Bernard Madoff Ponzi Scheme and Wrongful Convictions in the U.S.

Case Brief: U.S. v. Madoff (08-MAG-02735)

It should be noted that Bernard Madoff's scandal attracted several lawsuits. Some of the main cases include SIPC v. Bernard L. Madoff Investment Securities, SEC v. Madoff, and U.S. v. Madoff. This discussion focuses on U.S. v. Madoff, 08-MAG-02735.

Year the crime was committed: Being a Ponzi scheme in which investors had committed significant sums of money over a long period of time, it is estimated that Madoff commenced the fraud in the 1980s. In the words of Henshaw (2014), "investigators believe that Madoff's fraudulent activities extend back to perhaps the early 1980s, and it is possible that his firm was never really a legitimate business" (p. 109).

Place the crime was committed: Investors in Madoff's investment company came from all over the world and from as many as 136 countries (Cohn, 2018). A significant percentage of the victims came from the United States. New York City, however, was the principal place of business for Bernard L. Madoff Investment Securities.

Who was the perpetrator? The perpetrator of this investment scandal, which has been branded one of the largest Ponzi schemes in history, was Bernard Madoff. In addition to being the founder of the investment company that served as the front for the scam — Bernard L. Madoff Investment Securities LLC — Madoff was also the company's chairman.

Who was the victim? Madoff's victims included thousands of investors. By some accounts, "as many as 37,000 people" had invested in Bernard L. Madoff Investment Securities (Cohn, 2018). Other victims included a number of foundations and charities.

Elements of the Crime and Penal Code

The apparent elements of the crime in this case are actus reus (criminal act), mens rea (criminal intent), and causation. With respect to actus reus, Douglas, Burgess, Burgess, and Ressler (2011) point out that "before a person may be convicted and punished for a crime, the prosecution must present evidence that the person (acting as a principal, accessory, or accomplice) committed a criminal act as defined by statute" (p. 48). In the case of Madoff, he pleaded guilty to all charges leveled against him during his plea proceeding. Madoff was charged with 11 federal crimes including, but not limited to, money laundering, wire fraud, investment adviser fraud, securities fraud, and perjury.

With respect to mens rea, there must be criminal intent. According to Henshaw (2014), following a visit by the FBI, Madoff was asked by Agent Theodore Cacioppi whether he had any innocent explanation concerning the purported Ponzi scheme he had presumably been running. Madoff's answer was brief: "there is no innocent explanation" (Henshaw, 2014, p. 302).

Regarding causation, Klotter (as cited in Douglas et al., 2011) notes that "for one to be guilty of a crime, his act or omission must have been the proximate cause thereof" (p. 49). As the key participant in the scandal, Madoff engaged in criminal acts as described above and was fully aware that he was running a fraudulent enterprise. His conduct was therefore the proximate cause of each of the crimes with which he was charged.

Penal code violated: 18 USC Ch. 47.

Punishment attached to the offense: All 11 charges carried a maximum sentence of 150 years. The term consisted of "20 years on each of Counts 1, 3, 4, 5, 6, and 10; 5 years on each of Counts 2, 8, 9, 11, and 11; and 10 years on Count 7" (Suk, 2017).

Summary of the Madoff Incident

Born in 1938, Bernard Madoff rose to become one of America's best-known hedge fund investment managers. At one point he even served as NASDAQ chairman. However, by age 71, Madoff had been found guilty of running one of the largest Ponzi schemes in history. It all began sometime in the 1980s: by promising investors high and steady returns, Madoff attracted significant deposits of client funds and thereafter falsified trading activities by filing false SEC returns and making fraudulent foreign transfers (Henshaw, 2014). Madoff explained his high returns by citing a unique investment strategy known as a split-strike conversion, which largely involved taking options contracts on blue-chip stocks he had purchased. He claimed this approach could deliver returns as high as 20%.

According to Henshaw (2014), at the outset Madoff cultivated close associations with influential and wealthy New York businessmen in order to attract as many investors as possible. He ensured that the returns he purportedly generated were significant enough to motivate early investors to add to their initial investment and to recruit their friends and associates. This approach proved effective.

In reality, however, Madoff was using funds from new investors to pay off existing investors — a hallmark of a pyramid scheme (Henshaw, 2014). In such a scheme, the recruitment of new participants is essential, as the fresh capital injected into the fraudulent enterprise gives the entire operation the appearance of a legitimate business. Following the 2008 global financial crisis, an unexpected number of investors sought to redeem their investments. Unable to meet these requests, Madoff was finally compelled to confess. He first told his family members about the true nature of his business, then confided in a lawyer friend who alerted law enforcement. From that point forward, his downfall was swift.

Was the perpetrator convicted? If so, what was the sentence? Yes, the perpetrator was convicted. For his guilty plea "to 11 counts of securities fraud, investment advisor fraud, wire and mail fraud, money laundering, making false statements, perjury, filing false documents with the SEC, and theft from employee benefit funds," Madoff received the maximum prison sentence prosecutors had sought: 150 years (Suk, 2017).

Wrongful Convictions: Introduction and Context

In the criminal justice system, the problem of wrongful convictions has been prevalent for a long time. Although the situation is in some instances remedied early through eventual acquittal, wrongful convictions can be irreversible — most critically in cases involving the death penalty. Founded in 1992, the Innocence Project seeks to exonerate those who have been convicted wrongfully. It pursues this goal through various means, including DNA testing and advocacy for the reform of the criminal justice system. In an effort to demonstrate the need to exonerate those already wrongfully convicted — and to establish the importance of strategies that prevent future wrongful convictions — this section reviews a specific wrongful conviction case and suggests approaches that could help reduce such miscarriages of justice.

In basic terms, a wrongful conviction involves the conviction of an individual for a crime he or she did not commit, a fact often discovered through subsequent investigations. As Gross, O'Brien, Hu, and Kennedy (2014) observe, "in the past few decades a surge of hundreds of exonerations of innocent criminal defendants has drawn attention to the problem of erroneous conviction" (p. 7231). One such case involved Kirstin Lobato — a woman who spent a total of 11 years and 9 months in prison for a crime she did not commit.

Conclusion

In the final analysis, wrongful convictions impact not only those who are unjustly imprisoned, but also the entire justice system. With every wrongful conviction, public confidence in the ability of the criminal justice system to dispense justice fairly and reliably is eroded. Wrongful convictions also compromise public safety: convicting an innocent person means that the real offender remains free and may continue to commit crimes. For these reasons, the imperative to reduce wrongful convictions cannot be overstated. Addressing this problem will, however, require a multifaceted approach involving both the justice system and organizations like the Innocence Project. While organizations such as the Innocence Project advocate for the exoneration of those already wrongfully convicted, police departments must simultaneously adopt practices that prevent innocent persons from being imprisoned in the first place.

References

Cohn, S. (2018). The stories of Madoff's victims vary widely, as the fraud continues to unwind 10 years later. Retrieved from https://www.cnbc.com/2018/12/10/the-stories-of-madoffs-victims-vary-widely-a-look-10-years-out.html

Column Five (2013). The path to innocence for wrongly convicted Americans [Digital image]. Retrieved from https://www.good.is/infographics/infographic-the-path-to-innocence-for-wrongly-convicted-americans#open

Douglas, J., Burgess, A. N., Burgess, A. G., & Ressler, R. K. (2011). Crime classification manual: A standard system for investigating and classifying violent crimes. Hoboken, NJ: John Wiley & Sons.

Gross, S. R., O'Brien, B. O., Hu, C., & Kennedy, E. H. (2014). Rate of false conviction of criminal defendants who are sentenced to death. PNAS, 111(20), 7230–7235.

Henshaw, J. M. (2014). An equation for every occasion: Fifty-two formulas and why they matter. Baltimore, MD: JHU Press.

Leo, R. A. (2016). The criminology of wrongful conviction: A decade later. Journal of Contemporary Criminal Justice, 33(1), 170–176.

Suk, J. (2017). Sentencing transcript in U.S. v. Madoff. Retrieved from https://h2o.law.harvard.edu/collages/44935

Turvey, B. E., & Cooley, C. M. (2014). Miscarriages of justice: Actual innocence, forensic evidence, and the law. New York, NY: Academic Press.

Zalman, M. (2017). Wrongful convictions and the innocence movement. Journal of Contemporary Criminal Justice, 33(1), 212–218.