Madoff Investment Scandal: Finance Case Study at [University Name]

This case study analyzes the Madoff Investment Scandal, the largest Ponzi scheme in history, orchestrated by Bernard L. Madoff. It examines the fraudulent activities of Madoff Investment Securities LLC, detailing how Madoff manipulated the market and misled investors for years. The paper explores the company's rise, Madoff's role within the financial industry, and the eventual exposure of the scheme in 2008. It discusses the impact on various stakeholders, including clients, employees, and the financial system, and the legal repercussions Madoff faced. The study also highlights the use of misleading information, the role of whistleblowers, and the factors that contributed to the scheme's longevity, offering insights into corporate fraud and financial misconduct.

Running head: MADOFF INVESTMENT SCANDAL
Madoff Investment Scandal
Student’s name:
University:
Author’s note:

1
MADOFF INVESTMENT SCANDAL
Corporate fraud is an unethical tendency that affects all the stakeholders, including
employees, shareholders and customers of a company. It can be best described as an
intentional misrepresentation of the financial condition of a company or simply as activities
undertaken by the management that mislead the people to increase the profit (Soltani, 2014).
The history of corporate fraud dates back to a shocking timeline of 15th century. Since the
dawn of industrial revolution, organizations have adopted unfair means to deceive the people
associated with them for their own interest (Wells, 2017). However, corporate frauds have
affected public and organizations alike. Some organizations have resurfaced after surviving a
scandal, while some of them have collapsed and were compelled to declare bankruptcy. One
of such widely known corporate scandals, called out for ‘cooking up numbers’, is Madoff
investment scandal. It is known as the biggest Ponzi scheme of the world, mishandling
several billions of dollars.
Madoff Investment Securities LLC was a famous investment company that dealt with
stock and securities. Based in the USA, Madoff Investment Securities LLC was founded by
Bernard L. Madoff, the former chairman of NASDAQ. Bernie Madoff started his company in
1960, at an early age of 22. Initially, he used to trade penny stocks with $500 as per the
market price of 1960s. Gradually, the business started expanding with the help from his
father-in law (Ragothaman, 2014).
Started out as a small investment management firm, Madoff Investment Securities
LLC grew to be a giant of the American stock market. The main reason behind the rise was
the innovative information and communication technology (ICT) used by the company to
disseminate competitor organizations’ quotes. Moreover, the technology that the firm used
eventually became the famous NASDAQ shortly after a trial run. This particular feature of
then firm asserts the amount of authority and significance Madoff Investment Securities had

2
MADOFF INVESTMENT SCANDAL
over the market. At a certain point, the firm was declared as the biggest buying and selling
‘market maker’ at the NASDAQ. (Wilson, 2019)
Bernie Madoff himself gained importance and power as well. He was an active
member of National Association of securities Dealers (NASD) which was a self-regulatory
organization of the security industry. He was appointed as the chairman of the board of
directors. Also he was a member of the board of governors. (Ragothaman, 2014).
The fraud surfaced in 2008, although federal officers and investigators suspected that
the fraudulent scheme was going on since 1970. Madoff’s purported strategy towards the
fraud involved his tricky sales pitch that used a split-strike conversion, otherwise known as a
collar (Alagoa, 2015). Later Madoff confessed that the wealth management unit of his firm
was nothing but an elaborated Ponzi scheme. He used misleading information to report to the
stockholders about the company’s profit and deposited the entire amount in the Chase
Manhattan Bank. Whenever clients wanted to cash out, the firm paid them back with the
newly acquired capital. This fraudulent strategy made the stakeholders believe in the
credibility of the company. Due to this image, the firm was never investigated in spite of
repeated whistleblowing by Harry Marcopolos, the financial analyst and portfolio manager of
Rampart Management (Stolowy et al., 2014). He informed the SEC as he realized that Madoff’s
number did not add up to his claim. He further remarked that it was mathematically
impossible to replicate the system using the reported strategies Madoff has claimed to use
(Douady, Abdulali & Adlerberg, 2013).
Nevertheless, Madoff could not hold up the disguise for long. The flow of cash
redemption hit the firm as a result of the 2008 general market downturn. Markopolos asserted
that Madoff tried to keep the firm from going insolvent by drawing $342 million from his
broker-dealer’s credit line. However, as the cash redemption trend grew, the numbers did not

3
MADOFF INVESTMENT SCANDAL
match and the firm required more money to pay the stockholders back. At this juncture,
Madoff confessed the whole situation to his sons, who immediately reported to federal
agency against him. (Wilson, 2019)
Bernie Madoff was arrested on December 11, 2008. Upon investigations and court
hearings, he was sentenced to 150 years of federal prison on the grounds of 11 federal crimes
including securities fraud, wire fraud, perjury and money laundering, as well as theft from
employee benefit scheme. The investigations estimated a $65 billion fraud conducted by the
firm, thus declaring it as the biggest money laundering in history.
The collapse of Madoff Investment Securities had not only affected the management
and the owners. It did cause a great stress to the clients, whose assets were misappropriated.
These clients included banks, hedge funds, universities, charitable organizations etc., along
with notable wealthy individuals (Williams, 2017). The employees nevertheless was deeply
impacted as well. Thus, the biggest Ponzi scheme and corporate fraud shook the history for
its amount of deceitful assert misappropriation and the magnitude of people and business
affected by its collapse.

4
MADOFF INVESTMENT SCANDAL
References
Alagoa, H. (2015). Assessment of the Effects of Task and Environment Variables on JDM
quality in an Accounting Scandal. Available at SSRN 2661217.
Douady, R., Abdulali, A., & Adlerberg, I. (2013). The Madoff case: Quantitative bests
qualitative.
Ragothaman, S. C. (2014). The Madoff debacle: what are the lessons?. Issues in Accounting
Education Teaching Notes, 29(1), 94-109.
Soltani, B. (2014). The anatomy of corporate fraud: A comparative analysis of high profile
American and European corporate scandals. Journal of business ethics, 120(2), 251-
274.
Stolowy, H., Messner, M., Jeanjean, T., & Richard Baker, C. (2014). The construction of a
trustworthy investment opportunity: Insights from the Madoff fraud. Contemporary
Accounting Research, 31(2), 354-397.
Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection. John Wiley &
Sons.
Williams, D. C. (2017). A TIMELINE AND FRAUD TRIANGLE ANALYSIS OF THE
SEC'S MADOFF PONZI SCHEME INVESTIGATION. International Journal of
Business & Public Administration, 14(1).
Wilson, L. (2019). Madoff’s dirty money. Journal of Money Laundering Control.