BERNARD MADOFF PONZI SCHEME / MADOFF INVESTMENT SCANDAL

I. KEY TERMS AND CONCEPTS

Ponzi scheme - is a serious financial crime where an individual or organization pays returns to its

financiers from new capital paid by new financiers, rather than from profit earned.

- Ponzi schemes rely on a single person or group to coordinate every aspect of

the fraud.

Madoff scandal - is considered to be one of the worst white-collar crimes of all time.

- Madoff had tricked his investors by paying them extraordinarily high returns

out of their own money or that of other investors without having engaged in

any actual or effective activity to create a profit.

Fraud Triangle - was developed by the famed American criminologist Donald R. Cressey in the

1950’s in criminology report named, “Other People's Money: A Study in the Social Psychology

of Embezzlement”.

Motivation - it mostly arises due to financial problems; such as gambling addiction, accumulated

debt, or unexpected expenditures.

the hunger to achieve or the fear of losing something.

Opportunity - it explains how the fraudsters utilize their position, power or capability to fulfill

their non-shareable needs.

Rationalization - the perpetrator always tried to find a reason to justify his or her act as being

morally acceptable. Hence, they would view themselves as victims of circumstance rather than

fraudsters.

II. BACKGROUND OF THE CASE

The Bernard Madoff scandal is considered to be one of the worst white-collar crimes of

all time (Henriques, 2012). By running the largest Ponzi scheme in history, Madoff had tricked

his investors by paying them extraordinarily high returns out of their own money or that of other

investors without having engaged in any actual or effective activity to create a profit. Years

previously, Bernard Madoff founded his firm, Bernard Madoff Investment Securities (BMIS), in

1960 with his savings from his lifeguarding career and borrowings from his father-in-law (Hurt,

2009). During the next four decades, Madoff’s firm kept growing and gained a reputation on

Wall Street as one of the largest buying and selling market makers at the NASDAQ (National

Association of Securities Dealers Automated Quotations). Surprisingly, on December 11, 2008,

it turned out that the advisory business, part of BMIS, was simply a lie. Based on financial

statements as at December 2008, the advisory business serviced almost 5,000 client accounts

with client funds of almost $65 billion. However, it has since been revealed that only about $17.3

billion of this had actually existed (Hurt, 2009). He was caught in December 2008 and charged
with 11 counts of fraud, money laundering, perjury, and theft. Moreover, it appeared that the

fund might not have ever conducted any legitimate business to generate earnings. The scheme

had been going on for around 20 years by the time it was uncovered due to the consequences of

the Global Financial Crisis. After the collapse of the finance market in the fall of 2008, many

investors wanted to redeem the huge sums of money that they had invested in year after year,

which resulted in claims of redemption of up to $7 billion from investments that did not exist.

In March 2009, Madoff pleaded guilty to fraud, money laundering, and other crimes.

Madoff’s accountant, David G. Friehling, was also charged in March with securities fraud; it was

later revealed that he had been unaware of the Ponzi scheme, and, after cooperating with

prosecutors, Friehling ultimately served no prison time. The thousands of people and numerous

charitable foundations, who had invested with Madoff, directly or indirectly through feeder

funds, thus spent the early months of 2009 assessing their often huge financial losses. U.S.

federal investigators continued to pursue suspects, including some other members of the Madoff

family. Estimates of losses ranged from $50 billion to $65 billion, but investigators

acknowledged that locating the missing funds might prove to be impossible. In June 2009 federal

judge Denny Chin gave Madoff the maximum sentence of 150 years in prison.

III. STATEMENT OF THE PROBLEM

The underlying ethical issues and questions in this case are:

1. Why do trusted persons commit fraud?

2. Why did the auditors was not able to detect any suspicious transactions?

3. How did Madoff manage to conduct a huge fraud scheme for so many decades without

being questioned by many investors?

The whole Ponzi scheme started because of Madoffs greed for more money and being

wealthy, even if that meant lying to all of his clients, the people who bought into his business,

and even his own family. Whenever the SEC, which is known as the Securities Exchange

Commission, investigated him countless times, according to the article, they had found no

problems with his business until he was dealing unregistered stock later on. Throughout all of the

investigations he had lied and used some of these investigations to his advantage to deceive

investors. Because of all these deceptions and his obsession with money, Madoff impacted and

lost the trust of a lot of investors, charities and his family and friends. This being said, a Ponzi

scheme was a scheme created by Charles Ponzi in the 1920s. It is when a business owner

“promises above-average returns for their investment and then individuals appear willing to

stand in line to give you their money”. The problem with this, however, is the scheme makes no

real investments besides paying back previous investors. This creates a lot of “imaginary” money

where really only the person performing the scheme is reaping the benefits.

One of the major key factors in Bernard’s Ponzi scheme was that he had both family and

friends working for his business. Now with his family involved in the business, lets say if it is

true that they had an idea about the fraud, it shows that running a family-owned business can

lead to ethical issues. With all his family in high ranked positions, it is understood at how he

could have gotten away with this much fraud for such a long time. Bernard was the moneymaker,

and as long as he provided the money then his children and friends would keep quiet and assist in

the Ponzi scheme. This disrupts the integrity that is supposed to be held in a business, especially

one where the family is involved. These issues are definitely present in Madoff’s firm. All his

children were in major positions in his company and could have easily assisted him in
performing this Ponzi scheme. All in all, a Ponzi scheme is a dangerous tactic that has been and

probably is still being used in the world of business. The power of greed is strong in businessmen

and women and can make them do things where only they gain from their actions. Bernard

Madoff is the definition of this greed that people today should learn from and avoid. Having

integrity and being an honest, hardworking business owner is the best way to avoid going to

prison and gives the brilliant minds of today the power to provide services to the world, instead

of trying to take away from the world.

Bernard Madoff, as a well-known founder of Wall Street firm, was confirmed to be

running his business with an illegal or swindled act of generating profit. Aside from his personal

intentions, this was all possible because of many opportunities. The case was similar to the

popular fraud back then which was called Ponzi Scheme (named after Charles Ponzi) which we

are familiar with today as the pyramid scheme.

How the found did made profit generating and expense payment possible? Where all this

money did came from considering the fact that profit from product was falsified? Simply because

as long as there are investors lured, recent investments will be allocated to the first investors.

Through that, Madoff was able to provide fictional assets and profits.

Who would join this sick idea of business? The organization structure as the basis, it was

consisted of Bernard's kin. Making the information and trust within the business confined and

secured.

How was Bernard able to operate such anomaly for a very long time without regulatory

bodies' noticing it? United States' Security and Exchange Commission was accused of being

involved in the fraud because of not investigating Madoff's business.

investors of Madoff will consider their stock value a loss since the asset presented and profit are

falsified. Clearly, because of the true profit generating of Bernard, his business do not have any

capital nor original assets to liquidate.

V. ALTERNATIVE COURSE OF ACTION / ACTION PLAN

In order to avoid such fraud, alternative actions are provided. These actions primarily

involve the role of the investors and auditors;

A. Before providing long term capital investment for the sake of return, investors must have

a thorough background check to the company they wish to be involved. It minimizes the

possibility of them being part of illegal transactions.

B. As an auditor they have the job to inspect and check the reliability of the financial

statements especially in the input amounts whether material or not. Careful inspection

will eliminate tricked and manipulated transactions.

C. Most of people do not know or never heard about Ponzi Scheme. And as an investor, one

should have the right to see audited financial statement for the purpose of transparency.

D. Also, do not put money in an investment without full understanding on how investment

works. You must first understand fully the investment process, learn it and identify the

possible risk that may happen.

Do not put money in an investment without full understanding on how investment works.

You must first understand fully the investment process, learn it and identify the possible risk that

may happen.

 Unclear business models

 Aggressive sales

 Promise of high returns for no work

 Difficulty withdrawing funds

VII. CONCLUSIONS

Bernie Madoff arranged Ponzi scheme this scheme is one of the most prominent schemes

in history because of the expansive size of illegal act. The fact that the SEC conducted numerous

reviews or ignored tips to investigate the organization more in-depth, and was never able to

conclude that the organization was a Ponzi scheme proves that investigative practices and acts

were lacking, and follow-up investigations into the SEC’s probe helped to solidify these

findings. Many people are affected by this kind of damage, especially the person who works with

him or his employees. They were investigated and others were arrested for being involved in

unlawful act. A vague approach of an organization is evidence that it is a scam and it is

appropriate that their scheme is clearly understood. This scheme taught a lot of lessons to the

people most importantly to the investors that they must have a comprehensive research to find

out if the organization is legitimate and to detect an action of fraud, so you must be careful of

your actions to prevent you from becoming a victim of any kind of scam.
BERNARD MADOFF PONZI SCHEME / MADOFF INVESTMENT SCANDAL

Submitted by:

Eunice Ann Bea

Johnloyd Benitez

Mae-Ann De Leon

Mark Jeoffrey Espina

Marjorie Gerio

Paul Anthony Logo

Melizze Yvonne Mejico

Jay Jay Reyes

Tricia Lane Sarmiento

Group 2

BS Accountancy/ 2BSA-2/ 3:00 PM – 6:00 PM/ Tuesday

Submitted to:

Prof. Norvin L. Tamisin, MBA

TITLE PAGE i

TABLE OF CONTENTS ii

REFERENCES iii

I. KEY TERMS AND CONCEPTS ………………………………………………1

II. BACKGROUND OF THE CASE……………………………………………...2

III. STATEMENT OF THE PROBLEM…………………………………………...3

IV. ANALYSIS OF THE CASE……………………………………………………4

V. ALTERNATIVE COURSE OF ACTION……………………………………...6

VI. RECOMMENDATION………………………………………………………...7

VII. CONCLUSION…………………………………………………………………7
 REFERENCES

Bernie Madoff / Bibliography, Ponzi Scheme, & Facts Retrieved from

https://www.britannica.com/biography/Bernie-Madoff

What is Ponzi Scheme – Bernie Madoff Ponzi Scheme Explained Retrieved from

https://www.moneycrashers.com/bernie-madoff-ponzi-scheme-explained/

Bernard Madoff’s “Ponzi Scheme”: Fraudulent behavior and the Role of Auditors

Retrieved from

https://www.google.com/url?sa=t&source=web&rct=j&url=https://pdfs.semanticscholar.org/a03

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