Table of Contents
Madoff's ascent to fame and wealth The Madoff Ponzi scheme has been uncovered. The SEC's complicity in the Madoff Scandal Accountants' responsibility in the Madoff Scandal Losses incurred as a result of the Madoff Scandal Madoff is incarcerated and condemned. Conclusion Bibliography
During the 21st century, the corporate world has experienced some huge frauds. The Enron affair of 2001, which resulted in one of the Big Five international auditors, Arthur Andersen LLP, being destroyed from the global landscape, the WorldCom scandal of 2005, and the recent stunning collapse of Lehman Brothers last year, are among the most prominent. The most recent addition to the list is Bernard L. Madoff Investment Securities LLC, whose creator Bernard Madoff is infamous for perpetrating one of the greatest financial frauds in history.
Madoff's ascent to fame and wealth
Bernie Lawrence Madoff was born in New York on April 29, 1938, to East European immigrants Ralph and Sylvia Madoff (Biography.com, 2009, page 1, para.1). Bernie's first foray into the business world began in 1960, when he dropped out of law school and partnered with his wife Ruth to form Bernard L. Madoff Investment Securities LLC. Ruth's father, a retired Certified Public Accountant (C.P.A. ), was instrumental in the successful launch of the business. The approach of word-of-mouth persuaded individuals to invest in the firm. The Madoffs used an innovative strategy to entice investors: they guaranteed at least 10% annual returns on money deposited with them. This strategy was so effective that by the end of the next two decades, Madoff Investment Securities had appropriated nearly 5 percent of all trading transactions conducted on the New York Stock Exchange, in addition to attracting a large clientele that included several well-known Hollywood actors such as Kevin Bacon, Kyra Sedgwick, and Steven Spielberg (Biography.com, 2009, page 1, para.5&6).
As the burgeoning business demanded the presence of dependable individuals to supervise and manage lower-level employees, Bernie employed many members of his family in such capacities. His children comprised Andrew and Mark, as well as his brother Peter and niece Shana. Madoff Investment Securities profited on the flood of electronic trade by incorporating computerization into their operations, so accelerating the universal admiration of Bernie's accomplishment as an investor with a golden touch. The fact that the computer program that was tested and used by them went on to become the National Association of Securities Dealers Automated Quotations NASDAQ, as well as the additional accolade that followed when Bernie became president of the NASDAQ stock exchange board of directors (Biography.com, 2009, page 1, para.7&8), as well as its first Chairman and member of the National Association of Securities Dealers board of governors (Damon, para.4), served to bolster the reputation of the founders On Wall Street, Bernie's status as a notable individual grew rapidly. At the height of his fame, Bernie's investment firm maintained an amazing track record of consistently providing clients with a minimum rate of return of 12 percent (Damon, 2009, para.2).
The Madoff Ponzi scheme has been uncovered.
The famed Ponzi scheme of Bernie Madoff was uncovered on December 10, 2008, when he informed his sons of his intention to deliver millions in bonuses 60 days early. The peculiar nature of this knowledge caused his sons to inquire about its source. They were astounded when their father admitted that one of Madoff Investment Securities' divisions was a convoluted, lavishly embellished Ponzi scheme. The following day, their father was arrested on allegations of securities fraud as a result of Bernie's sons' prompt complaint to federal authorities (Biography.com, 2009, page 2, para.1).
The Ponzi Scheme is named after Carlos Ponzi, an Italian immigrant who ran a similar scheme in the United States for more than two decades in the 1920s. The four phases of Bernie's Ponzi scheme were as follows (Hinton, 2009, paragraphs 6 and 7):
The stockbroker entices the first client by guaranteeing a solid rate of return. The stockbroker invests relatively little or none of the client's funds, as opposed to using it for himself or for other purposes. When the time comes to repay the initial investor's funds, the stockbroker recruits new clients and pays out the initial investment with funds from the new clients. This process continues in a $50 billion pyramid scheme in which there is no real money in the business – the funds were simply transferred from one investor to another.
The SEC's complicity in the Madoff Scandal
On November 9, 2009, federal investigators revealed evidence demonstrating the Securities and Exchange Commission's (SEC) role in the Madoff Scandal. The documents demonstrate that SEC authorities conducted at least five examinations of Madoff Investment Securities, during which they failed to take fundamental actions that would have uncovered Bernie's deception. Instead, their terrible incompetence resulted in the SEC repeatedly giving Bernie's company a clean bill of health. To add insult to injury, the audacious Bernie displayed the SEC approval to existing and potential investors as evidence that his business was lawfully compliant (Damon, 2009, para.5). Bernie even bragged about his personal relationships with SEC leaders such as Mary Shapiro, the current head of the SEC, whom he referred to as his "dear friend," and Arthur Levitt, the previous chairman of the SEC, whom he claimed to know "very well" and had lunch with on multiple times (Damon, 2009, para.13). As a result of the rise in computerized trading, Levitt appointed Bernie to a panel of experts in 2000 to advise the SEC on the need for new stock market regulations (Damon, 2009, para.4).
The SEC authorities examining Madoff Investment Securities erred by relying solely on Bernie's records and failing to conduct a third-party check with the firm's equivalents or the Wall Street clearing house that kept records of the firm's operations, or the absence of such records (Damon, 2009, para.6&7). The incompetence of SEC regulators is inexplicable in light of three realities. First, it was well known that competent investors and dealers viewed Bernie's transactions with distrust. Second, since 1999, a securities industry leader called Harry Markopolos had issued official letters to the SEC encouraging it to conduct a thorough investigation of Bernie's company, which he described as "the world's largest Ponzi scheme." Thirdly, SEC regulators wilfully ignored evidence in the firm's records indicating that it regularly provided investing advice to investors, which is a criminal violation (Damon, 2009, para.10&11).
Due to the well-known fact that SEC investigators are typically rewarded for their "oversight" with high-paying Wall Street employment that can make them overnight multimillionaires, the incompetence demonstrated by SEC investigators takes on sinister overtones (Damon, 2009, para.20).
Accountants' responsibility in the Madoff Scandal
New York-based auditing company Friehling & Horowitz, along with 33,000 other auditing firms, joined in the American Institute of Certified Public Accountants' (AICPA) peer review program, which requires professional auditors to annually evaluate the quality or grade of each firm's audit. However, Friehling & Horowitz not only failed to submit any review since 1993, but also verified annually to the AICPA in writing that it does not perform auditing tasks (Abkowitz, 2008, para.5&6). In actuality, Friehling & Horowitz audits Madoff Investment Securities. The firm's name and signature appear on Madoff Investment Securities' Statement of Financial Condition from October 31, 2006. This indicates that Friehling & Horowitz was in collusion with Bernie, as the business not only suppressed the fact that it conducted audits for Bernie's company, but also failed to submit any audits for peer review as needed. Currently, the AICPA is undertaking a comprehensive "ethics investigation" into Friehling & Horowitz (Abkowitz, 2008, para.7).
Bernie's investors were unaware that Friehling & Horowitz was a small firm manned by a partner over 70 years old who resided in Florida, an accountant, and a secretary, with a strip mall office in New York. The investors invested in feeder funds established by third-party firms, which subsequently distributed the monies to Bernie's company. The Rye Select Broad Market fund is a prominent illustration of a Madoff feeder fund (Gandel, 2008, para.7&8).
While the Madoff feeder funds that invested with Bernie were audited by illustrious firms such as KPMG, Pricewaterhouse Coopers, and BDO Seidman, these auditors did little to protect their clients from Bernie's fraud, such as independently reviewing Bernie's firm statements thoroughly especially because the firm was using an unknown auditor to check its accounts, instead being content with accepting at face value the statements of Bernie's firm that Bernie himself issued. Investors who knew that the feeder fund's accounts were audited by reputable accountants for example, KPMG audited Rye Select Broad Market fund and were therefore happy and certain that their money was secure suffered the most (Gandel, 2008, para.7&8).
Following the 16 December 2008 announcement that auditor BDO Seidman and its Madoff feeder fund client Ascot Partners were sued by New York Law School, the legal community foresees ominously that litigation would soon be filed against other auditors of Madoff feeder funds. Scott Berman, a lawyer with Friedman Kaplan Seiler & Adelman who has dealt with auditors in several similar cases in the past, explains this argument well: "The fact that they [Madoff feeder firm auditors] didn't notice the fraud leads me to conclude that they blew it. I will carefully consider if there is a culpability here" (Gandel, 2008, para.4&5).
Losses incurred as a result of the Madoff Scandal
Bernie's fraudulent operations wiped out $ 61 billion in investments (Damon, 2009, paragraph 2), which included 11 counts of felony, the first offense being securities fraud (Biography.com, 2009, page 2, paragraph 2), which accounted for the majority – over $ 50 billion (Hinton, 2009, para.5). A variety of investors were negatively impacted. Millions of dollars were lost by affluent and renowned people. International banks and hedge firms faced losses in the billions of dollars. Organizations such as university endowments and charities suffered enormous losses, with many of the latter being forced to close. Numerous retirees who had placed their whole life savings in Bernie's company lost their entire investment (Damon, 2009, para.3).
Madoff is incarcerated and condemned.
In a significant development following Bernie's arrest on 11 December 2008, Federal investigators revealed on 12 March 2009 that Madoff admitted to 11 felonies, including 4 counts of fraud relating to securities, investment adviser, mail, and wire; 3 counts of legitimizing illegal money; 3 counts of falsification relating to statements, perjury, and filings with the SEC; and 1 count of theft from a worker benefit scheme. On June 29, 2009, the 71-year-old disgraced stockbroker was sentenced to 150 years in jail (Biography.com, 2009, page 2, para.2&3).
While Bernie and his puppet auditors are the primary perpetrators and a portion of the guilt for the Madoff Scandal must be placed on the well-known auditors of the Madoff feeder funds, the SEC should also be held accountable for the scandal. It is inexcusable that an independent agency of the United States government charged with enforcing federal securities laws is hindered by investigators who are blatantly abdicating their responsibilities for the sake of financial gain this practice is well exemplified by an SEC investigator's 2006 email: "I don't think we should be involved in this case." (Damon, 2009, para.11). The United States administration has a substantial portion of the guilt for the Madoff Scandal, however this is by no means the least important factor. It is widely believed that Wall Street remains well-protected because individuals like SEC chief Mary Shapiro and Lawrence Summers (Damon, 2009, para.25) the former Clinton administration official who was instrumental in the ousting of Brooksley Born, Chief of Commodities Future Trading Commission, when the woman urged reform of the derivatives market (Damon, 2009, para.21) continue to play prominent roles in United States President Barrack Obama's administration.
Abkowitz, A. (2008). Does Madoff's Auditor Not Audit? Web.
Life story of Bernard Madoff (2009). Web.
Documents Reveal SEC Complicity in the Madoff Ponzi Scheme, according to Damon (2009). Web.
Gandel, S. (2008). How Guilty Were the Auditors in the Madoff Fraud? Web.
Hinton, P. (2009). The Life and Fraud of Bernard L. Madoff. Web.