Madoff LLC Fraud - Research Paper Example

Madoff LLC Fraud Background of the Company In the United States as well as abroad, Bernard L. Madoff Investment Securities LLC, has been performing its operation as one of the agents and/or brokers in the securities dealing segment. The company was initiated in the year 1960 in New York and has been rendering numerous services to the banks, financial institutions as well as broker and dealers (Bloomberg Businessweek, 2011). The founder and the president of the company was Mr. Bernard Madoff who used to invest the money for the hedge funds, institutions and wealthy people. It has further been found that the company that had been based in New York was the 23rd biggest market maker in the month of October, 2008 on NASDAQ. It was evident that the company handled approximately 50 million shares per day. The main activity of the company has been to handle the orders that the online brokers belonging to a few of the biggest US companies used to make such as the Citigroup Inc. and General Electric. It is evident that the company has been the foremost to mechanize market-making. In this type of dealing, the dealer tends to incessantly buy the stocks and sell them as well. Madoff’s firm has also been the biggest to offer “payment for order flow” (Glovin & Scheer, 2011). Bernard Madoff never revealed his financial statements and kept back them under his safe custody. Further, it has been noted that Madoff has also been one of the active members of the NASDAQ Stock Market related board of governors as well as the member of NASDAQ’s executive committee and also had been the Chairman of trading committee. It has been evident that greater than 75% of the firm that has been owned by Bernard Madoff, along with Peter Madoff who is his brother; were the only two persons who were recognized on the regulatory records, being the direct owners and the executive officers. The other family members operating for Madoff has been Peter Madoff’s daughter named Shana working as compliance attorney. Sons of Bernard Madoff namely Mark and Andrew, and Charles Weiner were in the trading section. Andrew invested his funds in the company, however he was stopped from doing so by Mark in the year 2001 (Glovin & Scheer, 2011). The company made use of the numerous marketing tactics for the purpose of drawing the customers and thus stimulating a new era where electronic trading was of priority. The company has been a highly profitable security firm tapping enormous volume of the stock trades from the Big Boards. The company during its initial days used to deal with the Over-The-Counter along with Pure-Brokerage-Pink Sheets transactions. It was because of the Rule 390, the company was able to trade in NYSE stocks. For the purpose of altering the execution practices, the company had to utilize the Cincinnati Stock Exchange. It has been evident that among the five brokers, Madoff has been one of them who had been involved in the creation of the NASDAQ. It was noted that the company’s spread was quite sublime. It started as an investment advisory firm. It has been noted that the company had not been recorded in the stock exchanges till 2006. It can be stated that in terms of the US Securities by the year 2000, Madoff Securities had been successful at becoming the top traders and had in approximation $300 million of assets (De La Merced, 2008). Three floors were occupied by the business of Lipstick Building. The 17th floor belonging to Lipstick Building was office of Bernard Madoff that had in approximation of less than 24 of the staffs. It has been found that only a few of the employees were allowed to enter into that building. The floor was named as the hedge fund floor (Henriques & Berenson, 2008). The branch office of Madoff was also in London that was completely separate and different to that of the Madoff Securities employing 28 people and thus handled the investment and there was £80 million that Madoff kept as cash in the London office. It was used to fund those deals through which he could gain himself along with his wife named Ruth and his sons Mark and Andrew (Dovkants, 2008). The main aim of the report is to comprehend the types of frauds as committed by the Bernard Madoff. It will further try to find out how the frauds were identified and the control measures implied by the company. Types of Frauds Committed Numerous news and articles reported the frauds that were committed by Bernard Madoff. One of such frauds has been the operation of $50 billion scheme, named Ponzi scheme, which was one of the major frauds that took place in the history. Madoff stated that it had been his fault that he paid the investors the money which was not at all real. It was found that approximately 50 percent of its customers invested in hedge funds, while other customers consisted of banks along with the wealthy customers. In the website of the company, it focused upon the “high ethical standards” of the firm (Glovin & Scheer, 2008). The auditors of Madoff were accused by the Securities and Exchange Commission (SEC) of committing frauds in securities. They fallaciously demonstrated that they had conducted the audits legitimately while the fact was that they had not. It was stated by SEC that it was Friehling that helped in the smooth operation of the Madoff Ponzi plan. He falsely stated in the yearly audit reports that F&H ‘(David G. Friehling, CPA and his firm, Friehling & Horowitz, CPAs, P.C.)’, has checked the financial statements of BMIS according to the Generally Accepted Auditing Standards (GAAS). Further, the auditors of Madoff were accused of attaining ill-received benefits via returns from Madoff as well as BMIS. They were also accused of taking out the returns in the names of Friehling along with his members of the family from BMIS accounts (LaRocco, 2010). It is because of the fact that 50% of the customers invested in hedge funds, Marcopolos who had been the first securities executive, stated that it is a fraud and thus blew the whistle on the fraud committed by the company. The frauds that have been committed by the company have been extraordinary and such kind of manipulations tends to be not just a financial crime but something that tends to surprise the people (Lichtman, 2011). It can be stated that in the reports of KMPG, 25 risks had been acknowledged in the year 2006, while it was found that 28 such risks and frauds occurred in the year 2008. The frauds and risks that have been identified were all spread over the procedures of Madoff LLC inspection and accounting and receiving for the funds of the customers. It was stated by the KMPG that if there is limited control over the place then it may not assist in stopping the frauds or errors that is occurring at the accounts of the clients if the staffs or the administration of the Madoff LLC tends to dominate control or may commence certain activities where the suitable controls are not found. It can be observed that in the report of the year 2006, number 5 listed the risks from the fraud that the cash or the funds of the customers are being diverted for the personal benefits. The other fraud risk that was stated in the reports of the KMPG was that the company, Madoff LLC has been wrongly reporting the investors without executing the buy/sell related trades so that they can gain commission (Groendahl, 2011). It has been found that the Securities and Exchange Commission had identified one of the biggest sales of the unregistered securities. $440 million was invested into the investment pools by the numerous investors. Further, two accountants in Florida have been raising the funds who had been acquiring the money since a decade by not informing the SEC and prohibiting the disclosure of the financial accounts to the investors of the funds. This can be one of the prime frauds. It was noticed that the two accountants have promised to pay the investors the returns of more than 13.5% to 20%. The money invested by the investors could have been turned over for the management by the unnamed brokers. Regulators doubted that it may be a major fraud. It was found that it was because of the court-appointed trustee the mystery of the case was revealed. The trustee identified that the mystery money manager has been whipping the said returns by a huge margin that led to the betrayal by the two accountants in their accounting business in the year 1984 so that they can pay due attention towards the lucrative investment business with the mystery money manager. After having identified the fraud being committed it was important to locate the mystery money manager. It was Mr. Bernard L. Madoff who had been quite successful personality on the Wall Street, however was not identified as being the top class money manager. In an interview, he stated that he was unaware of the fact that the money had been raised illegally that he was managing. It can be stated that the number of the investors ultimately rose to 3200 with Madoff’s company in nine accounts. It was charged by the SEC that Messrs. Avellino and Bienes had been operating as an unregistered investment company engaging themselves in the illegitimate sale of unregistered securities. Although, Mr. Madoff had registered himself as the broker-dealer, nevertheless he has been performing his business as an assets manager. How Were They Caught At the outset, it can be stated that it is quite inaccurate to believe that Bernard Madoff was caught by any person or organisation. Bernard Madoff himself confessed that he had committed a crime (Forbes, 2011). Until recently, Harry Markopolos has been an incomprehensible financial analyst and an unconventional fraud investigator belonging to Boston. However, he holds the dominant position after his whistleblowing against Bernie Madoff and his $50 million fraud. It was identified that innumerable people had been fooled by the Madoff. Further, the London fund manager attacked and accused the US regulators for not detecting the frauds at an earlier date after having known the damage that has been caused by Madoff (Hearst Communication, 2011). People for long period of time has been investing their retirement fund into the Madoff Securities and waited for the stock market to rise with the aim of receiving greater rates of returns. Since, the market was good so investors didn’t want to take back their invested money. With the enough cash that Madoff had in hand he was capable of paying them to the people who asked for withdrawal. However, the statement of the people came via mail demonstrating higher rates of return. But the truth was Mr. Madoff was not investing the investor’s money at all. He just kept them and initiated real estate investments all over the globe. During this era, the investors were not worried regarding their investment. However, after the market had sunk, people started to become concerned and thus wanted to take back their hard-earned money. Since everyone came out looking for their money, Madoff did not have sufficient funds and thus got caught. It has been found that Madoff was caught after he acknowledged to his sons regarding the frauds that he committed and stated that his business was a Ponzi scheme, where the investors who sought after their money, got back their money that the earlier investors’ used to invest, in a serious meeting held with his sons (Gimein, 2008). He further stated that the returns that he gave the investors came from the investment that other people made into the business. The failure of the Ponzi scheme had assisted in arresting the fraud (Appelbaum & Et. Al., 2008). The sons contacted their lawyer and thus alerted the federal authorities regarding the frauds (Gandel, 2008). Madoff stated that he had planned to admit defeat to the concerned authorities but wanted to payback certain amount of money that was left to the employees (Efrati & Et. Al., 2007). It has been noticed that the fraud case embarrassed SEC and the FBI who couldn’t catch hold of the fraud going on by Bernard Madoff. If the sons, Mark and Andrew had not revealed regarding the fraud investment practices of their father than Madoff might have continued the same way and would have cheated a few millions of people till today. Controls Implemented After having acknowledged that Madoff LLC is a fraud, numerous measures had been employed. At the outset, Mr. Madoff was arrested. The officials of the US Securities and Exchange Commission were to be inquired. Further, Wall Street regulators were interrogated on matters of how Wall Street allowed such a scandal to be successful. All the related parties who have assisted in the smooth functioning of the Madoff fraudulent business were investigated and questioned into how they missed to recognize the world’s prime fraud. The court ordered Mr. Madoff to assemble a list of the investments, loans, and lines of credits, assets and the account of his company to be delivered to the SEC. The court also ordered Madoff to account for the assets that was maintained by him for his own benefits. The court further directed wife of Madoff, Ruth to be located and pay on behalf of the company so that her husband could be protected from the bruised investors and thus preventing him from running away (Seib & Jagger, 2009). It was also identified that after Madoff confessed that he had been practicing Ponzi scheme, SEC started taking steps so that it can reduce the likelihood of such frauds from occurring in the near future and thus tried to implement measures so that they can detect such frauds in the near future. The SEC aimed at restructuring the Enforcement Division so that it can focus upon the specific cases. It was further found that, every year SEC had been receiving large volume of complaints that needed to be handled with care. For the purpose of improving the way the complaints were taken care of the policies and actions were updated. It was further noted that SEC had encouraged and tried to gain cooperation from those inside as well as the people who are well aware of the fraudulent practices in the activities. Such insiders could be the sources of information to the investigators and can help the agencies to build the cases strong. It was in the year 2009, when SEC implemented numerous measures to protect the investors’ fund from being stolen or from getting indulged in fraudulent activities. It has been noted that for the purpose of identifying those areas that tend to be riskier for the investors and the market, SEC implemented numerous risk assessment methods and techniques. Further, for the purpose of safeguarding the assets of the investors SEC conducted examinations of the firms by sending its examiners to those firms that demonstrated numerous characteristics of risk. For the purpose of detecting the frauds and much other violation of the firms, SEC has implemented numerous measures through which the ability of the examiners to determine the frauds and other violation of the rules and regulations could have been identified. The examiners are expected to visit the customers, counter-parties as well as the custodians during the process of the examination for the purpose to identify if the assets of the client are being managed by them in a legitimate manner. In order to enhance its risk assessment ability, SEC has been trying to recruit the staffs that possess high skills and knowledge. They are expected to detect the frauds, conduct the examinations and thus focus upon the SEC’s priorities. By implementing quarterly review program by SEC, it can be made sure that the important issues are resolved at the earliest. The examinations of the broker-dealer along with the investment adviser are integrated so that a person having the right skill can be assigned for the purpose of examinations (US Securities and Exchange Commission, 2010). Status of Perpetrators It has been noticed that Mr. Bernard L. Madoff was verdict to prison for 150 years for the fraud that he committed. The investigators tried to figure out the other persons who were involved in the fraud of Madoff (CBSNews, 2009). The other perpetrators had been Annette Bongiorno and Joann Crupi who were accused of scheme as operated by the company. They were further indicted of tax evasion, falsifying the records and thus with the securities fraud as committed by them along with other members. It was found that both Annette Bongiorno and Joann Crupi used to operate from the 17th floor that is in Lipstick Building office and thus used to assist Madoff as well as Frank DiPascali who had been his operations chief, to create more than tens of thousands of the false account statements (The Daily Beast, 2010). On the second centennial of his father’s detention suicide was committed by Mark Madoff (The Raw Story, 2010). Conclusion It is quite important for the investors to be suspicious of the guaranteed returns. If any company promises to pay speedy returns then the investors need to be quite careful prior to investing their hard-earned money. It is further significant for the investors to check the credentials and thus make Financial Industry Regulatory Authority (Finra) to verify all the certificates. Investors should not invest by viewing the reputation of the company or just by word-of-mouth referrals. Thorough examination is quite important for the investors. The investors have all the rights to question regarding the allocation that has been made by the fund managers. It is also significant to understand the fund managers’ performances in the consecutive few years. If a person finds that he is the victim of fraud or is in doubt then he needs to inform the SEC so that adequate measures can be taken against the investment company. Investors need to make certain that they receive the statement from his adviser’s firm rather than his adviser. Adoption of the numerous measures as stated can assist the investors to protect their money from being cheated (Pilon, 2008). References Appelbaum, B. & Et. Al., (2008). All Just One Big Lie. The Washington Post. Retrieved Online on June 28, 2011 from http://www.washingtonpost.com/wp-dyn/content/article/2008/12/12/AR2008121203970.html?hpid=topnews Bloomberg Businessweek, (2011). Capital Markets. Company Overview. Retrieved Online on June 28, 2011 from http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4432249 CBSNews, (2009). The Man Who Figured Out Madoff's Scheme. News. Retrieved Online on June 28, 2011 from http://www.cbsnews.com/stories/2009/02/27/60minutes/main4833667.shtml De La Merced, M. J., (2008). Efforts Under Way To Sell Mandoff Unit. The New York Times. Retrieved Online on June 28, 2011 from http://www.nytimes.com/2008/12/25/business/25madoff.html Dovkants, K., (2008). Revealed: Magic Madoff’s Family ‘Piggy Bank’ In the Heart of Mayfair. News. Retrieved Online on June 28, 2011 from http://www.thisislondon.co.uk/standard/article-23602414-revealed-magic-madoffs-family-piggy-bank-in-the-heart-of-mayfair.do Efrati, A. & Et. Al., (2008). Top Broker Accused of $50 Billion Fraud. Article. Retrieved Online on June 28, 2011 from http://online.wsj.com/article/SB122903010173099377.html Forbes, (2011). Why Madoff Wasn’t Caught. Halah Touryalai. Retrieved Online on June 28, 2011 from http://blogs.forbes.com/halahtouryalai/2011/02/04/why-madoff-wasnt-caught/ Gandel, S., (2008). Wall Street's Latest Downfall: Madoff Charged with Fraud. Newsfeed. Retrieved Online on June 28, 2011 from http://www.time.com/time/business/article/0,8599,1866154,00.html Gimein, M., (2008). The Madoff Dilemma. How Can You Spot A Wall Street Crook? Retrieved Online on June 28, 2011 from http://www.thebigmoney.com/articles/judgments/2008/12/12/madoff-dilemma Glovin, D. & Scheer, D., (2008). Madoff Charged in $50 Billion Fraud at Advisory Firm (Update3). Bloomberg. Retrieved Online on June 28, 2011 from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8EVy7KVpBaA&refer=home Groendahl, B., (2011). HSBC Was Told About Madoff ‘Fraud Risks’ in KPMG Reports. Bloomberg. Retrieved Online on June 28, 2011 from http://www.businessweek.com/news/2011-03-18/hsbc-was-told-about-madoff-fraud-risks-in-kpmg-reports.html Hearst Communication, (2011). Alleged Madoff Fraud Caught Big Names. SFGate. Retrieved Online on June 28, 2011 from http://articles.sfgate.com/2008-12-16/business/17130948_1_bernard-madoff-investment-pool-wall-street-money-manager Henriques, D. B. & Berenson, A., (2008). The 17th Floor, Where Wealth Went to Vanish. The New York Times. Retrieved Online on June 28, 2011 from http://www.nytimes.com/2008/12/15/business/15madoff.html LaRocco, J. B., (2010). Madoff Auditors Charged. Commentary. Retrieved Online on June 28, 2011 from http://www.angel-and-venture-capital-guide.com/madoff-auditors-charged.html Lichtman, J., (2011). It’s Ethics Stupid. Fame. Retrieved Online on June 28, 2011 from http://www.ethicsstupid.com/fame-shame.html Pilon, M., (2008). How to Steer Clear of Shady Advisers. The Wall Street Journals. Retrieved Online on June 28, 2011 from http://online.wsj.com/article/SB122981065261124223.html Seib, C. & Jagger, S., (2009). The Times. Kevin Bacon caught up in Bernard Madoff scandal. Retrieved Online on June 28, 2011 from http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5426032.ece The Daily Beast, (2010). Business. Is Madoff Family Next? Retrieved Online on June 28, 2011 from http://www.thedailybeast.com/articles/2010/11/18/madoff-arrests-annette-bongiorno-joann-crupi-his-family-next.html The Raw Story, (2010). Madoff’s Oldest Son Kills Self Two Years After Father’s Arrest. The Raw Story. Retrieved Online on June 28, 2011 from http://www.rawstory.com/rs/2010/12/11/madoffs-son-dead-suspected-suicide/ US Securities and Exchange Commission, (2010). The Securities and Exchange Commission Post-Madoff Reforms. Spotlight. Retrieved Online on June 28, 2011 from http://www.sec.gov/spotlight/secpostmadoffreforms.htm Read More