...MVE220 Financial Risk The Madoff Fraud Shahin Zarrabi – 9111194354 Lennart Lundberg – 9106102115 Abstract: A short explanation of the Ponzi scheme carried out by Bernard Madoff, the explanation to how it could go on for such a long period of time and an investigation on how it could be prevented in the future. The report were written jointly by the group members and the analysis was made from discussion within the group 1. Introduction Since the ascent of money, different techniques have been developed and carried out to fool people of their assets. These methods have evolved together with advances in technology, and some have proved to be more efficient than other. One of the largest of these schemes ever carried out occurred in modern times in the United States, it was uncovered as recently as in late 2008. The man behind it managed to keep the scheme running for over 15 years in one of most monitored economic systems in the world. The man in charge of the operation, Bernard L. Madoff, got arrested for his scheme and pled guilty to the embezzling of billions of US dollars. It struck many as unimaginable how such a fraud could occur in an environment so carefully controlled by regulations and...
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...Abstract This report allows the facts to be known concerning the still mysterious case of Bernard L. Madoff and his longtime investment securities activities, which eventually turned into an enormous fraud of incomparable size. In this report, you will begin to understand how Bernard Madoff was able to execute such an elaborate fraud. The illegal business behavior found in this case is too numerous to count however, quite a few will be identified. In addition, the roles of the perpetrators, accomplices, and their involvement in this scheme will be made known. This fraud had such an enormous impact on the victims, we will examine several implementations that the private investors could have implemented to protect themselves. An assessment of the perpetrators motives and the identity of some internal controls that could have deterred or prevented the fraud from occurring will be explored also. We will discover the action of the SEC and document how the fraud was discovered and investigated, including what should have been identified as “red flags”. And finally, a variety of legal actions arose when the Madoff fraud was uncovered, which is leading to more litigation currently and in the future. The Bernard Madoff’s Fraud Introduction Bernard L. Madoff was the mastermind and the admitted operator of the biggest Ponzi scheme in American History. His Ponzi scheme is considered to be the largest financial fraud in U.S. history. He stole millions maybe billions...
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...Bernard Madoff was either the most ethically void individual or he just had no regard for ethics. He managed to pull off one the largest Ponzi scheme in history with very little help. He had a legitimate stock trading business on one floor and his illegitimate investment management business was on another floor (Ferrell, Ferrell & Fraedrich, 2011). The top executives in the company were family which leads to the question, did they really not know? This paper will examine the origin of the Ponzi scheme, a brief history of Bernie Madoff, and the fallout as a result of his fraudulent business. A Ponzi scheme is “a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from legitimate profits (Fitzpatrick, 2010).” The Ponzi scheme was named after Carlo (Charles) Ponzi who fled Italy for America at the age of 21. In 1919 Ponzi developed a scheme to get investors to buy postage coupons in one country and then sell them for more money in another country (Wells, 2009). Instead of investing the money he used the pooled funds to pay investors. This lasted until 1920 when a federal audit confirmed he was bankrupt, he had scammed investors for more than $4 million (Wells, 2009). According to Wells (2009), the Madoff scheme “...may be the largest single fraud of any kind in history...” The estimated total of the Madoff scheme is $65 billion, it is the largest financial fraud in the history of Wall Street. On...
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...Markets were riddled with corruption and fraud. At the beginning of the decade we saw the likes of Enron and WorldCom become insolvent due to accounting frauds of epic proportions. The one case that stands out amongst all of them is the Bernard Madoff case, which is considered to be the largest fraud case of all time. “Madoff managed to lure billions of dollars away from huge charities, as well as wealthy individuals in both the United States and Europe by getting them to invest in his hedge fund. He did so by claiming extraordinary returns (generally in the low double digits). His scheme eventually reached a staggering $50 billion under "management" (Armstrong, 2008). Mr. Madoff was born on April 29, 1938; he graduated from Far Rockaway High School in 1956. He then enrolled in Hofstra University Law School from which he did not graduate. In 1960 he created Bernard L. Madoff Investment Securities (BMIS) with initial capital of $5000 (Gagnier, 2008). In the years to come his firm became ranked as “one of the top money markets on the NASDAQ” (Gregoriou, et al, 2009). He was described as “a man that had an impeccable reputation on Wall Street. Investing with him was an exclusive privilege, a clear sign that one had made it socially. Bernard Madoff was a legend” (Gregoriou, et al, 2009). His persona and BMIS came crashing down on December 11, 2008, when he was arrested by the FBI on securities fraud charges. The night prior to the 11th, he confessed to his two sons, who were top...
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...Bernard Lawrence "Bernie" Madoff 1. Describe three types of illegal business behavior alleged against Mr. Madoff and for each type of behavior, explain how the behavior is illegal or unethical in the conduct of business. In March 2009, Madoff pleaded responsible to 11 federal crimes and confessed to turning his wealth management business into a massive Ponzi scheme that cheated thousands of investors of billions of dollars. Madoff said he started the Ponzi plan in the early 1990s. However, the federal investigators believe that the fraud began as early a 1970s and speculation process may never have been lawful. Investigators found out that there were others individuals occupied in the scheme. The U.S. Securities and Exchange Commission (SEC) came under fire for not examining Madoff more thoroughly; inquiries about his firm were lifted as early as 1999. There were some allegations and they are as follows: Monopolizing Trade, this was unlawful according to Sherman Antitrust Act (1890); possessing unfair performs and misleading acts in or affecting commerce, which was prohibited by Federal Trade Commission Act (1914); Fraudulent financial accounting was also unlawful according to Sarbanes-Oxley Act of 2002 2. Name three types of parties who were impacted by the actions of Mr. Madoff and describe how they were impacted. The U.S. Securities and Exchange Commission (SEC) examined Madoff in 1999 and 2000 about concerns that the firm was hiding its customers' orders from other traders...
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...and as a lifeguard on the beaches of Long Island, Bernard Madoff founded “Bernard L. Madoff Investment Securities,” a “trading power” house that would become one of the largest independent trading operations in the securities industry (Washington, 2012). In the year 2000 his company ranked among the top trading and securities firms in the nation. By age 70, his name had become legendary; he was considered to be one of the most “influential spokesmen” on Wall Street. But on December 11, 2008, Bernard Madoff was arrested and charged “in a 20 year Ponzi scheme, which would come to be known as “the most infamous fraud in Wall Street history (Leonard, 2008; Washington, 2012).” Mr. Madoff pleaded guilty to all federal charges filed against him, which included the following: “11 felony counts, including securities fraud, money laundering and perjury (Washington, 2012).” Judge Denny Chin was in charge of the proceedings, and on June 29, 2009, Bernard Madoff, former chairman of the NASDAQ stock exchange, was sentenced to the maximum penalty of 150 years. This paper will seek to analyze this case in its multiple dimensions in order to identify all ethical issues and propose potential alternatives to the moral choices that Bernard Madoff made. Facts Bernard Lawrence Madoff was born April 29, 1938. He grew up in a small Jewish community in Queens, New York. At age 22, in 1960, he founded his own wealth management business, “Bernard L. Madoff Investment Securities.” He made his business out...
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...Bernard Madoff and the 2008 Financial Crisis On December 11, 2008, the Securities and Exchange Commission (“SEC”) charged and arrested Bernard Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme. On March 12, 2009, Madoff pled guilty to an 11-count criminal complaint admitting to running an international Ponzi scheme and defrauding thousands of investors. The SEC defines a Ponzi scheme as an investment fund that involves the payment of purported returns to existing investors from funds contributed by new investors (SEC). In the 1920s, the originator of the Ponzi scheme, Charles Ponzi, conned thousands of New England residents into investing in a postage stamp speculation scheme. Ponzi promised his investors returns of 50% in 90 days, which, at the time, was exceptionally high considering the annual interest on bank accounts was only 5% (SEC). Unlike Ponzi, who targeted average people and was very open with his scam, Madoff was very private and targeted wealthy individuals promising them steady returns of 8 – 12% each year. Madoff was perceived as a successful Jewish investor in the financial community and his investment fund was considered as an exclusive membership club. The key to running an ongoing Ponzi scheme is an unlimited supply of new investors because without new incoming money the entire system would collapse. Unlike most Ponzi schemes, which usually fail due to a lack of new...
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...The Madoff investment scandal broke in December 2008, when former NASDAQ Chairman Bernard Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme. Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its Chairman until his arrest.[1][2][3] At his firm he employed his brother Peter as Senior Managing Director and Chief Compliance Officer (Peter has since been sentenced to 10 years in prison), Peter's daughter Shana Madoff as the firm's rules and compliance officer and attorney, and his sons Andrew and Mark (Mark committed suicide by hanging exactly two years after his father's arrest). Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On March 12, 2009, Madoff pleaded guilty to 11 federal crimes and admitted to operating the largest private Ponzi scheme in history.[4][5] On June 29, 2009, he was sentenced to 150 years in prison with restitution of $17 billion. According to the original federal charges, Madoff said that his firm had "liabilities of approximately US$50 billion".[6][7] Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients as of November 30, 2008.[4][8][9] Ignoring opportunity costs and taxes paid on fictitious profits, half of Madoff's direct investors lost no money.[10] It is also the largest accounting fraud in American history. Investigators have determined others were involved...
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...Bernard L. Madoff Scandal From what we know about Bernard Madoff is he started a business called Bernard L. Madoff Investment Security LLC in the 1960 where he was the chairman of this company for over a decade, building his reputations to the world making his way into large businesses and gaining a number of wealthy clients on the way. When he was still a small company making his way into society he started his scam off with luring in the small clients, and since he was Jewish he decided a good place to start would be the Jewish community, because when you are starting a scam the easiest way to start it is to find a common ground with your victims, and so that’s actually what he did. So one of the ways he started his scam is by taking advantage of his Jewish brothers and sisters, because of their common grounds of them all being Jews. After he got enough people from the Jewish community giving their money to his company with the promise of big returns of about twelve percent return on their investments....
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...Dr. Nassar, The case of Bernard Madoff details a massive Ponzi scheme that resulted in financial losses, ruined careers and imprisonment. As a result, I will describe prevention mechanisms that could ensure that Ponzi schemes do not happen in the future. First, corporate culture should be revised to deter white-collar crimes like Ponzi schemes. The causes of typical white-collar crimes involve peer influence, inherently criminal behavior of employees. The manager’s role should involve close monitoring of employees that are prone to unethical behavior. Second, family members working in the organization should not the head of business units that are responsible for financial decision and corporate oversight. Conflict of interest should be...
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...The Fraud of the Century: The Case of Bernard Madoff 1. What are the ethical issues involved in the Madoff case? Not only is what Bernard Madoff did highly unethical but for his company to be able to pass the tax audition imposed question on the SEC internal system a farce. I guess Madoff bribed the auditors. I guess the saying money talks holds true for some. How people could morally falsify documents for money is just beyond comprehensible. To even take advantage of an innocent person is unfathomable. The ethical issues I saw were a manipulation of cash flow to make his company appear to be more valuable than it truly was and his company’s financial reports were never made public during the scheme. How is it that no one ever questioned that and he got away with it? Again, all I can think of is bribery. Makes you sort of wonder how people supposed to be dealing with the law can just break it without question and get away with it. 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? I feel Bernanrd Madoff had help with the Ponzi scheme. Even the smartest of people need help. I don’t feel a scheme like this could be concocted or carried out alone. For no one in his company over the course of the thirty years in which he carried this scheme out to have even picked up on it is just shocking to me. Not even the accountant or auditors with respect to the financial...
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...White Collar Crime: Ponzi Scheme with a Focus on Bernard Madoff NAME College White Collar Crime: Ponzi Scheme with a Focus on Bernard Madoff Most people, when they hear the word “crime,” think about street crime or violent crime such as murder, rape, theft, or drugs. However, there is another type of crime that has cost people their life savings, investors’ billions of dollars, and has had significant impacts of multiple lives; it is called white collar crime. The Federal Bureau of Investigation defines white collar crime as illegal acts which are characterized by deceit, concealment, or violation of trust and which are not dependent upon the application or threat of physical force or violence. Individuals and organizations commit these acts to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure personal or business advantage (as cited in Barnett, n.d., para. 3). White collar crimes consists of such things as embezzlement, bank fraud, forgery, insider trading and investment schemes. This paper is going to focus on a Ponzi scheme, a type of investment scheme, and Bernard Madoff. Madoff is probably one of the most known offenders when it comes to the Ponzi scheme. The U.S. Securities and Exchange Commission (SEC) defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors” (U.S. Securities, n.d.). In another words, a person...
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...Bernard Lawrence ‘Bernie” Madoff Valerie Correa Prof. Masheika E. Allen BUS 100 Mini Session 10/26/2010 1. Describe three types of illegal business behavior alleged against Mr. Madoff and for each type of behavior, explain how the behavior is illegal or unethical in the conduct of business. Mr. Madoff was found guilty of white collar crimes. Some of the crimes he was found guilty of were money laundering, perjury and securities fraud. Description: Securities fraud is one of many white collar crimes which violate trading laws. The definition of security encompasses many things including stocks, bonds, commodities and other investments. Money laundering is money obtained from criminal activity as a white collar crime is and have it appear as it originated from a legitimate source. Money laundering laws were enacted to take the profit out of criminal activity. Perjury is known as lying under oath. It is the deliberate, willful giving of false, misleading or incomplete testimony under oath. Mr. Madoff, who is allegedly lost $50 billion in investor money in histories largest documented Ponzi scheme, He plead guilty for stealing vast sums of dollars from individuals and organizations, some of them charitable, by taking their money and pretending to invest it in the stock market, when in actuality he used the...
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...First Name Surname Instructor Course Date Recent Corporate Scandal Meltdowns - Bernard Madoff Bernard Madoff also known as Bernie is a previous Chairman of the NASDAQ stock exchange. Madoff founded an investment advisory firm called Ascot that later brought about the famous Ponzi scheme (Rhee 363). The project led to defrauding of many investors. The investors lost over $50 billion in the project over a period of around two decades. It all started in early December 2008 when there was the financial crisis in the United States (Vagts 684). Madoff was not in a position to honor the investors' requests for cash. He had to come out in the open and confess what he was doing. He had to admit to the Ponzi scheme and Wall Street together with other parts of the world was shocked (Hansen & Movahedi 368). There was massive investment fraud and many people fell victims even high profile investors. The financial community had a lot of respect for Madoff. The trust they had made some investors give their life savings to the scheme. Those who came to invest included charitable organization that got its funding from Steven Spielberg, Kevin Bacon, who is an actor, New York Mets owners, and others (Vagts 684). Madoff got investments from large banks and pension funds, for example, Royal Bank of Scotland, Banco Santander from Spain and many others. Many investors lost all they had in the scheme. After his tricks were exposed he pled guilty of securities fraud among others. He was then...
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...CASE STUDY #1 | The Function of Accounting Information Systems in the Enron and Bernard Madoff Fraud Cases | | | | | | | What is the definition of accounting information system? The Core Concepts of Accounting Information Systems textbook defines accounting information system “as a collection of data and processing procedures that creates needed information for its users” (Bagranoff, 2010). A key factor in determining the success in an organization is its accounting information system. It is the combination of the organization’s resources, such as its people, procedures, and business records that it (the organization) maintains to provide financial data. The basis of this case study is to disagree with the question of whether or not accounting information systems played a role in the Enron and Bernard Madoff fraud cases. All organizations should have an adequate, effective, and efficient accounting information system in tack. In my opinion, the Enron and Bernard Madoff fraud cases had the classic signs of pure greed; the accounting information systems were perhaps manipulated, ignored, and compromised to financially suit the personal gains of the individuals involved and did not assist with the cases. An important part of the accounting information system is its internal control system. Internal controls are methods and procedures used by an organization to safeguard assets, authorize transactions, and ensure accuracy of the accounting records...
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