Being involved in any profession in any part of the world is to be entangled in one's own and the government's own senses of moral values. Upholding those values allows for the advancement of one's own career, while simultaneously not harming anyone else's success or life. For that reason, for every profession there are legal statements and routes that are put in place; if violated, there are repercussions and measures to amend those violating. When involved with any career or profession, it is extremely vital to keep up moral and virtual standards; specifically, when dealing with other people's assets, funds, investments or lives. As a greatly interdependent capitalist world that we live in today, as an immoral judgment by an individual or a set of individuals can cause people to lose their life savings and have consequences that outlast their lifetimes by placing unnecessary burdens on their families, such as debts or lawsuits. Therefore, exercising extreme precaution, following the rule of law, upholding integrity, honesty and transparency while simultaneously working under the government's framework are some of the most ideal ways to ensure that the great responsibility that your clients entrust you with isn't breached. However, these moral and legal values are sometimes failed to be upheld by certain individuals or entities, especially in the business world. This paper will begin to explore what specific repercussions and consequences may occur when individuals do not uphold those values, and will focus in-depth on the staggering, unique and fascinating case of Bernard (Bernie) Madoff.
Bernie Madoff was born in the year 1938 on April 29th in Queens, New York to parents Ralph and Sylvia Madoff. Both Bernie's parents became involved in finance and investments. However, in his early years, Bernard didn't show much interest in finance; although, that changed as he began growing older and started being involved with finance later in his life. He started his first investment company with the 5000$ he made off of lifeguarding and installing sprinkler systems. He then radicalized and turned his small investment into a multi-millionaire company with big name clients. Bernie was able to achieve that due to his charming, honest and captivating cast. He won over clients with his warmth and façade of honorability and trust; clients were infatuated by him. The character of Bernie Madoff and his unquestionable intelligence allowed him to go undetected for over a decade of fraud, money laundering and theft. Bernie Madoff became known as a new villain in American history in 2008, as evidence about him began surfacing to the public about his dishonest business.
The scandal and fall of Bernie Madoff was an unexpected turn for a lot of investors. A small amount of Bernie's investors were multi-millionaires or even billionaires, like HSBC and the Royal Bank of Scotland; however, the majority and new investors were people whom put in their entire life savings and trust in Bernie Madoff. His own ultimate demise was devastating and almost unrecoverable for some of his clients. It has been reported that four suicides had been linked to Madoff's loss of his clients' money.
Bernard (Bernie) Madoff managed to con his investors of sixty-five billion dollars over a decade with no questioning from the government or his clients. The way he schemed one of the most savage fraudulent cases in U.S. history is almost mind-boggling and unbelievable. The next question arises as to how Bernie managed to pull this off for, so long. Bernie orchestrated a scheme that is known as the "Ponzi Scheme" or a pyramid-selling scheme. Taking its name from Charles Ponzi, whom first put this idea into practice but was caught shortly after. The Ponzi Scheme consists of luring investors in with your company's high returns, while getting money from new investors to pay off old investors. The issue with Ponzi Schemes however, is that there is a consistent need for cash flow and a constant need to keep new investors coming in. When that becomes unachievable, keeping a business running becomes near impossible and the scheme collapses.
In December of 2008, Bernie Madoff was arrested, and his fraud was exposed. Madoff was turned in by his own sons, Andrew and Mark Madoff on December 12th of 2008. The downhill spiral of events started the day before, when Bernie was planning on giving out several million dollars of bonuses to his employees, far earlier than scheduled. However, his sons, Mark and Andrew, were wary about the whereabouts of the money. This ended up in Bernie admitting his elaborate Ponzi Scheme to his sons. Furthermore, during that time, Bernie's investors were demanding seven billion dollars in return, but Bernie's business only had 200 to 300 million dollars. Bernie's attitude of trying to keep investors in by using a "stay with us longer, and we will offer you higher returns" was quickly collapsing underneath his feet. His investors and his sons didn't trust him anymore and his own family ended up turning him in.
After his arrest, Bernie was sentenced to a 150 year in prison on 11 accounts of fraud, money laundering, perjury and theft. However, as far back as 1999 an independent investigator, Harry Markopolos, reported to the US Securities and Exchange Commission (SEC) in a 17-page statement of the illegitimacy of Bernie Madoff's business. However, SEC didn't look into it deeply enough for various reasons. First, Bernie was known as an honorable, well-versed, trust-worthy and eloquent man. Second, he advised SEC on trading securities, and was on the board of National Association of Securities Dealers. He also helped launch the NASDAQ stock market. On the outside, his business and his character seemed very ethical and conscientious. Moreover, when SEC tried to investigate this, Bernie recruited 4000 new clients who had great slates and the allegations against him were dismissed shortly after. Former Chairman of SEC, Christopher Cox, was disgusted by the lack of attention given to this case after Bernie's arrest. Christopher then launched an internal investigation within SEC and evidence surfaced that one of the employees of SEC had a connection to Bernie and was married to his niece.
At the time, SEC didn't seem to be wanting involvement with Bernie's investigation, but I believe, that a more in-depth analysis would've revealed that Bernie's his returns were too good to be true. Bernie's company's returns were linear; not fluctuating or changing as the market did, but somehow, that didn't tip people off. Madoff marketed on low risks and high returns, and his returns were at an unusually steady rate. Logically, high returns usually correspond with high risks, but after the stock market crash in 2008, people looked for steadiness and reliability. Madoff said that his clients were "too greedy" to ask or investigate the whereabouts of his trades and the unparalleled success of his investments, and that to Bernie, made it seem like they were accomplices to his conning scheme.
Furthermore, this elaborate fraud scheme was not only viewed as a betrayal to his clients but specifically hit the Jewish community hard. Jerry Reisman, a New Jersey lawyer who represented 13 investors who lost $150 million, said: "Hitler tried to kill the Jews as a people. In one weekend, Bernie Madoff destroyed Jewish wealth in America as we know it. He preyed on his own community." In addition, the fall of Bernie Madoff was compared to the sinking Titanic, as everyone was distraught and there was no escaping the financial crisis, pain and suffering that Madoff inflicted on his clients. Bernie ruined a lot of people's lives in his scheme.
Even for Bernie's immediate family, things didn't look so good. After his imprisonment and sentencing, Madoff's immediate family continued to be harassed. His wife, two sons, and even his daughters-in-law were heavily scrutinized by the public. On several accounts, the family members were sued, even Bernie Madoff's 4-year-old granddaughter was mentioned in lawsuits. That pressure resulted in Bernie's son, Mark, taking his own life, and his other son, Andrew, losing his battle with a disease and dying in 2014. The Madoff family was torn apart and devastated, a result that they all paid for Bernie's own mistakes. Bernie brought down a lot of people with him with his crooked investment and trade deals.
Post the Madoff scandal and his imprisonment, SEC began new reforms to help combat similar incidents and protect investors from losing a huge amount or all of their money to people like Bernie Madoff. One of the first initiatives by SEC is known as the Dodd-Frank Act, also called the Wall Street Reform and Consumer Protection Act. Dodd-Frank involved registration requirements and induced hedge fund and investment funds to comply to SEC's new reporting requirement. Dodd-Frank also gave SEC authority to monitor financial firms that may pose systemic risk. Moreover, SEC has revitalized the enforcement division and filed a number of investigators and enforcement actions against investment firms and advisors. SEC is also working on changing the handling of complaints and tips, such that, the tip from Harry Markopolos would be given much more value and impact. In addition to this, SEC has adopted a few other strategies to help combat fraud such as: Integrating Broker-Dealer and Investment Adviser Examinations, advocating for a Whistleblower Program, Improving Internal Controls, Expanding and Targeting Training, Improving Fraud Detection Procedures for Examiners, Conducting Risk-Based Examinations of Financial Firms and Encouraging Greater Cooperation by 'Insiders.' Recently, SEC also launched an additional reporting qualification that require brokers to file quarterly reports on how they keep and deal their customers securities and cash.
All these deployed strategies seem to have been working thus far while revolutionizing the way SEC has operated in the past.
In addition to SEC's reforms, the investment industry was also forever changed in response to the legacy that Bernie Madoff created. The investment industry was transforming itself quickly as a greater call for transparency was being pushed for, and the rise of extensive due-diligence from investors increased rapidly, as investors looked closely to what their investments would do and where their money would be. Bernie didn't only affect his clients, his immediate family or the Jewish community, he had a much greater impact on an entire industry as we know it today and affected how SEC is being run. Of course, Ponzi Schemes in specific may be hard to detect, but with new reforms and cracking down on business that may have a slight chance of being corrupt, the industry is moving towards a more honest and moral framework.