Bernie Madoff: Business Ethics, Case Study Example

Part 1: Summarize the point of view of the author

Because of the nature of the political system in the United States, ideology has trumped practicality with regards to the regulation of the economy and of the banks. Bernard Madoff pulled off the largest Ponzi scheme in the history of the world, which lasted over two decades and ultimately his pyramid collapsed when a global economic recession was in full effect. The financial crisis left Madoff in debt billions and billions of dollars to his investors, rendering him unable to give back to his investors above-average returns that they were promised or even ample funds to give back the initial money invested by his clients. In addition, there is no evidence to prove that Madoff made trades with the money invested by his clients. Madoff’s pyramid finally met its demise in 2008, and Madoff was subsequently arrested for criminal securities fraud. As the progenitor of the largest Ponzi scheme carried out in the world of commerce, Madoff successfully stole over fifty billion dollars of his investors over a protracted period of time. Moreover, as the former chairman of the NASDAQ Stock Exchange, Madoff was accused of defrauding various corporations, individuals, foundations, universities and endowments. Critics point to the covert nature and opacity of hedge funds as the etiology of the Madoff crisis (Donaldson, 2008). Madoff founded Bernard L. Madoff Investment Securities, LLC, his renowned investment company that soon found itself at the center of a litany of class-action lawsuits that exposed Madoff as a thief who orchestrated a Ponzi scheme that reached people on a global scale.

Various red flags came up with regards to the illegal and fraudulent activities that Madoff and his company engaged in. Madoff guaranteed a certain financial return over a protracted period of time. However, no guarantee can ever be verified. Another red flag was that Madoff devised a closed trading system to ensure that none of his clients could check the true asset value of any investment they made to Madoff and his company. A third omen was that the amount of reported trades made by Madoff, which was incommensurate with the documented volume of trading reported by the Standard & Poor’s options market. Nonetheless, despite his trading practices and firm activities being investigated numerous times over a two decade span by the SEC, Madoff was able to carry on his nefarious business practices for over two decades, a fact that the SEC time and again has articulated its regret for exhibiting a lack of due diligence, thereby failing to adequately perform its duties in a cogent manner.

Madoff’s business was a family one, as his two sons worked for their father in managerial positions, while his brother and niece were purportedly in charge of compliance. This fact raises another red flag because nepotism in itself breeds controversy and failure to carry out duties in an objective manner. As such, it is unequivocal that the author of this case study decries Madoff’s attempts to claim innocence when corruption pervaded every level of operations in his business. Madoff’s illegal and fraudulent activities out of greed had diffuse ramifications on many people and organizations, especially on charities (Tavakoli, 2008). Ultimately, Madoff paid the consequences for his actions, pleading guilty to eleven felony accounts that had been brought against him. He received a prison term of 150 years in prison. The impact of Madoff’s twenty-year fraudulent scheme profoundly affected his family and friends, which resulted in many other officials who had worked for him receiving lengthy prison sentences.

Part 2. Questions for thought

Trust is very significant in any business transaction, as investments are made with the idea of making higher returns than the money invested. Although highly illegal, Ponzi Schemes will persist in the modern business world because people are so driven by greed. Madoff was greedy to earn money off his client’s trust of him and his company. As such, he exploited both their trust and greed in order to amplify his own.

A Ponzi scheme occurs when someone like Madoff takes funds from investors, pay dividends, requests redemptions from older investors, and ultimately keeps a large portion of the money. Such schemes always fail, as the stated returns promised to the investor never materializes. Examples of other Ponzi schemes include one carried out during the 1930s by a Swedish businessman named Ivar Krueger in which he defrauded investors predicated on the purportedly profitability and expansive nature of his monopolies. The pyramid ultimately collapsed at the end of the 1930s, and Krueger committed suicide.

They probably did not know what they were doing was fraudulent because their father kept hidden what was actually transpiring. Building a firm or business with family and friends ensures trust and loyalty regardless of what activities take place. Their antagonism towards their father in the aftermath attests to the fact that their father lacked any moral compass in the realm of business.

There are a litany of ethical issues related to running a family business, including regulating employee behaviors. Moreover, in the Madoff case, if any of the sons became apprised of what their father was doing, rather than report him at the outset, they have a filial obligation to cover for their father (Tavakoli, 2008). As such, family members should never be put in charge of compliance to extant business laws and codes of ethics because they will always protect their own and maximize familial profit.

References

Case 1: Bernard Madoff: How “One Big Lie” Can Destroy Thousands of Lives.

Donaldson, T. (2008). Hedge fund ethic. Business Ethics Quarterly, 18(3), 405-416.

Tavakoli, J. (2008). Madoff deserves lots of company. Tavakoli Structured Finance, Inc. Retrieved August 23, 2015 from http://www.tavakolistructuredfinance.com/TSF11.html.