Managing Finance and Financial Decisions - Assignment

Managing Finance and Financial Decisions 1
MANAGING FINANCE AND FINANCIAL DECISIONS
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Managing Finance and Financial Decisions 2
The Fraudulent Scheme of Madoff
Bernie Madoff adopted the Ponzi scheme concept to lure investors into his company,
Bernard L. Madoff Investment Securities LLC (BLMIS), by promising an unusually high return
on their investments. Madoff acquired his clients’ assets, then transferred the money into his
accounts and mailed fictitious statements to his clients to hide his subterfuge (Rimkus 2017).
When Madoff’s clients withdraw their funds, he uses the capital obtained from new investors to
pay out the redemptions and the cycle continues. Arguing from a marketing standpoint as noted
by Arvelund (2009) and Campos (2009), Madoff sold his financial product to customers as in the
form of a hedge fund with promises of consistently good performance irrespective of the
prevailing market conditions. He used a business strategy that included both long and short
positions thereby making his claim to be plausible (Kirtzman 2010; Bernard and Boyle 2009).
The scheme also managed to operate for decades based on the fact that Madoff rarely met with
his investors and he did not divulge any form of information that regards the organization’s
business transactions. In this sense, he used split-strike conversion investment strategy (Pozza Jr,
Cox and Morad 2009).
Circumstance Surrounding the Eventual Exposure of the Scheme
The fear for the 2008 global financial crisis resulted in financial panic among most
investors, and this made most of Madoff’s investors to request for their redemptions. The
company received a high number of redemption requests amounting to $7 billion, and Madoff
could not successfully pay these redemptions as he could not bring in additional funds from new
investors.

Managing Finance and Financial Decisions 3
The Role of the SEC and Allegations against SEC, in The Case Of Madoff
The U.S Securities and Exchange Commission (SEC) carries out its operations in a three-
part mission; and these are protecting investors, maintaining a fair, orderly and efficient financial
market and also facilitating capital formation (US SEC 2009). From another article by Fishman
(2011), the author provides that one of the primary responsibilities of SEC is to ensure the
legality and transparency of business practices with regards to their accessibility to their
stockholders and the public. This organization, therefore, police how businesses conduct their
transactions and how they regulate themselves in the market; focussing primarily on the
irregularities in their stock transactions to expose any operation that is financially improper
according to market regulations (Poser 2008; Fisch 2009). In general, this organization was
created to protect consumers from corporate malfeasance and industrial greed.
With regards to Madoff’s fraud case, SEC is accused of negligence to take action on the
several initial warnings that were brought to its attention by both internal and external
individuals who detected illegal dealings at the company. The organization’s Chairman, Cox,
indicated that there were massive failures within the agency in investigating what is regarded as
one of the largest Ponzi schemes in America history (Chung 2008). One of the allegations
brought against SEC was the fact that the commission received numerous credible and specific
allegations against Madoff’s financial crimes from as early as 1999, but there was no
recommendation for action. This indicates a sense of negligence on the part of the commission
for failure to fully carry out their mandate. Also, the failure of the Agency to seek formal
authority to investigate Madoff’s company shows a failure on its part to use the subpoena power
to gather information on Madoff (Markopolos 2011). However, as indicated by SEC’s chairman,