October 14, 2015
READ: Case 11: The fraud of the century: the case of Bernard Madoff. Answer the three questions on page 425 of the text. Pay particular attention to Q#3, “What should be done”.
These are the questions you will find in the text:
Q1. Besides the obvious issues of lying and misleading the investors, Madoff used his legitimate business venture to provide context and to substantiate his illegal investment venture. The Case Study does indicate Madoff even went so far as to intimidate and pressure existing clients to providing additional funding as pressure to show returns and payout other clients increased. Additionally, taking funds from charitable organizations in which Madoff knew he wasn’t going to invest or use legitimately is of a different degree than wealthy individual investors.
Q2. While somewhat discussed in the Case Study, Madoff’s family was involved in the conspiracy. Based on the book, “No One Would Listen,” by Harry Markopolos, when probed by the SEC during the initial investigations, Madoff stated that his investment strategy was proprietary and confidential to he and his brother, and that it was too complicated for others to comprehend, and would divulge internal company trade secrets if shared. At the time, this was deemed an acceptable answer, although investigators, and other investment firms confirmed no matter how they matched the trades over the reported timeframes, the performance Madoff’s company reported was impossible. This level of deception, while painted by Madoff’s own, “charm,” it is very unlikely for him to be the lone wolf. At the very least, his “feeder” accounts referenced in the Case Study must have known through a lack of increased funding, but decreased return performance.
Q3. As mentioned in the Case Study, there were numerous red flags that were brought forward to the SEC, but because of a lack of understanding of the potential implications of the issues, combined with quasi “good ol’ boy network” mentality within the SEC’s investigators, a lack of accountability and follow-up lead to Madoff continuing his scheme. A greater auditor general presence to review any major allegations, or repeated allegations, could be part of increased oversight and subjected to deeper investigation and scrutiny.
Admittedly, I was disappointed the Case Study failed to mention beyond two short references, Harry Markopolos and the work he did in bringing the material and his investigation to the SEC. In his book, Markopolos addresses how Madoff was able to successfully avoid being taken down much sooner by government agencies. Additionally, he provides recommendations to investigators and auditors for how to detect and identify fraudulent activity. With his background in investigations and internal audit, his work served as a strong foundation in what eventually brought down Madoff.
The title of his book is by no accident, as he presented his case multiple times to government regulatory authorities who chose to take the word of the charismatic Madoff verses reviewing and verifying Madoff’s proprietary, non-existent, fraudulent investment strategy.
[Disclosure, Markopolos was a speaker at a conference I marketed in a previous job and spoke on this very subject first hand of his investigation.]
Business Ethics, Ethics, MMC6213, Ponzi Scheme, Strategic Communications, Whistleblower,