Financial Pyramids: Bernard Madoff Ponzi Scheme | Free Essay Example

Financial Pyramids: Bernard Madoff Ponzi Scheme

Words: 1365
Topic: Business & Economics
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In most cases, if it is about financial pyramids, unstable, and usually rather weak market economies are meant. At the same time, when financial relations were not yet typical for the population, and the majority of people started to master the capitalist principles of the market, the chances for fraudsters grew. Nevertheless, experience shows that even in countries with long-standing market traditions where people are closely connected with the business world, there are no substantial guarantees for the safety of monetary investments. It was demonstrated by the case of Bernard Madoff, who entered the economic history of America as the creator of the biggest financial pyramid. Over the years, this man managed to professionally hide his machinations, but in the end, the losses were enormous. Therefore, the success of a financial operation depends not on how much money investors have but how competently and safely they distribute their funds.

Summary of the Ethical Dilemma

Most people call Madoff a fraud. However, till 2008, this man had a reputation of a brilliant financier and specialist in the stock exchange. It is impossible to be an exchange or financial fraud for almost half a century without having a unique talent. Madoff’s financial career began in 1969, from the bottom of the Wall Street hierarchy (Mohammad and Saiful 122). Later, he founded his own brokerage company “Madoff Investment Securities.” He turned out to be a successful broker and soon was able to earn a fortune and became one of the founders of the NASDAQ stock exchange, which focused on shares of high-tech companies.

However, on December 11, 2008, there was a scandal in America because the head of the company Madoff Investment Securities, Bernard Madoff who was suspected of building a financial pyramid was arrested (Mohammad and Saiful 122). The case is often called the “Bernard Madoff Ponzi scheme” in honor of a famous Italian Charles Ponzi who created such a pyramid (Gibson 221). The company that belonged to Madoff was a successful and reliable corporation in America, and as an investment fund, it brought investors a high percentage of profits. The reason for this success was that Madoff had access to extensive flows of insider information from other companies.

When the financial market collapsed, Madoff Investment Securities had more than $12 billion at its disposal, and although there were some concerns from experts about Madoff’s zero-volatility, it did not stop a new flow of customers (Mohammad and Saiful 122). It was facilitated by the fact that inspections conducted by the Securities and Exchange Commission and auditors did not reveal the violations of the activities of the corporation. That is why the deception that unfolded shocked all investors and caused a great public response since not only an ethical but also a financial issue was involved.

Organization’s Reaction to the Dilemma

The organization that worked with the financial resources of the depositors was shocked that the fraud was revealed. The company that belonged to the fraudster worked quite normally, and most employees were unaware that their organization’s activities were illegal and swindling. Moreover, none of the participants in the whole chain realized that the schemes built by Madoff are entirely deceptive and useless for investors. Therefore, the reaction in the form of shock data was wholly justified, especially when the company experienced the arrest of its head and the publication of all the data.

Impact on the Major Stakeholders

Deceived investors were forced to apply to the courts to return their money. Nevertheless, as Madoff himself claimed, he did not have any funds to return them to all the depositors (West 49). The court ruled that for insurance, deceived participants of the pyramid were to receive 50% of the funds invested by them (West 50). However, these amounts were significantly lower than those used to build the financial pyramid, and that is why the Madoff case is called the largest economic scam in American history.

Most of the pyramid investors were representatives of large trading companies. According to Gibson, Madoff’s reputation as a financier was impeccable because he was one of the founders of the world’s most famous NASDAQ stock exchange that specialized in working with actively developing technology companies (223). Therefore, the depositors’ confidence was entirely justified. However, after disclosing all the secrets of the scheme deceived investors were left with nothing. Due to the actions of the court, they managed to return some of the lost money, but the substantial funds that they had invested in the activities of the pyramid disappeared. Similar cases happened in world history, but Bernard Madoff’s scheme is considered the biggest fraud experienced by the American trading market throughout the history of its existence.

Personal Opinion Concerning the Organization’s Response

Despite significant financial losses and the collapse of the whole company, the organization’s representatives behaved quite adequately. Perhaps, it is because, in addition to Madoff, no one knew that the basis of the activity was a fraud. As it is known, the financier did not even tell his family members about his secret, and only after he shared this news with his sons, they called the police and passed all the information to the authorities (West 50). The desire of deceived investors to return their money back was entirely justified. However, because the company did not have such funds, the organization’s representatives addressed investors with an explanation of the whole situation. Also, the case received a great public response; the trial involving Madoff was public, and everyone who wanted could learn about the features of the case and its consequences. Therefore, even despite substantial financial losses, the organization did not show panic and persistently suffered news regarding the collapse and bankruptcy.

Organization’s Alternative Responses

If the company that was under investigation had behaved differently, the outcome could have been more deplorable for it. For example, if Madoff’s organization representatives had refused all legal claims and had not admitted their guilt of embezzlement and fraud, the government would have surely obliged them to return everything and also tightened the punishment. Therefore, that outcome was utterly unacceptable for the organization.

Also, in response to a request for information on investors’ funds, the company could have refused and filed a counterclaim. However, such a case would almost certainly have been doomed to failure. Financial crimes, as it is known, are investigated carefully. The pyramid of Madoff lasted for thirteen years, and this period was enough for the deception to finally open (Baucus and Mitteness 39). The court would have undoubtedly satisfied the complaints of defrauded depositors, and the organization would have suffered even more because of the obstacles to the proceedings. Therefore, the decision to respond to the existing legislation was the most correct and logical.

Change of the Relationship Between the Organization and Its Stakeholders

After the incident, all the depositors, undoubtedly, completely lost confidence in the organization and stopped considering it as a potential source of profit. The desire of deceived investors was quite natural: they wanted to return the money wasted. Many of them invested large amounts of money in the pyramid, but to return it in full was impossible. In addition to individual investors, banks and large corporations were also among the range of stakeholders (Azim and Saiful 129). As a result, big enterprises in America and abroad suffered significant losses and had to compensate for the enormous losses, which, of course, entirely changed the attitude towards Madoff’s pyramid. Moreover, the experience gained as a result of this case became a warning for many other large organizations that are at risk of wasting money.

Conclusion

Thus, the success of any financial operation depends not on how much money investors have but how competently and safely they can distribute their funds to gain profits and mot to suffer expenses. Madoff’s case is the largest fraud in the history of the US financial market. The example of a famous pyramid is yet another confirmation that even a large and serious corporation can have fraudulent intentions and can try to deceive depositors. The reaction of Madoff’s organization to the charges was quite logical and natural. Any other measures taken by the company representatives could have aggravated the situation and caused even worse consequences.

Works Cited

Azim, Mohammad I., and Azam, Saiful. “Bernard Madoff’s’ Ponzi Scheme: Fraudulent Behaviour and the Role of Auditors.” Accountancy Business and the Public Interest, vol. 15, no. 1, 2016, pp. 122-137.

Baucus, Melissa S., and Cheryl R. Mitteness. “Crowdfrauding: Avoiding Ponzi Entrepreneurs When Investing in New Ventures.” Business Horizons, vol. 59, no. 1, 2016, pp. 37-50.

Gibson, David R. “Ignorance at Risk: Interaction at the Epistemic Boundary of Bernard Madoff’s Ponzi Scheme.” Qualitative Sociology, vol. 39, no. 3, 2016, pp. 221-246.

West, Joel. “The Dialogues of Bernie Madoff’s Ponzi Fraud: An Exploration of the Discourses of Greed, Cliques, Peer Pressure, and Error.” International Journal of Semiotics and Visual Rhetoric (IJSVR), vol. 1, no. 1, 2017, pp. 47-55.