Madoff Scandal Case Study

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A Madoff Scandal – A Ponzi Scheme
In 1899, Brooklyn bookkeeper William Miller deceived investors with more than twenty million dollars in today’s money (Altman, 2009). Miller is considered the first person to successfully use this scheme in the United States (Altman, 2009). However, the scheme is named after another practitioner who promised a fifty percent return on investment within ninety day, Charles Ponzi (Altman, 2009). Even though the scheme is named after Ponzi, the essential elements of the scheme continued in subsequent decades which led to the long-running scheme of Bernard L. Madoff.
“A Ponzi scheme is an investment fraud in which earlier investors are paid returns using money contributed by later investors” (Columbia Electronic
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In the beginning of 2008, BMIS managed a total of 17 billion dollars with 23 discretionary accounts. Gregoriou and Lhabitant (2009) stated that “most of these accounts belonged to feeder funds that were marketed to investors worldwide by numerous intermediaries or used as underlying assets for structured products, leveraged investments,” etc. (p. 90). That is, investors participated through one of the feeders, which had to then open a brokerage account with BMIS as the trading authority of the investor’s portfolio (Gregoriou & Lhabitant, 2009). Therefore, investors were able to investigate their feeder funds, but unable to do the same with BMIS (Gregoriou & Lhabitant, 2009). This design helped Madoff defraud thousands of people during its …show more content…
For instance, Madoff’s “brother Peter … was a senior managing director;” while his “nephew Charles Wiener, … served as the director of administration” (Gregoriou & Lhabitant, 2009, p. 94). There were also other Madoff family members involved in BMIS, such as his sons Mark and Andrew, and his niece Shana (Gregoriou & Lhabitant, 2009). The family influence is another indicator of weak internal controls that shields investment from fraudulent activities (Gregoriou & Lhabitant, 2009).
There were other reasons why Madoff’s fraud lasted so long, which are also red flag indicators of a Ponzi scheme and are guidelines to avoid becoming a Ponzi scheme victim. For example, in one of the regulatory filings, BMIS disclosed 17 billion dollars of assets; however, it indicated that it only had between one to five employees (Gregoriou & Lhabitant, 2009). It is logical to assume that such a large advisory firm will be managed by a larger group of

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