unethical in the conduct of business. A Ponzi scheme also known as a pyramid scheme is an illegal savings scheme where unwary savers are lured into putting their money into the fraudulent organization’s account with the promise of unusually high returns. On the surface this may look legitimate. But the problem is that unlike financial institutions who lend out or invest customer’s funds Ponzi schemes use funds received from newer entrants to pay out the earlier entrants exorbitant interest rates. They arouse others greed by enticing them with the prospect of high returns.
They pretend and falsify their financial records to create a false sense of stability. No sane government can register such schemes. They therefore operate illegally. Mr. Madoff stands accused of nepotism. This is a business practice why by the owner employs relatives and close associates. Suffice it to say that Madoff had more than 25 employees. However those in key positions were family members most of whom owned shares of the company. These included his wife Ruth Madoff, two sons Mark and Andrew Madoff, his brother Peter Madoff, Peter’s daughter Shana, and Madoff’s nephew Charles Weiner.
It is unethical to use a well positioned family team to cover up illegal dealings. It is unethical to sent more than $250 million from his New York-based firm, Bernard L. Madoff Investment Securities obtained ripping off unsuspecting savers in a Ponzi scheme to Madoff Securities International Ltd in the UK, and then back to accounts in the U. S. Question 2: Name three types of parties who were impacted by the actions of Mr. Madoff, and describe how they were impacted. Madoff’s friends included business associates who knowingly or unknowingly served to lure customers into his business.
While the going was good, they were well rewarded. They occupied positions in charitable organizations, and received hefty compensations for their services and cooperation. However when the scheme was busted they lost their positions, face, as well as their incomes. Some politically correct friends had to refund monies that had been given to them through Madoff sponsored organizations. The worst party hit was his customers. Many of them were ruined financially for life. The total loss to investors is reckoned to be somewhere between 12 to 20 million dollars. On the flip side, there are those who gained.
According to minutes from the trustee about $36 billion was invested into the scam, returning $18 billion to investors, with $18 billion missing. This being a pyramid scheme about half of Madoff’s investors were “net winners,” earning more than their investment. The extend of embarrassment Madoff’s family experienced can only be imagined. Apart from loosing face, they lost a lot of assets. Their bank accounts were frozen and property confisticated. They are also facing legal charges for negligence, and breach of fiduciary duty by virtue of being accomplices with Madoff.
Question 3: Describe three business safeguards (risk management) that may have prevented the harm caused by Mr. Madoff. Government regulations: The hedge funds industry is considered as low risk. While the law enforcers are very strict with the banking and insurance sectors, they do not pay much attention to hedge funds. This made it easy for a smooth operator like Madoff to receive money from investors and manage the same which is illegal. He achieved this through engaging various institutions who were themselves under government regulations. Stricter regulatory and standardizing approaches of the hedge fund industry need to be put in place.
a ‘best practice’ charter should be drawn and implemented. Proper audit of the Madoff’s transactions would have revealed anomalies. Independent external auditors would have done the job sufficiently. Question 4: Describe three ways private investors might have better protected themselves from risk. Due diligence in this case is the process of monitoring and reviewing the operation and management of hedge funds and those managing them. The collapse of Madoff was an expensive lesson in the importance of investors and their advisors carrying out thorough due diligence and not relying on word of mouth endorsement
Diversification of risk: the nature of a pyramid scheme is to so attractive that potential investors have no other option but put their money in there. With high returns and no fees charges investors were sold. It did not occur to them to avoid putting all their eggs in one basket. There are two types of investor’s risk: systematic risk and market risk. Systematic risk is associated with a single security and is reduced by diversifying or investing is other types of securities. Market risk is occasioned by economic forces and can not be wished away. (Petty 2007)
Refraining from greed: The saying that ‘when the deal is too good, think twice came true for the victims of the Madoff scam. The profile of its victims is not simple individuals disconnected from the financial markets and its remote mechanisms but investors who presumably have an expert knowledge of the trade of financial investment: rich private individuals and large financial institutions. The deal was just too good that they closed their eyes to anything else. It is a lesson to all that when investing one has to be level headed and not let themselves be overtaken by greed.
Question 5: Describe three legal actions that possibly may be brought against Mr. Madoff under criminal or civil law. Securities fraud: the SEC regulates against trading based on information that is not available to the public, Accounting fraud and misrepresentation (presenting misleading or untrue information about a company, or its securities, to an investor or the public). This crime earned him a maximum penalty of 20 years in prison; fine of the greatest of $5 million or twice the gross gain or loss from the offense; restitution.
International money laundering: In his book ‘Money Laundering’, Leonard Jason-Loyd describes it as a form of criminal activity where by money is placed in banks then passed through a number of transactions to act as a smoke screen in order to hide the origin of the cash and later returned to the launderer via the legitimate financial system. (p. 2). Madoff’s crime of transferring funds between his New York-based brokerage operation and the London trading desk earned him a maximum penalty of 20 years in prison, fine and restitution.
False Statements: Making a false filing with the Securities and Exchange Commission including processed stock trades, use of client money as collateral to obtain loans. This earned him a maximum penalty of 20 years in prison, fine and restitution. References Caruso, D. B. , February (26, 2010) (2 June 2010). Former Madoff Aide Charged with Conspiracy, and Securities Fraud. The Associated Press Retrieved from www. law. com/jsp/article. jsp? id=1202444611999 – United States Lloyd L. J. (1997). The Law on Money-Laundering: Statutes and Commentary, London, Great Britain, Frank Cass & Co.
Ltd ‘Madoff scandal poses challenges for directors’ (21 Dec 2009) (2 June 2010) Risk Management Lessons from Madoff Fraud Retrieved from www. lloyds. com › Petty, w. , Keowon, A. J. , Scott JR, D. F. , Martin, O. N. , Burrow, M. , Martin, P. , Nguyen, H. (2006) Financial Management, Frenchs Forest, NSW, Australia, Pearson Education Australia. Silver, V. , Glovin, D. , (2009, 13 Feb), (2 June 2010). Madoff Scandal Ensnares Order of Patron Saint for Moralists. Bloomberg News, Retrieved from www. bloomberg. com/apps/news? pid=20601109& refer=home