conversations are consistently and reliably recorded via comms surveillance technology, the need to trust another firm’s word is eradicated. The evidence can be put before a regulator and any wrongdoing duly reconciled.

‍

While it is tough to say whether such an approach could have prevented Madoff’s Ponzi scheme from wrecking the lives of countless victims, it can offer companies much greater protection against unfounded assurances. In simple terms, it could prove essential in preventing financial institutions from paying the hefty price of trust.