Case 8: The Fraud of the Century: The Case of Bernard Madoff

Introduction

Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and the former non-executive chairman of the NASDAQ stock market. He is very successful in his early life. Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 by buying and selling over-the- counter stocks that were not listed on the NYSE. As he became more successful, he moved the companys headquarters from Wall Street to the famous Lipstick Building on Third Avenue. After that, Madoff started to help his investors to manage their money. He used Ponzi scheme to cheat his clients by promising of consistent returns of 10 to 12 percent. Base on his trustworthy and reputation, he success to find billions of dollars from hundreds of investors. Basically, Madoff just took money from new investors and uses it to pay off the old investors. Why he can make it because lots of investors lack financial knowledge. Also they wont doubt about what the investment is as long as Madoff can make money for them. People didnt know what is going on until Madoff cant find any new investor to throw money in his schemes. After that, his schemes collapsed. In March 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme but he never indicated the involvement of any other company employees or his family members. After the investigation, investigators also found out his family also committed this fraud, Bernards son and his brother involve in his business, his wife does the social networking to attract celebrities to open account in his firm. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed. SWOT analysis Strengths * Investors didnt know what Madoff did for their investment. They also lack professional financial knowledge. * Madoff is able to manage all financial activities with his highly education and experience. * Madoff guaranteed the high return for his investors. * Base on Madoffs reputation, investors over trust him. Weaknesses * Madoffs schemes need consistent money from new investors. During the recession, Madoff had difficult time to recruit the new investor. Thats how his schemes went down. * If lots of investors ask for cash out in the same time, that means Madoff needs to find more new money to run the schemes. * This can be considered as illegal fraud. Opportunities * More and more people like to invest their money before the recession. Threats

* SEC and other investor will investigate Madoffs firm * Accountant can check his transaction record. 1. What are the ethical issues involved in the Madoff case? From an ethical perspective, this is an example of white- collar crime. Madoff is a typical white collar criminal who abused his trust for profits. In fact, Madoff s business is a lie. He promised all the investors will get the high return. Actually no one knew what is going on and what the investment detail is. Investors did not realize the problem because they still earning profit from Madoff. As more and more new investors throw money in these schemes, Madoff still has enough flow of money to pay to the old investors. Thats how he conducting his game. 2. Do you believe that Bernard Madoff worked alone, or do you think he had help increating and sustaining his Ponzi scheme? Would this represent a conflict of interest? I dont think Madoff can do this by himself. In fact, Madoff family works as a team to cheat the investors. Ponzi schemes need teamwork to get everything done. Madoff can easily elude investigation of SEC by transfer between his account and his familys account. 3. What should be done to help ensure that Ponzi schemes like this one do not happen in the future? We should prevent this happen in the future by changing peoples financial concept and knowledge. Investors must know what the investment detail is. Investors also should be careful of any guaranteed investments because every investment has some degree of risk. There is no sure win investment in the world.