The Bernard Lawrence “Bernie” Madoff Scam Case

Bernard Lawrence “Bernie” Madoff was involved in a massive investment scam case. He had been in business for many years, leading many to believe that the actual extent of the scam might not be fully known.

A. Types of Illegal Business Behavior of Madoff

Madoff’s business activity involved various illegal actions and unethical conduct. Three types of illegal business behavior alleged against Madoff were:

  1. Investment fraud in the form of a Ponzi scheme
  2. Money laundering
  3. Falsification of SEC filings
1. Investment Fraud

Investment fraud is a deceptive business behavior that can harm investors. In the case of Madoff, the investment fraud took the form of a Ponzi scheme, which deceived investors into thinking that their investments were earning when, in reality, the returns that they received were just part of the money coming from newer investors.

The result was a situation in which the investors were supported by other investors and not by the supposed business. This business behavior is illegal because it is deceptive in nature and is, by principle, stealing people’s money.

This business behavior is unethical in the conduct of business. In the utilitarian perspective, investment fraud is unethical because its end or ultimate consequence, i.e. the loss of billions of dollars at the expense of investors, does not provide any benefit to the investors. In the deontological perspective, it is unethical because it is stealing and is considered ethically wrong. In the communitarian perspective, the behavior is unethical because it does not support the needs of the community, i.e. the financial needs of the investors, and because it is against the individual rights of the investors. Therefore, Madoff’s investment fraud in the form of a Ponzi scheme was illegal and unethical.

2. Money Laundering

Money laundering is the practice of using illegally obtained money, where the money is used in legal transactions to make the money become “clean” or legally acceptable. In Madoff’s business behavior, money laundering occurred when he used money he got from investors. He used the money in transactions that changed the status of the money from illegal to legal, and turned the money into his personal profits. The practice is deceptive and illegal. Money laundering is illegal, as there are laws that prohibit it.

In the utilitarian perspective, money laundering is unethical because it does not benefit investors. In the deontological perspective, money laundering is unethical because it is wrong to acquire money illegally, and deceitfully use it to make it look legal. In the communitarian perspective, money laundering is unethical because it violates the rights of investors from whom the money is taken. These individuals have the right to be properly informed about the legality of the transactions they make, and the right to refuse to enter into any money laundering transaction. Thus, the money laundering activity of Madoff was illegal and unethical in the utilitarian, deontological and communitarian perspectives.

3. Falsification of SEC Filings

Falsification of SEC filings is the practice of creating false documents for business transactions. In Madoff’s business behavior, the falsification of SEC filings was committed to hide the truth behind Madoff’s supposed business transactions. This behavior is illegal because there are laws that prohibit the filing of false documents in government offices.

In the utilitarian perspective, falsification of SEC filings is unethical because it does not benefit the government and it does not benefit the people. In the deontological perspective, the business behavior is unethical because it is wrong to deceive the government into thinking that the documents filed are true, and because it is wrong and unacceptable to lie about the truthfulness of the documents or filings. In the communitarian perspective, this business behavior of Madoff is considered unethical because it violates the rights of the government to have accurate information about business transactions within its jurisdiction. The falsification of SEC filings is illegal and unethical in the utilitarian, deontological and communitarian perspectives.

B. Types of Parties Impacted by Madoff’s Actions

Three types of parties that were impacted by the actions of Madoff were the investors, the government, and the securities industry. These parties have interests that are different from each other. Such differences in interests serve as the basis for the differences in the way these parties were impacted by Madoff’s business actions.

The investors were interested mainly in gaining profits from their investments. They expected that their investments in Madoff’s company were in good hands and would give them considerable profits. Many of these investors were companies, as well as charitable institutions and other non-government organizations. The investors were impacted by Madoff’s business actions in terms of the loss of their investments because of the scandal. The investors lost money because of Madoff’s Ponzi scheme.

The government is interested mainly in ensuring that the market runs properly. In the case of Madoff, the government was interested in ensuring that Madoff’s firm was compliant with all the applicable rules and regulations, and that Madoff’s firm did not do anything illegal or harmful to the people or to the economy. The government was impacted in terms of the confidence of the people. Public trust and people’s confidence in the government partly declined as a result of the Madoff scandal.

The securities industry was also impacted by the Madoff scandal. The securities industry is mainly interested in gaining profits from investments. Because of the Madoff scandal, the security industry was shaken and suffered a decline in investor confidence. Madoff’s actions made people lose trust in securities companies.

C. Business Safeguards for Risk Management

Businesses can protect themselves against investment risks, such as the risks due to the Madoff scandal. Three business safeguards that may have prevented the harm caused by Madoff include the following:

  1. Diversification of investments
  2. Transparency in documentation and reporting
  3. Comprehensive regular monitoring by third parties

The diversification of investments is the practice of investing in various businesses and not just in a single business or industry. The goal of diversification is to ensure that the investments would not be subject to systemic risks. If an industry collapsed, the other investments placed in other industries would not suffer as much as the investment in the collapsed industry.

The transparency in documentation and reporting is an important practice that helps ensure that reports and documents are always accurate. It prevents unethical and illegal practices by individuals in the organization, especially high-ranking officials such as Madoff.

Comprehensive regular monitoring by third parties is the practice of allowing other companies or outsiders to evaluate the profitability and condition of the business. Through comprehensive regular monitoring by third parties, actions like those of Madoff could have been minimized or prevented.

D. How Private Investors might have Protected Themselves from Risk

Private investors were among the groups that suffered the most from Madoff’s business scam. Three ways that private investors might have better protected themselves from risk include:

  1. Diversification of investments
  2. Checking with government agencies about Madoff’s firm
  3. Monitoring actual progress and activities of Madoff’s firm

In diversification of investments, the aim of the private investor should be to ensure that investments do not suffer from a sudden decline of the business or industry. The investors could have invested in other companies, industries or economies to minimize exposure to the risks of Madoff’s business.

In checking with government agencies, private investors are responsible for ensuring that they are investing in legal business. This means that the private investors should have checked with the SEC and other government agencies about the truthfulness and reliability of Madoff’s firm before making their investments.

In monitoring of the actual progress of the firm, the private investors could have regularly checked on the performance of Madoff’s business. The investors have the right to know what they are investing in. The investors have the right to know what the company was actually doing to earn profits. In the Madoff scandal, the private investors should have asked for documents or other information about Madoff’s firm to ensure that they were investing in a legitimate business, so as to avoid getting involved in the scam.

E. Legal Actions against Madoff

Three legal actions that could be brought against Madoff include these cases:

  1. Investment fraud
  2. Embezzlement
  3. Falsification of documents

Investment fraud is illegal as any fraudulent activity is. It is illegal because it harms investors. Investment fraud charges could be brought against Madoff.

Embezzlement is the use of deceptive contracts or agreements to access victims’ money. What Madoff did was large-scale embezzlement. Madoff could face multiple counts of embezzlement as criminal charges.

In the falsification of public documents, Madoff’s business actions were illegal because there are laws that prohibit the filing of false documents in government offices. Madoff could be charged with falsification of documents. Madoff could also face various related charges that could put him and his business into a halt.

These charges represent only some of the various illegal and unethical business activities that Madoff did in the past decades prior to the discovery of his scam. His business activities involved illegalities, such as money laundering and embezzlement, along with problems with taxation. Such variety of illegal business activities means that Madoff could be subjected to various legal sanctions and penalties.

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