Opportunity Cost of Fraud: Is it Worth it?
Written by: Ian Young

Whether the case be one of an accidental fraudster, or a fraudster with malicious intent, fraud surrounds us everyday. Asset misappropriation plagues small businesses constantly. We also hear stories of bigger fraud cases, like that of the 1MDB scandal, where the 1MDB trust fund bypassed anti-money laundering laws and was embezzled by the prior Malayasian Prime Minister. With so many people committing fraud, one asks themselves, is it worth it? If it was not worth it, then why would people continue to commit fraud? We are going to answer these question here today by looking at the most infamous fraud case to date, that of Bernie Madoff’s ponzi scheme.

First before we get into whether it was worth it for Bernie Madoff, you need to know what a ponzi scheme is, and the extent of Madoff’s crime. A ponzi scheme is a fake investment scheme, where the fraudster in question never invests the money. The investor takes money from new “investments” to pay the “interest” of the old “investments.” This is why ponzi schemes are also referred to as the “rob Peter to pay Paul” schemes, because you rob the new investors to pay the old ones. This is why ponzi schemes are doomed to fail from the start, but can last indefinitely as long as the scheme continues to get new investors. Bernie Madoff had the largest ponzi scheme, and while it is hard to nail down the exact price because it was an international ponzi scheme, it is believed that he stole around “$64.8 billion in client assets.” (Will Kenton) $64.8 billion is a lot of money, but what was the opportunity cost worth it?
Now that we know how much money Madoff made in the ponzi scheme, we need to figure out how much money he was making before to see how much money he could make. What people don’t remember is that Bernie Madoff was the head of a very successful and legitimate stock exchange company. At the height of his stock exchange company Bernie Madoff was making roughly $100 million a year. (Will Kenton) We do not know how long the ponzi scheme was running, but it is thought to be going for 17 years. So just looking at the period of when the ponzi scheme was running Madoff gave up $1.7 billion for $64.8 billion. If the story would have ended the moment the FBI put hand cuffs on Madoff, then yes it would have been worth it, but the story did not end.

Before he was tried in court, he was arrested, and was released on a $10 million bail, raising the opportunity cost to $1.71 billion. The Court case was a brutal one for the defendant, Madoff stole so much money that the government was not willing to give him a plea bargain, and sentenced him on eleven counts of felony. (justice.gov) Madoff got sentenced to 150 years in prison, because he took the full blame of the ponzi scheme. This was controversial because there is strong evidence to believe that his family knew of and helped with the ponzi scheme, but that is a discussion for another time. The important part is that Madoff was sentenced to 150 years in prison, those are 150 years that he could be hypothetically making money if he did not commit fraud. So $100 million a year for 150 years brings the total to $15 billion, so the total opportunity cost would be $16.71 billion. But you might be thinking, “Ian, even if Madoff was locked up at his birth, there is no way he could be alive for 150 years, much less be working and making money that whole time!” This is correct, however you need to take into account that Madoff’s children could take over the company, or he could sell the company for a similar profit, which is why I am still including it in the opportunity cost.
But wait there’s more! Even though one Bernie Madoff’s papers his ponzi scheme was responsible for $64.8 billion, this number is drastically overstated. This is because a lot of the money was fabricated interest that only existed on paper. Even though the $64.8 billion adequately represents the time stolen from the investors, the actual principal investments only total $20 billion. Madoff also had a lot of his assets seized. When all was said and done, the total amount of money was $104 million in assets. That brings the opportunity cost up to $16.81 billion. Then you need to consider how Madoff’s family was impacted, because after all they were working at his “investment” company. The total lawsuits to be brought against the Madoff family were roughly $199 million(CNN) this brings the opportunity cost of the crime up to $17 billion.
There is still a $3 billion dollar difference from the amount that Bernie Madoff gained in his ponzi scheme to the opportunity cost, but there is still one factor left unanswered. Those are the lives that Bernie Madoff took indirectly due to his ponzi scheme. Bernie Madoff’s son hanged himself at the age of 46 on December 11, 2010, and Bernie Madoff himself has stated that he is responsible. Charles Murphy, a well-connected hedge funder with Bernie Madoff, lost $7 billion with Madoff; this drove him to jump from his hotel room on the 24th floor to his death.(CNBC) Who knows how many others could not pay their medical bills, could not make their mortgage, and had to spend the rest of their lives barely making ends meet because they lost their life savings with Madoff. Due to this Madoff stole the lives and freedom of many people when he stole their money.
It was not worth it for Bernie Madoff, and if it was not worth it for someone who stole $20 billion, it will never be worth it.
Works Cited
“Bernard Madoff Fast Facts.” CNN, Cable News Network, 24 July 2019, www.cnn.com/2013/03/11/us/bernard-madoff-fast-facts/index.html.
JeffCoxCNBCcom. “Investor Burned by Bernie Madoff Jumps to Death from Hotel.” CNBC, CNBC, 28 Mar. 2017, www.cnbc.com/2017/03/28/charles-murphy-investor-burned-by-bernie-madoff-jumps-to-death.html.
Kenton, Will. “The Bernie Madoff Story.” Investopedia, Investopedia, 4 May 2019, www.investopedia.com/terms/b/bernard-madoff.asp.
Longley, Robert. “What Is Fraud? Definition and Examples.” ThoughtCo, ThoughtCo, 26 Aug. 2019, www.thoughtco.com/fraud-definition-and-examples-4175237.
ScottCohnTV. “10 Years Later, Here's What Became of Bernie Madoff's Inner Circle.” CNBC, CNBC, 11 Dec. 2018, www.cnbc.com/2018/12/09/heres-what-became-of-bernie-madoffs-inner-circle.html.