Facts in the Bernie Madoff Scandal - Case Study Example

? Bernie Madoff Scandal: "The Kind of Ponzi Schemes" Facts in the Bernie Madoff Scandal Firstly the Ponzi scheme carried on by Bernie Madoff made theinvestors counter a loss of around $65 billion. The second fact reflects that the returns gained by the initial investors of around 1 percent were rendered to them from the consecutive investments gained from other investors and not from returns. Thirdly the above condition ran from 1990 to 2008 after which the case of subprime crisis hit the investors resulting in the doldrums. Fourthly, Bernie Madoff in the light of gaining investments from institutional investors in times of recession reflected to them a picture that their returns would be met. Fifthly, Bernie Madoff stated that the amount gained from investors would be employed to procure stocks pertaining to government securities and funds and would be traded effectively to gain. Sixthly, Bernie Madoff reveals to his family on December 9 and 10, 2009 that the Ponzi scheme was a complete fraud. Madoff also stated that he desired to distribute $200 to $300 million left among friends, family members and employees. Seventhly, Harry Markopolos an older employee of Madoff reflected that in spite of knowing the concern he failed to highlight such owing to fear of losing employment and trust of government bodies. Eighthly, the Securities and Exchange Commission (SEC) in United States failed to render an adequate probe into the matter. Finally, on March 12, 2009 Madoff finally appears before the court and admits all the fraudulent charges laid on him by SEC during December 11, 2008 (Brooks and Dunn, 2009, p.119). Inferences Drawn from the Facts Firstly, Bernie Madoff is a fraud for whom large number of investors had to suffer from huge financial losses. Secondly, though the security trading authority of United States had knowledge about the financial scam yet they failed to launch an adequate probe into the matter. However in the third case, Bernie Madoff reflects consideration for his family, friends and employees through deciding to leave around $200 to $300 million before surrendering before the authorities. Analysis of Specific Problems Firstly the Ponzi scheme of Bernie Madoff was based on a fraudulent strategy where Madoff promised the investors that their investments would be traded on securities purchase and in overseas market when in reality it was not conducted. Returns at the rate of 1 percent were rendered based on investments gained from new investors which countered a fall in the emergence of sub-prime crisis. Secondly, Harry Markopolos an employee of Madoff reflected the fear of being a whistleblower owing to lack of employment security and anticipation of fall in trust from government agencies. Thirdly, lack of an effective investigative team in SEC led to the failure of conducting a proper probe into the matter. The Cause-Effect Relationship Firstly the concept of Ponzi scheme reflects that it was initiated by Charles Ponzi who used to pay returns to the initial investors through the money gained from the investment made by other consecutive parties. The initial investors owing to gaining considerable returns acclaimed that Charles Ponzi was a genius. This fact attracted other people to render more investments thereby helping Ponzi to run away with the funds. Thus any investment activity carried out by an individual promising high returns in short time came to be known as Ponzi scheme which in here was carried out by Bernie Madoff (Wang, 2006). The same can be reflected through the following flow chart. The flow chart reflects that how the fund gained from new investors NI1 and NI2 were used to render interest to investors I1 and I2 by Bernie Madoff. Secondly, the employees working in a Ponzi company are found to suffer from certain relative fears that deter them turn whistleblowers to the scam. The employees fear that being part of the scam operation they would also be prosecuted by the law of the region. They also fear of being ostracized by the social community and also being turned out of the company. Further they also fear that their statement would not be trusted by high government authorities and would amount to self degradation (Cullen and Wilcox, 2010, p.775). Owing to the above facts in this case Harry Markopolos failed to highlight the scam operations carried out by Bernie Madoff. The following flowchart reflects the different causes that had caused Harry Markopolos in not being able to whistle blow the range of scam operations. Impact on Stakeholders and the Organization The stakeholders of Bernie Madoff’s corporation included his brother and other family members also involving friends and large scale investors. The government authority of United States governing securities trading was also a potential stakeholder. Lack of effective corporate governance guidelines in the light of the emergence of the global financial crunch coupled with reduction of business ethics and accountability to the public by Bernie Madoff resulted in potential losses and loss of trust in regards to the stakeholder groups (Chong, 2010, p.22). Analysis of the Solution to the Potential Problems Firstly in regard to Bernie Madoff it is required of him to be ethical and socially responsible in his actions. He should have fulfilled the promise made to the stakeholders and also needed to share the business problems with them to earn trust and business confidence. Secondly the organizational practice of the body governing securities trade needs to be improved in the light of effectively ceasing the emergence and growth of Ponzi companies. Thirdly it is required by the banks and other financial corporations to right assess the credit risk involved before rendering funds to the Ponzi companies (Paula and Dymski, 2005, p.144). SWOT Analysis of the Solutions Rendered Strength Enhancement of social and ethical responsibility in regards to Bernie Madoff would help him in gaining stakeholder’s trust. Development of the practice of the SEC would help in tracking down the scam. The rigid assessment practice of the banks would amount to reduction of financial resources in the hands of investors thereby helping in ceasing the growth of such scam concerns. Weakness Ethical and social responsible practices of Bernie Madoff can result in loss of employees and investors. Development of the practice of SEC would mean incurring high training cost to develop the personnel. Reduction in the amount of credit funding would reduce the potential of investors. Opportunity Ethical practices of Bernie Madoff would result in increase of transparency in the concern and would result in enhancement of trust. Development of the practices of SEC would lead to confidence building among the employees. Threat Such means of ethical transparency may lead Bernie Madoff to lose productive people and investors who may feel being convicted. Development of the practices of SEC would lead to any person in the concern raising his or her voice against the concern’s policies which would turn detrimental to the interest of the concern. Finally growth of securities and investment trading firms would be considerably affected in the economy owing to bank’s reduction of credit allowance. Decision Making Process for the Solution Gained The SEC needs to be well resourced in terms of effective personnel and information technology resources to rightly store and monitor large chunk of databases pertaining to investors’ activities. It would thus help in tracking the emergence of fraudulent transactions and thereby reducing such (Semmler, 2011, p.295). Inability of the SEC also amounted to the rise of another Madoff affair amounting to loss of around $550 billion (Choi and Papaioannou, 2009, p.118). Other Ponzi companies like Bennett Funding Group and that owned by Tom Peters happened to tune fraud amounts of the order of $700 million and $3.5 million respectively (Golden, et al., 2011, p.498). Recommendations and Solutions It is thus found that the Ponzi scheme tends to impact the investor and the employee communities in a devastating fashion through the incurring of high amount of losses. Ponzi concern owners owing to their social responsibility deficits coupled with the ineptness of the security trading governing bodies happen to enhance the magnitude of the problem. Thus it is required to aptly enhance the resource base of the SEC in terms of personnel and database storage and analytical resources to help track and thereby cease the emergence of such Ponzi concerns. References Brooks, L.J. and Dunn, P. (2009). Business & Professional Ethics for Directors, Executives & Accountants. United States: Cengage Learning. Choi, J.J., and Papaioannou, M. (2009). Credit, Currency or Deratives: Instruments of Global Financial Stability or Crisis? United Kingdom: Emerald Group Publishing. Chong, D. (2010). Arts Management. United Kingdom: Taylor & Francis. Cullen, F.T., and Wilcox, P. (2010). Encyclopedia of Criminological Theory, Volume 1. California: SAGE. Golden, T. W., et al. (2011). A Guide to Forensic Accounting Investigation. New Jersey: John Wiley & Sons. Paula, S.D., and Dymski, G. (2005). Reimagining Growth: Towards A Renewal Of Development Theory. New York: Zed Books. Semmler, W. (2011). Asset Prices, Booms and Recessions: Financial Economics from a Dynamic Perspective. Germany: Springer. Wang, W. (2006). Steal This Computer Book 4.0: What They Won't Tell You about the Internet. United States of America: No Starch Press. Read More