final paper accounting 2600.docx - The Bernie Madoff Scandal Bernie Madoff through his firm Bernard L Madoff Investment Securities conducted the largest

final paper accounting 2600.docx - The Bernie Madoff...

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The Bernie Madoff Scandal Bernie Madoff, through his firm Bernard L. Madoff Investment Securities, conducted the largest Ponzi scheme financial fraud in U.S. history. On March 12, 2009, when he plead guilty to 11 federal felonies including securities fraud, he was believed to have owed almost $65 billion to his stable of 4,800 clients. He received a 150-year sentence. The Madoff scandal is personally relevant to me because we lived in Greenwich, Connecticut until 2007. As such, we directly knew people who were affected by this scheme, including our realtor who lost several million dollars. A Ponzi scheme is “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors”. Investors believe that the operator of such a scheme is investing money on their behalf to generate a return on their investment. However, the operator never actually invests this money. He uses a portion to pay a return to previous investors so that they will be pleased with their investment. He doesn’t want them to ask for their principal to be returned. He’ll also spend a large portion of the remaining funds on himself. The ability to create and sustain a successful Ponzi scheme depends on at least three factors. First, the operator must have the ability to continually draw a massive amount of new investment. Because returns to previous investors are generated from funds deposited by new investors, this effort is crucial. Second, the operator needs to prevent investors from requesting withdrawal of a significant amount of their initial principal from the fund, because only a small portion of this initial investment remains in the operator’s possession. And finally, the operator must avoid detection and prosecution from either investors or regulators like the Securities and Exchange Commmission (SEC). Bernie Madoff was a master of managing these factors. Bernie began Bernard Madoff Investment Securities (BMIS) as a startup back in 1960, shortly after his graduation from Hofstra University. The firm was one of many “market-makers”, buying and selling stocks for clients and making a profit on the transaction. BMIS became an innovator in using innovative computer information, utilizing technology that eventually became the National Assocation of Securities Dealer’s Automated Quotations (NASDAQ). This is important, because a large part of Bernie’s success was his ability to portray himself as a key figure on Wall Street. Not only did his trading firm continue to grow and thrive, he was active in NASDAQ, eventually rising to serve as its Chairman for three successive years. He also served on the Board of SIFMA, the Securities Industry and Financial Markets Association, as well.
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  • Fall '14
  • Steven
  • Accounting, Ponzi scheme, Bernard Madoff, Madoff, Markopolos. Madoff

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