Bernie Madoff Fraud Case

Topics: Bernard Madoff, U.S. Securities and Exchange Commission, Ponzi scheme Pages: 7 (2829 words) Published: June 15, 2013
Bernie Madoff Fraud Case

Bernie Madoff Fraud Case
Introduction
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.” 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 their retail market orders; and since the NYSE was charging for order flows this convinced others to redirect a significant share of their trading volume to BMIS as well, to create what was known as “the third market.” They further claimed that, “by 1989, BMIS was a market maker handling more than 5% of the trading volume on the NYSE. But, the brokerage business was becoming increasingly competitive and margins were shrinking. Madoff therefore decided to create a separate investment advisory firm, which he located one floor below his brokerage business. In 2008, BMIS had $700 million of equity capital and handled approximately 10% of the NYSE trading volume. Its 200 employees (100 people in trading, fifty in technology, and fifty in the back office) were divided between New York and London, but only twelve of them were assigned to the famous split-strike conversion strategy (which will be discussed later) devised by Madoff.” Execution of the Fraud

When news broke that Bernard Madoff – the man described as a legend and one with an impeccable character – had defrauded investors billions of dollars, one of the first questions that many asked is, how was this man able to execute such fraud; especially in the presence of the Securities Exchange Commission and all the other regulatory institutions within the United States. To answer this, it was often written in the press that, “Madoff operated a hedge fund or a series of hedge funds. This is factually incorrect – there has never been a ‘Madoff fund’ and Madoff never claimed to be a hedge fund manager. Madoff simply claimed that BMIS was able to execute a conservative strategy that would deliver annual returns of 10% to 12% per year by actively trading a very specific portfolio of stocks and options. But access to this coveted strategy was by invitation only – merely being rich was not in itself sufficient.” In his criminal information issued by...


References: Armstrong, B. (2008). Madoff and the failure of the SEC. Retrieved from http://mises.org/daily/3260
Bernstein, J
Carozza, Dick. (2009). Chasing Madoff: An Interview with Harry Markopolos. Retrieved from http://www.acfe.com/madoff-case/Chasing-Madoff.pdf
Dipaolo, C
Gasparino, C. (2008). The Red Flags in the Madoff’s Fund’s Past. Retrieved from http://www.cnbc.com/id/28195326/The_Red_Flags_In_the_Madoff_Fund_s_Past
Gregoriou, G
Lamont, G. 2011. (2011). Looking beyond a decade of fraud, corruption and turmoil. 2010 Securities Litigation Study. Retrieved from http://10b5.pwc.com/PDF/NY-11-0484%20SEC%20LIT%20STUDY_V6BONLINE.PDF
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Piper, D. (2010). Fraud: forgotten but not gone. Retrieved from http://www.inhouselawyer.co.uk/index.php/fraud-and-corporate-crime/8264-fraud-forgotten-but-not-gone
Southern District Court of New York
Spanier, A. (2011). Ascot, Gabriel and Ariel Funds. Retrieved from http://www.abbeyspanier.com/cases-overview/254-ascot-gabriel-and-ariel-funds
Sunderland, R
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