CASE STUDY

Bernie Madoffs Ponzi scheme: Reliable Returns from a Trustworthy Financial Adviser
1. Should Mark Madoff have granted his fathers request for a one week delay before
notifying government authorities about his crime?
No, he shouldnt. Because it would take him into jail. Mark had done the right decision
because sooner or later of all this Ponzi scheme will appear although Mark had granted
his fathers request for a one week delay before notifying government authorities about
his crime.
2. Describe the chronological evolution of Bernie Madoffs Ponzi scheme!
Bernie madoff owned three very successful financial companies. But, he built them
dishonestly. At the beginning, Bernie, helped by Ruths father, established some
legitimacy by giving him office space in his midtown Manhattan accounting firm. Bernie
began this business by bought and sold penny stock and traded outside NYSE or AMEX.
Businesses borrow money from banks to this pay for expansion but bernies plan. Bernie
had a bank account with money flowing in and out from his illegal investment advisory
business. He used some of this money, without his clients permission, to avoid interest
payments. Bernie moved money between his Bank ofNew York brokerage bank account
and his Chase investment adviser bank accountas needed. Whenever he fell short of the
guaranteed 20 percent investment advisoryreturns, he made up the difference by taking
money out of his brokerage bank account.If he needed income to grow the brokerage
firm, he took money from theinvestment advisory bank account.
3. Why did sophisticated investors trust Bernie Madoff with their funds? Why didnt they
perform appropriate due diligence?
Bernie assured them by sold blue-chip stocks and claimed he invested client money using
a complicated three-part split strike conversion investment strategy. He told clients that
first he purchased common stock from a pool of 35 to 50 Standard & Poors 100 Index
companies whose performance paralleled overall market performance. The S&P 100
Index represents the 100 largest publicly traded companies based on market
capitalization, and represented a very sound investment. Second, he bought and sold
option contracts as a hedge to limit losses during sudden market downturns. Third, he left
the market and purchased U.S. Treasury Bills when the market was declining, and then
sold the U.S. Treasury Bills and reentered when themarket was rising.

4. Why didnt the SEC, which received several complaints about Bernie Madoff, uncover
the fraud?
- The SEC annually receives more than 10,000 complaints against brokers.
Theunderstaffed SEC assigned cases to investigators who had little experience with
Ponzi schemes. As a result, they focused on the more familiar front-running,which
-

Bernie was not doing.

The SEC had difficulty understanding the complexity of Bernies operations.Bernie

lied to them multiple times to keep them off track.

They gave Bernie the benefit of the doubt because he had an impressive trackrecord

with NASDAQ and had assisted the SEC on complex issues.

Bernie never requested the presence of a lawyer when speaking with SEC

agents,signaling that he had absolutely nothing to hide.

When questioned about his consistently high returns, Bernie explained he had
apersonal feel for market fluctuations, which is why he had been a

successfulinvestor for decades.

Markopolos unsuccessfully competed against Bernie, thus leaving himself

vulnerableto the sour grapes accusation.

SEC managers and Markopolos had an adversarial relationship.
The SEC believed Markopolos was primarily motivated by a desire for the

whistleblowingreward windfall.
5. Do you believe Mark and Andrew Madoff didnt know about their fathers Ponzi scheme
prior to their December 10, 2008 discussion at Bernie Madoffs apartment?
Yes, I do believe Mark and Andrew didnt know about their fathers Ponzi scheme. It is
because they, along with other family members and close friends, werealso heavily
invested in the fund. Besides, they looked forwatd to inheriting the company.
6. Should sophisticated investors whowithdrew millions from their Madoff accounts forfeit
the undeserved gains to people who lost the millions of dollars theyinvested?
Yes, I think they should. But in fact, its impossible for sophisticated investors to do like
that because they thought business is business andif you failed in a business, its your
own business.