The stock market is characterized by a lot of problems. These problems range from the fraudulent activities of the players in this sector to the running of other fraudulent financial schemes under the cover of stock market activities. The essay explores the involvement of Bernard Madoff in the Ponzi scheme under the cover of a penny stock trader. In June 2009, Bernard Madoff was arrested by the FBI for a securities and exchange fraud. For decades, he had been running an international Ponzi scheme that had deprived his victims billions of dollars. Madoff was sentenced to 150 years in prison for running the Ponzi scheme. With the abolishment of parole, this is equivalent to a life sentence (Henriques 1).
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It all started with his Wall Street investment securities firm. He started his firm as a penny stock trader. Penny stocks are normally priced at less than five dollars and they are normally traded over the counter. Due to the complexity of the trading of penny stocks, it is not always easy to find legal information on their traders and thus stocks are easily controlled maliciously. This was therefore a perfect cover for Bernard Madoff to start a Ponzi scheme. He started the Ponzi scheme as an affinity scam for the Jews but it developed to an international scope. The fact that penny stocks are high-risk investments that attract people who do not have much financial knowledge also played a very important role in helping Madoff find clients. Normally, people who invest in penny stocks are high-risk takers hungry for high returns and therefore, he was sure that the cover of a penny stock dealer would work well in winning clients. At its inception, the firm provided markets for buying shares. They quoted bids and asked prices through the NQBPS (National Quotation Bureau’s Pink Sheets) and profited by taking advantage of the difference between bids and actual prices.
The Ponzi scheme
Madoff started the scam during the late 1990s following the aftermath of the inflation at the time, fuelled by the bursting of the dot-com bubble. He has in need of money to gain the returns he had promised his clients. He thought that after the inflation, he would replace the money but he failed and continued with the scam. This is very evil because he knew the repercussions of the scam on his victims. His scam fared well under the disguise of investment management and advisory division within his company. With his Ponzi business hidden within the operations of his security business, it was very difficult to know that it was a Ponzi scheme without critically analyzing his investment management division. Although he claimed to have started the Ponzi scheme in the 1990’s it is suspected that he started it in the 1970s or the 1980s (Zambito 1).
Another reason why Madoff was able to operate his Ponzi scheme for so many years without being caught is his close ties to the SEC (Securities and Exchange Commission). He had a lot of friends in the agency who are suspected to have been negligent in his case. This was even after the case being highlighted severally by Markopolos, a financial analyst who was hired by his employer to study the success of Madoff for innovation in their investment firm. After the discovery of fraud in Madoff’s business, Markopolos presented a report to the SEC but SEC officials said that nothing was alarming in Madoff’s business. Markopolos had submitted materials to the SEC on five separate occasions in 2000, 2001, 2005, 2007, and 2008. Nothing was done until the scam revealed itself later. This was after the scam had extended its disaster to more unsuspecting victims. Madoff was also heard severally heard praising the SEC and even gave a confession that one of his nieces is married to an SEC official. With the SEC safeguarding his interests, Madoff was not afraid to expand his business and thus he expanded his Ponzi scheme to get an international client base (Levihson 1).
Madoff’s scheme was unethical from the very start. The Ponzi scheme is a scheme that defrauds its victims their money and has an inevitable collapse because it does not generate any profits. The survival of the business is based on the continuous entry of new investors. Investors are paid returns from the money they invested or from money invested by subsequent investors. Therefore, the Ponzi scheme is characterized by a lot of enticements for new investors. These enticements include unrealistic returns for investments that are practically unachievable, prompt payment of the returns of the first groups of investors, and exercise of public relations activities to win the trust of the investors. This leads to an extensive network of investors joining the scheme due to the evidence of returns. People who have received returns also reinvest their returns to attract more returns. This leads to the massive growth of the scheme. It is therefore clear that this business is characterized by a lot of deception, manipulation, and blackmail. It is therefore out rightly unethical. It, therefore, grows until new subscriptions are unable to sustain the benefits of the existing clients, and this way, it collapses. In Madoff’s case, the Ponzi scheme was still growing even after attaining an international base, until he confessed to his sons that the scheme is ‘one big lie’. After this confession, his sons reported him to the authorities. However, Markopolos had unveiled the fact that the business Madoff was operating was fraudulent (Henriques 1).
The most unethical aspect of the business that Madoff was practicing is how it ends. After collecting money from hundreds of thousands of thousands of people and even organizations and using more than half of that money to pay returns, the people who invested in the scheme lose their contribution and they can not be easily indemnified. An intervention by the government to indemnify them using new currency will raise the inflation levels of the currency. Thus the establishment of the Ponzi scheme by Madoff was fraudulent, malicious, unethical, and wicked. He planned this scheme knowing that it is illegal and knowing the devastating effect it normally has on its victims. Considering the effects this scheme had on its victims, especially the poor ones, one clearly understands the gravity of Madoff’s actions and knows why he received 150 years in prison for his actions (Levihson 1).
A lesson for everybody
The loss suffered by the victims of the Madoff scam should be a lesson to those victims and the world as a whole. Investors should be very careful before jumping into investment deals that are too good to be true. People suffered these losses due to their negligence to seek information and their determination to get healthy returns from their investments. It is therefore important for investors to evaluating investment opportunities critically before jumping into them. This should especially be the case with investment opportunities that seem to have limited information regarding their authenticity. The scam was also a lesson to any people who may be contemplating engaging themselves in a Ponzi scheme.
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The prospect of being caught in the long run is very high to the level of certainty. The frustration that the scheme causes to its victims should also be enough to make people shy away from starting such an unethical scheme. A Ponzi scheme can thus be considered to be a license to die in police custody and it can be regarded as the most selfish financial activity ever. Bernard Madoff was thus very wrong in involving himself with this scheme knowing its implications. Although he apologized to the victims and was jailed for 150 years, all these cannot be equated to what he should have done; realizing the gravity of the scheme and avoiding it. From the experience of the Madoff scam, changes should be made in state bodies that do not perform their duties as expected. To be specific, the SEC should be equipped with highly trained and uncorrupt officials able to guard investors against investment disasters like Madoff’s Ponzi Scam. This way, such kind of malicious financial schemes will be detected before their effects become disastrous and thus investors will be safe.
Henriques, Diana. “Madoff is sentenced to 150 years for Ponzi Scheme.” The New York Times. 2009. Web.
Levisohn, Ben. “Madoff pleads guilty to Ponzi Scheme.” Business Week. 2009. Web.
Zambito, Thomas. “Feds say Bernard Madoff’s $ 50 billion Ponzi was worst ever”. New York Daily News. 2009. Web.