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SAMPLE Assignment Madoff Ponzi Scheme 2010

Bernard Madoff ran the largest Ponzi scheme in history, defrauding investors of $170 billion over 17 years. A Ponzi scheme uses money from new investors to pay off earlier investors in order to perpetuate the fraud. Madoff primarily marketed a single investment strategy to wealthy Jewish communities where he was respected, claiming average returns of 10.5% even during market downturns. When redemptions outpaced new investments due to the 2008 financial crisis, Madoff turned himself in to the FBI and confessed to his massive fraud. He was subsequently arrested, tried, and sentenced to jail.

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180 views2 pages

SAMPLE Assignment Madoff Ponzi Scheme 2010

Bernard Madoff ran the largest Ponzi scheme in history, defrauding investors of $170 billion over 17 years. A Ponzi scheme uses money from new investors to pay off earlier investors in order to perpetuate the fraud. Madoff primarily marketed a single investment strategy to wealthy Jewish communities where he was respected, claiming average returns of 10.5% even during market downturns. When redemptions outpaced new investments due to the 2008 financial crisis, Madoff turned himself in to the FBI and confessed to his massive fraud. He was subsequently arrested, tried, and sentenced to jail.

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Madoff Ponzi Scheme 2010

Ponzi Scheme is the name often applied to any fraudulent financial scheme that uses
money from a steady stream of new investors to pay off old investors seeking to redeem their
investments. Since in the framework of this scheme, no assets are really purchased, but
dividends are paid out, the scheme will inevitably collapse whenever redemptions outstrip
new investments (Sarna, 2010,p.28).
A technical explanation of a Ponzi scheme is provided by Culp and Heaton,
(2010,p.92).According to Culp and Heaton (2010,p.92), in a Ponzi scheme, the promoter
solicits funds from customers for investments in some portfolio or strategy, but little or no
investing actually occurs. Redemption requests and distributions are financed by cash
received from new participants in the scheme.
Bernard L. Madoff, the president and the 75% owner of Bernard L. Madoff
Investment Securities confessed to the FBI and finally in open court that he had organized
what was arguably the longest-running and the most extensive Ponzi scheme in history run
by an individual, involving cash flowing through the accounts of USD170 billion (Sarna,
2010,p.147).
The following account from Culp and Heaton, (2010,p.92) recounts Madoff tangled
web of deceit to investors. According to Culp and Heaton, Madoff Ponzi scheme scandal is
the largest fraud done on investors by a single individual in history. In his Ponzi scheme
framework, Madoff primarily marketed a single investment strategy, known as 'split strike
conversion', in which he claimed to be purchasing blue-chip stocks in the S&P100 index and
simultaneously selling 'call options' and buying 'put options' on the S&P100 Index. A split
strike conversion strategy is essentially just a stock index arbitrage program and as such
should have relatively low risk and generate modest returns. However, for the 17 years during
which his Ponzi scheme went undetected, Madoff boasted average returns of nearly 10.5

percent per annum even at time when the stock market fell nearly 40 percent in November
2008.
As stated above, Ponzi scheme generally collapse when unexpected larger
redemptions occurs. If not for the credit crisis which originated from the 2008 subprime
crisis, Madoff might have been able to perpetuate his fraud more a couple more years. One of
the reason why Madoff's Ponzi scheme went undetected for so long was because it was an
'affinity fraud' which was aimed at the effluent Jewish community in New York and Palm
Beach, Florida. Within that community, Madoff was a respected figure and gained his
investors trust. Adding to his appeal was his practice of sometime turning away investors who
want to invest with him. Apart from that, the returns in Madoff's Ponzi scheme were
generally not so high as to be completely ridiculous on the face of it (Culp and Heaton,
2010,p.93).
Most of Madoff's money came from feeder funds that gathered investments from
customers and then used Madoff as either the investment manager or broker.Managers of
feeder funds earned high fees for providing fresh investors for Madoff (Peck,2011,p.5).In
2008, as the securities market began in downward spiral in 2008, investors redemptions
outstripped new funds. Madoff, sensing the impending collapse of his scheme turened
himself in to the federal Bureau of Investigation (FBI) (Peck,2011,p.5).
Thus when Madoff's ponzi scheme was uncovered. Madoff was held retrospectively
accountable for years of deceitful, exploitative, criminal behaviour. Consequences naturally
follow, Madoff's retrospective accountability involved arrest ,trial, testimony and jail
(Johnson,2011,p.69).

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