Bernard Madoff's Investment Scandal

Bernard Madoff's Investment Scandal

Introduction

Bernard Madoff turned his investment business into the biggest Ponzi scheme ever and is now serving a prison sentence of 150 years on 11 felony charges (Wikipedia, 2010).

Bernard Madoff was a businessman who started a very successful investment business, now he spends his time in prison for committing numerous counts of fraud in an investment scandal known as a Ponzi scheme. The ethics issues involved are: deceiving prospective and current investors for personal gain, providing false information to investors and regulators, and questionable involvement with various charities. I will discuss these issues and their effects on individuals, organizations and society.

Facts

Bernard Madoff founded Bernard Madoff Investment Securities LLC in 1960 (Wikipedia, 2010). He ran a successful business until the 1980's or 90's when he started deceiving his clients. Madoff began using new clients' investments to pay his existing clients. He no longer invested his clients' funds. Madoff would mail false detailed returns to his investors to keep them from finding out the scheme. To continue to gain new investors, Madoff promised a return of about 15% (Corporate Narc). Madoff deceived his clients and he also deceived regulatory agencies that checked on his business. There was even a whistleblower who questioned Madoff's activities to the authorities, and they did not follow through. Did the regulatory agencies involved do their job? They seem to have had numerous opportunities to reveal Madoff's scam but failed every time. Madoff either had some influence on them or deceived them very well.

Madoff's scheme came to an end when investors were requesting withdrawals totaling around $7 billion (Wikipedia, 2010). He did not have the funds to pay these investors, but he continued to solicit funds until right before his confession and arrest. Madoff confessed to his sons the operation he had been running and they turned him in to the authorities. In the end, his scam was not discovered by regulatory agencies but by his own confession. He was arrested by the FBI on December 11, 2008 for criminal securities fraud (Ferrell, Fraedrich, & Ferrell, 2011). Madoff had been operating a 65 billion dollar Ponzi scheme. He posted 10 million dollars for bail and was confined to his apartment with numerous restrictions and surveillance (Wikipedia, 2010).

Bernard L. Madoff Securities LLC was liquidated on December 15, 2008 (Picard, 2010). A trustee was appointed to the liquidation. In June of 2009, the estate of Bernard L. Madoff was ordered to be consolidated into the liquidation of the business (Picard, 2010). On January 5, 2009, prosecutors requested Madoff's bail be revoked when they discovered he had mailed assets, including jewelry, to relatives (Wikipedia, 2010). The request was denied but conditions were added to the bail including having Madoff's mail searched and making an inventory of personal items (Wikipedia, 2010). Madoff was charged on March 10, 2009 with eleven felonies by the United States Attorney for the Southern District of New York including: investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, making false filings with the SEC, and theft from an employee benefit plan (Wikipedia, 2010). These charges added up to a total of nearly 65 billion dollars that Madoff fraudulently took from his investors (Wikipedia, 2010). On March 12, 2009, Madoff pled guilty to all charges in court and his plea was accepted (Wikipedia, 2010). On June 29, 2009, Bernard Madoff was sentenced to 150 years imprisonment at the Metropolitan Correctional Center in New York and 170 billion dollars in restitution (Wikipedia, 2010). Madoff did not cooperate fully with authorities in the investigation. He claimed he was the only one involved in the scheme, which is not very likely. Prosecutors are still working on finding and proving that others were involved in helping Madoff pull off this scheme.

Ethical Issues

Bernard Madoff acted very unethically. There are ethical issues on individual, organizational, and societal levels. On an individual level, Madoff deceived prospective and current investors for personal gain. He promised them their investments would have consistent returns. He illegally operated his investment business, hurting his clients and eventually himself. Madoff also made an unethical decision to mail his clients fake returns concerning their investments. His investors did not know their lives would be turned upside down. Madoff kept his secret from family members, employees, and friends. His lies destroyed a great number of individual lives.

On an organizational level, Madoff provided false information to regulators who checked on his company. Even when individuals voiced concern about Madoff's activities, the regulators failed to discover the scheme (Economist, 2008). Madoff's actions caused his business to fail, along with other businesses that had a connection to his. These organizations could not survive the scandal that Madoff carried out.

On a societal level, Madoff involved charities, nonprofits, and educational institutions by donating to them. Some of them, in return, invested money with Madoff's business. His scheme caused some of these charities and nonprofits to close, no longer being able to do the work they were formed to do. Madoff's scheme also affected society's view of investment businesses. Society, as a whole, will be more skeptical and have a hard time trusting businesses with their investments. It will take great measures and time to regain society's trust and respect for investment businesses.

Alternatives

There are three alternatives which Madoff could have chosen. The first is that Madoff could have been honest when his trading strategy failed and switched to a different strategy. If needed, he could invest some of his personal money in his business to keep it going. This would have been more respectful to his clients and employees.

A second alternative is that Madoff could have been honest when his trading strategy failed and closed his business. He could have admitted that his methods were not working, gave his clients what they had left of their investments, and closed his business. This may have cost him both money and friends, but he would