Bernie Madoff Case Study

4814 words - 20 pages

The Fraud of the Century:
The Case of Bernard Madoff

The fraud perpetrated by Bernard Madoff which was discovered in December, 2008 is based upon a Ponzi scheme. Madoff took money from new investors to pay earnings for existing customers. The greater the payout to retiring and withdrawing customer, the more revenue or clients he would need to start and “investment relationship” with Madoff. The Ponzi scheme was named after Charles Ponzi who in the early 20th Century, saw a way to profit from international reply coupons. International reply coupons were a guarantee of return postage in response to an international letter. Charles Ponzi determined that he could make money, legally, ...view middle of the document...

In the case of Bernard Madoff, he may have perpetuated the fraud for many years.

Bernard L. Madoff Investment Securities LLC: ‘All in the Family’
Bernie Madoff started in the investment business by legally buying and selling stocks not listed on the New York Stock Exchange (NYSE). Started in 1960 as a sole proprietorship, he served as a ‘wholesaler’ between institutional investors. In the early days, working with investment firms such as A.G. Edwards, Charles Schwab and others he made his money based on the variance between the offer price and sales price of stocks. In the 1990s, Madoff Securities was trading up to 10% of the NASDAQ shares on certain days. Early success and competitive advantage came from Bernie working with his brother, Peter (the first of several family members to join his firm) who after graduating from law school joined Madoff’s company and developed superior technology for trading buying and selling at the best prices. Madoff did not operate a hedge fund, which charges a fee for services and holds the money at a custodial bank. Madoff controlled the funds in house and made his money, in this division, from commissions on sales and profits and as far as has been revealed, the profits were not based on fraud.
As Madoff became more successful, he moved the company’s headquarters from Wall Street to Third Avenue to the red granite “Lipstick Building” built by famed architect Philip Johnson. Not unlike Ken Lay and his lobbying efforts to deregulate the energy and gas industry, Bernie became more involved in lobbying for regulatory changes which would make it easier to trade electronically. Peter took on more oversight of the firm’s securities business. Bernie served as Chairman of the NASDAQ in 1990, 1991, and 1993. Through his successful networking, visibility at the NASDAQ, and promise of consistent returns (10-12%) Bernie was drawing billions of dollars from hundreds of investors. In addition, he held a seat on the government advisory board on stock market regulation, served on charitable boards and started his own foundation added to his credibility. He developed respectability and trust as a highly knowledgeable investment specialist. His inaccessibility and ‘invitation only’ approach to new investors created an air of exclusivity and desire to be involved. It could be equated to the most exclusive of country clubs-the greatest enjoyment is the status of membership. Ruth Madoff, Bernie’s wife, also worked at the firm for a time indicating a family network of relationships in the firm.
Peter’s niece, Shana Madoff, was a rules and compliance officer at Madoff’s firm and worked under her father who was head of compliance in the market making arm (not the firm’s money management business). Shana, although not charged with any crimes, is married to Eric Swanson, a former SEC compliance lawyer. Shana Madoff has a respected career and was honored by the Girl Scouts of America as a “woman of...

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