Madoff's Ponzi Scheme: Unraveling the Largest Fraud in History

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Ponzi schemes are categorically extreme cases of unethical practices in business. Charles
Ponzi who was a Ponzi schemer in 1920 gave his catchy name to this fraud. Ponzi schemes are
characteristic of investment frauds that attract investors by promising large profits with little
risks involved. The income generated is converted to cash out original or existing investors in the
name of profit from legitimate transactions (Cross, 2018). Most Ponzi schemes operate under the
radar of hoodwinking ordinary people. The schemes themselves have an illusion of complexity at
first blush and that is purportedly an essential part of what constitutes the fraud.
Bernie Madoff's Ponzi scheme that was unknotted in 2008 is said to be the largest in
history. This scheme was a multi-billion dollar ($65) fraud in an alleged duration of 17 years that
ostensibly could be longer. Madoff had blackmailed his new investors that his company would
generate large steady returns via a strategy of investment called "split-strike conversion". He,
however, only deposited funds from clients into a single bank account that was in turn used fund
redemptions existing clients until 2008 when the market became sharply low. Madoff was so
exceptionally talented that among his victims were astute managers of family trusts, seasoned
investment professionals, to include other hedge funds- feeder funds, all of whom had different
levels of financial sophistication (Cross, 2018).
This essay will perform an analysis on the on the Ponzi scheme by Madoff in order to get
an understanding of what might have influenced such conduct and how ethical decision making
can apply in the scenario to include any resolutions applicable especially the role of an auditor in
preventing and controlling fraud.
11 years ago, Bernie Madoff was sent to prison for 150 years out of his unethical
behavior of running the largest falsified scheme in the history of the United States (Cross, 2018).
There are a few of those who became victims who have received full compensation for losses
accrued. Madoff is a well- versed, successful and respected active financier in the financial
industry was influential enough to convince thousands of investors to hand over their savings via
false promises of steady profits in returns. He is was accused of conning $65 billion off his
clients using the Ponzi scheme (Gandel, 2008). This scheme has been known to lure investors by
promising high returns founded on the 50 % returns fraudulent promise by Charles Ponzi in 90
investments day. The case with Madoff went out of hand when his clients demanded a total of $7
billion back in returns but it turned that Bernie only had $200-$300 million to give. What
actually contributed to the belief people had on Madoff was based on the fact that he was an

MADOFF’S PONZI SCHEME 3
investment advisor, a former stockbroker and among the founding members of the NASDAQ
stock exchange. BY virtues of this reason, Madoff could have been so knowledgeable on how to
make the system work for decades without being noticed not even by the SEC until Madoff
himself handed himself to the FBI and pleaded guilty (Rockefeller, 2016).
Madoff would pay the old investors a certain fixed percentage using money from new
investors. He knew the system so well plus the fact that the rate of return not being staggeringly
high, he could sustain his fraudulent game on and on. The Ponzi scheme collapses once the
investors call their money back, when no more new investors can be found, or when there are so
many current investors pulling out and requesting for their returns. This actually happened with
Madoff as he could not sustain the $7 billion demand by his investors (Rockefeller, 2016). How
the Madoff’s scheme avoided the SEC scrutiny still baffles some people and how that the case
was not noticed until unveiled by Madoff himself could be related to the fact that he was a
member of the National Association of Securities Dealers Board and was a holder of an advisory
role in Securities and Exchange Commission on numerous trading subjects (Forbes. com, 2009)..
From the above case there are certain ethical lenses that can apply or should have applied; Rights
and responsibility lens, the results lens, and the relationship lens.
Three ethical theories can apply to Madoff's Ponzi scheme. These are; the character of the
person or company, the consequences of that particular conduct and the principles or rather
standards of conduct guiding behavior (Harris, Parmar, Wicks, 2015).
To start with, the lens on ethics highlights the responsibility of managers in
understanding and respecting the principles of conduct in their places of business (Laasch, &
Conaway, 2014). These standards of conducts are the determinants of what is morally
appropriate and inappropriate action and articulate the moral values that guide communities such
as the firm, local communities, and the business industry not excluding the national and
international scales of business. The rights/responsibility lens applies here in that it values
respect and the benefit of the work to others as the Kantian theory proponent Immanuel Kant put
it (Business Through an Ethical Lens | BizEd Magazine, 2013). It is with no doubt that the
actions of Madoff were done knowingly and with fraudulent intent. Madoff most definitely knew
that a Ponzi scheme is a grievous financial crime that attracts many counts of crime (11 in
Madoff’s Case) and a very harsh punishment (150 years- which is an indirect life sentence as no
man can live that long today). It would have been for his own best interests had Madoff acted