Madoff Case Study Answer

CASE STUDY Bernie Madoff’s Ponzi scheme: Reliable Returns from a Trustworthy Financial Adviser 1. Should Mark Madoff have granted his father’s request for a one week delay before notifying government authorities about his crime? No, he shouldn’t. Because it would take him into jail. Mark had done the right decision because sooner or later of all this Ponzi scheme will appear although Mark had granted his father’s request for a one week delay before notifying government authorities about his crime. 2. Describe the chronological evolution of Bernie Madoff’s Ponzi scheme! Bernie madoff owned three very successful financial companies. But, he built them dishonestly. At the beginning, Bernie, helped by Ruth’s father, established some legitimacy by giving him office space in his midtown Manhattan accounting firm. Bernie began this business by bought and sold penny stock and traded outside NYSE or AMEX. Businesses borrow money from banks to this pay for expansion but bernie’s plan. Bernie had a bank account with money flowing in and out from his illegal investment advisory business. He used some of this money, without his client’s permission, to avoid interest payments. Bernie moved money between his Bank ofNew York brokerage bank account and his Chase investment adviser bank accountas needed. Whenever he fell short of the guaranteed 20 percent investment advisoryreturns, he made up the difference by taking money out of his brokerage bank account.If he needed income to grow the brokerage firm, he took money from theinvestment advisory bank account. 3. Why did sophisticated investors trust Bernie Madoff with their funds? Why didn’t they perform appropriate due diligence? Bernie assured them by sold blue-chip stocks and claimed he invested client money using a complicated three-part “split strike conversion” investment strategy. He told clients that first he purchased common stock from a pool of 35 to 50 Standard & Poor’s 100 Index companies whose performance paralleled overall market performance. The S&P 100 Index represents the 100 largest publicly traded companies based on market capitalization, and represented a very sound investment. Second, he bought and sold option contracts as a hedge to limit losses during sudden market downturns. Third, he left the market and purchased U.S. Treasury Bills when the market was declining, and then sold the U.S. Treasury Bills and reentered when themarket was rising.

4. Why didn’t the SEC, which received several complaints about Bernie Madoff, uncover the fraud? - The SEC annually receives more than 10,000 complaints against brokers. Theunderstaffed SEC assigned cases to investigators who had little experience with Ponzi schemes. As a result, they focused on the more familiar “front-running,”which -

Bernie was not doing. The SEC had difficulty understanding the complexity of Bernie’s operations.Bernie

-

lied to them multiple times to keep them off track. They gave Bernie the benefit of the doubt because he had an impressive trackrecord

-

with NASDAQ and had assisted the SEC on complex issues. Bernie never requested the presence of a lawyer when speaking with SEC

-

agents,signaling that he had absolutely nothing to hide. When questioned about his consistently high returns, Bernie explained he had apersonal “feel” for market fluctuations, which is why he had been a

-

successfulinvestor for decades. Markopolos unsuccessfully competed against Bernie, thus leaving himself

-

vulnerableto the “sour grapes” accusation. SEC managers and Markopolos had an adversarial relationship. The SEC believed Markopolos was primarily motivated by a desire for the

whistleblowingreward windfall. 5. Do you believe Mark and Andrew Madoff didn’t know about their father’s Ponzi scheme prior to their December 10, 2008 discussion at Bernie Madoff’s apartment? Yes, I do believe Mark and Andrew didn’t know about their father’s Ponzi scheme. It is because they, along with other family members and close friends, werealso heavily invested in the fund. Besides, they looked forwatd to inheriting the company. 6. Should sophisticated investors whowithdrew millions from their Madoff accounts forfeit the undeserved gains to people who lost the millions of dollars theyinvested? Yes, I think they should. But in fact, it’s impossible for sophisticated investors to do like that because they thought “business is business” and“if you failed in a business, it’s your own business”.