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CASE STUDY

Bernie Madoff’s Ponzi scheme: Reliable Returns from a Trustworthy Financial Adviser
1. Should Mark Madoff have granted his father’s request for a one week delay before
notifying government authorities about his crime?
No, he shouldn’t. Because it would take him into jail. Mark had done the right decision
because sooner or later of all this Ponzi scheme will appear although Mark had granted
his father’s request for a one week delay before notifying government authorities about
his crime.
2. Describe the chronological evolution of Bernie Madoff’s Ponzi scheme!
Bernie madoff owned three very successful financial companies. But, he built them
dishonestly. At the beginning, Bernie, helped by Ruth’s father, established some
legitimacy by giving him office space in his midtown Manhattan accounting firm. Bernie
began this business by bought and sold penny stock and traded outside NYSE or AMEX.
Businesses borrow money from banks to this pay for expansion but bernie’s plan. Bernie
had a bank account with money flowing in and out from his illegal investment advisory
business. He used some of this money, without his client’s permission, to avoid interest
payments. Bernie moved money between his Bank ofNew York brokerage bank account
and his Chase investment adviser bank accountas needed. Whenever he fell short of the
guaranteed 20 percent investment advisoryreturns, he made up the difference by taking
money out of his brokerage bank account.If he needed income to grow the brokerage
firm, he took money from theinvestment advisory bank account.
3. Why did sophisticated investors trust Bernie Madoff with their funds? Why didn’t they
perform appropriate due diligence?
Bernie assured them by sold blue-chip stocks and claimed he invested client money using
a complicated three-part “split strike conversion” investment strategy. He told clients that
first he purchased common stock from a pool of 35 to 50 Standard & Poor’s 100 Index
companies whose performance paralleled overall market performance. The S&P 100
Index represents the 100 largest publicly traded companies based on market
capitalization, and represented a very sound investment. Second, he bought and sold
option contracts as a hedge to limit losses during sudden market downturns. Third, he left
the market and purchased U.S. Treasury Bills when the market was declining, and then
sold the U.S. Treasury Bills and reentered when themarket was rising.

I do believe Mark and Andrew didn’t know about their father’s Ponzi scheme. Bernie never requested the presence of a lawyer when speaking with SEC - agents. it’s impossible for sophisticated investors to do like that because they thought “business is business” and“if you failed in a business.The SEC annually receives more than 10.signaling that he had absolutely nothing to hide. It is because they. it’s your own business”.000 complaints against brokers. The SEC believed Markopolos was primarily motivated by a desire for the whistleblowingreward windfall. werealso heavily invested in the fund. they focused on the more familiar “front-running. . Bernie explained he had apersonal “feel” for market fluctuations. 2008 discussion at Bernie Madoff’s apartment? Yes. Markopolos unsuccessfully competed against Bernie. uncover the fraud? . SEC managers and Markopolos had an adversarial relationship.4. The SEC had difficulty understanding the complexity of Bernie’s operations. which received several complaints about Bernie Madoff. 6. Besides. Theunderstaffed SEC assigned cases to investigators who had little experience with Ponzi schemes. which is why he had been a - successfulinvestor for decades. Do you believe Mark and Andrew Madoff didn’t know about their father’s Ponzi scheme prior to their December 10. they looked forwatd to inheriting the company. But in fact. along with other family members and close friends.Bernie - lied to them multiple times to keep them off track.”which - Bernie was not doing. As a result. They gave Bernie the benefit of the doubt because he had an impressive trackrecord - with NASDAQ and had assisted the SEC on complex issues. I think they should. When questioned about his consistently high returns. Should sophisticated investors whowithdrew millions from their Madoff accounts forfeit the undeserved gains to people who lost the millions of dollars theyinvested? Yes. Why didn’t the SEC. 5. thus leaving himself - vulnerableto the “sour grapes” accusation.