The Case of the Century: Bernard Madoff

June 30, 2017 Management

1. What are the ethical issues involved in the Madoff case? Bernie Madoff was a thief, plain and simple. He was a greedy, selfish, self-indulgent con artist, no different from any other grifter that you meet, except because of who he was, he was able to pull the con off on a grander scale. Madoff used his name and position and the legitimacy of his first business to draw people into his Ponzi scheme (like a pyramid scheme where one takes money from newer clients to pay older clients).

He misrepresented (the kinder word) or lied (if you want the truthful description) to his friends and clients from the beginning and as later documented in his allocution, he never invested any of the money he got. It would have been different if this scheme formed from some bad business decisions and he did this in response to that and was trying to save some of his client’s money, but it wasn’t. Madoff originally provided his clients the 10-12% returns on investment that he offered, but it appears that with the increase in funds, the persons that benefitted the most from the Ponzi scheme was Madoff and his family.

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They all shared in an expensive and lavish lifestyle bordering on the garish with its excesses. He appeared to hire incompetent people so no one would be the wiser to what he was doing which was a disservice to his clientele. He also appeared to have used some of his misbegotten gains and infused them into his legitimate business therefore, putting it at risk. Nepotism was rampant in Madoff’s business which is why many people believe his family had to be involved more than just the sons and the confession of the scheme. 2.

Do you believe that Bernard Madoff worked alone, or do you think he had help in creating and sustaining his Ponzi scheme? Would this represent a conflict of interest? I don’t believe it was possible for Madoff to create and sustain his Ponzi scheme on his own. By all accounts, this scheme has been going on since sometime in the 1990’s and the value of the scheme was upward of $65 billion dollars. Madoff was consistently investigated by the Securities Exchange Commission (SEC) which had financial and market experts and accountants who should have caught the fraud.

Unfortunately since many of the people who work with the SEC later move on to work for the companies they may have investigated, the relationship becomes incestuous and complicit. Several members of Madoff’s family worked for their firm and had access to the money generated by this scheme, so they should have at least been curious about how they were able to consistently maintain their gregarious lifestyle, no matter the state of the economy and markets. When their legitimate business needed cash, Madoff made it available which should have given his family members access to the investment company records, if they had chosen to look at them.

Several investment companies invested with Madoff and had to know the rate of returns they were receiving were unsustainable, yet they continued. Yet at the end, several firms made a grab for their money and are now advising their clients to put their money in accounts, annuities, and trusts that can’t be broken so the government can’t retrieve the money. If these companies didn’t know the extent and the absolutes, they had to at least suspect some type of criminal behavior because the market was collapsing around them, yet they were still being promised unrealistic returns.

I believe there was certainly a conflict of interest because no one really wanted the fraud to be uncovered or at least not until they were able to recover the portion that they were due. This is why I believe no one really wanted to blow the whistle on this fraud. The SEC abdicated their responsibility because they conducted several investigations and had numerous chances to put a stop to Madoff and for whatever reason, did not. 3. What should be done to help ensure that Ponzi schemes like this one do not happen in the future?

A) The primary thing that must be done is to break the link between the SEC and the companies they investigate. Many people use the connections that that they make at the agency and parlay that into business and job opportunities at later dates. This may cause a person to not perform due diligence when inquiring into a company. There should be a timeframe that is stated that if you worked for the SEC, you cannot work on Wall Street or for any company or person that you may have investigated for a minimum of five years after you stopped.

This will break down the networking aspect and “quid pro quo” aspect of working for the SEC. B) The FBI and SEC need to aggressively go after all the stolen money and make restitution to the victims. As it stands right now, Madoff family is still very wealthy while claiming they have no idea what Madoff did with the money or where it could possibly be. So outward appearance is there really was no longstanding consequence of the scheme. Yes, Madoff went to jail, but he is currently falling on the sword ll alone. C) An extension and speedy investigation needs to be conducted with monthly public updates so the fraud stays in the forefront of people’s minds until it is completed. The investigation needs transparency so the public’s confidence can be restored to the federal agencies that should have caught the fraud well before they did. It doesn’t help that at the time Madoff was caught; it was solely due to the confession of Madoff to his sons and then their turning him into the SEC.

Without that, there really is no telling how long the scheme would have continued for and how many additional people would have been burned by it since he was going for larger scores at the end. D) Audits are a must and legislation and regulations requiring companies to have in cash reserve and liquid assets, a percentage to cover some of their losses in the event that fraud like this is uncovered. It is understandable that people take risks when they invest and so the potential for loss is there, but when you entrust your money to money management and investment firms, you should have some security that they have your best interest.

It appears that at some time, investment firms may have actively participated in the fraud to ensure they got their money back. E) CFO’s must be held accountable for their companies, to the tune of criminal behavior if there is an epic failure. For the most part, it appears people are being rewarded with huge golden parachute compensation packages and so there are no repercussions for failure and these people just move on to another company.


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