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White Collar Crime – Madoff Affair

Introduction

White collar fraud is best depicted in the activities of Bernard Madoff who ran an elaborate Ponzi scheme that swindled billions of dollars from unsuspecting investors. In the disguise of a stock brokerage firm, Madoff lured wealthy investors to his cage and robbed them off their billions leaving no trail of suspicion and had it not been for the global financial meltdown, Madoff would still be conducting his business to this date. This elaborate scheme was partly due to Madoff’s many years experience with the stock market and so he knew how to play, but more importantly, it was due to the many loopholes in the regulatory framework. Madoff exploited these loopholes to run his illegal activities.

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Legal enforcements of guardianship that should have prevented the fraud

In its endeavor to protect investors from rogue investment companies and brokerage firms, guardianship has a set of law enforcement processes that if followed to the latter can prevent fraud from taking place. In the U.S the law enforcement framework for brokerage firms is vested in the Security and Exchange Commission which together with other firms carries out the filing of all the audit reports of all firms that are involved in brokerage activities. The actual audit is performed by certified accountants who are licensed to carry out the auditing. The functions of the certified accountants generally involves the following: Performs legitimate audit to ascertain the brokerage firm’s financial base before issuance of a license; Audits financial statements to generally accepted auditing standards; conducts routine audits to ascertain that the company’s financial base is stable before renewing of the license and sends a copy of the audit report to the Security Exchange Commission for the purpose record keeping.

The audit should be carried out in accordance to generally accepted accounting principles (“Victims of the fall of Madoff,” 2008, para. 7).

In the case of Bernard L Madoff investment securities limited these guidelines were not strictly adhered to and this flaws were exploited by Madoff to defraud investors (Pennington, 1993, p. 43). If these guidelines could have been followed Madoff’s intentions could have been unraveled early enough to prevent this white collar fraud. Many investors who had invested through Madoff’s investment securities were aware that Madoff’s firm dealt with both investment management and brokerage services. This arrangement is likely to be abused and they knew that but somehow there confidence in Madoff was due to the constant assurance by the U.S Security and Exchange commission who claimed to undertake routine audit of Bernard L Madoff investment securities limited. Allowing Madoff to provide this two services contributed to the fraud, letting him choose between brokerage and investment management could have prevented the fraud. The certified accountants assigned to audit Madoff’s investment company should have been aware of his other offices on the seventeenth floor of the lipstick building, rather than concentrating on the eighteenth and nineteenth floors only. This could have led them to discover the suspect activities that were being carried out on that floor and subsequent prevention or stopping of the fraud. Enforcement of certain other rules could also have prevented the fraud for instance, the rule that requires employees of a brokerage firm to keep their mails in the hard drive of the computers they are using was violated and may this could have raised some suspicion in them. In spite of technological advances, Madoff insisted on using an old computer which he manually fed with information on the share prices. He would doctor the information and send it to the investors. Appropriate legal provisions for tempering with information were not followed and certified accountants should have known the reason behind Madoff’s use of the old Computer.

How the guardianship failed

The regulatory framework that was required to check into the activities of Madoff and detect any fraud failed to achieve this due to various reasons. The officials of the U.S Securities Exchange Corporation (SEC) failed to investigate Madoff in the face of glaring evidence that was presented by whistle blowers. There were many reports to the SEC that Madoff may be conducting illegal business but the SEC never took the matter seriously. Thus in this case the guardianship was failed by negligence of the officials to take proper steps and investigate the allegations that were being labeled against Madoff (“Victims of the fall of Madoff,” 2008, para. 7).

The certified public accountants that were required to conduct an audit of Madoff’s investment company failed to think of the possibility of a ponzi scheme and thus failed to investigate towards that line. This failure to perform a conclusive audit on Bernard L Madoff investment securities limited led to the escalation of Madoff’s schemes, casting his net wider. The certified public accountants failed to verify his trade with the Depository trust corporation which could have helped them to discover the fake account Madoff held on behalf of his investors. In addition to this there are allegations of complicity by the certified public accountants, which claims that they purposely gave Madoff’s company a clean bill of health without carrying out proper audit.

The guardianship was let down by Madoff’s investors who never made any follow up to ascertain the transactions Madoff claimed to do on their behalf. It’s this reluctance that enabled Madoff to still from them for so long without raising any suspicion. Confirming the transactions could have led to the early discovery of the activities and subsequent investigation by the Securities exchange Commission. Bernard Madoff had two companies, a legitimate brokerage firm and a fraudulent hedge fund. Investors seeking to trade with his company had accounts opened for them in the fraudulent hedge fund wing rather than the legitimate brokerage firm. Given the secretive dealings that took place in this company the investors and the regulatory bodies could not establish that something was going wrong somewhere. It is a requirement by the U.S Securities exchange commission that every employee of a brokerage firm must have a use the hard drive of the computer he or she is using to store emails. Yet Madoff asked his employs to print them out and delete from the hard drive. This in itself should have raised suspicion among the employees and subsequent reporting of the matter to the SEC whose requirements had been violated. The fact that Madoff had other offices on the seventeenth floor of the lipstick building and that this escaped notice of both the certified accountants and the Security Exchange Commission, it is in this offices that Madoff designed all the fake transaction he claimed to have done on behalf of his investors. For all the years that Madoff stole from his investors these lower offices remained mysterious to his employees in the eighteenth and nineteenth floors. Although some employees curious about the activities the matter never reached the SEC and even it did, no appropriate measures were taken to investigate the claims. It’s unlikely that all the investors in the Madoff’s Brokerage firm were contended by the statements that Madoff kept sending to them. Some have agreed that at times there were errors on prices of the Stock Madoff had bought for them. Simple clarification of these mistakes could have led to the discovery of Madoff’s fraud and hence stopping it at the earliest opportunity.

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Several financial institutions both in the U.S and Europe provided feeder funds to Madoff’s investment company. This created confidence to the SEC and other regulatory bodies that Madoff was conducting the right business and therefore they failed to take the appropriate steps to ascertain this.

How the illegal actions could have been prevented

There are many illegal activities that were done by Madoff and his accomplices to defraud the investors. Many of these activities however, could have been stopped had the appropriate authorities carried out investigations. Financial analyst Harry Markopolos had on several occasions informed the U.S Securities and Exchange Commission of the mathematical viability of the gains Madoff claimed to make. His claims were ignored by; the Boston Securities and exchange commission twice in 2000 and 2001, and also by the Cheung at the New York SEC in 2005 and 2007 when he offered more evidence on the allegations. The entire fraud could have been stopped had the Securities and Exchange Commission taken a step to investigate Markopolos’s claims. Another illegal activity that went on unnoticed was the services offered by the certified accountant who was supposed to audit Madoff’s investment company. The company owned by David G Frieghling was a suspect as it had not fulfilled some requirements. The firm was supposed to have been registered by the Public Company Accounting Oversight Board (PCAOB), a private sector non profit Corporation which was created by the U.S federal law to oversee the activities of auditors of public firms so as to prevent fraud. The company owned by Frieghling was not registered by the PCAOB and therefore it was not appropriate for it to carry out accounting activities therefore it’s accounting services to Madoff’s firm were illegal. Had the PCAOB taken appropriate measures to investigate the Frieghling’s company they could have discovered the fake audits performed by Frieghling. It was also a requirement that certified accounting companies involve in peer reviews for the purpose of quality control. Freighilng’s company was a member of a peer group but never had any peer reviews claiming that he had not conducted auditing services for thirteen years. Had this been investigated it could have led to the confirmation that he offered such services to Madoff.

Appropriate sanctions for white collar crimes

The victims of Madoff’s fraud were the investors who had entrusted him with their money to conduct business on their behalf, after discovering that Madoff had actually defrauded them off their money, most of the investors underwent untold agony. The worst aftermath of these of this revelation happened when an investor who had invested a lot of money with Madoff committed suicide. Many of the firms were forced to shut; an Example is a Jewish charity organization that had invested all its proceedings with the Madoff investment Company, it was forced to close shop after failing to meet its financial obligations. Several other businesses were shut and many families lost their source of livelihood.

In view of the above events that unfolded as a result of Madoff’s conduct measures should be taken to create appropriate sanctions for white collar crimes such as these one. The Madoff scam involved 65 billion Dollars far much than the maximum amount the law had legal recommendations for the action to be taken.

For proper sanctions, the first thing to be identified is extend of the damage caused to the victim’s life. After this, investigations should be conducted to determine all those involved in the fraud. Complicity by certified accounting firms, financial institutions and regulatory bodies should be investigated for effective sanctioning. This should be followed by prosecution of those involved with the administration of proper sentences to deter others from getting involved in white-collar crimes. Depending on the extent of the fraud case, withdrawal of the licenses of the involved companies can be undertaken. In addition, the owner of the firm should be compelled to pay the victims, and should complicity by financial institutions and regulatory bodies be established, then the persons involved should be prosecuted. In case the mastermind has no money to pay the victims his accomplices should be compelled to pa, because justice should seem to be done for the victims.

Conclusion

Bernard L Madoff was recorded in the history books one of the biggest name in the History of fraud, having embezzled money from his investors amounting to 65 billion dollars. It’s clear that Madoff could not have accomplished this by himself, was it a classical case of white collar fraud? or did someone else aid him to accomplish the fraud? Several more questions arise on who might have facilitated these activities. The regulatory bodies assigned the duty to oversee the activities of investment firms have received a fare share of the blame. Evidence has come up that the certified public accountant never did his job as far as Madoff investments were concerned. The investors are also partly to blame for they entrusted Madoff to carry out all the purchasing activities without seeking clarification even when mistakes were glaring.

The SEC failed in its duties by failing to investigate the claims that were labeled against Madoff by the whistle blower and which later turned out to be true. The feeder companies are also partly to blame for they enhanced investor confidence in Madoff and also contributed to Sec’s laxity in investigating the claims that were labeled against Madoff.

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It’s regrettable that the biggest casualties of Madoff’s activities were the investors. They had entrusted their money to him to conduct business on their behalf only to loose to it. With no recovery of the money in sight for these investors and pain caused due to the loss of livelihood by many of them, measures should be put in place to prevent a similar occurrence in the future

References

Pennington, K. (1993). The Prince and the Law, 1200–1600: Sovereignty and Rights in the Western Legal Tradition, California: University of California Press

Victims of the fall of Madoff: Banking and Finance: Business (2008). Times Online.

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