Madoff Securities International Limited - Scandal - Essay Example

Even if the director fails to apply his mind to whether a transaction is in the interests of the company, it does not automatically follow that he isliable for the consequences of the transaction. The court will ask whether an honest and intelligent man INTRODUCTION From the corporate description, the term director generally points out towards one responsible head that analyses and regulates the functionality of an organization or a projects in a manner that appears favourable to the cause (Australian Institute of Company Directors (AICD), “Roles, Duties and Responsibilities”). These boards of directors can be held accountable for structuring and implementing various innovative and management strategies through which an organization can be made to accomplish its desired objectives in a much effective manner (Authenticity Consulting, LLC, “Overview of Roles and Responsibilities of Corporate Board of Directors”; Bytestart Limited, “Responsibilities and duties of a limited company director”). This discussion will mainly focus towards evaluating the case of Madoff Securities International Limited. Moreover, the discussion will also focus towards understanding the functional flexibilities and duties that were negatively apprehended by the company directors, which resulted in bringing Madoff Securities International Limited to its needs. (Brefi Group Limited, “Roles and responsibilities of directors and boards”). SCANDAL DETAILS Madoff investment scandal during the period of 2008, turned out to be one of the major evidences that elaborated the type of business fraudulences that can be conducted by a financial organization. Along with Bernard L. Madoff being the chairman of this company, the entire scandal also included multiple other culprits including Bernard L. Madoff’s own brother Peter Madoff as being the ‘Senior Managing Director and Chief Compliance Officer’ of this company. Madoff’s business took the form of a Ponzi scheme as a result of which, he was charged for violation of 11 federal crimes and sentenced with 150 years of imprisonment along with a chargeable compensation fee of $170 billion USD (CMS Cameron McKenna LLP 2012, “Lessons from Madoff on directors’ duties”; CMS Cameron McKenna LLPb, “Directors’ duties under the Companies Act 2006”). In alignment to the above scandal descriptions, multiple roles and duties for the directors have been structured under the Company Act of 2006, adherence to which might not bring the director under direct jurisdiction of the court even if the director fails to apply his mind in deciding whether a transaction is in the interests of the company or not. FREEDOM OF DIRECTORS TO WORK ALONE UNDER THE COMPANIES ACT 2006 Understanding the responsibilities of the directors, it can be stated that being a highly responsible head of an organization, it becomes a mandate for the directors to attain sound consent of the organization’s functionality and the decision of the shareholders before approving any business related judgment (Smokeball Australia, “Statutory and Common Law Directors Duties A Summary”). Thus from a corporate perspective, it is worth apprehending that the actions and decision making pattern of a director are always restrictive and aligned with the organization’s interest. Justification regarding these aspects can be provided taking consideration of the fact that without the opinion of other directive heads, the decision provided by a sole director might go out of track and in an eventual manner might also turn hazardous against the company’s best interests (Wolin 1-31; Taylor Wessing LLP, “What obligations does a director have?”). OBLIGATIONS AND DUTIES THAT THE DIRECTORS WILL HAVE TO BEAR IN MIND The specific sectional duties of the directors that have been structured within the Companies Act 2006 have been enlisted under as follows: Duty to Act Bona Fide (In Good Faith) In the Interests of the Company as a Whole under Section 172 of the Companies Act 2006. The first direct role is regarding the functional flexibility that needs to be provided to the directors so as to motivate them towards functioning in alignment to the organization’s benefits as stated in the Section 172. In accordance to this duty, a director should have the urge of guiding the company towards the attainment of a better market reputation. Moreover, a director should also project his / her rigidity against the occurrence of fraudulency activities. A similar kind of instance was observed in the case of ‘Industrial Development Consultants Ltd v Cooley (1972)’ (Crown, “Section 173: Duty to exercise independent judgment”; Crownb, “Directors responsibilities”; Dignam & Lowry 354-366). Duty of Acting in Harmony and As a Team under Section 176 of the Companies Act 2006. The second credential responsibility of an organization’s director is to indulge into proper business and functionality discussion with the other directors within the organization. It can be asserted that such strategic discussions often lead to the structuring of tactical business plans through which the effectiveness of a business process can be increased. This kind of business plan also provides significant amount of support in terms of mitigating the occurrences of varied forms of business fraudulences (Globe Business Publishing Ltd, “Statutory duties of directors of English companies as from 1 October 2008”). The responsibility also requires the director of the company to take consideration of the voting opinions of other directors before finalizing any specific decision (CMS Cameron McKenna LLP 2012, “Lessons from Madoff on directors’ duties”; CMS Cameron McKenna LLPb, “Directors’ duties under the Companies Act 2006”). In such manner, the accountability of a director against any specific organizational fault will also minimize. The case of ‘Australian Securities and Investments Commission (ASIC) v Macdonald (No 11)’ also projected the attainment of similar kind of allegation under this section. Moreover, the judgment offered by the voting process will be far more effective in comparison to that of the decision (Department for Business Enterprise & Regulatory Reforms, “Directors and Secretaries”; FTC Corporate & Tax Advisory Pte. Ltd, “Directors Statutory and Fiduciary Duties”). Duty to Exercise Independent Judgment Section 173 of the Companies Act of 2006. Being a part of the Company’s Act, as per section 173, this duty provides every director, the freedom of projecting his / her decision against any sort of organizational events or discrepancies. However, it also mandates the fact that the provided decision should completely depend on the decision making capabilities of the director. Any sort of organizational or higher authority pressure on the director that might affect his judgmental capabilities, which will be considered as a violation of the norms as mentioned in the Company’s Act. A better elaboration of this law can be provided by taking consideration of the ‘Madoff Securities International Limited’ case. In this case, the court took account of Peter Madoff as being a violator of ‘Duty to Exercise Independent Judgment’ taking consideration of the fact that he was intensively pressurized by Bernard L. Madoff in term of contributing to the Ponzi scheme irrespectively of his will (Institute of Directors,” Directors duties and responsibilities”). “Duty To Retain Discretion Under Section 174 Of The Companies Act 2006”: The third identified responsibility that is worth suggesting is regarding the capability and the intellect of a director in terms of doing the aftermath about the organizational consequences that might occur as a result of any financial transaction or decision execution as per section 174 of the companies Act. In that manner, the directors will not be brought to direct questioning by the court in case any consequence occurs. In alignment to the section 174 of the company’s act, a similar kind of fraudulency case was witnessed during the period of 1742 namely, ‘The Charitable Corporation v Sutton (1742) 26 ER 642’. One specific advice by taking consideration of the overall context is that the directors should avoid getting along with such business or financial transaction that might eventually bring the company’s reputation and sustainability at risk (Globe Business Publishing Ltdb, “Lessons from Madoff on directors’ duties”). Duty Not To Act for an Improper Purpose under Section 172 of the Companies Act 2006. As per section 172 of the Companies Act 2006 this aspect can be considered as one of the major ethical responsibility that should be taken care of by the directors of an organization. An organization or a project majorly relies on the management techniques as practiced by the directors, thus it is the duty of every director to utilize his/ her allotted power under good use rather than focusing on negative or short terms techniques of profit attainment, which in turn might jeopardize the organization’s market reputation. The case example of ‘Re Smith and Fawcett Ltd [1942] Ch 304’ can also be considered. This, duty also takes consideration of multiple factors that an organization needs to impose on its directors so as to force them in terms of maintaining their authenticity and ethicality (Crowc, “INS48310 - Legal background: Directors duties: What are the statutory duties of directors?”; FTC Corporate & Tax Advisory Pte. Ltd, “Directors Statutory and Fiduciary Duties”). Some of these mandate factors have been illustrated hereunder. The first mandate factor is regarding the abidance of the voting opinion as projected by majority of the directors from the same organization The directors are not authorized to use unethical tactics in terms of new majority options within the board In terms of raising funds for the organization’s functionality the directors should only take consideration of commercial options that does not pose any sort of threat to the organization’s interests Directors are often allowed to indirectly project their functional capabilities and expertise through the development of the company’s interests Every business transaction that a director facilitates with another organization should in alignment with the company’s interests Duties of Care and Diligence under Section 174 of the Companies Act 2006. An organizational director also gets allotted with a responsibility of projecting himself / herself as a transparent representation of each and every functional aspect occurring within the organization. Any sort of encapsulation projected by the director in terms of projecting the organization’s data during an enquiry or audit also gets categorized as a violation against the ‘Company Law’. The directors are also required to keep themselves updated with all the possible information regarding organizational solvency (Formacompany.ie Ltd, “Directors Duties”). The duties of an organization’s director also requires him to be answerable to all the possible questions in case the organization gets accused against any sort of ethical or financial misconduct. The case of ‘Regal (Hastings) Ltd v Gulliver, (1942)’ can also be considered as a relevant example as being alleged under the same section. In addition, evaluation of the organization’s each and every financial data during the end of a fiscal year also gets accounted as one of the prime responsibilities of a director. The main intention of the director is to eliminate the occurrence of any sort of unbalance in the organization annual reports, failure to which might raise multiple auditable questions against the organization by the legal bodies (1st Formations, “The statutory duties of limited company directors”). Duty to avoid conflicts of interest under section 175 of the Companies act of 2006. In accordance with the Company’s Act, directors should also have an appropriate mindset based on which they should avoid of getting themselves into conflictive situations within other company assets. These directive responsibilities often get termed as the ‘fiduciary duties’ that a director must abide by so as to safeguard the company’s interests. Multiple directors consider this as an obligation for which they fail to project their expertise and efficiency. Justification regarding this statement can be provided in a manner that the guidelines associated with this duty require the directors to take consideration of the company’s interests prior to their own interests (ICAEW, “ICAEW guide to the duties and responsibilities of directors”). The case of Cook v Deeks (1916) 1 AC 554 also finds alignment with this section as being alleged under section 175 of the company’s act. Regardless of all these, multiple conflictive issues arises that often hampers the decision making and the behavioural traits projected by the director towards the other credential aspects of the organization. The projection of a director’s involvement in a conflictive situation can be in a direct as well as in an indirect manner. In a direct manner, the director might project his / her own capabilities in a prior manner irrespective of the fact that it might hamper the organization’s development pattern. However, the indirect approach of a director in terms of getting involved in an conflictive situation gets addressed in case he / she plays the role of being a director as well as shareholder of the organization (Legalease.co.uk, “DIRECTORS: Beggering belief”; Lloyds Bank, “Becoming a director”). Duty Not To Disclose Confidential Information under Section 175 of the Companies Act of 2006. This is one of the most crucial ‘fiduciary roles’ of the directors in terms of safeguarding the company’s interest and market integrity. As being a high ranking individual within the organization the directors are required to maintain confinement of the organization’s functionality and performance data so as to prevent other major competitor’s from imitating the products, services and working techniques of their organization. In the long run, it might also hamper the performance and overall reputation of the directors itself. In terms of functionality, it can be stated that product types, resource information, client and supplier information along with their functionality patterns are the prime aspects to the effective survival of any organization. As an associated result, disclosure of any of these confidential data might result in huge amount of drop within its market share price, which might even result in terms of the company going bankrupt (Mondaq Ltd, “South Africa: Duties and Responsibilities of Company Directors”). The above mentioned facts elaborate about some of the legalized duties and obligations that every organizational director should have in mind. Regardless of all these, multiple statutory duties also exists in the minds of the directors during their functionality. Few of such statutory duties have been elaborated as under. In alignment with this section, a similar instance has been addressed in the case of ‘CMS Dolphin Ltd v Simonet (2001)’ (Mondaq Ltd, “South Africa: Duties and Responsibilities of Company Directors”). Duty Of Attaining Shareholder’s Consent Against Every Financial Transaction Under Section 176 Of The Companies Act Of 2006. One of the major statutory responsibilities of a director is to take approval of all the organizational shareholders before sanctioning any sort of financial transaction to other suppliers or counteracted business processes. Through this manner, a director mitigates his accountability in terms of being questioned in case any financial discrepancy occurs on later basis. In accordance to these responsibilities, the director should also compel each of the shareholders regarding the possible impact of every financial transaction of the overall functionality of the organization (Pinsent Masons LLP, “The code of directors duties”; Office of the Director of Corporate Enforcement, “Responsibilities”; Dignam & Lowry 362-379). Duty towards the Projection of Appropriate Financial Reports to the Shareholders under Section 176 of the Companies Act Of 2006. Regardless of being only a director or a stakeholder to the organization, it is the prime responsibility of the director to project accurate financial reports to all the shareholders through which the performance of the organization along with its associated resources can be analyzed. Failure to such duties might result in implementation of heavy penalties on the directors and in certain cases might even result in imprisonment. The case of ‘Peskin v Anderson (2000)’ also projects a similar kind of happening and thus can be considered to be accountable under section 176 of the company’s act of 2006 (Rocket Lawyer, “Different types of company director”; Ross 1-15; Dignam & Lowry 381-387). POPULAR CASES OF PONZI SCHEMES The case of the ‘The Scientologist Snake: Reed Slatkin’ can be considered as one of such appropriate examples in alignment with the context. The obligations against Reed Slatkin stated about the plans of implementing the Ponzi scheme on Hollywood artists that eventually got exposed. The sentencing of this case was done depending on multiple sectional laws namely, ‘Section 17(a) of the Securities Act of 1933’, ‘Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder’, ‘Sections 206(1) and 206(2) of the Investment Advisers Act of 1940’ and ‘investment adviser registration provisions of Section 203(a) of the Advisers Act’ (U.S. Securities and Exchange Commission, “Reed E. Slatkin Sentenced to 14 Years for running a $600 Million Ponzi scheme And Obstructing Justice”). CONCLUSION Throughout the discussion, multiple facts and elaborations have been projected regarding the potential duties of an organization’s director as legalized by the certain corporate contracts and acts. All these legalized and statutory norms have been formulated in accordance with an organization’s best interests and practices. Appropriate evolutions of these legalized duties will specifically help in understanding the types of fallacies that were conducted by the CEO and director of ‘Madoff Securities International limited’ that eventually penalized the company’s reputation and market share and finally led to its complete failure. Works Cited “Roles, Duties and Responsibilities.” Australian Institute of Company Directors (AICD). 2014. Web. 30 October. 2014. “Overview of Roles and Responsibilities of Corporate Board of Directors.” Authenticity Consulting, LLC. 2014. 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Web. 30 October. 2014. “Lessons from Madoff on directors’ duties.” Globe Business Publishing Ltdb. 2013. Web. 30 October. 2014. “INS48310 - Legal background: Directors duties: What are the statutory duties of directors?” Crowc. 2014. Web. 30 October. 2014. “Directors duties and responsibilities.” Institute of Directors. 2013. Web. 30 October. 2014. “ICAEW guide to the duties and responsibilities of directors.” ICAEW. 2014. Web. 30 October. 2014. “Becoming a director.” Lloyds Bank. 2014. Web. 30 October. 2014. “DIRECTORS: Beggering belief.” Legalease.co.uk. 2014. Web. 30 October. 2014. “South Africa: Duties and Responsibilities of Company Directors.”Mondaq Ltd. 2005. Web. 30 October. 2014. “Responsibilities.” Office of the Director of Corporate Enforcement. 2014. Web. 30 October. 2014. “The code of directors duties”. Pinsent Masons LLP. 2014. Web. 30 October. 2014. Ross, Stephen. ‘Madoff Securities International Ltd (In Liquidation) v Raven & Others [2013] EWHC 3147 (Comm).’ Withersworldwide. (2013): 1-15. Print. “Different types of company director.” Rocket Lawyer. 2014. Web. 30 October. 2014. “Statutory and Common Law Directors Duties A Summary.” Smokeball Australia. 2014. Web. 30 October. 2014. “What obligations does a director have?” Taylor Wessing LLP. 2014. Web. 30 October. 2014. “Reed E. Slatkin Sentenced to 14 Years for running a $600 Million Ponzi scheme And Obstructing Justice.” U.S. Securities and Exchange Commission. 2014. Web. 30 October. 2014. Wolin, Robert M. ‘Fiduciary Duties of Nonprofit Directors and Officers in Managing Investments.’ Business Law and Governance Practice Group. (2010): 1-31. Print. Read More