Bernard L. Madoff (Bernie) is still making news headlines. He is currently incarcerated for numerous illegal and unethical behaviors. I am going to: Describe three types of illegal business behavior alleged against Bernie and explain how the behavior is illegal or unethical. Name three types of parties who were impacted by the actions of Bernie and how. Describe three business safeguards that may have prevented the harm caused by Bernie. Describe three ways investors might have better protected themselves from risk. Describe three legal actions that possibly may be brought against Bernie under criminal or civil law. And provide an analysis on the causes and actions of Bernie as well as the measures taken to prevent this action in the future.
Bernie started making money legitimately through Bernard L. Madoff Investment Securities L.L.C.(BLMIS), one of the most successful broker-dealers on wall street, specializing in over-the-counter stocks. He was a market maker, meaning he both bought and sold stocks and profited by selling stocks for a few cents more per share than he bought them for. People trusted him, believed in him. Nasdaq make him its chairman, and the SEC appointed him to industry panels. (Bandler, Varchaver, Burke, Kimes, & Abkowitz 2009) Bernie, and by association BLMIS, seemed to have special status. BLMIS set itself apart from others in the way that it made its money. Normally market makers made their profit from the spread, the difference between what they bought stocks for and what they sold them for, which in the beginning was ~12.5 cents a share. BLMIS paid firms as much as two cents a share for their business. He made less money per sale but made up for it by doing more business. His company attracted customers because it was faster and cheaper. By the early 1990’s BLMIS executed more than nine percent of the daily trading volume. But in 1997 the rules governing trading spreads changed and the spread kept getting smaller. (Bandler, et all 2009) The market making operation’s profits got smaller and smaller and were sometimes non-existant.
BLMIS occupied two and a half floors of the Lipstick building. The legitimate market making business operated on the 19th floor using one outdated IBM Application System/400 computer known as House 5. (Dodge 2009) The software programmers and information technology operated on the 18th floor. Half of the 17th floor was the “fake trading operation where a second IBM AS/400, known as House 5, processed historical price information on securities allegedly bought for clients.” (Dodge 2009) Only a few people knew about floor 17 and even fewer had access. Basically, House 17 manufactured official- looking statements for clients and created a massive, though completely fake, paper trail.
So how did BLMIS stay in business? Bernie used his illegal investment business to subsidize his legal trading operation. Bernie was subsequently charged with three counts of money laundering, which involved transferring atleast $250 million from his fraudulent business through his London operation to his legitimate New York business. (Bandler, et all 2009) He was also charged with Fraud, theft, and perjury. Bernie first started managing money in the early 1960’s, though it was not reported to the SEC so he was not being regulated. It started with close family and friends and grew in larger and larger circles. Bernie was charismatic and subtle. He cultivated relationships, gained trust, and swayed opinions without people realizing what he was doing. That is part of why he was able to remain under the radar so to speak for so long. When outsiders started questioning his results and realized that something didn’t make sense they brushed it off because it was Bernie, you could trust him. He was a pioneer in electronic trading, though he...
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