Bernie Madoff Ponzi Scandal Abstract: Biggest investment scandal in American history had been brought to light during the last financial crisis in 2007-08 in USA. The man behind the history was Bernie Madoff.Who was he , how did he made ,what were the impact and lesson –all answers are insight. . To diagnosis the crisis, It needs to know his history with his Ponzi Scheme which will be helpful to understand the Financial Crisis in 2010-2013 in Bangladesh due to the Capital Market Collapse, Destiny Group, Hall Mark Scandal. Background: Biggest Investment Scandal in the US history was discovered during the Global Financial Crisis in 2007-8. What exactly was that? Who was the person behind the scene? How did he do that? What was the impact of the scandal in the USA and in rest of the globe? What was the failure of regulators? What has the scandal left the learning for the US as well as rest of the world by which regulators and the public can be aware about such scandal in future? We will try to find that answer here. Bernie Madoff, was once a name of national hero, a legend on Wall Street, chairman of the NASDAQ board, Philanthropist, but is now a name of a villain to not only the Americans but also the whole world, a prisoner who has been awarded 150 years in prison till November 14, 2139. Bernie Madoff Ponzi scandal is a story, how a well-reputed market maker, financier, Madoff influenced thousands of investors to furnish over their savings, falsely promising consistent profits in return , eventually was caught in December 2008 and charged with 11 counts of fraud, money laundering, perjury, theft and left a great lesson for the world. What Happened in case of Madoff Ponzi scandal? During the housing bubble period of US and boom economy, Bernie Madoff was a star on Wall Street. His success grew very quickly and he built a trading thrust named Bernard L. Madoff Investment Securities which was established in 1960. He enjoyed telling employees, peers, and friends that his enterprise started on the Pacific Ocean beaches in Long Beach, CA as a lifeguard. Madoff enjoyed leading his company, chairing the NASDAQ board, and presenting to traders as a leader in the industry sharing his tips, tricks, and lessons learned. By 2000, his company had become very popular and was commonly used by hedge funds, wealthy investors, and institutions. Bernard L. Madoff Investment Securities had been successful for over 20 years that was worth nearly $65 billion at the time when the success had been discovered as fraud in 2008 and everything came out from his own statement when he was arrested in December 2008. What is insight in in Ponzi Scheme? Under his investment Securities business, Madoff had set up a flourishing Ponzi scheme. A Ponzi scheme “is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than any actual profit earned.” The name originated with Charles Ponzi, who promised 50% returns on investments in only 90 days during the early 1900s. By the time Ponzi was arrested in 1920 he had swindled investors out of an estimated $7 million dollars. To avoid having too many investors reclaim their profits, Ponzi schemes encourage them to stay in the game and earn even more money. The investing strategies used are vague and/or secretive, which schemers claim is to protect their business. Then all they need to do is tell investors how much they are making periodically, without actually providing any real returns. Ponzi schemes arent usually very sustainable. The setup eventually falls apart after: (1) The operator takes the remaining investment money and runs. (2) New investors become harder to find, meaning the flow of cash dies out. (3) Too many current investors begin to pull out and request their returns. Madoff’s Ponzi scheme was a well crafted game and cheated the authorities by “generating false and fraudulent documents” that were used to disguise these unethical business transactions in time of investigation. The authorities investigated the scandal and they found that individuals, institutional investors, and securities authorities had been involved. Madoff had created a group of financial managers to work with potential investors to sell the fraud. Those documents including trade blotters and monthly account statements were created using historical stock data from the Internet. The largest Ponzi scheme in history went undetected for decades right under the nose of the SEC in New York as Bernie Madoff ran his $65 billion Ponzi scheme. Modus Operandi of the fraud According to the SEC indictment against Annette Bongiorno and Joann Crupi, two back office workers who worked for Madoff, they created false trading reports based on the returns that Madoff ordered for each customer. For example, once Madoff determined a customers return, one of the back office workers would enter a false trade from a previous date and then enter a false closing trade in the amount of the required profit, according to the indictment. Prosecutors allege that Bongiorno used a computer program specially designed to backdate trades and manipulate account statements. They quote her as writing to a manager in the early 1990s I need the ability to give any settlement date I want. In some cases returns were allegedly determined before the account was even opened. Madoff admitted during his March 2009 guilty plea that the essence of his scheme was to deposit client money into a Chase account, 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. Private and Social effect of the scandal The globe has rightly observed demonstration of thousands of people in the street in 2008-2009, the fate of the once happy members of Madof’s family including suicide of his one son, Mark Madoff after two years from his arrest, but not the 162-page list of clients( published on February 4, 2009)/Investors who lost billions of dollars in Bernard L. Madoff Investment Securities LLC in his Ponzi scheme fraud . Affected institutions considered victims of affinity fraud include Hadassah, the Womens Zionist Organization of America, the Elie Wiesel Foundation and Steven Spielbergs Wunderkinder Foundation. Jewish federations and hospitals have lost millions of dollars, forcing some organizations to close. The Lappin Foundation, for instance, was forced to temporarily close because it had invested its funds with Madoff. Madoff also dealt with James Harris Simons. The size of the fraud was often stated as $65 billion early in the investigation, but former SEC Chairman Harvey Pitt estimated the actual net fraud to be between $10 and $17 billion. Erin Arvedlund, who publicly questioned Madoffs reported investment performance in 2001, stated that the actual amount of the fraud might never be known, but was likely between $12 and $20 billion. Reasons behind Big failure: who were responsible ? Though Madoffs name came up in a fraud investigation for the first time in 1992 to the SEC about investments , Madoff returned the money to those investors and the SEC closed the case. Madoff Securities was investigated by the SEC eight times over 16 years and given a clean bill of health every time. A spokesman for Swanson, who has left the SEC, said he did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship with Shana Madoff. While awaiting sentencing, Madoff met with the SECs Inspector General, H. David Kotz, who conducted an investigation into how regulators failed to detect the fraud despite numerous red flags. Madoff said he could have been caught in 2003, but inept investigators acted like Lt. Colombo and never asked the right questions: I was astonished. They never even looked at my stock records. If investigators had checked with The Depository Trust Company, a central securities depository, it wouldve been easy for them to see. If youre looking at a Ponzi scheme, its the first thing you do. Major flaws were identified after the Madoff’s arrest : 1. Lack of Financial expertise and due diligence of the regulators 2. Lack of Transparency/disclosure requirement from hedge funds and other high-fee asset managers. Impaired Securitization Market during the crisis. 3. Strong ties with powerful political figures in both Washington and New York and affiliation with SEC’s high officials 4. Madoffs background and reputation were impeccable 5. Lack of prudence judgments on credit rating of the firm by The raging agency of Dun & Bradstreet. Some of flaws may indirectly influence Madoff Ponzi scheme , are given below: 1. Madoff was a truly liar and his investment fund was just one big lie and basically, a giant Ponzi scheme. 2. Boom Economic scenario : subprime-mortgage, Housing bubble for Government policy on ‘’Americas Dream’’ , 3. Total failures of corporate governance and risk management inmany systemically important financial institutions, 4. Excessive borrowing, risky investments, and lack of transparency by financial institutions, 5. Collapsing mortgage-lending standards and the mortgage securitization pipeline, 6. Deregulation of over-the-counter derivatives, especially credit default swaps, and 7. And overall failures of credit rating agencies to correctly price risk. Lesson learned: The Madoff Ponzi scandal has left many lesson for the Governments ,regulators ,investors around the Globe. Specially the following lesson has been learned from the Berne Madoff Ponzi Scandal. • Due Diligence: have the ability to perform competently. If you do not have the tools to perform adequate due diligence, you should not be invested in any hedge funds, VC, or private equity funds. • No outsourcing: Do not outsources your thinking or due diligence. Donot rely on 3rd parties, fund of funds, lawyers or consultants • Must not keep all of money with one manager • Too good to be true: Low risk, high gain outcomes are extremely low probability. • Believe in Your Money Your Responsibility, should not assume someone else will protect you. • The investor have to have answer with these five questions:Is the seller licensed? ,Is the investment registered? , How do the risks compare with the potential rewards? ,Do I understand the investment? , Where can I turn for help? • Trust but verify • Investor must observe the transparency in every operation of managers. Conclusion: Finally, it would be mentionable to cite Madoff’s apology to his victims ‘I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. Im sorry.’ But is it enough to forgive by any human being who will discover his charismatic as well as villainous story of being fraudster. No one can but there will a fear always in future someone may come in disguise not in the name “Madoff” but ……..using the systemic weakness (if there is). So, let us all concerned be aware always from such amicable one. Md. Nazrul Islam (Can be reached at: mnislam75@yahoo) Reference: 1. Stephanie Yang 2. businessinsider/how-bernie-madoffs-ponzi-scheme-worked-2014-7#ixzz3Al1yLtcP 3. economist/node/12817637 4. forbes/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html 5. money.cnn/2013/12/10/news/companies/bernard-madoff-ponzi/ 6. en.wikipedia.org/wiki/Ponzi_scheme 7. en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010 8. nydailynews/new-york/madoff-sons-knew-scheme-lawsuit-article-1.1869985 9. princeton.edu/~achaney/tmve/wiki100k/docs/Ponzi_scheme.html 10. investing.answers/investing/how-to-avoid-a-ponzi-scheme 11. Ponzi Schemes – Frequently Asked Questions. U.S Securities and Exchange Commission. U.S Securities and Exchange Commission. Retrieved 23 June 2012. 5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Heres How His Scheme Worked The mechanics of the Ponzi scheme. businessinsider
Posted on: Fri, 22 Aug 2014 07:52:02 +0000
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