8Ed.sol1.12 - CASE 1.12 MADOFF SECURITIES Synopsis A...

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CASE 1.12 MADOFF SECURITIES Synopsis A childhood friend summed up the driving force in Bernie Madoff’s life: “Bernie wanted to be rich.” As a youngster growing up in New York City, Bernie realized that Wall Street was the greatest wealth creation machine the world had ever known. So, after graduating from college in 1960, he set his sights on joining the exclusive fraternity that ran Wall Street by organizing his own one-man brokerage firm, Madoff Securities. Madoff was one of the first individuals to recognize that computer technology provided the means to “democratize” Wall Street by establishing a system that made securities trading much more efficient and much cheaper. In the early 1970s, Madoff and several other individuals organized the NASDAQ exchange, which was destined to become the world’s largest electronic stock market. Years later, the NYSE would be forced to follow suit and switch to electronic securities trading. Literally millions of investors have benefitted from the lower transaction costs of electronic securities trading that were in large part a result of the pioneering efforts of Bernie Madoff. Unfortunately, Bernie Madoff will not be remembered as a pioneer of electronic securities trading. Instead, the word “Madoff” will always be associated with the phrase “Ponzi scheme.” Although his stock brokerage firm was extremely lucrative, Madoff eventually established a parallel business, investment advisory services. Over a period of several decades, Madoff became known as the “Wizard of Wall Street” for the incredibly consistent and impressive returns that he earned on the billions of dollars entrusted to him by investors. However, those returns and Madoff’s secretive investment strategy that produced them were fraudulent. This case documents the Madoff fraud with a particular focus on its implications for the nation’s financial reporting system. Many critics have insisted that the ineffectiveness of the SEC was a major factor that allowed Madoff to sustain his fraud for so long. Likewise, those critics insist that Madoff’s independent auditor played a major role in allowing the fraud to go unchecked for decades. Throughout most of its existence, Madoff Securities was audited by a small accounting firm with one professional accountant. That accountant, David Friehling, would become the second individual arrested by federal prosecutors investigating Madoff’s massive fraud. Friehling was charged with “flouting” the accounting profession’s auditor independence rules and with performing “sham audits” of Madoff Securities.
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87 Case 1.12 Madoff Securities Madoff Securities—Key Facts 1. The driving force in Bernie Madoff’s life was his desire to become wealthy. 2.
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This note was uploaded on 09/15/2011 for the course ACT 442 taught by Professor Nancy during the Spring '11 term at Ohio State.

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8Ed.sol1.12 - CASE 1.12 MADOFF SECURITIES Synopsis A...

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