Madoff Investment Scandal, Case Study Example

Background

December 11, 2008, Bernard L. Madoff was arrested by the U.S. Federal Bureau of Investigation (FBI) on criminal charge of securities fraud. Tipped off my his sons whom were employees of Bernard L. Madoff Investment Securities LLC (BMIS), the FBI arrest Madoff with an order to freeze all fiscal activities and denied right of trading from the London based companies Madoff Securities International Ltd. (Madoff International) and Madoff Ltd., the FBI received report on what became the basis for United States Attorney for the Southern District of New York eleven count criminal complaint, charging Madoff with: false filings with the Securities Exchange Commission (SEC) investment advisor fraud, mail fraud, money laundering, securities fraud, wire fraud, and theft from an employee benefit plan. Upon investigation, he was also accused of making false statements and perjury.

Defrauding his clients of almost $65 billion, Madoff’s activities had resulted in the largest Ponzi scheme in history, as well as investor fraud committed by a single person. “Prosecutors allege that he used the London office at Madoff Securities International Ltd. to launder more than $250 million in client’ weath; transferring funds from the investment-advisory business in New York to London, and then back to the U.S. in support of U.S. trading operations at Bernard L. Madoff Investment Securities LLC. Madoff defrauded through pretense of trading in Europe for his clients.

Released on a $10 million bond the same day he was arrested, Madoff’s court ordered home detention included surrender of passports, electronic monitoring of movement, and a 7:00 PM curfew as condition of bail. In a January 5, 2009 motion, prosecutors requested revocation of bail, after Madoff and his wife were accused of violation of court-order asset freeze; mailing jewelry worth up to $1 million to relatives, and $173 million in signed checks found in an office desk post arrest.

Prosecution argued that Madoff presented a serious risk of flight citing: 1) the scope and the nature of the alleged crime; and [. . .]; 3) the fact that Madoff [had] assets. On January 5, 2009, concession was reached in a decision that due to the fact that substantial bail had already been posted, there was no serious risk of flight [§ 3142(f)(2) of the Bail Reform Act]. While Justice Ellis denied the motion for revocation of bail, Madoff was subject to further conditions, including search of all mail.[i] On March12, 2009, Bernard L. Madoff pled guilty to eleven felonies. U.S. District Court Judge Denny Chin convicted Madoff to the maximum 150 years behind bars for what his judge called an “extraordinarily evil” fraud.

Legal Analysis

The landmark sentence of Bernard L. Madoff stands as a testament to the competency of the United States legal system, and in particular the Judiciary. The case also provokes renewed interest in the separation of powers, and the ineffectiveness of regulatory oversight in contrast with the jurisprudence of statutory law and law enforcement. While regulatory policies of the SEC and the Federal Reserve banking oversight arm are intended to mitigate investment fraud, as seen in Madoff’s conduct, compliance measures were of little affect in a company culture already riddled with unethical activities.

Corruption stood at the heart of the scandal, and the history of the Ponzi scheme dates back to another era of tumultuous economic disparity, Madoff’s activities while exceptional in terms of fiscal cost were felonies, in fact were subject to commonly applied criminal statute. In short, Madoff’s extravagant theft of monies through the various acts stated within the contract law stipulations of the Statute of Frauds, were a direct violation of contract law breaching client trust, but also pertained to the rules of criminal statute through intentional act, and commission of felonies utilizing rule restricted forms of communication (i.e. wire transfer).

Although Madoff was convicted within District Court by the State of New York, client-victims may have also filed tortfeasor complaints prior to the investigation, as negligence in response to investment agreements proposed future detriment to employee benefit plans, pension funds and other sources of income of serious reliance. Compensatory damages in this area would, of course, be high. An area of inquiry into law and retributive limits will most likely be of serious public discussion for years to come. For investors in London, the outcomes to the case may or may not be adequate. Structural limitations on trials in the United States, reveals that international jurisprudence, and the exercise of enforcement predominantly takes place in state district courts. The sheer magnitude of Madoff’s crimes at an international level, were succinctly dealt with in a U.S. Federal court of law; thus inhibiting any possibility of extradition to the United Kingdom on similar charges.

Ethical Analysis

At the close of his trial, Madoff offered little in terms of apologetics for stripping investors of billions of dollars in wealth. Quite simply, he said, “I cannot offer you an excuse for my behavior [. . .] how do you excuse betraying thousands of investors who entrusted me with their life savings? How do you excuse deceiving 200 employees who spent most of their working life with me? How do you excuse lying to a brother and two sons who spent their entire lives helping to build a successful business? How do you excuse lying to a wife who stood by you for 50 years?”[ii]

The due process of law is a discreet intervention. Jurisprudence has its limits. The efficacy of law as a model of ethical governance once up against a citizen like Madoff, finds its ground only in the last instance. Prohibitionary impetus within law is then, of little tacit agreement in the face of intentional corruption. The ideas of constitutional law and the protections it guarantees rests on deaf ears. Only in the punitive realm of law do we find retribution through conviction. Nevertheless, even restitution measures do not induce and equilibrium in the past. Justice is far for victims such as Michael Schwartz, 33 years old, of New Jersey, who reflected on the loss of his family’s funds set aside for care of his mentally disabled brother, “I hope his sentence is long enough so his jail cell will become his coffin.” For many, the 150 sentence Madoff received fell short of adequate justice. Judge Chin’ activism was clear for others however, and his citation of the defendant’s conduct as “evil” marks history with the ethics of his decision.

Contributing Factors

U.S. District Court Judge Denny Chin cited a record of more than one hundred victim letters within the complaint, including a widow was provided consultation by Bernard L. Madoff himself just two weeks post the death of her husband in regard to their life savings. According to Chin’s discussion, Madoff put his arm around the widow and said, “Your money is safe with me.” Justice Chin also emphasized that not one of the letters he was in receipt of regarding Mr. Madoff contained a single statement of support prior to conviction.

Retrospectively, it is difficult to imagine the extensive damage caused to individuals without knowledge of the degree of wealth lost by large institutions during the Ponzi scheme. Institutions retain accurate records, and as default after default catapulted major investors in partnership with Madoff’s enterprises, retention of the damage has concluded in a project of financial historiography of sorts, far beyond the scope of audit normatively seen within the financial services realm. In the final hour, the Wall Street Journal produced a public statement of victim accounts, addressing at least a portion of the significant damage done to international financial institutions as a result of the fraud (Appendix: A).

Ethical Factors

Throughout the twentieth century, there is perhaps no more significant discussion within Philosophy than examination of the democratic State. At the most basic level, participatory democracy is fostered by the presence of liberty within conduct and in sovereign agreement. Government as both institution and politics is most readily captured in the realm of law and legislative processes. In recent years, however, judicial activism on behalf of individual justices has increased in response high profile cases. Madoff’s case is an incredible example of how one individual’s wrongdoing might affect the entire international monetary system. The case also provides one of the most lucid instances of ‘natural law’ within social contract thought; where all men are subject to tyranny under a dictator whom has gained power by tacit consent. Throughout the blogging sessions, gain insight into the larger public discourse on the legal matter, and into individual perceptions in response to the dialogue on ethics that the scandal and attendant conviction and imprisonment of Bernie Madoff has instigated.

In the Leviathan, Hobbes proposes a pessimistic vision of the state of nature where human beings are in perpetual struggle against each other.[iii] A royalist, Hobbes envisions the formation of the commonwealth as a public good, where individual powers are consensually and necessarily offered to the authority of an absolute sovereign. A State of War provides justification of monarchal dominion, and individual obedience to even arbitrary government is essential in order to hedge against disorderly evil. Hobbes shares the lack of diligence that his contemporary Locke perceived to be the rationale for enslavement – the opposite of freedoms. If a state of war is to be avoided, near tyranny and certainly the loss of freedom of those whom “threaten” the rational order of things are to be subjugated. Territory and its charismatic reckoning with the state of nature once operated upon by rational men was the most significant aspect of this interpretation, with the future of the sovereign dependent upon expansion of property as right.

How it is that the social contract, or compact comes to be considered an activity of “men” rather than exegesis, is of course, tautological for 17th and 18th century male philosophers whom are attempting to build theoretical arguments at the nexus of commonwealth social structures, and common law outcomes that are ultimately vested in Revolution. Property is at the core of Locke’s (1690) Second Treatise on Government as he offers a systematic account of the mechanistic activity of labour as a means to property.[iv] According to Locke, free men whom toil land are justified in claim to property, and as a result are to be considered as consenting, and reasoned men. Property also provides the basis for calculation during this period, and it is not surprising that for Locke and others, the intersection between national systems of accountability begin to converge with quasi demographic forms of governmental administration.

In the present day, articulation of “right” as a universal factor within democratic formations is most explicitly rendered through jurisdictional relationships of citizenship, property and Law’s potential to dictate sovereign interpretations of Justice. The presence of Justice is perhaps the most critical factor in determining the effectiveness of democratizing nations in situ of existing ideological and market practices.

In 1985, Anthony de Jasay’s The State sought a diagnostic approach toward an evolutionary analysis of polity.[v] For de Jasay, origination of the modern state is the result of happenstance event, and conquest (i.e. violence) and contract (i.e. property) maintain the foundations. Market fluxes such as inflation are either “cure or endemic condition[s];” all dependent upon whether the “infliction of losses is required to gain elsewhere.” Identified most often as a public-choice approach intellectual, de Jasay’s methodological approach to the examination of the state the primary instrument for all else, reflects a distinct tradition from mere laissez-faire market expansion. Ideological nativity is of import for de Jasay, as states are “in a state of nature” so while man is rational and instigative, the state has only one ultimate logic which is power.

Predicating distinctions between states as a sum of systemic constants versus the variables of the human element [in the] context of private and state capitalism (“The State as Class”)” de Jasay analyses the place of the managing bureaucracy and concludes that equilibrium rests in institutional systems, like law, which are precarious in their tenure, and discretionary power is limited. Configurations of power characterizing private and state capitalism within de Jasay’s theory are constants.

How “envy” is mapped out between citizens is possibly best seen in his analysis of the conditions of “free-rider” groups in the case where there is an absence of state-of-nature interest groups, and the entire burden is being carried by a minority. Accordingly, de Jasay argues at least three of the following conditions need to be present: 1) individual altruism; 2) All are selfish, yet some are non-envious and will carry the burden, even if some receive more; 3) All group members are both selfish and envious, and a threshold for free-riding must have been kept below the critical level. In the wake of Madoff’s lawsuit, the inexcusable nature of a free-rider of such excess is no longer vague.

If principles of Justice are indeed the primary basis for protections against property theft, and those premises are intrinsically linked to the existence and continuation of equa-liberty, we must determine how the elimination of arbitrary distinctions and reliance upon a natural equilibrium of democracy based upon individual advantages is fostered. In Hayek’s (1949) work he argues that “all institutions of freedom are adaptations to the fundamental fact of ignorance.”[vi] It is the inherent limitation of the human mind, that enables the realization of liberalism, and hence the content of law and policy, not to mention the abstractions of the market, to tacitly rule individual liberties through the processes of those institutions. Accordingly, liberal principles and legal rules are not the product of conscious construction or enlightened invention, but the evolution of naturalistic phenomena that preserve the liberal order through the spiritual conduct of collective allegiance.

Counter constructivist in tendency, Hayek nevertheless struggles with the market and proclaims the “price system? [an] evolved medium communication.” Here, he points to his epistemological roots in evolutionary thought, and argues that the good of the market is spontaneous. In Economics, yield of market integration or Purchasing Power Parity (PPP) is considered a relatively reliable predictor of distributive effect. Integration of market institutions should be adequately measured by PPP across polities, including cities. More precisely, Purchasing Power Parity (PPP) or market rates of exchange over time directly impact the robustness of an economy, as PPP is not expected to “hold instantly or absolutely, but only relatively and with some equilibrating time needed.”xii In short, meddling with the market by actors such as Madoff has, according to Hayek’s proposal, deleterious effects so powerful that longitudinal parity is put into exceeding danger.

As sometimes proposed, distributive justice often serves to legitimate institutional authority as a system of justice when market mechanisms are functioning according to optimized laissez-faire practices. When law and market are put into real relationship, and shifts within the market are less stable or are undergoing manipulations through enforcement of law by policy and new priorities of fiscal contribution, as seen in the IMF instigated structural adjustment policies of the 1980s and 1990s, financial relationships and their outcomes are not a stable enough instrument nor predictor of liberties within democratic nations. The entrance of legal and extra-legal relationships dedicated to negotiated settlements surrounding complaints about financial rights abuses has had up to the present moment, little to do with economic policies. Madoff’s investment schemes prompted a widespread crisis of monetary devaluation and global devolution of personal finance that potentially exceeds normative constraints on market activity, including state mandated retraction of liberties. Constitutional reconfiguration in some nations has often been the result, and the solution. In the United States, where constitutional law is founded on legal writing rather than the „order of the day? as it is in the common law UK, judicial activism provides an extraordinarily important vehicle for prioritizing statutory interventions toward adequate constraint of a market gone awry.[vii]

Corrective Action

There is no parole in the federal system. Bernard L. Madoff, but he is eligible for 15% off from his original sentence for good behavior, which would still leave him facing at least 127 years. The sentencing, “while high, isn’t a record for financial fraud. In the past decade there have been sentences as high as 330 and 845 years.”[viii]

Today, Madoff resides in a medium security prison. In the past several decades, the U.S. prison system has been transformed from a mere state institution to an industrial prison complex. In many states, unparalleled budgetary allocation goes toward retention of inmates (State of California, CDCR 2007-08 Budget, $9,776,618,000). Comparatively speaking U.S. states outstrip tax payers on a state by state basis in excess of revenues not met in other contexts (i.e. Western Europe multi-national region). If one were to argue against the over-determined economic benefits being derived – and promoting a prison complex far exceeding normative size in a democratic state – then one would have to still find it incumbent to upon citizens to find regulatory or other interests to retract from the feedback loop between criminal law, jurisdictional conviction rates, and the financial returns of incarceration. The distance between prison activities and responsible decision making in business and in governance, however, is oft quite far. And so we see that without judicial decision, institutions, whether market based or state administered, in the last instance, cannot ‘think.’

[i] United States v. Madoff, 586 F. Supp.2dn 240 (S.D.N.Y. 01/12/2009).

[ii] ‘Evil’ Madoff Gets 150 Years in Epic Fraud Victims Cheer Tough Sentence; Judge Slams Financier for Stonewalling Investigators; True Size of Losses Still a Mystery. Wall Street Journal, June 30, 2009. Retrieved from: http://online.wsj.com/article/SB124604151653862301.html

[iii] Hobbes, T. (1668). Leviathan. Indianapolis & Cambridge: Hackett Publishing, 1994.

[iv] Locke, J. (1980). Second Treatise of Government. Indianapolis & Cambridge: Hackett Publishing.

[v] De Jasay, A. (1985). The State. Indianapolis: The Liberty Fund.

[vi] Hayek, F.A. (1949). Individualism and Economic Order. New York & London: Routledge.

[vii] Ibid ii