Bernard Madoff Ponzi Scheme Case - Essay Example

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Bernard Madoff Ponzi Scheme Case Introduction Bernard Madoff operated what was considered to be one of the most successful investment strategies in the world, for more than seventeen years. His embezzlement of funds came to light in December 2008, as one of the most detrimental Ponzi schemes in history…
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Bernard Madoff Ponzi Scheme Case
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Download file to see previous pages The fraud caused investors to lose billions of dollars, and gave rise to a crisis of confidence in the capital markets. In reality, Madoff’s funds had no investment strategy to provide “hedges” against the usual forms of risk. For over a decade, there had not even been any trading of stock. In Madoff’s Ponzi scheme, the early investors were bought off with the money from the later investors; additionally, the payouts to the early investors were used as proof of profitability, to thereby convince later investors that the returns were legitimate. The bankruptcy trustee is implementing remedial measures including a “clawback” action for the later investors to recover the profits of the early investors. Thesis Statement: The purpose of this paper is to investigate the Bernard Madoff Ponzi Scheme Case, examine the reasons for the fraud to take place over several years, identify the warning red flags missed by the investors, and the preventive and recovery measures to be adopted in Ponzi cases, besides other related aspects. Bernard Madoff’s Ponzi Investment Scheme The investment operation of Bernard Madoff was exposed in December 2008 as an extensive Ponzi scheme. The term is derived from Charles Ponzi who organized such a scam in 1919, and it denotes a fraudulent investment arrangement in which investors give cash and property to the main individual in the arrangement. While misappropriating some or all of the funds, the investment operator reports to the investors that the funds made profits. These professed amounts, and those actually paid to earlier investors are funds received from later investors. The fraud is revealed usually when a large number of investors wish to withdraw their investments at the same time, particularly when there is insufficient in-flow of money from new investors. Thus, Bernard Madoff duped investors of an estimated amount of more than $50 billion, by the time the fraudulent scheme was uncovered (Mannino, 2010). Madoff’s alleged Ponzi had a reach across the globe of more than $50 billion. The sustained durability of the fraud for nearly two decades is considered to be due to Jewish money managers, severe regulatory shortcomings including ineptitude, and probable conflicts of interest by Federal Communications Commission (FCC), Securities and Exchange Commission (SEC), and other regulators and auditors. Madoff appears to have taken actions that reveal him as an equal opportunity thief, who unashamedly misappropriated funds from close relatives and charities in his scheme (Vinod, 2009). One of the main reasons for Madoff’s attracting a wide following was that he “delivered consistently high returns with very low volatility over a long period” (Bernard & Boyle, 2009, p.3). His technique to obtain these low risk returns was to use a split-strike conversion strategy. This requires taking a long position in equities together with a short call, and a long put on equity index to lower the volatility of the position. It was eventually revealed that these returns were false. The Madoff case raises obvious questions on why it was not discovered earlier, and the reasons for investors and regulators to miss the various red flags. The need for risk management and regulation through improved capital requirements for operational risk, is evident from the implications of ...Download file to see next pagesRead More
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