Madoff's Case Study

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Bernard Madoff
Bernard Madoff

Devry University
Professor: John Doe
AC572 – Accounting Fraud Examination Concepts
June 18, 2012
Devry University
Professor: John Doe
AC572 – Accounting Fraud Examination Concepts
June 18, 2012

Introduction
Without a doubt, the first decade of the 21st Century could be characterized as one renowned for numerous corruption allegations and fraud cases. Lamont noted that during the early years of the decade the criminal justice system recorded the greatest accounting frauds involving Enron, Tyco, and WorldCom. To think that was the end, it would be absurd, as there was another set of finance-related fraud cases which had also swarmed the financial markets in the latter years and created frenzy among investors and other stakeholders alike. Some of these cases could have been considered as minor fraud cases, however the one that stood out the most and which could have been considered one of the largest fraud cases of all times is that of the “Bernard Madoff Case.” According to Armstrong (2008), “for a number of years Madoff managed to lure billions of dollars away from huge charities, as well as wealthy individuals in both the United States and Europe by getting them to invest in his hedge fund. This he did by offering extraordinary returns to investors, until his scheme eventually reached a staggering $50 billion under “management.” Born on April 29, 1938, Bernard L. Madoff graduated from Far Rockaway High School in 1956 and attended Hofstra University Law School, however he never graduated. Furthermore, In the early 1960s, Madoff opened Bernard L. Madoff Investment Securities (BMIS) with $5,000 as start-up capital earned from working as a lifeguard during the summer and installing refrigeration systems. Notwithstanding that small amount of start-up capital, years after Bernard Madoff’s firm became ranked as “one of the top market makers in NASDAQ stocks.” Just as his business had been lauded by all, so too was his character. Gregoriou & Lhabitant (2009), described Madoff as, “a man that had an impeccable reputation on Wall Street. Any investing with Madoff was considered a privilege which made him a legend. Contrary to this belief and as this case analysis will reveal however, Madoff was really nothing more than a “fraudster.” So evident it was – his real plight began in recent years when he started to suffer reversals in his business. Within this paper, efforts will be made answer a number of questions, including how was this fraud executed; who were the perpetrators, accomplices and victims; how was the fraud discovered; what were some of the possible red flags; and what role did the SEC play in discovering the fraud. In addition to this, mention will be made of how the case was resolved and what are some of the measures that could have deterred or prevented the fraud from occurring in the first place. Given these harsh economic times which we live in, all efforts have to be made to enforce strict rules and regulations within financial institutions – so that investors and other stakeholders’ interests are protected. Had there been closer attention given by the Securities Exchange Commission and other regulators to the ‘red Flags’ associated with Madoff and his firm, then so many persons would not have lost billions. Bernard Madoff Investment Securities (BMIS)

Founded in 1960 by Bernard L. Madoff, Bernard Madoff Investment Securities (BMIS) was described as a broker-dealer firm that engaged in three principal types of business – market making; proprietary trading; and investment advisory services. BMIS had its principal place of business in the United States, but it also had its subsidiary – Madoff Securities International Limited (MSIL) which was incorporated in the United Kingdom. Gregoriou & Lhabitant (2009) stated in their paper that, “initially, BMIS was a pure brokerage business. It paid brokers $0.01 per share to execute...
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