Bernard Madoff the Events Surrounding

Bernard Madoff

The events surrounding Bernard Madoff, his fraudulent activities and his eventual arrest have highlighted several issues in today's economic and social reality. While it is true that justice has finally prevailed, it is also true that many problems exist within the social and economic justice system. Madoff has been able to conduct his scheme for several years before finally being brought to justice. The reason for this is not only that he was particularly clever at hiding the realities of his actions, but also that those subjecting him to periodic investigation turned a blind eye to the red flags and potential problems raised. The reasons for this will be investigated subsequently.

According to Stephen Lendman (2008), the first whistleblower to attempt to warn the SEC of the possibility of fraud in Madoff's case was Harry Markopolos in 2005. Markopolos was a derivatives expert and became suspicious when following Madoff's strategy. Among several of the red flags was Madoff's secrecy regarding his company and his returns. Some of the red flags he rose included the fact that Madoff Securities did not operate like other hedge funds, and charged undisclosed commissions on trades. Madoff also did not let investors mention his firm in their performance summaries. Furthermore, Madoff's consistently high returns raised suspicion. Markopolos held that these returns could only be the result of illegally front-running order flows by means of advance information that others have no access to.

Prior to this, it is already in 1999 that Markopolos notified the SEC in Boston of what he suspected and suggested that Madoff be investigated. He followed this with repeated requests, which were all ignored until the New York office finally took heed in 2006.

On the basis of this, it appears that the SEC was unwilling to believe any of the allegations against Madoff. This indicates the social tendency to favor the very rich. They are practically untouchable in terms of criminal charges, and it takes much more effort to expose their wrongdoing than it would for smaller businesses people. Indeed, while few would profess to the truth of this, it appears that money can indeed buy anything.

Upon investigating the issue, the SEC found that Madoff misled the investigators about his hedge fund accounts strategy; he did not inform investors that he himself was the investment advisor; and he did not register with the SEC in his capacity of advisor when his client list exceeded 15. Still, the SEC did not act, as Madoff promised to rectify these violations. They took other allegations no further, as they held that they were unsubstantiated (Lendman, 2008). They therefore recommended closing the case.

According to Lendman (2008), this is typical of the SEC, in that they, like many others, were seduced by Madoff's money, power, and status in the economic sector. Indeed, according to the author, they provided Madoff with a "free pass" to do as he pleased. Regardless of Markopolos's continued attempts, no action was ever taken until the economic collapse of 2008, when he was finally exposed after investors attempted to withdraw their money from his scheme. It was therefore not by any action of the SEC that Madoff was exposed; it was only when he was called upon to in fact demonstrate his ability to pay his investors and failed.

Lendman (2008) cites former SEC Boston examiner of advisers and funds, Eric Bright, in the opinion that the SEC is not ruled by sound ethical principles, but rather by political, economic, and social power. This is why Madoff and many others are allowed to continue their fraudulent practices. Indeed, so seduced are the SEC staff by money and power that many staff regulators resign to enter the financial industry, where the potential earnings are much more than their government salaries. The reality therefore is that money appears to rule the actions of the SEC, its staff and its regulators. The more money a financial company has, or professes to have, the safer it is from prosecution for whatever criminal and unethical activities it chooses to engage in. This is substantiated by the political attitude towards stock fraud. Lendman (2008) suggests that Federal cases against stock fraud were considerably fewer when George Bush took office at the White House. The SEC has also undertaken remarkably fewer investigations from the 1990's to the new millennium. Indeed, the allegation is that the SEC is more concerned with protecting Wall Street than investors. It appears that little will change under Obama, with the appointed head of the SEC, Mary Schapiro, similarly concerned with protecting Wall Street sharks.

James Petras (2008) similarly believes that Madoff's failure is not a personal one, but a failure of the current social, political and economic justice. In addition to an economic culture that most favors the very rich, Petras also believes that the SEC and its actions are completely predictable, precisely because the regulators are selected from those are regulated. Madoff was so successful for so long because he was able to play the fraud game better than others.

According to a radio interview conducted with (2008), Maurice Schweitzer explains the exact principles that worked together in enabling the Madoff scandal, as well as others like it. These principles include scarcity, authority, social proof, and the liking principle. According to the first, the client is told that the fund is closed, but the advisor nonetheless attempts to find a place for the investor. This creates a sense of exclusivity, which is one of the main features of the Madoff scheme. Secondly, Madoff had considerable authority in the field, being the chair of NASDAQ in 1990 and subsequently a board member. Authority figures are a social phenomenon that exert a large amount of influence over the social consciousness. They tend to be trusted with little or no question. Thirdly, the social proof principle is a phenomenon by means of which individuals trust whatever they see many others engaging in. Many high profile investors, including the Abu Dhabi Investment Authority, Stephen Spielberg, and the owner of the New York Mets, invested in Madoff's scheme. This attracted other high profile investors to follow suit, without any further investigation into the scheme or its merit. This type of merit is based solely on the actions of others and the appearance of legitimacy. The final principle that Schweitzer mentions is "liking." This is another social phenomenon, by means of which people are influenced by those they like. Social networking, country clubs and charity events played a key role in Madoff's ability to commit long-term fraud. Investors wanted to believe that Madoff's consistently high earnings were real, and they influenced each other in the perpetuation of this belief.

One could therefore conclude that it is not only the SEC or the government that is at fault in encouraging and perpetuating fraudulent schemes like that of Madoff. Indeed, it is the combination of both political, economic, and social paradigms that operate in the current social consciousness. To change this, the collective consciousness of society would have to change.

One might argue that the SEC and government can begin such change by operating on the principles of public trust and ethics rather than economic and political power. Instead of allowing fraudulent activities to continue, the structures that are elected to protect individuals and the public at large should in fact begin to their job as such.