Ponzi Scheme

Bernie Madoffs Ponzi scheme is one of the biggest scandals that have faced the U.S. Securities and Exchange Commission. The beginning of this scheme can be traced back to 1960 when Madoff started his brokerage company, which grew to become one of the largest brokerage companies on Wall Street. After establishing his company, Madoff started investing money as a favor to his family and friends. This marked the beginning of what would later become one of the largest Ponzi schemes since Madoff was not licensed to do so. Madoffs side investments to family and friends became an investment fund that grew into a Ponzi scheme worth $50 billion within a period of five decades. Madoffs Ponzi scheme provides significant lessons on SEC regulations and enforcement of relevant laws to prevent financial fraud.

Synopsis of Madoffs Ponzi Scheme

The development of Bernie Madoffs Ponzi scheme can be traced back to 1960 when he established a brokerage company. The brokerage firm focused on trading over-the-counter penny stocks that were valued at less $1.00 and traded outside the American Stock Exchange (AMEX) and the New York Stock Exchange (NYSE). When investors wanted to purchase or sell penny stocks, they would phone Madoff who would in turn contact other stockbrokers or investors to make the trade as reasonable prices. He soon got several big breaks as he completed trades for Alpern and Shapiro within a short period of time and used profits from the trades to subsidize his penny stock brokerage company. This was essentially an avenue through which Madoff started investing money as a favor to his friends and family. Madoff engaged in an illegality as his investments were beyond what he was licensed to do.

Madoff did not obtain an investment advisory license that could have enabled him to legally provide the investment services he was offering to his family and friends. By failing to obtain an investment advisory license, he continue to operate an illegal business and used it to promote the growth of his brokerage firm. The failure to obtain an investment advisory license was part of his efforts to continue violating SEC licensing laws and prevent authorities from auditing his financial books. The illegal investment services offered to family and friends were side investments that grew into a $50 billion Ponzi scheme for a period of 50 years. He pled guilty to operating a Ponzi scheme in 2009 and was sentenced to 150 years in jail (Heydenburg, 2015).

While Madoff confessed to operating a Ponzi scheme from 1991 during his sentencing trial, most analysts believed that he started much earlier. The growth of Madoffs Ponzi scheme into billions of dollars was fueled by his use of the...

In this case, Madoff successfully capitalized on the growth of his brokerage company to cover his fraudulent side investment activities. Through the use of his brokerage firm to cover his fraudulent activities, Madoff appeared to investors as a successful fund manager. Many investors trusted him easily because of his long track record of successful investments. Moreover, Madoffs charismatic personality and a strong sense of family, honesty, and loyalty enabled him to gain the trust of many unsuspecting investors. The other factor that fueled the growth of his Ponzi scheme was how he always played hard to get. He would always tell investors that his investment fund was closed by later re-contact them and offer huge favors for reopening the fund.

Effectiveness of Post-Madoffs Fraud Laws and Regulations

Madoffs fraudulent activities resulted in significant losses for thousands of philanthropic organizations, affluent clients, and middle-class people. Many middle-class people who invested their...

…could have contributed to the failure by sophisticated investors to perform due diligence. These factors were seemingly a source of confidence to the sophisticated investors that made them trust and invest with Madoff.

The other factor that contributed to the failure by sophisticated investors to perform due diligence before investing with Madoff is his actions to rebuff efforts by some investors to obtain greater insights into the investments. Madoff safeguarded his investment from such detailed scrutiny from current or potential sophisticated investors by arguing that it was an options-based investment strategy (Smith, 2010). Through this Madoff successfully maintained a level of secrecy regarding his investment activities. While the level of secrecy was essentially a red flag for some investors, sophisticated investors were overlooked it because of Madoffs charismatic personality and his standing on Wall Street.

In conclusion, Bernie Madoff operated a Ponzi scheme for a period of fifty years resulting in losses of more than $50 billion. Madoffs Ponzi scheme started after he registered a legitimate brokerage firm in 1960. As the brokerage firm grew into one of the largest companies on Wall Street, Madoff started investing money as a favor to his family and friends. This side investment marked the beginning of what would later mushroom into a $50 billion Ponzi scheme. Madoffs scheme occurred a century after the original Ponzi scheme perpetrated by Charles Ponzi took place. This fraudulent financial activity was exposed some of the loopholes in the regulatory framework in the financial industry. As evident in the case, the SEC served as an accomplice that perpetuated Madoffs Ponzi scheme at it failed to investigate the fraud despite repeated warnings. Moreover, the fraudulent scheme reflected the failure of the accounting profession and the federal government agencies to create and enforce relevant laws and regulations that prevent financial/corporate fraud. This scheme…