Ponzi Scheme of Bernard Madoff - Case Study Example

Analyzing the Madoff Case Summary of the Case Bernard Madoff created the world’s greatest Ponzi scheme. A Ponzi scheme’s system makes sure that it completely disintegrates after the discovery of the fraud. The fraudulent activities of Madoff fell down upon the constant streams of redemptions after the financial turmoil. However the disaster is that the Securities and Exchange Commission (SEC), on several instances, comprising many reliable pursuers, had chances to inspect and discover Madoff’s scheme. The most known and exposed prospect was given by financial analyst Harry Markopolos. He presented a comprehensive financial statement to the SEC in 2005, showing compelling proofs of Madoff’s fraud. The SEC embarked on an investigation in 2006 but concluded it in 2007 based on the finding that there were no proofs of fraud found. Nevertheless, Madoff was arrested on December 2008 and on March 2009 he officially confessed taking part in various crimes. He was sentenced to a 150-year imprisonment. (1) What are the ethical issues involved in the Madoff case? The ethical issues in the Madoff case obviously concern fraud, defined as “any purposeful communication that deceives, manipulates, or conceals facts in order to create a false impression.” Apparently, Madoff offered false hopes to potential investors and gave fabricated investment reports or financial statements. He encouraged large investors to put money in his investment machine by using his established image as a reliable, esteemed, and successful businessman. Madoff is, particularly, guilty of consumer fraud, marketing fraud, and accounting fraud. He deceived potential investors for personal gain or, according to the investigators, to sustain the lavish lifestyle of his family, which is suggestive of consumer fraud. He committed marketing fraud by exaggerating possible returns on investment, which can also be called ‘puffery’, or implied falsity since he told potential investors that his investment machine will generate a steady source of profit but in fact the returns come from the money of new investors which was risky. Lastly, he committed an accounting fraud by manipulating the financial statements of his company to avoid any detection of his wrongdoings. Madoff implicated educational, nonprofit, and charitable organizations by giving a contribution to them. Several of these organizations put money into the company of Madoff as a return of favor. His fraud forced a number of these organizations to shut down. The scandal also negatively influenced the public’s perception of investment companies. People will become hesitant and doubtful of investment businesses, which will negatively impact other sectors of the society. (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? Bernard Madoff has accomplices, definitely. Although he is obviously a financial wizard, he wouldn’t be able to pull off such a big scheme for a long time without the help of people who are knowledgeable of regulatory procedures in the investment and finance industries. The substantive report of Harry Markopolos should have been sufficient to indict Madoff of fraud, but he was still able to continue his fraudulent investment activities for a couple of years after Markopolos’s report. However, with regard to participation in Madoff’s fraud, it is vague whether it represents a conflict of interest or not. For instance, the most important positions in the company of Madoff is occupied by the members of his family, particularly, his brother, wife, niece, and sons. But it should be kept in mind that his sons were the ones who turned him to the authorities. In so doing, the sons have chosen the interests of the organization, the victims, and the society over their personal interests (e.g. the welfare of the company, flow of profit, etc). But it is possible that these family members have known of the scheme beforehand and was only forced to disclose the fraud because everything was on the verge of discovery. If this is the case, then a conflict of interest is still evident. But in this case personal interests reigned over the welfare of others since they chose to reap the profit while others, particularly the investors, were clueless to what was happening to their investments. Other possible accomplices are his accountant, some of the ‘feeders’, regulatory officials, and the rules and compliance officer, Shana Madoff. It was on her watch that these fraudulent activities took place. (3) What should be done to help ensure that Ponzi schemes like this one do not happen in the future?’ Financial frauds usually can bring about major damages to the society, organizations, and individuals. They harm employees, lenders, vendors, and investors; they lead to misappropriation of resources to firms that perpetrate accounting frauds. A number of measures could and ought to be taken to educate stakeholders, like students, scholars, auditors, and inventors of the cases from earlier financial tragedies. An organization or department that shares information and strategies for thwarting and spotting financial fraud should be established. Aside from this, and possibly most crucially, teachers of business administration should distance themselves from the outdated and incompetent way they are educating students. Instead of obliging them to commit to memory auditing processes and accounting principles, students should be learning the rich documents on financial reporting violations and errors. Other professional field of expertise, like law and medicine, educate their apprentices by introducing examples from the earlier periods. To mitigate the occurrences of fraud in the investment and finance industries and discover it when and where it takes place, radical reforms in financial statement analysis, financial reporting, and accounting training are required. This kind of training would divert focus from learning by rote auditing protocols and technical principles to an emphasis on the learning of financial reporting frauds and mistakes. Investors should also learn to manage their accounts and diversify their investments. The problem with the Madoff’s investors is that they placed all their investment in the firm which, after the discovery of the fraud, left them penniless. These measures have the potential to finally eradicate financial reporting scheme. References Ferrell, O.C. & J. Fraedrich. Business Ethics: Ethical Decision Making & Cases. Mason, OH: South-Western College Pub, 2010. Rhee, R.J. “The Madoff Scandal, Market Regulatory Failure and the Business Education of Lawyers” Journal of Corporation Law 35.2 (2009): 363+ Read More