University of Hawaii at West Oahu
Phil 481
Bernard Madoff Case Analysis
3/16/2012
Being an investor and investment
adviser, Bernard Madoff started off with a legitimate and successful
businessman in his early career. He also served as chairman of NASDAQ in 1990,
1991, 1993 and served on charitable board. Being a man of respect and
trustworthiness, Bernard Madoff founded his own company called Bernard L.
Madoff Investment Securities LLC in 1960 which consisted of only his family
members. His company was one of the top market maker businesses in Wall Street.
Bernard Madoff was arrested on December 11th, 2008 for using Ponzi
scheme to defraud his clients. Basically, in this scheme, He promised investors
a large return of 10 to 12 percents of profit for their investment. Tricky part
was Bernard Madoff never invested any of his money in his investor funds. All
he did was transferring money from one bank to another. However for this scheme
to work, Bernard Madoff always needed to attract new investors and use their
investment money to pay the earnings for old investors. Typically, this type of
scheme would likely to be self-destruct because of the ability to attract new
investors would diminish gradually. Ironically, Bernard was able to continue
his scheme for so many years. Clients of Bernard Madoff included successful business
people and entrepreneurs, profit and non-profit organizations. All of these
investors lost significant amount of money to Bernard Madoff’s scheme. Some of
investors lost their entire life saving fund led to their suicides. He was
arrested for his $65 billion Ponzi scheme, charged with criminal securities
fraud, and sentenced 150 years in prison.
This is a 30-years Ponzi scheme that
destroyed $65 billion in investment. How come a scheme with such a staggering
scale had been going on for so long without any suspicion? The question goes
straight to the business gate keeper such as accountants, regulators, and
auditors in the SEC who supposed to protect investors’ interest. Their jobs are
to protect the investors from swindlers like Bernard Madoff. Obviously, the SEC
did not do a very good job in this case. Bernard’s scheme had been going on for
years and the SEC was not able to stop his scheme until it’s too late. Many
investors were hurt financially, emotionally, and physically. Considering the
scale of this scheme how could the SEC not notice? The SEC should have placed
investor like Bernard Madoff under a tighter government scrutiny
What about the people and
institutions who contributed millions of dollars to his scheme? Why did those
investors blindly invest a huge amount of money without any careful research on
where the money going to? The investors also took faults in Bernard’s scheme.
The scheme was very fishy from the start. The return of investment was a lot
higher than usual. Because of high profit in return, those investors chose to
trust their money with Bernard Madoff without any hesitation.
What are the ethical issues involved in Madoff’s case?
The case of Madoff was a very
complicated case. From an ethical perspective, this is a white-collar crime.
Bernard Madoff sacrifice the public interest to pursuit his own financial
goals. From the beginning, there were several ethical issues to begin with.
First of all, Madoff manipulated the stream of cash flow to make it look like
his company is more valuable than it actually was. Second, his company’s
financial reports were never made public during the time of the scheme. For
some reason, no one ever question on that. And how his company passed the tax
audition imposed question on the SEC internal system. There were maybe bribery
involves for the one who audit his company. Those facts make us question the US
government system.
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?
It
doesn’t matter how intelligent Bernard Madoff is, he cannot possibly pull this
scheme all by himself. The fact is who know and complicit Madoff on this scheme
is questionable. How did people in his company’s internal system such as accountant,
and auditors not know about the suspicion on the financial report? It would
make more sense if these people not become suspicious if the scheme end in
couple months. However, this scheme had been carried out for 30 years. And
there is no one to report the suspicions on the company’s financial
documentation. Another explanation would be that those people get some kind of
benefit so they can keep their mouth shut. Besides, his whole family is
involved with the company. Judgment had not been made whether or not his family
members were involved. It’s still under investigation. However, I am positive
that they are involved in his scheme in at least a certain degree. Assumption
that Madoff carried out this entire scheme by himself would be out of the question.
What should be done to help ensure that
Ponzi schemes like this one do not happen in the future?
The SEC exists to protect the
investors. We rely on SEC system to uncover frauds from the start to protect
the public interest. The failure of SEC, in my opinion, is due to the
understaffing problem. SEC does not get enough funds from the government to investigate
cases before the damage have been made. One way is to get more funds from the
government so that they get more power to do what they are supposed to do.
For
investors, they should be more careful about overly consistent profit return.
Stocks tend to go up and down unexpectedly. If someone guarantees a high profit
return regardless of the changes of the stock market, do some careful research
before investing. It usually is too good to be true.
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