Final Case Analysis

Bernard Madoff

Final Case Analysis

Bernard Madoff
Pedro Vasquez
ORGL 3322-BV1
Behavior/Ethics/Leadership 1

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Abstract

In the following I will be discussing on how Bernard Madoff went ahead and did the
never been done in U.S. history. That was commit the largest securities fraud known to date in,
which people lost all of their money and Bernard Madoff made billions of dollars during the
several decades that he ran a giant Ponzi scheme. I will provide the red flags that should have
been seen from the beginning but people were just so taken by the way he presented himself. He
was a very well-known person in Wall Street and that made it easier for him to obtain new
clients. His name was all that was needed to feel relief knowing he was in total control of their
finances. People after he was arrested were in stoke knowing that they lost all of their money but,
still showed Madoff respect and talked good about him. But none the less this was an unethical
disaster that Bernard Madoff did.

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Final Case Analysis
Bernard Madoff
Imagine that you are at AT&T stadium for the first game of the season. The Stadium is
filled 100,000 fans. Rowdy comes out and starts getting the crowed hyped up and ready to go for
the start of the game. Everyone sees Rowdy as the honorable mascot for decades and the fans
follow his move. Then the Fans hear that Rowdy shares his business opportunities with some of
the fans. They hear that he runs businesses, a hedge fund and an orange warehouse and that his
investors triple there returns. Then you see more and more fan opening their wallets and perhaps
so do you.
You hand over a nice juicy check to Rowdy and to your relief knowing where he is every
Sunday. Every so often you might get a statement in the mail displaying your increase of
investment, but mostly you rely on a good name. Several years later, you happen to found out
there was no hedge fund and all of your money is gone. To no worries the police have arrested
Rowdy on charges of securities fraud.
Furthermore, a federal law provides reimbursement if you just go along and state you
were an orange warehouse customer. This is how the Bernard Madoff scandal looked like. The
mascot was Bernard Madoff, the orange warehouse was the brokerage, and the police well that is
the SEC (Securities and Exchange Commission). This is how one of the biggest securities fraud
case in US history came about and how one man was able to create this giant Ponzi scheme and
work it for decades. In return he made off with not millions of dollars ladies and gentleman but,
with Billions of dollars. This was (Glodstein) (Glodstein) (Fornaro) One of the largest financial
fraud cases in history, Bernard Madoff stole billions of dollars of savings, investment and
retirement funds from numerous individuals, businesses and not for profit organizations.

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The Red Flags

We should always reflect on the hedge fund failures to learn from the past to not repeat in
the future. There were several of red flags that a potential investor would of notice of the Bernard
Madoffs investment. Madoffs Ponzi scheme was very sophisticated that it was extremely
difficult to detect. But like I mention a little bit of research and you could have seen the red flags
too.
The first red flag was from the operational Lack of segregation amongst service
providers. (GREGORIOU) (LHABITANT) a typical hedge fund uses a network of service
providers, which normally includes an investment manager to manage the assets, one or several
broker to execute trades, a fund administrator to calculate the NAV, and some custodian(s)/ prime
broker(s) to custody the positions. In regards to Madoff most of the functions were performed
internally and with no third party independent oversight. Next was obscure auditors BMIS was
audited by a small accountancy firm called Friehling and Horowitz. Although this firm was
accredited by the SEC, it was virtually unknown within the investment management industry.
Madoff did may have given the investors some type of relief since they were audited by
respected audit firms were just going base of the reports of Friehling. Next was Unusual fee
structure (GREGORIOU) (LHABITANT) Officially, there was no management or
performance fee at BMIS-the sole form of compensation according to its Form ADV was a
market rate commission charged on each trade. This could have been a good time to pose the
question to Madoff from his investors but they didnt. Next was Heavy family influence
(GREGORIOU) (LHABITANT) His brother Peter joined the firm in 1965. He was a senior
managing director, the head of trading, and the chief compliance officer for the investment

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advisor and the broker-dealer businesses. Madoffs nephew, Charles Wiener, joined in 1978 and
served as the director of administration. Bernard Madoffs oldest son, Mark, joined the family
team in 1986 and was director of listed trading. His youngest son, Andrew, started in 1988 and
was director of Nasdaq. Peters daughter and Bernards niece, Shana, joined the firm in 1995 and
served as the in house legal counsel and rules compliance attorney for the market making arm on
the broker-dealer side. This is how Madoff was able to keep the fraudulent activities under wrap
and controlled since the employees were mostly family. This should have been also question by
investors. Next was No Madoff mention (GREGORIOU) (LHABITANT) several of the private
placement memorandum and marketing materials never mention the Madoff or BMIS names.
This would have had me asking questions as to why not. Madoff did have a way of going around
it. Then was the Lack of staff (GREGORIOU) (LHABITANT) In its regulatory filing, BMIS
indicated that it has between one and five employees who performed investment advisory
functions, including research. This was really mind blown to hear that this huge business that is
net worth in the billions only have a couple of employees to manage it. Now was the SEC
registration (GREGORIOU) (LHABITANT) Madoff only registered as an investment advisor
with the SEC in September 2006. Prior to this, he evaded registration and its subsequent
disclosure rules by using a regulatory gap that allowed investment advisors with less than 15
clients not to register. And since Madoff manipulated the system This allowed him to operate
under the radar screen and random audits of the SEC. Next was Extreme secrecy
(GREGORIOU) (LHABITANT) Madoff refused to answer questions about his business in
general and his investment strategies in particular. In the hedge fund world this has to be
available to their investors on how the quality operations. Then Paper tickets (GREGORIOU)
(LHABITANT) Feeders funds that had some level of transparency on the investment strategy

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were only able to receive paper tickets by mail at the end of the day. On some occasions, the
paper tickets had no time stamps, so that the exact order of the purposed transaction was unclearofficially a protection in case others might try to replicate it or trade against it. Most others
would provide an electronic document but not with Madoff. And finally there was Conflict of
interest (GREGORIOU) (LHABITANT) the fact that BMIS was simultaneously a brokerdealer and a market maker in the stocks traded according to the strategy. These were the red
flags from the operational side in the following I will go over the investment red flags.
A black box strategy (GREGORIOU) (LHABITANT) When applied systematically
with a monthly rollover, a split-strike conversion strategy can be profitable over long periods, but
it will also generate some down months and exhibit significant levels of volatility. Madoff used
market intelligence and front running as part of this black box strategy. The type of front running
he was doing was illegal in the U.S. Next is Questionable style exposures (GREGORIOU)
(LHABITANT) a variety models and dynamic benchmark portfolios to analyze hedge funds on
the basis of their track record. Then Incoherent 13F filings (GREGORIOU) (LHABITANT)
Investment managers who exercise investments decisions over U.S. $100 million or more
must disclose quarterly their holding on a 13F form with the SEC. Madoff didnt even though
he had (GREGORIOU)(LHABITANT) over U.S. $17 Billion of positions, his 13F form usually
only contained scatterings of small positions in small (non-S&P 100) equities. This is another
way Madoff rode under the radar for so long. And the final red flag on the investment side was
Market size (GREGORIOU) (LHABITANT) Given the daily trading volume, option prices
would have experienced sharp moves in the wrong direction for Madoff. None of that
happened. And this comes to a shock since most do have bumps but not with Madoff. Madoff
also never confirmed the names of who he was trading with or nothing. All of these that were

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mention were part of the Operational and Investment red flags that should have been spotted
early on, but people might have just ignored them since they would dare of Madoff doing such a
thing since he was well respected and considered a legend in the wall street world of business.
The Mind Set
The mindset that went with Bernard Madoff would be Destructive Motivations. He was a
very brilliant man. He was knowledgeable in his expertise of finance and was well respected in
his field by others. Just as he was so brilliant and smart, people would think he would do the
right things. He did the most bizarre thing and created a huge Ponzi scheme. He knew how to
control the situation and a person. I believe his ego got the best of him since (Johnson) we can
become overconfident, ignore the risks and consequences of our choices, take too much credit
when things go well and too little blame when they dont, and demand more than our fair share
of organizational resources. Greed may have played a role in his decision to keep this Ponzi
scheme going at all costs for the greater good of the number.
Victim Thoughts
The thoughts of most victims you would thing would be in rage and hate towards Madoff
and would have had bad stories to talk about him, but its the complete opposite. One former
client states that (Lewis) Bernie knew the name of everyone who worked there-from the
department heads all the way down to the mail room. (Lewis) Bernie treated his employees
very well-benefits, parties, bonuses, etc. Everyone looked up to him and respected him. Most of
his victims were close friends of Bernard Madoff and of many years even decades. This was
who Bernard Madoff was a smooth talker, a person who can fill a whole room with just his
presence, trust-worthy person, a person people would look up to. This is the person he wanted
people to see him as but, he was not that person in heart.

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Final Thoughts
My final thoughts of Bernard Madoff would be that he was very unethical. People may
have different opinions about him and thats fine. But when it comes down to it in the business
world after he was exposed he was nothing more than a walking fraud. He knew what he created
decades ago with his Ponzi scheme and he knew what he wanted to accomplish and that was to
get wealthy at whatever cost. Even if it meant to steal from the very own people that respected,
admired, and trusted him. He had an ego and greed that was beyond evil for what he did. What
we can learn from this is to be more vigilante in whatever we do, be ethical, and dont let your
ego, greed or emotions be your kryptonite to your downfall.

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References
GREGORIOU, G. N., & LHABITANT, F. (2009). Madoff: A Flock of Red Flags. Journal Of
Wealth Management, 12(1), 89-97.

Lewis, L. (2011). How Madoff Did It: Victims' Accounts. Society, 48(1), 70-76.
doi:10.1007/s12115-010-9394-3

Glodstein, D., Glodstein, S. L., & Fornaro, J. (2010). Fraud Trauma Syndrome: The Victims of
the Bernard Madoff Scandal. Journal Of Forensic Studies In Accounting & Business, 2(1), 1-9.

Johnson, C. E. (2012). Organizational ethics: A practical approach (3rd ed.). Thousand Oaks,
CA: SAGE Publications.