Fake Investor

Topics: Bernie Madoff

During the early 2000s, Bernie Madoff disguised himself as one of the most reliable and successful stock investors in the industry. For years, Madoff served in high-level positions in business and the stock industry, creating a name for himself. When people had the chance to invest with him, they would often jump on the opportunity because of his good reputation, and the reported returns he would bring his investors.

In reality, Madoff would take investors’ money and place it in a personal bank account.

Madoff determined that if he offered a 10-12% return rate for his investors he would attract the most people and thus the most money. Because he controlled the investors’ money in the bank account he could offer them just that (Company Man, 2018).

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Madoff kept a record of his investors, and how much he owed them. He would mail fake paper updates to his investors that reported the 10-12% returns he had promised (Nolte, n.d.). Because he had many people investing with him, he had the funds to give people the returns he had promised and could continue lying to them through the updates, as long as he continued to gain more investors.

Stocks went down in 2008 though, prompting investors to pull their money out of their investments all at once (Company Man, 2018). Instead of gaining more investors as he needed, Madoff lost investors due to the state of the market. Madoff gave investors their money back, but he quickly drained his bank account as a result (Company Man, 2018). Upon realization of his financial ruin, he reportedly told his sons about what he had been doing for many years (Company Man, 2018). His sons decided to turn their father in, which led to him being jailed.

Several conditions allowed Madoff to continue with this scheme for as long as he did. As mentioned above, Madoff had an incredible reputation in the financial business. He made promises and delivered on those promises, making people believe he knew what he was doing. People had little reason to be skeptical of, anything on the surface. Madoff seemed to be a respectable person and because he had such a big name in his business, people would be deterred from accusing him of anything.

An accountant named Harry Markopolos saw through the surface though and knew that Madoff’s investments could not be as consistently good as he reported them to be (Company Man, 2018). Markopolos informed the Securities and Exchange Commission (SEC) of his suspicions, however, they did not investigate (Company Man, 2018). Most likely the SEC fell into Madoff’s trap the same way his investors did. Too many people trusted him and invested with him, making it seem impossible that he could be deceiving them all.

Several actions could have been taken to prevent this scheme from continuing. The clearest course of action would be the opportunity the SEC had to investigate Madoff. Had they done that they would have uncovered his fraud and possibly prevented the level of damage done. Another solution would have been more security checks on investors like Madoff. More separation of duties would have helped. Because Madoff handled the money and created the fake mail updates himself, no one could monitor him. Had someone else been responsible for writing the mail updates he could have been found out sooner because they would have seen no investments being made. Whether this could have easily been done should be beside the point because it would be worth taking extra effort to ensure the integrity of investors.

Several regulations were in place at the time Madoff ran his scheme. Investors had to update their clients regularly and submit to spontaneous inspections from an auditor (Nolte, n.d.). Madoff followed both of these guidelines, however, he fabricated the updates and worked in cahoots with a CPA firm (Nolte, n.d.). A possible change to these guidelines would be that investors must submit to spontaneous inspections from auditors, however they are prohibited to be inspected by the same auditor for more than a set number of years. While Madoff had worked with one small CPA firm throughout his scheme, he would most likely not have been able to work with several firms over almost two decades.

Bernie Madoff’s Ponzi scheme shows why internal controls are such an essential aspect of the business world. Not only internal controls but regulations, in general, are put in place to maintain the integrity of businesses and those that run them. Many businesses have likely learned from the Madoff scheme on what to look out for and what to avoid doing, however, the public has likely learned from this as well. The financial business can be a dangerous place for people that know what they are doing and for those that do not. Madoff’s scheme serves as one example of many on why caution and investigation should always be present in the business world.

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Fake Investor. (2022, May 12). Retrieved from https://paperap.com/fake-investor/

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