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The circumstances under which Madoff’s scandal occurred were reminiscent of classical fraud mastery. Bernard Madoff masterminded and undertook a scheme that devastated individual investors and organizations. The Ponzi scheme was a despicable outfit for a man publicly respected for his other investments, such as his Bernard L. Madoff Investment Securities LLC. However, it was later discovered that Madoff relied on the trust he build through Bernard L. Madoff Investment Securities LLC firm, to woo investors into his infamous hedge fund. Madoff’s hedge fund turned out to be a Ponzi scheme when in 2008 the fraudulent deals he had dealt on investors became public. Madoff had managed to fraudulently rip his clients of $50 billion by the time of the disclosure. The Ponzi scheme operated by wooing clients by announcing double-digit returns to old investors (Lenzner, 2008). The money paid to old investors was purported to have come from high yield and low risk investments the firm engaged in. In Madoff’s case, he promised to invest the clients’ money through his own investment firm, Bernard L. Madoff Investment Securities LLC. Sadly, the firm did not invest the money at all, but the money collected from the new investors was used to compensate old investors, run the company and finance the leisurely life of Madoff and his family. In the aftermath of the scandal, Madoff, who was seventy at the time of the scam revelation, was jailed for 150 years.
The Ponzi scheme was discovered after clients’ claims for redemptions overwhelmed the firm. Madoff was put under pressure to pay the legitimate claimants of redemptions by employees of his firm, but he had already spent the money to the level where he had nothing. He owned up to having been a liar to investors in his firm, his workers and the public in general. Madoff broke the news about his fraud in a meeting with his senior employees where he declared his financial problems and the $50 billion debt that had accrued in the course of the Ponzi scheme (Wilson, 2008). Madoff was confronted with fate of his scheme. Having disposed of the money through his own private spending, he had nothing to compensate those asking for redemptions. He had reached practically a place of no return and owning up was the best option. Being an expert in financial issues, he was absolutely aware of the laws he was contravening by running the fraudulent scheme. Though he owned up of the criminal deeds, he could not repay the losses he caused his many clients.
According to Wilson (2008), some of the victims of the Ponzi scheme were Tremont Capital, Maxam Capital Management LLC, Fairfield Greenwich Group, Fix Asset Management, Unnamed European Funds of Funds and Palm Beach Country Club among other investment firms. Individuals and nonprofit organizations who invested their fortunes in Madoff’s firm were also devastated by the scam (Lenzner, 2008).
Legal regulations in the financial investment sector are very important in terms of preventing dishonoring of the promises given to a client by the investment firm. The legislations were duly invoked immediately after Madoff confessed. The outrageous Ponzi scheme Madoff ran contravened the anti-fraud clauses of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 (Wilson, 2008). These legislations needed to be applied in Madoff’s scandal in view of salvaging clients’ investments and making Mr. Madoff accountable for his actions. Provisions about reparations for damages caused to clients as stipulated in these laws empowered the authorities to confiscate and sell his properties. The money would later be used to settle the victims. Nevertheless, in all sense, the crimes Madoff committed could not be repaired. The prison sentence of 150 years in jail that Madoff received does not fit the crimes he committed. The fraud crimes caused spiraling destabilization of institution and individuals, and reparation for this cannot be through his jail term. Madoff’s assets were scarcely enough to compensate all the people and institutions he had defrauded.
The police started investigations immediately after Madoff confessed to running a Ponzi scheme and in the process successfully opened criminal proceedings against him. Other people who were co-accused with Madoff were irresponsible investment chiefs who had mindlessly invested their client’s money in Madoff’s outfit. Madoff’s investment managed clients’ money as well as money from financial companies. Madoff was so trusted that financial companies would secretly send clients’ money for him to manage. One financier, the erstwhile chairman of GMAC LLC, the finance company that fell victim to Madoff by losing clients money, is facing charges brought against him by the state for reckless conduct (Reuters, 2012).
From these Ponzi scheme revelations, it can be concluded that hedge funds operate in the U.S. without strict regulations. It beats the logic of investing that Madoff could pretend successfully for such a long time. The hedge fund is a non-transparent investment vehicle and it suffered a great setback following Madoff’s scam. However, people are pulled to invest in them following reports that such investments yield double digit returns and are a serious form of wealth creation (Lenzner, 2008). The law should have somehow been applied to gauge the capital which Madoff owned through his hedge fund. It would be expected that in every organization where the public has a stake, external auditors have to be contracted to look into the accounts. Again it is surprising how the lack of investment of the clients’ funds went on undetected. Having no checks, the investments of Americans were a plaything for Madoff. At the final meeting with his senior employee, Madoff shamelessly stated that the hedge fund was a big lie. This statement underscores the easiness of protracting the Ponzi scheme. His owning, rather than being caught, tells of the reluctance of financial matters investigating agencies.
The fraud committed by Madoff, a respectable man as an elder and a top brain in the financial services industry, underlines effect of the substitution of unquestioning loyalty for proper procedures. Investors believed in Madoff too much to question his capabilities. Had doubts about his abilities arisen, the investors could have called for audits which would expose the fraudster. Madoff’s Ponzi scheme reveals the gullibility of investors, especially if they are promised good returns. Madoff succeeded, just like Charles Ponzi before him, to defraud gullible clients of their lifetime savings and money from sold properties.
Dishonesty can be colored by high social standing and qualifications leading to blind approach of would-be-victims. This is exactly the case with Madoff’s Ponzi scheme. Bernard Madoff was an esteemed and socially high standing investment professional in the United States before he decided to declare his fraudulent ways. According to MadoffScandal.com (2009), Madoff’s good social standing waned when in the midst of the modern financial crisis he emerged as a dishonest person. Madoff relied on the trust people had in him as a seasoned financial expert. MadoffScandal.com (2009) has an argument to the effect that most of the people he defrauded expressed astonishment on finding he was nothing but an outright liar. His expertise in the field hadd clearly hoodwinked them not to stop and consider the unrealistic returns that Madoff constantly reported. Lenzner (2008) argues that though the high returns Madoff announced were warning signals, nobody perceived any danger, and the Ponzi scheme could have gone on if the firm had not faced $7 billion in clients’ claims for redemptions. To avoid regrets, people should look out for these types of signals which show the firm is fraudulent.
Madoff had a positive contribution to the financial markets as he founded the NASDAQ in the 1960s while trading in penny stocks. The aim of the NASDAQ was to disseminate quotes through the use of information technology. His reason for advocating for the use of technology in stock trade at NASDAQ was to avoid shady deals and underhand processes in over the counter stock market. He also was in the good books of his hedge fund investors who he had compensated, though fraudulently, since he established the Ponzi scheme in 1970s. Moreover, his story of success which fits to the proverbial description of “rags to riches” must have inspired many youngsters who looked up to him as a role model before the scam occurred. The awesome story of Madoff is that he started off as a lifeguard, saved money which he invested in the Bernard L. Madoff Investment Securities LLC in the 1960s and since then worked his way up the financial ladder (MadoffScandal.com, 2009). Indeed, Madoff’s star did shine when he was a senior member of NASDAQ. Wilson (2008), reports that throughout his career, Madoff has been a senior member of the securities. He served in the NASDAQ in various capacities including membership to its board of governors and chairman of the New York region among other prominent positions.
The lasting implications of the fraudulent situation uncovered in the aftermath of Madoff’s confession are that control measures should be imposed on hedge funds, and that the public should demand more accountability from those they trust with their investment. The financial institutions that lost billions of dollars in the Ponzi scheme suffered huge financial setbacks and their managers faced court cases filed by their respective clients. The government should intervene in the situation by imposing requirements on the hedge funds to operate in transparent manner. One way to go about resolving this would be that the affairs of hedge funds should be run by boards of directors and not single people. Participation of investors in the hedge funds should not be shady. Hedge funds that have a history of not paying some clients returns should be deregistered. This is because there is evidence indicating that under Madoff’s scheme, returns were not released to all qualified clients. Lack of payment of returns to deserving clients should be treated as a signal that the financial firm is bogus. The Securities and Exchange Commission should emphasize to investors the need for them to notice the signals of Ponzi schemes. The signals include: high returns on investment and low risks, unregistered investments, secretive strategies, paper work problems and problems in getting payments. All these red flags manifested themselves in Madoff’s Ponzi scheme.
Madoff might be in prison for the rest of his life but the financial problems he caused continue to resonate among the victims. Madoff will remain an all time fraudster for a long time due to the gravity of the crimes he has committed. His name will be mentioned alongside that of Charles Ponzi from whom the term Ponzi scheme was derived. Chares Ponzi was an Italian immigrant who in the 1920’s received money from people in New England and New Jersey, promising he would make 50% return in just 45 days before he was apprehended for the fraud.
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