Bernard L. Madoff Investment Securities, LLC, 2008 (Massive Ponzi Scheme)
Up until 2008, many people had no idea of what a Ponzi scheme was. Most had never even heard of it. So what exactly is a Ponzi scheme? “A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital from new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of shortterm returns that are either abnormally high or unusually consistent (Wikipedia, 2014).” In December 2008, Bernard Madoff gained worldwide recognition for carrying out the largest ponzi scheme in history with estimated losses of $65 billion. “Madoff said when he started the fraud in the early 1990s, he felt "compelled" to give institutional investors strong returns despite the weak stock market and national recession. His need to prove himself by being the hero is what compelled him to start this scheme/fraud. "When I began the Ponzi scheme I believed it [the weak stock market and national recession] would end shortly and I would be able to extricate myself and my clients from the scheme," he told the court. "However, this proved difficult and ultimately impossible (Sta.rtup.biz)."
The pressure Madoff felt stemmed from the 1980’s when the Dow Jones Industrial Average was at it’s peak but then crashed 7 years later. There were minimal redemptions and minimal returns. This is what ultimately put the pressure on him. Madoff, at this point, decided to borrow from new investor capital to pay off redeeming investors. He began falsifying results to show big returns. Hereafter, those returns became just what he needed to grow his firm and gain more investors.
With rumors spreading regarding Madoff’s success, he gained popularity throughout the investor community and many investment banks wanted to join in. This included banks such as UBS, Credit Suisse and Banco Santander. Madoff saw this as a major opportunity. During this time investors began asking questions but Madoff refused to divulge the secret to his success. When he refused to share his ambiguous strategy and because investors were seeing steady returns, no one pushed the issue. He supplied clients with false statements that depicted big returns. In reality however, his investments in treasuries were only yielding 2%. Some would say that another unfortunate opportunity for Madoff was how the U.S. Securities and Exchange Commission (SEC) had conducted investigations into Madoff's business practices, but failed to uncover the massive fraud. If cought years earlier, many people would not have lost their life savings.
To deal with whatever conscience he may have had, Madoff’s rationalization was justified by one ominous warning for making it acceptable to take new investor funds. He forewarned new clients on the risk of investing and how it could possibly lead to losses. This apparently was enough of a disclosure for him. If his clients agreed, he need not feel guilty about taking their money and investing it into his ponzi scheme. His rationalization didn’t seem to fail him all the same when he needed to turn a prospective client away. For anyone who was too intrusive, inquiring about his secrets, he had no qualms rejecting someone.
With all this said there has yet to be an explanation for the responsibility the auditors played in detecting Madoff’s misrepresentation. David Friehling, audited ...
References: Wikipedia.org (November 16, 2014) Ponzi scheme. Retrieved November 18, 2014, from
STA.RTUP.BIZ (March 14, 2009) Bernard Madoff – What Prompted Him To Commit A Ponzi
Huffingtonpost.com (November 3, 2009) Madoff Auditor: I Wasn 't Aware Of Bernie 's Fraud.
SEC.gov (n.d.) Diebold, Incorporated Retrieved November 20, 2014, from
SEC.gov (n.d.) QSGI, Incorporated Retrieved November 20, 2014, from
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