Describe three types of illegal business behavior alleged against Mr. Madoff and for each type of behavior, explain how the behavior is illegal or unethical in the conduct of business.
In the general sense, Madoff was accused of running a Ponzi scheme. This is a form of "pyramid scheme" in which essentially returns are paid to existing investors out of the principal being taken from new investors, eventually leading (as Madoff's scheme did) to a collapse when the entire system runs out of capital and investors cannot regain any of their own investment. Here is the official definition offered by the SEC (2011):
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
There are many ways to commit a Ponzi scheme fraud, and indeed Charles Ponzi's original scheme was originally based on a minute difference in valuation between stamps that were available for international usage: he therefore proposed to buy the stamps in bulk in Italy and then sell them in the United States, offering this as an investment scheme that seemed "too good to be true," for its returns were seemingly guaranteed. Of course, the scheme was too good to be true, as Ponzi's willingness to take in new investors did not decrease even when the loophole in the international pricing scheme was closed, and the domestic market for the stamps had dried up: by now, the system of investments and returns had entirely ceased to do with the purchasing of actual stamps. To this degree, his crime did resemble Madoff's -- but Madoff was not buying and selling something like stamps (which could be understood as analogous to the safe investment normally entailed in a government bond), but instead stocks and securities, under the jurisdiction of the S.E.C. As a result, Madoff's crimes hinged crucially on the reporting of transactions that had never actually occurred: to cover up the Ponzi scheme nature of his business, he needed to invent transactions that made it appear that the money paid out had not come from new investors but from returns on the existing investment in the market (which Madoff had never done, keeping the money for himself, essentially).
However, in the eye of the law, "Ponzi scheme" is not in itself a discrete felony by legal statute, like (say) arson or sodomy. The legal charges against Madoff therefore focused on provable felonies committed in the course of the larger "Ponzi scheme" -- Madoff ultimately pled guilty to 11 federal felonies. These included such various charges as securities fraud, perjury, and theft from employee benefit plans. The charge of securities fraud relied obviously on Madoff's reported claims that he had bought and sold certain stocks, when in fact no such transaction had been made. This is unethical because in many cases Madoff was under legal obligation to tell the truth, hence the charge of perjury. Because Madoff's victims included numerous employee benefit plans, laws that are in place to prevent the large-scale defrauding of these corporate entities (either by corporations or by unions) were also invoked against Madoff because these charges were all easily provable, and carried substantial jail time.
2. Name three types of parties who were impacted by the actions of Mr. Madoff and describe how they were impacted.
One type of party has just been described: these are large-scale financial funds representing the pension or benefit plans of employees of large corporations or institutions. An example of this would be Yeshiva University, an educational institution whose employee benefit and pension plans were invested with Madoff with holdings valued at 14.5 million, according to the Wall Street Journal (2009). Other types of course were individual personal investors, such as the married Hollywood actors Kevin Bacon and Kyra Sedgwick, who had invested personal wealth with Madoff (Andrews 2009). The Wall Street Journal reported that legendary Hungarian varicose vixen Zsa Gabor had invested some 10 million dollars of personal wealth with Madoff (2009). A final type would be the charitable foundations that had invested their holdings with Madoff but did not operate on a for-profit basis, so Madoff's willingness to defraud them looked like taking money from churches and poor people. These included such eminent institutions as the Elie Wiesel Foundation, named after the eminent Nobel laureate and Auschwitz survivor, and various other Jewish charities including Hadassah and filmmaker Steven Spielberg's educational charity. The Wall Street Journal reported that the Wiesel Foundation had invested "substantially all" of its assets with Madoff, valued at 15.2 million dollars (2009). From the standpoint of ethics, Madoff's willingness to confiscate all this money which had been donated in honor of a great humanitarian who had survived Hitler seemed to demonstrate a particular heartlessness: like a serial killer, Madoff largely hunted for victims within his own ethnic type, for the sound reason that they would be more likely to trust him, and less likely to demand accountability. This is referred to by the S.E.C. As "affinity fraud," and demonstrates a clear explanation of Madoff's modus operandi.
3. Describe three business safeguards (risk management) that may have prevented the harm caused by Mr. Madoff.
All safeguards that could have forestalled Madoff's Ponzi scheme are in the realm already of SEC oversight. For example, Madoff used an internal accounting firm, essentially -- a "firm" of two people whose only apparent client was Madoff. This failed to set off alarm bells presumably because of Madoff's eminence within the NASDAQ hierarchy, but obviously external accountants are not susceptible to the same sort of corruption as Madoff's employees (basically). A second safeguard would have been to require those subsidiary investment funds which sent their money to Madoff to inform the initial investors of where the money had been invested: if this had been done, the largest portion of Madoff's victims would have been in a position to request financial statements, any of which might have exposed some aspect of Madoff's malfeasance in advance. But the largest single act of fraud that Madoff committed -- namely, the reporting to the SEC of fictional stock purchases -- could have been prevented if there were a requirement for not only internal reports but verifiable proof that any such purchases had been made.
4. Describe three ways private investors might have better protected themselves from risk.
Private investors could have better protected themselves from risk first by realizing that Madoff's statements as reported were simply too good to be true. They could also have requested statements more frequently and had them examined by their own accountants. Finally, private investors might have realized that Madoff's secrecy was a red flag. The S.E.C. itself has declared that there are specific things to watch out for as a signal of a Ponzi scheme: these include high investment returns with little or no risk or overly consistent returns (which was the case with Madoff), unregistered investments (such as most of Madoff's reports to clients) or unlicensed sellers, secretive or complex strategies (such as Madoff purported to employ), issues with paperwork and difficulty with receiving payments (as obviously a Ponzi scheme works to prevent individuals from divesting by encouraging them to "roll over" promised payments, often with a promise of even higher returns).
5. Describe three legal actions that possibly may be brought against Mr. Madoff under criminal or civil law.
The first legal action brought against Madoff under criminal law has taken place already -- these are…