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Revisiting Benard Madolff’s Historic Investment Scandal

Updated on October 28, 2021
Nyamweya profile image

Nyamweya is a Kenyan scholar who has done many years of research on a diversity of topics

The Madolff scandal erupted in 2008 when its founder, Bernard Madolf frankly admitted in a court of law that the wealth management aspect of his business entity was actually a ponzi scheme. His company, termed as the Benard, L Madoff investment Securities was established in 1960 where until his arrest, was his chairperson. He had placed his own brother Peter as Chief Compliance Officer and Managing director of the firm. He also placed his own nephew, Peter’s daughter, Shana Madolff as the organization’s lawyer, compliance and rules officer.

Madoff was arrested towards the end of 2008. In 2009, he pleaded to being guilty on 11 counts of federal criminal charges. He was in June 29, 2009 confined to 150 years imprisonment in addition to $17 billion restitution. According to Madoff, his organization had liabilities that were approximated to be $65 billion (Gendar, 2009). The prosecutors approximated the the magnitute of the fraud to be more than $65 billion. This amount was based on the 4, 800 clients of Maddoff firm as per the time of his arrest. The freezing of Madolff foundation degenerated into a chain of reaction from many business entities, individuals and institutions that had invested in the foundation. Business organizations that had to close down instantly included, Lappin charitable Foundation, JEHT organization, Picower and so on. The US Exchange and Security Commission was largely blamed for ignoring to investigate the scandal, despite consistent alert by whistle blowers. Questions regarding his conduct and operations of his organisationhad arose from as early as 1999 but SEC had failed to act on them.

Maddolf’s trouble started in the year 1999, when Harris Markopolos, a Boston based financial analyst, suspected that Bernard Madoff's ponzi business scheme was nothing but a scam. By logical reasoning and investigations, Markopolos believed and concluded that Bernard Madoff’s business was a scandal in the making. He figured out that there was no way Madoff could be earning the kind of money he had claimed to be making for his investors even when economic conditions were unfavorable in USA. By discovering that, Harris Markopolos tried to report this under- dealings to the Securities and Exchange Commission, expecting them to take a swift action in stopping the scandal early enough (Markopolos, 2010).

The reaction from the SEC officers was not a favourable one to Markopolos and they seemed to be negligent of their supposed obligation. Markopolos repeatedly approached the SEC officials more than five times in 2000, 2001 and 2005 to provide more evidences on the fraudulent activities taking place at Madoff's investment scheme. Even after submitting various documents and evidences depicting these under dealings in Madolf’s case, the SEC officials still did not care about the so-called “evidences,” thus allowing the ponzi scheme to go on.

The reluctance of the SEC officers to follow Madolf’s operations may based on many factors, but among the major one is that he was too clever on his dealings. Madoff appeared too clever to the authorities and he created many methods to shield him from being discovered. As Harris Markopolos notes in his book, “No one Could Listen” “The quants” who created these financial products understand differential equations and nonnormal statistics; they programed in languages the SEC couldn’t understand; they run statistical packages the SEC didnt even know exist in this world. While the “quants” are busy data mining with supercomputers while the SEC is still panning by hand." They created unique statistical programs to confuse and shield them from external financial analysts and auditors on the fraudulent activities and operations (Markopolos, 2010).

Ethical Concerns in Madolff Case

Topics of malpractices by organizations’ workers and managers have been a common feature in media headlines around the globe. Many are familiar with stories of scandals, corruption, bankruptcy, cases and other ethical issues in organizations. The publics and other stakeholders are concerned about this rising ethical malpractices and the effects they have not only in this organizations but also on the national economy in general. Ethical malpractices have become an impediment to many of the organization’s development aspects, and are therefore, a problem to the management of these organizations. Public concern about ethical malpractices have related with how their investment is dealt with in the organization. This makes investors to be very sensitive on this issue. Frequent media reports and public awareness programs have become so rampart to an extent that we are used to most of them. What is more amazing is that despite the stringent laws passed by lawmakers and the organization’s management, Ethical malpractices have never ceased, instead, they continue to be increasing reported (Connor, 2005, p1).

Benard Madolff may be regarded as one of the most manipulative and smart individuals in the world. Don’t take me for contradicting myself as the guy is currently under prison custody for fraud crimes. He was able to manipulate people to an extent of making them invest all their money in his illegal scheme. Madoff had informed his clients that their investments would attract a substantial amount of returns. In convincing them further, he tailored the financial statements to reflect his allegations. Madolff’s lack of moral ethics resulted into individuals and organizations loose huge sums of their money. Apart from his business collapsing, he also lost his own freedom, as he is now serving 150 years imprisonment; this is actually equivalent to life imprisonment. However, Madolff was not to blame alone; rather employees and people who were behind him should have seen these malpractices and avoided them at an early phase. This is where moral and ethical considerations comes into play and indicates that all the people in this corporation had lacked integrity.

There are many other ethical and moral issues surrounding Madoff’s case. Madolff exemplifies an individual with no respect in his her work. In addition, he disregards indivividual relationships that he fights hard to establish for many years. Though he had been respected and trusted by his clients, and many other people including government officials, he had failed to reciprocate this respect..

It was also interesting that the Securities and Exchange Commission, an entity supposed to watch over and offer security to investors and their funds, failed to investigate Consistent corruption allegations against Madolff’s company before the scandal erupted fully. The SEC had been tipped severally but it not heed the warnings, thus questioning the integrity of the commissioners and workers at the commission.

It is probably true that Madolff and his employees understood quite well that what they were doing was unethical. What they did not however, realize was that there unethical ways were numbered and was a recipe for the organizations failure. For an organization to achieve positive returns employees have a great impact in that perspective and being ethically responsible is one of them. The competitiveness and ability of the employees to embrace morality so as to achieve the company goals is an important factor. Good ethical practices by the management and employees in the work environment is an indication that these workers, are proud of their company. Good ethics means that employees and the management show respect to other workers, management, customers, partners and suppliers. In this way, the company will be building a favorable image to these important stakeholders and therefore, increasing the business prospects of the company. In typical sense, there exists typical model for professional conduct constituting a set of regulations and policies which prescribe a foundation for both professional and legal ethics requirements. In essence, many organizations anticipate that for improved performance and increased revenues, employees comply with the policies and regulations of that company with regard to moral conduct (Duggan, 2013).

Business Ethical Theories

In instilling the ethical culture in an organizations’ workforce, managers and employees ought to put into practice theories related to people’s understanding of ethics. Hartman developed one such theory which he named the model of axiometrics; this involved ethics of intrinsic thinking, extrinsic dimension and systematic thinking. This theory of axiometrics can assist both employees, and the management in evaluating an individual’s thought, and how they relate to his or her conduct (Connor 2009, p3). This approach is different from that taken by Conventional psychometrics, which poses that inductive thinking in evaluating persons conduct is essential. A good instance is whereby in evaluating and individual’s value, people are required to agree or disagree on various statements; their responses are then used to evaluate them.

Axiometrics Ethical principal will be best applied in instilling and evaluating the workers moral development. This is because this theory portrays a more sense of reality as it incorporates the three systems of thinking: intrinsic, extrinsic and system. Employing this principal in awork environment such as that in Madolff’s case will be highly beneficial to both the employees and workers in their ethical evaluating of decisions from different perspectives. In other word Axiometric principles is deductive: that is it uses different approaches in evaluating individuals. It does not tie itself to a specific type of reasoning. It identifies a malfunction and tries to figure out its specific causes. If employees at Madolff company had bee acquainted with this principle, then they could have either stopped the operations or quite the company altogether, but instead, they assisted by supporting it.

Another significant theory that could be applicable in this perspective is the social contract theory. Hasnas (1998) a professor at Georgetown University is the pioneer of this this theory. The author postulates in this theory that all business entities ought to be concerned on the aspect of improving their communities’ welfare in general. However, Mudoff’s rogue organization was not interested on the communities’ welfare as they extorted money from vulnerable people who were not aware on his under dealings. Social contract theory postulate that an organization should operate in a manner that takes into consideration, the wellbeing of both the employees and clients. Madoff did not even care for the company’s employees as he cheated them on to contribute towards employee’s benefits, which he was mis-using. The theory of social contract also claims that business entities ought to be obligated with social justice and welfare. The developer of this theory Hasnas, articulates that even though this theory may not be regarded as areal contract, it imposes high standards for business organizations to adhere to social responsibilities. In essence, social contract theory advocates that all business entities to be guided by ethical guidelines in improving the social welfare of the community. This should be done through satisfying their clients, employees and all the other stakeholders without going against the prevalent justice system.

According to Hasnas, (1998), the basic responsibility of any businessperson or organization is to effectively, and efficiently manage the business. They should subsequently extend the business resources to achieve the particular goal(s) for which the organization was established. The theory of social contract was based on the traditional social framework. This framework is based on the agreement between society and an artificial organization where the society identifies the prevalence of an organization on the fact that it adheres to the communitie’s interests.

In Benard Madolff’s case, we find the essence of applying common sense in our day today activities. Investors with Bernie Madoff could be perceived as people who were obsessed with greed, lack of diligence, hard mentality and so on. This is because they could not use their common sense the same way Markopolos had used his to reason that the kind of returns put forward by Madoff could not be in reality practical. Harris Markopolos understood this at the first instance that Madoff’s theory in providing extremely glittering hopes for his investors was simply not practical at all. This offers us a lesson that we have to be careful enough on some cronies’ antics lest we be dubbed in such get rich quick schemes.

The Legal Aspects in Benard Madoff Case

What Bernie Madolf had committed was one of the largest frauds in history. By stealing more than 50 billion dollars from investors , he had committed criminal injustices to these vulnerable people. The guy had made millions of money by luring people to invest all their money and savings in the rogue scheme. This simply portrays how some people are vested with greed as well as well as the consequences of greed. Though he was able to “eat” the money for a long time, “his forty days” finally dawned on him. It would be important for individuals to be aware on the consequences of making wrong judgment and unethical decisions.

What is even more interesting is the manner in which he operated the scheme without being caught by the government officials. This also displays how many individuals are ignorant on where they invest and are not even concerned on how the business of their investment is operating. Madolff’s investors did not also make wise judgments as it seemed that they were easily lured by Madolf into a deal they did not fully understand its operations. There is a need for investors to evaluate all types of risks they are likely to encounter so that their investments could be protected especially when the deal appears too good. Madolff’s ponzi scheme resulted into the finance world being scrutinized concerning the type and magnitude of corruption prevalent in our society.

Benard Madolf was found to be a criminal because he employed his Ponzi scheme to defraud his customers. As a bait, he had promised them huge returns which in real sense could not be practical. He had used the investor’s money in wrong ways since in repaying those who had invested earlier, he had to keep on recruiting new investors until no other could be found. This is what made the scheme to collapse because he had no more money to repay the investors. When the company collapsed, new investors, profit and nonprofit organization plus institutions that had invested their entire money in the rogue scheme went at a huge loss since they could not recover anything.

In blinding government authorities on his operations, he employed a legal organization which he used to lure more investors in return for double digit returns, as well as covering is organization from detection from the Security Exchange Commission . When a loss happens in his organization, he obtains money from legal firms to illegal ones to keep his company running. He goes ahead to include his family members including his wife and sons and engages them in the illegal activities. For instance, we are told that his wife was engaged in social networking to lure celebrities and influential figures to invest in the ponzi scheme. Everything appears as going well until the recession in 2008, when no new investors could be recruited because of the bad economy in the nation. This is when the under dealings are revealed and Murdollf, the architect of these illegal operations is sent to prison for his illegal operations.


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