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Bernie Madoff Case Study

3468 words - 14 pages

Introduction
Operated through a complex, cryptic structure Bernie Madoff, CEO of Bernie L. Madoff Investment Securities (BMIS), perpetuated the most embellished Ponzi scheme the world has ever seen. The basis of the securities fraud that took place approximately between 1991 – 2008 was influenced by Bernie Madoff’s reliance upon an unqualified staff, outdated software, organizational seclusion, a personal halo effect, and weaknesses in the regulating body. Madoff had the confidence of the public, yet to pull off such an elaborate scheme, he relied on a startling number of family members, vital accomplices working on the illegal trading floor such as Frank D. Pascali, IT staff members, and a ...view middle of the document...

Although the majority of blame rests with top management and the company he carefully hired, its more important to analyze the underlying reasons BMIS was allowed to operate successfully for so long, and not merely the unethical decisions of those who made them.
Explanation of the Madoff Fraud
The problem with decision-making biases is that they also contribute to unethical decisions (Crews 2). Prior to the scandal surfacing, Madoff was revered as an astute, influential man of special status serving as the NASDAQ chairman and even sitting in on industry panels (Abkowitz et al.). While disregard of the due diligence process was the primary reason why investors lost their money, it was the initial breach of trust and unethical decision making by Bernie Madoff that perpetuated it. Madoff acted upon his unethical inhibitions because he had an understanding of the public’s idolized perception of him as well as a knack for convincing people to invest in his exclusive brand image he had created for the business.
The public saw him as a Jewish CEO of a highly successful investment securities firm offering great returns; therefore they wanted a stake in it without second thought. Michael Bienes, a partner of Avellino & Bienes, an investing client who ran a feeder fund through Madoff, talks about how Madoff transfixed his clients with his aura as a strategy to gain their unwavering trust to invest in his Ponzi scheme. “’Hey, come on we’re family, aren’t we?’ And at that moment, he had me. He had me. We were family. Oh, my God! I was in!” (Abkowitz et al.). He personalized client relationships through influence of charm to get them to act on their emotions versus investing based on details and quantitative facts. Given his pre-existing track record for outstanding returns to stakeholders, new clients were blind to rationalization and negligently acted without performing any due diligence.
“He had a particularly painful impact on the Twin Cities, where his method of preying on Jewish families and foundations was highly effective in this close-knit and long-established community” (Kansas). Madoff immersed his Ponzi scheme amongst Minneapolis investors who fed their funds through Engler & Budd Securities, a brokerage firm that ran a feeder fund resulting in an estimated six hundred million dollar damage to the community. But the halo effect wasn’t Bernie Madoff’s only hook for reeling wealthy people in, he also utilized his Jewish heritage to take advantage of investor biases according to personal preferences of his particular ethnic background. Those affected in Minneapolis are also cited saying that his aura did play a monumental factor in their consideration to invest with him.
The illegal construction of the Bernie Madoff securities pyramid scheme grew to preposterous proportions from legal, auditing, and regulatory weaknesses of the Securities Exchange Commission, the designated regulatory body of the U.S. financial markets. The...

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