Bernard Madoff Case Study: Ponzi Scheme
Identification and discussion of company background
It was the year 1960, when Bernard Madoff founded, with an initial capital of U.S. $5,000, his own company: Bernard L. Madoff Investment Securities LLC, or short BMIS. First, the company was a pure brokerage business, which quoted bid and ask prices via the National Quotation Bureau’s Pink Sheets and executed, on the behalf of its clients, OTC transactions. BMIS was listed as a member of the Cinginnati Stock Exchange (CSE). BMIS focused on electronic trading and therefore Madoff spent over a quarter billion to upgrade the computer of CSE and transformed it into the first all-electronic computerized stock exchange. In 1980 Madoff discovered that the Rule 390 of the New York Stock Exchange
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history. For decades he ensured investors that they would receive returns between 12-13%, not only an unusually steady rate, but he also assured this rate in in every year, no matter if it was an up or down year. This should have been a big red flag for investors, as no other investment firm was able to match or even come close to such a performance. (Berman & Knight, 2009)But there are a few more choices of Bernard Madoff and his behavior, which should have questioned his credibility. A good example was the choice of a small accountancy firm to audit one of the largest investment firms on the Wall Street. Furthermore the audit firm claimed every year since 1993 to the American Institute of Certified Public Accountants that they didn’t conduct any audits. Also worth mentioning is that Madoff hired for the major key positions of control at BMIS his own family members. It is questionable if the position could be performed independent, when they all were family connected. Bernard Madoff’s behavior towards investors should also have been seen very skeptical. He was extremely secrecy, he never answered any questions about his business and his investment strategies. He even threatened those who ask too many questions. (Gregoriou & LHabitant, 2009)
The question is, why did people, despite all the red flags still invest into Madoff’s firm and trust their money to such an questioned
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