Madoff Fraud

1. Where does the Madoff fraud fit into the ACFE taxonomy of occupational fraud and abuse: asset misappropriation, corruption or fraudulent financial statements? Which specific type(s) of fraud does it exemplify? (Primary author: Yeseul Jeong) Madoff was one of the biggest and most trusted firm in Nasdaq traded stocks. Many people trusted his firm and made investments to it. Madoff’s firm was called “BMIS”: “Bernard L. Madoff Investment Securities LLC” (Gregoriou, and Lhabitant 89). Madoff made wealthy people invest, promising he would provide higher rate of interest than other firms. However, when economic crisis hit in the United States, investors wanted to get their money back; unfortunately, Madoff was not able to pay them back because he did not have the money and he never made profit; basically, he used new investor’s money to pay old investor’s interest, so money would flow and investors would not get suspicious. This fraud is called “Ponzi scheme”. From professor Hurt’s website, he stated that MLM schemes and Ponzi scheme fits the same category. Since Ponzi scheme is considered as asset misappropriation, the entire scheme that happened inside Madoff’s company will be included in asset misappropriation. There are two categories in asset misappropriation, theft and non-cash; also both of them include investment fraud (Report to the Nations 14). Madoff’s fraud would not fit into theft category perfectly because Madoff was still providing interest as he promised to investors; the only problem was he misused investors’ investments. Therefore, Madoff’s fraud would be considered as misuse of non-cash assets.

2. From the viewpoint of an investor, what red flags existed in the Madoff case? (Primary author: Nan Jiang) In the Madoff’s case, there were many obvious signs of red flag along the way. But investors, or at least majority of them, failed to notice them. As discussed by Gregoriou and Lhabitan, there was a long list of red flags that should have