The Fall of the Madoff, Research Paper Example

Over the last two decades, the financial and business markets in the United States have been plagued by major scandals, such as the Enron scandal, the Wall Street collapse and subsequent bailout, the mortgage bubble, and the disappearance or dissolution of people’s pension plans.  This paper will discuss the financial fraud involving Bernie Madoff  and his theft of billions of dollars from people, both ordinary and prominent, and the ways in which he was able to successfully cheat so many for so long without being caught.

Bernie Madoff engaged in various forms of criminal activity, including securities fraud, wire fraud, and money laundering.  According to Businessdictionairy.com, securities fraud is a crime in which the laws governing business or trade have been violated; these may involve stocks, bonds, investments, or other financial practices.  Most often, securities fraud occurs when investors purchase stocks or bonds based on misleading or outright false information.  This practice is against the law because it clearly takes advantage of people who are seeking to ensure their own financial futures using lies and false claims.

Wire fraud involves various elements of financial malfeasance; firstly, when a person intentionally invents a method by which they can obtain money or property by lying, making false promises, or misrepresentations.  Secondly, the person involved uses wiring messages or funds in an effort to carry out their fraudulent scheme; whether or not the criminal behavior is successful in defrauding someone is not relevant to the charge of wire fraud; what is significant is that person’s intention to commit the crime.  Obviously, this practice is illegal because it misleads people with false information, making them vulnerable to losing their money in get- rich-quick schemes or similar promises of success.

Money laundering involves obtaining funds through criminal means, but processing the funds in such a way that makes them appear to be legal.  The source of the money is camouflaged so as to make it nearly impossible to trace the person or persons involved.  Typically, this practice is utilized in order to present the profits of the criminal behavior, such as theft or drug sales, as having come from legitimate channels.  This is an illegal practice because while using criminal means to obtain money, it hides behind the criminality of such actions by pretending to be “clean,” and again, takes advantage of people and their personal funds

Bernie Madoff  had many victims—almost any group of people or individuals were vulnerable to the promise of accumulating wealth overnight—but the three groups perhaps affected to the largest degree were those most subject to wishful thinking and needy: charities, the elderly, and Jews.(New York Magazine, 2008).  When the Securities and Exchange Commission examined the scope of of people affected by Madoff’s fraud, it included prosperous celebrities such as Steven Spielberg, Swiss banks, but most pathetically, various charities and senior citizens whose dreams of a comfortable retirement fell completely flat.  Madoff was particularly focused on appealing to his own community, fellow Jews.  The effect on these client groups was profound.  Banks in Europe and the United States lost millions of dollars because they needed to reimburse wealthy customers who they had encouraged to invest in Madoff’s fraudulent plots.  Among the charities who lost money, a large number of them were forced to close down entirely.

Regarding the individuals and families who lost their personal savings because of Madoff’s criminality, one can only speculate about the downturns in their own lives, such as losing one’s retirement pension funds, paying for college for their children, losing money meant to pay for health costs, as well as countless other personal tragedies.

In order to avoid the types of fraudulent business practices perpetrated by the Madoff scam, there are several possible ways to insure that this sort of scheme does not occur again.  One method would be to make sure that investors carry liability insurance so that in the event that the investments fail, or turn out to be fraudulent, the investor could recoup some or all of their original funds.  Another means of preventing fraud from occurring would be to encourage whistleblowers to report any suspicious activity to the SEC, providing incentives for people to come forward with information that would lead to the disclosure of others’ fraudulent business practices.  In addition, if there was sufficient and strict oversight over such investment companies or individuals, that carried severe criminal penalties and fines when violations are discovered, it is likely that these sorts of schemes would decrease and, ideally, disappear.

There are several ways that consumers could protect themselves against being robbed by people like Bernard Madoff.  One way would be for consumers to use the concept of “due diligence”, or a thorough analysis of any financial, business, accounting or other records that would provide a realistic assessment of the investors’ credibility.  Another would be for consumers to familiarize themselves with regulatory practices pertaining to financial investments, and to consult with attorneys or accountants before making major decisions involving spending large sums of money on investments.  Finally, consumers would do well to avoid investing large sums of money in any one opportunity, so that if one investment contained in their portfolio turns out to be a losing proposition, they would not find themselves completely without funds to use for daily and other necessary expenses.

Insofar as charges being brought against Bernie Madoff,  he was charged with many felony indictments including securities fraud, investment adviser fraud, mail fraud, wire fraud, money laundering, false filings with the United States Securities and Exchange Commission; criminal charges including perjury and  theft from an employee benefit plan; in addition, he was sued in a large class action suit filed by his many victims.  In March, 2009, Madoff  pleaded guilty to all counts and a few months later, he was sentenced to a prison term of 150 years.

Analysis

A few years after the Madoff scam has passed, it’s hard to imagine that so many people looked the other way deliberately or inadvertently in an effort to capitalize on a get-rich-quick scheme.  Billions of dollars were lost by famous people as well as non-celebrities, but they all bore at least one characteristic in common: greed.  People were willing to rush ahead, investing their money in large quantities without apparently asking the essential questions that would normally be asked, even when making investments that were not as large as those made by Madoff’s clients.  One doesn’t have to have a background in economics or business to know that if something sounds too good to be true, most likely it is.  Yet, apparently intelligent, well-connected, decent people were uniformly taken in by Madoff’s fraudulent schemes.

Because of his reputation—he was the former chairman of the NASDAQ and a well known insider on Wall Street—people simply dropped their sense of caution in order to get on board.

Due diligence did not occur when in other situations, these clients most likely would have had the situation analyzed, and risk assessments done, and probably would have gotten some sound advice from people who knew exactly what was involved as well as how much of a possibility of failure was likely.  Socially, Bernard Madoff spent his time with upper class, Jewish professionals and Wall Street insiders much like himself, where questioning the motives and/or business practices of a social connection was most likely considered gauche or unacceptable and therefore, people simply dispensed with asking any questions at all.

The failure to regulate the financial market is another factor that contributed significantly to Madoff’s so-called Ponzi scheme.  During the last few decades, regulation of any number of industries and markets has fallen by the wayside so that people without conscience have been free to manipulate, exploit, and literally steal from the unknowing or deliberately ignorant public.

In fact, despite the fact that Madoff was able to bilk billions of dollars from his victims, a few short years later, Wall Street is once again accused of all sorts of criminal, exploitative, and despicable behavior towards the public.  The most recent area of criminal behavior has involved freely giving out mortgages to people who can in no way afford to own a home or apartment, and then foreclosing on them, leaving people homeless, without any means to pay the mortgage in a financial market with high unemployment rates and few jobs.

It is not clear whether the lessons that should have been learned from following the Bernie Madoff scandal have in fact been learned.  Human nature being what it is, people usually will always look for a quick and easy way to profit, despite the fact that they’re vulnerable to any number of con artists and brilliant criminals.  One only needs to consider the numbers of people who invest and reinvest their money in casinos to observe that no matter how slim the odds of winning, many people are still willing to risk it all even when the odds of prevailing are slim to none.

Madoff was able to succeed in defrauding so many people because they did not follow the basic, sensible practices that should always accompany investments.  Instead of spreading out their assets amongst various investments, many of them put everything into Madoff’s shady deals, so that when the bottom fell out of the scheme, they had lost it all.  In addition, rather than verifying the facts regarding the investments, his clients trusted him and ignored any methods to safeguard their money, such as consulting with other knowledgeable financial professionals.  Although there has been a tendency to blame these victims for being naïve and gullible, only a truly heartless person can fail to feel sympathy for them; the fact that Madoff ended up with such a long jail sentence may have provided some emotional, but not tangible, solace for them.

References:

Madoff scandal poses challenges for directors . (2009, December 21). Lloyd’s, Retrieved 2010 May 28 from http://www.lloyds.com/News_Centre/Features_from_Lloyds/Madoff_scandal_poses_challenges.htm

Pressler, J. (2008, December 15). Charities, Old People, Jews Hit Hardest by Madoff Fraud updated. New York Magazine, Retrieved 2010 May 28 from http://nymag.com/daily/intel/2008/12/charities_old_people_jews

Singletary, M. (2009, May 3). How Madoff became an Equal Opportunity Thief. Washington Post, 1.

“United States v.  Bernard L. Madoff and Related Cases.” Skip Navigation The United States Department of Justice.  29 June 2009.  Southern District of New York.  28 May 2010.    http://www.justice.gov/usao/nys/madoff.html