Introduction
The Bernie Madoff scandal was a Ponzi scheme involving Bernard L. Madoff Investment Securities LLC. The company was a Wall Street investment firm that was founded by Bernie Madoff himself. This scandal is considered the largest Ponzi scheme ever that ended up costing investors $64.8 billion. The main people involved were Bernie Madoff, his accountant David Friehling, and Frank DiPascalli. The three were responsible for paying investors with the investors own money rather than the profits. Madoff ended up telling his sons about the scandal. They reported him to the authorities and Madoff was arrested the next day. Madoff received 150 years in prison and owes $170 billion in restitution. Both Friehling and DiPascalli received prison time. The Bernie Madoff scandal was revealed only months after the 2008 financial collapse in the United States. It is considered to be the largest fraud case in United States history.
Discussion
Who
Bernard Lawrence Madoff is a former investment advisor and stockbroker. He was a non-executive chairman of the NASDAQ stock market. He founded his firm, Bernard L. Madoff Investment Securities LLC, in 1060. He also served as the chairman of the organization until his arrest in 2008. The firm was one of the top investment firms on Wall Street. His brother, Peter, was the Senior Managing Director and Chief Compliance Officer for the investment firm. Peter’s daughter, Shana Madoff was the firm’s attorney as well as compliance officer. Bernie’s sons also worked for the firm (Bandler, Varchaver & Burke, 2009).
The investment firm started as a penny stock trader company. Madoff started the firm with $5,000 he earned from working as a sprinkler installer and as a lifeguard. He also received a $50,000 loan from his father-in-law that he also used to help him start Bernard L. Madoff Investment Securities. His father-in-law also assisted him with starting up the business. His father-in-law, who was also an accountant, was the one who referred friends and families to the firm. Unfortunately, the firm was not competitive enough to compete with firms that were members of the New York Stock Exchange. Therefore, the company started to focus on information technology in order to become competitive. After implementing innovative computer information technology, the firm became the NASDAQ (Bandler, Varchaver & Burke, 2009).
The firm’s first fraud investigation was in 1992. Two different individuals complained to the SEC about investments they made through Madoff. Once Madoff became aware of the complaint, he paid back the investor and the case was closed through the SEC. In 2004, a SEC lawyer with the Office of Compliance Inspections and Examinations (OCIE), announced that she had found several inconsistencies when it came to the Madoff firm. However, she was told by her boss to stop working on the investigation. She was order to send him her findings and investigate another industry instead (Bandler, Varchaver & Burke, 2009).
How
Bernie Madoff had a “back office” located on the seventeenth floor of his office. This is where he conducted his Ponzi scheme. However, there wasn’t too much in the office. Majority of the files were kept on hard drives and everything else was kept in locked rooms. There were approximately twenty workers in this office. They were mainly used as clerks and were there to push papers. Frank DiPascali, Madoff’s chief deputy, was the one who ran the office. He was responsible for all activity that went in and out of the office. He had worked with the firm for over thirty years but no one in the firm knew exactly what DiPascali did for the firm. When people would ask, DiPascali would state that he “was like a ninja” (Bandler, Varchaver & Burke, 2009).
Madoff had been quietly managing his money for years. There were no suspicions of illegal activity happening within the walls of the firm. By the 1990s, Madoff’s firm was receiving nine percent of the trading volume in the New York Stock Exchange. His company was so large it was considered a “third market”. Behind closed doors, however, the company was conducting the biggest Ponzi scheme in history (Bandler, Varchaver & Burke, 2009).
According to documents, there were two different workers who worked in the “back office” who were responsible for creating false trading reports based on returns. These were ordered for each customer. For example, after Madoff would determine a customer’s return, one of these back office workers would create a false trade from a previous date. The employee would then enter a false closing trade that was in the amount the required profit. The firm used specific computer programs that were designed to backdate trades that allowed them to manipulate statements (Bandler, Varchaver & Burke, 2009).
Even though Madoff’s organization became a multibillion-dollar operation, none of the major firms traded with him because they did not believe the numbers were real. According to his son, Madoff began to struggle in 2008. He needed to meet seven billions dollars in redemptions. However, he was planning on paying out over one hundred million in bonuses two months early that year. His sons asked Madoff how he could pay the bonuses but not his clients. Madoff admitted to his sons that he was finished and there was absolutely nothing left when it came to his investment fund (Bandler, Varchaver & Burke, 2009).
Objectives
In 2009, Madoff told the courts what he was attempting to do. The scheme was designed to deposit money from the clients into a Chase account instead of investing it. He was attempting to generate steady returns that the client was anticipating. When the clients wanted their money. Madoff would give them their own money out of their Chase accounts (Bandler, Varchaver & Burke, 2009).
Results
Madoff told his sons about the Ponzi scheme he was conducting through the business. Both of Madoff’s sons then went to authorities and informed them about the scandal. They told the authorities that his their father had confessed that the asset management department of the firm was a Ponzi scheme. The next day, FBI agents arrested Madoff. Madoff was charged with one count of securities fraud. In the past, the U.S. Securities and Exchange Commission (SEC) had investigated into the investment firm. However, the SEC found nothing when it came to any type of fraud.
On March 12, 2009, Madoff plead guilty to the charges he received through his Ponzi scheme. This included eleven different federal felonies for turning his investment firm into one of the biggest investment scandals in history. The Bernie Madoff scandal is responsible for defrauding thousands of investors out of over sixty billion dollars. Madoff stated that he started the Ponzi scheme back in the 1990s. However, the FBI believe the scheme goes all the way back to the 1980s. Others believe that the investment firm was never legitimate and was created with the Ponzi scheme in mind. The end amount that was missing from client accounts was almost sixty-five billion. The actual cost to investors is estimated to be approximately eighteen billion dollars. On June 29, 2009, Madoff received a 150 year prison sentence. This was the maximum amount of time allowed by law.
In 2009, victims of the Bernie Madoff scandal received an additional ninety-three million from a “feeder fund” settlement. This amount brought the total amount recovered to $10.6 billion. Also, some individuals will receive $250 million from the liquidations of Bernie Madoff’s estate and his securities firm. The ninety million will go to the victims of the scandal and the $250 million will go to future payouts. Approximately sixty percent of total lose by Madoff’s scheme has been regained (Time 2015).
Alternatives
The first thing that Madoff did wrong was create the firm. It is believed that the investment firm was never legitimate. It was created with the Ponzi scheme in mind. Madoff had a good business that made a lot of money. If he actually would have properly invested the money instead of stealing form people, then maybe the firm would have been successful legitimately.
One thing that Madoff did wrong was never lose money. Everyone loses money. Losing is one of the most important aspects when it comes to a successful investor. He also claimed that his strategy consisted of working up and down markets. Markets change quickly, thus, making it impossible to have any position in the market place. At least not enough to receive a gain from the market. In other words, he had too much positive returns.
Madoff claimed that he had found a system that actually worked when it came to the market. However, there is no such thing as a guaranteed system. Madoff should have actually taken time to find out a system that worked. Instead, he was busy creating false documents that inferred his system worked.
Another thing Madoff should have done differently was stop while he was ahead. Madoff should have stopped when it had to withdraw large sums of money from his clients Chase accounts. Instead, he should have found alternative ways to pay his client. At this time, it should have been a good plan for Madoff to come up with another way of operating his business.
After his guilty plea, Madoff admitted that he actually hadn’t traded in the market since the early 1990s. All of the returns that he had received since that time had been fabricated. This was one thing Madoff did wrong. Madoff should have continued trading in the market. Even while producing fabricated returns, Madoff should have continued to trade in the market.
Madoff’s returns were modest. He did this deliberately. He was secretive about his business so he gave his clients steady returns so clients did not ask questions. He never offered high returns to his clients. Although smart, Madoff should have offered more to his clients. One top of finding alternative ways of getting money, giving clients a higher return would have resulted in more clients.
Madoff was in the ‘Jewish circuit’. He went to Jewish country clubs and had Jewish executives in his firm. A scheme that is considered to target particular ethnic or religious groups is considered affinity fraud. If Madoff would have been more involved outside of the Jewish circle, then his scheme would not have been considered affinity fraud. He should have been more cultural diverse when it came to associates and executives as well as clients.
Madoff’s numbers never added up. This is was Madoff’s biggest mistakes. Because of this, major firms would not trade with him. This makes a company not competitive in the market. If Madoff’s numbers added up and were more reasonable, then other firms may have wanted to conduct business with the firm. This would have been a more legitimate way of trading and gaining money.
There were also concerns when it came to the firms that did business with Madoff. One of the firms, Friehling & Horowitz, was an accounting firm that only had one active accountant. This accountant was David Friehling, a close friend of the Madoff family. Friehling was also an investor when it came to Madoff’s firm. This raised red flags. It caused other firms to pull away from the Madoff firm. An alternative would have been to use firms that were not investors of the Madoff’s firm.
Overall, the biggest problem that Madoff had was that he was producing numbers that were unrealistic. He also traded with firms that raised red flags for investors. The main alternative that Madoff should have taken was to actually trade and create trading reports that were solid. In return, more major Wall Street firms may have wanted to conduct business and trade with him.
Ethical approaches
Utilitarian
The idea of utilitarianism is to maximize the overall good for everyone in society. It is considered to be a form of consequentialism which means that every action is determined by its outcome. Thus, people should participate in actions that result in the most good for society (Playford, Roberts & Playford, 2015, p. 6).
Madoff did not follow utilitarian ethics. Madoff’s actions were based on what was best for him and his company. He did not take into consideration the good of his investors. If he did, then he would have properly traded the money and gave his clients honest returns. That would be the utilitarian approach to this situation.
Deontological
The deontological approach to ethics states that an individual judges an action based on whether or not that action adheres to a rule or rules. Deontological ethics is also referred to as duty or obligation ethics. Thus, the idea behind deontological ethics is that people will only participate if the action adheres to the rules (Playford, Roberts & Playford, 2015, p. 6).
Madoff did not follow the rules of deontological ethics. His business plan did not follow any rules or laws. His operation was actually built to break the rules. Thus, Madoff did not follow deontological ethics when it came to his business decisions.
The Rights Approach
The Rights Approach focuses on respect when it comes to human dignity. It believes that our dignity is based on the ability we have to choose how we live our lives and we have the right to respect others as free and rational people who can do the same. This approach makes an individual question how their actions will affect the legal, moral and contractual rights of everyone else (Capsim, 2011).
Madoff definitely did not follow the Rights Approach when it came to his business practice. Madoff did not care whether or not his business practices affected the legal, moral or contractual rights of everyone involved. He had a contract with his clients to conduct legal business activity and give them a return on their investment. He did not stick to what he promised his clients in their contacts. He also did not care that his actions could have been implementing his clients in any legal trouble. Thus, Madoff’s business practices did not follow the rights approach.
Hedonism
Ethical hedonism is derived from the idea that all individuals have the right to do everything possible to achieve the greatest pleasure possible for themselves. However, this is assuming that their actions do not have a negative effect on others or effect the rights of others. Hedonism also believes that a person’s pleasure should completely surpass how much pain they have. In other words, personal pleasure is the ultimate goal (Ethics, 2013).
In some ways Madoff did follow ethical hedonism. He created the firm for personal pleasure. The more money he made, the happier he was. He was doing whatever was in his power in order to create the greatest pleasure possible for himself. However, his actions did have a negative effect on others. He also infringed on the rights of others. This is not part of ethical hedonism. However, he did achieve the greatest possible pleasure for himself.
References
Bandler, J., Varchaver, N. & Burke, D. (2009). How Bernie did it. Fortune, 159(10).
Five ways to shape ethical decisions: rights: Rights Approach (2011) Capsim. http://www.capsim.com/blog/five-ways-shape-ethical-decisions-rights-approach/
Hedonist Ethics (2013). Ethics. http://www.ethicsmorals.com/ethicshedonist.html
Playford, R., Roberts, R. & Playford, E. (2015). Deontological and utilitarian ethics: a brief introduction in the context of disorders of consciousness. Disability & Rehabilitation, 37(21), 6.
Time.com (2015). Bernie Madoff victims’ fund breaches $10.6Bn after feeder firm settlement. Time.com.
