Case Study 2
Bernie Madoff defrauded many investors for over 17 years. His scheme involved depositing client’s savings and money in one bank account then uses the funds to pay out current clients who needed cash out (JMC RSA, 2017). His redemptions were funded by bringing onboard new investors. However, as of 2008, he was unable to maintain his Ponzi scheme with the sharp turn of the market. Madoff’s success was as a result of the respect he earned as a smart financial investor (JMC RSA, 2017). He executed his Ponzi scheme through the actual trading strategy, a financial arrangement that went undetected for many years (JMC RSA, 2017). The plan generated large sums of funds, and with his redemptions strategy, he kept attracting new capital and investors who invested more money into his scheme.
By using the Fraud Triangle, Madoff’s fraud scheme can be broken down for easier understanding.
Stage One: Pressure/Motivation
As chairman of Nasdaq, Madoff was under pressure to post positive earnings and profit for the electronic trading company (JMC RSA, 2017). As a Wall Street financier, market maker, and investor, he wanted to use every opportunity to outshine other market makers and investors. He tried to attract the best and most moneyed investors. The motivation to stand out as the best in Wall Street pushed him into the Ponzi scheme arrangement.
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Stage Two: Opportunity
At Wall Street, Madoff had the best opportunity to attract and retain the wealthiest investors in America. His smart skills gave him an edge over other market investors, giving him a chance to deceive many investors, affluent, and upcoming investors.
Stage Three: Rationalize
Madoff never viewed himself as a criminal (JMC RSA, 2017). He was an investor using a smart strategy to outwit the public and the entire Wall Street. He knew and understood that many Wall Street investors never wanted to trade with him, but he believed that he was not doing anything wrong and was investing and helping borrowers’ access funds. At the same time, he believed that as the chairman of Madoff Investment Securities, he had an obligation to do everything within his mandate to make a profit (JMC RSA, 2017). As an advisor, he understood the need to live up to his financial strategies and achieve success as a stockbroker.
The government was involved but only in passing. Over the years, Madoff called most government investigators as to his friends who never asked the right questions and never looked in the right places (JMC RSA, 2017). As a consulting firm, the best strategy to put in place to prevent bad investment is to verify and watch all investments. The plan should involve reviewing all the finances of the company and quarterly reports.
References
JMC RSA. (2017, May 11). Bernie Madoff - The Scamming Of America (FULL) Documentary. Retrieved November 16, 2019, from https://www.youtube.com/watch?v=AO4CIPuaTJ4.
