The Fraud of the Century:

The Case of Bernard Madof

A Managerial Ethics Case Study by:
Group 3
Acob, Priceljoanmar
Agustin, Jervis
Basilonia, Ken
Bustamante, Patricia M.
Sumudivila, Misty L.
BACKGROUND OF THE CASE
Bernard Lawrence “Bernie” Madoff
is a former stockbroker, investment
advisor, and financier.
He founded in 1960 the Wall Street
firm Bernard L. Madoff Investment
Securities LLC.
The firm is buying and selling over-
the-counter stocks that were not
listed on the New York Stock
Exchange (NYSE).
His firm began using innovative
computer information technology
to disseminate stock quotes, in
order to compete. After a trial run,
the technology that the firm helped
to develop became the NASDAQ .
Madoff became the Chairman of
NASDAQ in 1990, 1991, and 1993.
BACKGROUND OF THE
CASE
On December 10, 2008, Madoff's
sons told authorities that their
father had confessed to them
that the asset management unit
of his firm was a massive Ponzi
scheme, and quoted him as
describing it as "one big lie".
The following day, FBI agents
arrested Madoff and charged him
with one count of securities
fraud. The U.S. Securities and
Exchange Commission (SEC) had
previously conducted multiple
investigations into Madoff's
business practices, but had not
uncovered the massive fraud.
BACKGROUND OF THE
CASE
On March 12, 2009, Madoff pleaded guilty to 11 federal felonies
and admitted to turning his wealth management business into a
massive Ponzi scheme.
The Madoff investment scandal defrauded thousands of
investors of billions of dollars. Madoff said he began the Ponzi
scheme in the early 1990s.
However, federal investigators believe the fraud began as early
as the mid-1980s and may have begun as far back as the 1970s.
Those charged with recovering the missing money believe the
investment operation may never have been legitimate.
The amount missing from client accounts, including fabricated
gains, was almost $65 billion.
The SIPC trustee estimated actual losses to investors of $18
billion. On June 29, 2009, Madoff was sentenced to 150 years in
prison, the maximum allowed.
GOVERNMENT ACCESS AND
CONNECTIONS
From 1991 to 2008, Bernie and Ruth Madoff contributed about
$240,000 to federal candidates, parties and committees, including
$25,000 a year from 2005 through 2008 to the Democratic Senatorial
Campaign Committee.
The Committee returned $100,000 of the Madoffs' contributions to
Irving Picard, the bankruptcy trustee who oversees all claims, and
Senator Charles E. Schumer returned almost $30,000 received from
Madoff and his relatives to the trustee.
Senator Christopher J. Dodd donated $1,500 to the Elie Wiesel
Foundation for Humanity, a Madoff victim.
Members of the Madoff family have served as leaders of the
Securities Industry and Financial Markets Association (SIFMA), the
primary securities industry organization. Bernard Madoff served on
the Board of Directors of the Securities Industry Association, a
precursor of SIFMA, and was Chairman of its Trading Committee. He
was a founding board member of the DTCC subsidiary in London, the
International Securities Clearing Corporation.
U.S.SEC’s INVESTIGATION AND
ALLEGED NEGLIGENCE AND COLLUSION
In 1999, a financial analyst in the name of
Harry Markopolos had informed the SEC
that he believed it was legally and
mathematically impossible to achieve the
gains Madoff claimed to deliver.
Madoff's numbers did not add up, and it
took him four hours of failed attempts to
replicate them to conclude that Madoff was
a fraud.
He was ignored by the SEC's Boston office
in 2000 and 2001, as well as by Meaghan
Cheung at the SEC's New York office in
2005 and 2007 when he presented further
U.S.SEC’s INVESTIGATION AND
ALLEGED NEGLIGENCE AND COLLUSION
In 2004, Genevievette Walker-Lightfoot, a lawyer in the SEC's Office
of Compliance Inspections and Examinations (OCIE), informed her
supervisor branch chief Mark Donohue that her review of Madoff
found numerous inconsistencies, and recommended further
questioning.
However, she was told by Donohue and his boss Eric Swanson to stop
work on the Madoff investigation, send them her work results, and
instead investigate the mutual fund industry.
Swanson, Assistant Director of the SEC's OCIE, had met Shana Madoff
in 2003 while investigating her uncle Bernie Madoff and his firm.
The investigation was concluded in 2005.
In 2006 Swanson left the SEC and became engaged to Shana Madoff,
and in 2007 the two married.
A spokesman for Swanson said he "did not participate in any inquiry
of Bernard Madoff Securities or its affiliates while involved in a
relationship" with Shana Madoff.
U.S.SEC’s INVESTIGATION AND
ALLEGED NEGLIGENCE AND COLLUSION
In 2004, SEC cleared Madoff but in 2005 found
three violations including operating as an
unregistered investment adviser. Madoff was
registered as a broker-dealer, but doing business as
an asset manager. SEC did not found any evidence
of fraud. Madoff agreed to register his business in
2005 but the SEC kept its findings confidential.
In 2007, SEC completed an investigation which
began on January 6, 2006, into a Ponzi scheme
allegation which resulted in neither a finding of
fraud, nor a referral to the SEC Commissioners for
legal action.
U.S.SEC’s INVESTIGATION AND
ALLEGED NEGLIGENCE AND COLLUSION
While awaiting sentencing,
Madoff met with the SEC's
 “I was astonished. They never even
Inspector General, H.
looked at my stock records. If
David Kotz, who conducted investigators had checked with The
an investigation into how Depository Trust Company, a central
securities depository, it would've
regulators had failed to
been easy for them to see. If you're
detect the fraud despite looking at a Ponzi scheme, it's the
numerous red flags. first thing you do. Madoff said in the
June 17, 2009, interview that SEC
Madoff said he could have Chairman Mary Schapiro was a
been caught in 2003, but "dear friend", and SEC
that bumbling Commissioner Elisse Walter was a
"terrific lady" whom he knew "pretty
investigators had acted well".”
like "Lt. Colombo" and
never asked the right
questions:
U.S.SEC’s INVESTIGATION AND
ALLEGED NEGLIGENCE AND COLLUSION
After Madoff's arrest, the SEC was criticized for its lack of financial
expertise and lack of due diligence, despite having received
complaints from Harry Markopolos and others for almost a
decade.
The SEC's Inspector General, Kotz, found that since 1992, there
had been six investigations of Madoff by the SEC, which were
botched either through incompetent staff work or by neglecting
allegations of financial experts and whistle-blowers.
Some investors are suing SEC for negligence for its regulatory
responsibility and not detecting the fraud.
Many believed that because of Madoff’s vast connection in the
government especially in SEC and SIFMA, his Ponzi scheme was
swept under the rug all these years.
There were also speculations that many of the SEC’s employees
have ended up working in the Wall Street so there is a subjectivity
element in the investigations.
THE PONZI SCHEME
Ponzi scheme is a
fraudulent investment
operation, where the
operator, an individual or
an organization, pays
returns to its investors
from new capital generated
from new investors, rather
than from profit earned
through legitimate sources.
It was named after Charles
Ponzi, who used the
strategy in the 1920s using
the international reply
coupons.
THE PONZI SCHEME
Unlike pyramid schemes, in
which victims unknowingly rope
in more targets, Ponzi schemes
rely on a single person or group
to coordinate every aspect of the
fraud. To keep the scam going,
the masterminds behind the plan
convince numerous victims that
they’re investing in a legitimate
fund that promises great returns.
Then the scam artists take
money from new “investors” and
use it to pay off existing
investors. But for the scam to
truly work to everyone’s benefit,
the orchestrators would need
access to an infinite supply of
new victims.
THE PONZI SCHEME
DIAGRAM
THE MADOFF “PONZI”
SCHEME
In the early 1990’s, Bernie Madoff had been an image of
legitimate success. He used this high visibility to start his
second business of managing money. He promised
consistent returns of 10% to 12%. Because of these stable
returns, he attracted billions of dollars from investors.
The said investors were some of his wealthy friends from
the Palm Beach Country Club, investment managers
(feeders), Jewish charities, non-profit institutions and
foundations, and New York elite. Part of the appeal of
investing with Madoff was the appeal of “exclusivity”.
He made every client feel like he or she was his only client.
His inaccessibility and “invitation only” approach to new
investors created an air of exclusivity and desire to be
involved.
THE MADOFF “PONZI”
SCHEME
Madoff’s investment strategy was to buy stocks, while also
trading options on those stocks as a way to limit the potential
losses. His market timing strategy was called “the split strike-
conversion”. This strategy involves buying shares of companies
to create a portfolio that represents a major index, selling call
options at a strike price above the current index and buying put
options at the current index value or very close to it using the
call option premium cash.

To broaden his clientele, Madoff developed relationships with

intermediaries or middlepersons, also known as “feeders”, to the
investment fund. These feeders are investment managers who
trusted Madoff to take care of their clients’ money and it does
not appear that they were integrated in the fraud. The feeders
receive fees as their profit for ensuring that cash is flowing into
the operation.
THE MADOFF “PONZI”
SCHEME
Madoff confessed in his “Plea Allocution” that he
never invested any of his clients’ money.
Madoff admitted during his March 2009 guilty plea
that the essence of his scheme was to deposit client
money into a Chase Manhattan Bank account and
Madoff Securities International, Ltd., rather than
invest it and generate steady returns as clients had
believed.
When clients wanted their money, "I used the
money in the Chase Manhattan bank account that
belonged to them or other clients to pay the
requested funds," he told the court. In effect, he
was operating a Ponzi scheme.
THE 7 COMMON
CHARACTERISTICCS OF A
PONZI SCHEME
According to the U.S. Securities
and Exchange Commission, there
seven common characteristics of a
Ponzi scheme:

High investment returns

with little or no risk;
Overly consistent returns;
Unregistered investments;
Unlicensed sellers;
Secretive and/or complex
strategies;
Issues with paperwork;
Difficulty receiving
payments.
These are all present in
Madoff’s investment scam.
THE INVESTORS
In a 162-page
list filed in a
New York
court, there
are over
13,000 Madoff
victims . The
map shows
the spread of
the scam in
the United
States of
America.
THE INVESTORS
Investment houses, asset management firms and banks like the Fairfield
Greenwich Advisors which invested $7.5 billion and Tremont Group
Holdings with $3.3 billion in investment were among the big investors
impacted with the scam. They serve as Madoff’s large feeder funds.
Investors of these feeders never heard of Madoff before and were shock
and surprised that their investments, life savings were lose due to the
scam. This shows how extensive the effect of Madoff’s Ponzi Scheme.
The Madoff scheme also spread to the Jewish charities, non-profit and
educational institutions. Madoff being Jewish used this to penetrate the
Jewish community. Among its victims were the Elie Wiesel Foundation (of
Elie Wiesel, the famed author, Nobel Laureate and Holocaust survivor),
Yeshiva University (Jewish private university in New York) and
Wunderkinder Foundation (of the famous director Steven Spielberg).
The scam also reached Europe. Banks like Banco Santander (Spain),
Bank Medici (Austria), Fortis (Netherlands), Union Bancaire Privee
(Switzerland) and HSBC (UK) were among the top banks included in the
list who invested from $2.87 billion to $700 million.
THE MADOFF’S OPULENT
LIFESTYLE
Madoff owned an apartment in the posh
Upper East Side New York estimated to
worth $5 million .
He also owned a private yacht.
He also has two private planes on call
registered under BLM Air Charter, a
company registered at the same address
as his Bernard Madoff Investment
Securities firm.
The Madoffs also own a $9.4 million
home in Palm Beach, Florida, that's
under Ruth Madoff's name.
The two-story, 8,753-square-foot house
features five bedrooms, seven
bathrooms, and a pool.
The property also includes a boat dock
on the Intracoastal Waterway where
Madoff can park his yacht. He also
owned a $3 million oceanfront mansion
in Montauk, New York, a Long Island
hamlet.
THE MADOFF’S OPULENT
LIFESTYLE
Madoff’s credit card bills
revealed a lot about their
lifestyle.
The said bills were among the
pile of exhibits that were under
investigation.
It was revealed that majority of
the charges were from his
family and associates.
The bill includes, among
others, purchases of Ruth
Madoff on designer shops,
limousine service availed by his
son Mark, eating out at lavish
restaurants, and extravagant
trips with his associates.
MADOFF’S DOWNFALL
On December 10, 2008 , Bernie
Madoff confessed to his two sons,
Andrew and Mark, that the asset
management unit of his firm was a
massive Ponzi scheme, and quoted
him as describing it as "one big lie".
The next day, December 11, 2008,
the FBI arrested Bernie Madoff with
the charge of criminal securities
fraud.
Many clients requested for their
deposits including feeder funds with
a total withdrawal of $12 billion.
He resorted to soliciting and
sometimes subtlety threatening
clients for additional deposits.
He made them feel guilty for not
being better clients of such a
“distinguished” investment firm.
THE AFTERMATH
 On March 12, 2009, Bernie Madoff
pleaded guilty to 11 federal felonies,
including securities fraud, wire
fraud, mail fraud, money laundering,
making false statements, perjury,
theft from an employee benefit plan,
and making false filings with the
SEC. He was sentenced to 150 years
in prison.
 On July 2009 Ruth Madoff was sued
for $44.8 million by Irving Picard,
the trustee recovering assets for her
husband's victims, who charged that
she had capitalized on her
husband's fraud to lead a "life of
splendor.“.
 Mark Madoff, the older son,
committed suicide by hanging
himself in his Manhattan apartment
on December 11, 2011, the second
anniversary of his father’s arrest.
 Andrew Madoff, the second son, also
died on September 3, 2014, after his
long battle to mantle cell
ETHICAL ISSUES
There was a serious lack of ethics with what Bernie Madoff did or
there were none at all. It is out of greed and general disregard of
others and the law. In his own words according to his two sons, the
investment was "one big lie".
What Madoff did was an example of White-collar crime.
It is perpetrated by a rogue individual who knowingly steals, cheats,
or manipulates in order to damage others.
It creates victims by establishing trust and respectability.
Madoff also committed affinity fraud.
It is a form of investment fraud in which the fraudster preys upon
members of identifiable groups, such as religious or ethnic
communities, language minorities, the elderly, or professional
groups.
Him being a Jewish used his heritage and religious affiliation to
defraud Jewish individuals and organizations that identified with his
background.
ETHICAL APPROACH:
UTILITARIANISM
Utilitarianism basically states that by doing what is morally right will
benefit the most amount of people and generate the greatest
amount of happiness. The greatest happiness of the greatest number
should be the guiding principle of conduct. So in other words doing
what is right should be placed above all else.
We think it is safe to say that Bernie Madoff stood for everything that
utilitarianism is against.
Madoff was not interested in doing the right thing at all and because
of this he let a lot of people down and caused a lot of unhappiness
because of it. If he were to do the right thing he would not be in jail
right now and even if he couldn't make the amount he was making
illegally he would still be making a good amount and it would all be
clean instead of taken unwillingly from others.
In the utilitarian perspective, investment fraud is unethical because
its end or ultimate consequence, i.e. the loss of billions of dollars at
the expense of investors, does not provide any benefit to the
investors.
PROPOSED
ALTERNATIVE/RECOMMENDATION(S)
Before investing, we should look at the holdings of a fund and make sure
that their performance is consistent with the activity of the stock market.
Here are some signs on how you can spot a ponzi scheme.
Unclear business models. Crafters of Ponzi schemes will try to distract
you with big numbers, hoping that you don’t notice that the business
doesn’t make sense. In hedge funds or investment pools like Madoff’s, the
numbers won’t add up if you take the time to look at them. Schemers will
often discourage you from asking questions or run around them every time
you do.
Aggressive sales techniques. Have you noticed how scam artists will go
to any length to get someone to sign up with them? If they were for real,
they would just let their results speak for themselves.
Promises of high returns for no work. Anyone who tells you that you
can get rich quick is probably doing something illegal. If someone promises
you “easy money,” don’t give them a moment of your time.
Difficulty withdrawing funds. Madoff’s scheme was unusual, because he
made it easy for investors to withdraw their money fairly easily. Generally, a
Ponzi scheme discourages its investors from withdrawing and creates delays
for dispensing funds.
Thank you!
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