The Illegal Activities of Bernard Lawrence

Mr. Madoff began his firm in the 1960’s with a capital base of $ 5000, which he had acquired as a lifeguard and sprinkler. His firm commenced business as a penny stock trader and it later grew to be the largest trading company at the NASDAQ. He continued to get positive publicity from the media, which frequently termed him as “the master of the off exchange” in the securities market. Being a smart man, he employed mostly his family members as staff, who also invested in the fraud unknowingly. Madoff’s company is suspected to have started its illegal practice during the early 1990’s, for which it covered most of the volumes of stock New York Stock Exchange. He was, however, arrested in 2008 after his company failed to realize a stock deal of up to $7 Billion to its clients (Creswell, 2009).

Three Types of Illegal Business Behavior Alleged against Mr.Madoff

The first illegal business behavior Mr. Madoff was engaged in is his activities in the Ponzi scheme. Just like any other securities fraud, a Ponzi scheme is itself an investment based kind of fraud which involves the direct payment of supposed returns to the old investors using money that is primarily invested by unsuspecting new investors with the company. In this kind of scheme, the returns offered to these old investors are usually highly valued as compared to the values that are reflecting in the market floor. This manner in which the business dealings are carried out is considered unethical, since, basically, investors are completely lied to as their trust is used by a selfish individual who runs a business which is operating to exploit the unsuspecting new investors.

The second illegal and unethical business behavior is presented when Madoff’s company was used to advise potential investors on how to manage personal investments and went ahead to make investments for these unsuspecting individuals who never knew that the company had its own interests at heart. This kind of marauding business dealing is referred to as an investment advisor fraud. This type of fraud was presented in Madoff’s company in a vague investment plan which was based on split brokerage dealing.

The third illegal behavior which was conducted by Madoff’s company was presented when he failed to invest the money he received from the investors to the stock market but rather opted to boost his own business empire, which had no funds at all and actually made it look more successful than it was. This kind of behavior was considered unethical out of the fact that he used the lie in order to maintain the position he ferociously defended: “the master of off-market exchange”.

Three Parties Impacted by Madoff’s Actions

They included: (I) Hedgy funds invested by charitable foundations: an example is “The Innocence Project” which was owned by a couple, Ken and Jeanne. The foundation, which was later shut, lost an approximate of $244 million, including money which was lost from a foundation started by the parents of one of the couple. Another foundation, which was a victim of the fraud, was “The Picower Foundation”. The foundation which dealt in human rights in Massachusetts lost an approximate of $1 billion with Madoff’s company. (II) Banks; example of banks which were impacted by the actions of Madoff, which are: (a) Bank Medici, which is an Austrian based bank, lost an approximate of $ 2.1 billion through its Herald USA Fund and Herald Luxemburg Fund; the bank that lost its operating license in Austria is being investigated together with its founder, Sonja Kohn; (b) Westport National Bank, which acted in the capacity of a custodian of about 240 clients, lost a total of $ 10 million to Madoff’s fraudulent activity. (III) Wealthy individuals who included among others: (a) Notz Stucki, who lost about $ 103.2 million worth of client’s money; (b) William Fox Ton, a British soldier who lost all of his family savings through the fraudulent Herald USA Fund (Randall, 2008).

Three Business Safeguards (Risk Management) that May Have Prevented Harm Caused:

(I) Insurance, the investors should have thought of insuring their investments with a genuine insurance firm in order to protect their investments not only from the forthcoming fraud but also in cases of losses altogether. Insurance firms have products which are customized to different clients on matters pertaining investments.

(II) Assurances, so that incase of losses in life savings the money would have been easily recovered using assurance plans offered in the market.

(III) A demand of the auditing of the financial statements of the firm should have been used to forecast the real worth of the company and therefore prevent further losses.

Three Ways in Which Private Investors Might Have Protected Themselves from the Risk:

(I) They should have opted to seek the counsel of independent legal investment professionals presenting them with the mandate to privately oversee the activities of the firm so that in case of any kind of investment suspicion, they would in turn be warned.

(II) I believe that when the red flag was raised in 1992 about the fraudulent activities which were at that time being conducted in a rather secretive manner, the private investors should have taken the matter seriously and demand for a deeper investigation into the matter itself.

(III) The private investors should have also demanded to be included in the management of the company. Through this, they could have discovered the fraud long before its losses. The private investors did put all their trust in a man they hardly knew and thereby putting their confidence in a company that was operating under a lie. 

Three Legal Actions that May Be Brought against Mr. Madoff:

(I) A legal action involving Securities Fraud, which he participated in by paying old investors with new inventors’ money. He had confirmed that he had not traded in the stock exchange since 1990 and affirmed that he only used money received from the unsuspecting new clients to pay the old investors.

(II) He is also likely to face charges over which he purported to have used his company to defraud unsuspecting members of the public by lying to them that he had proficient investment skills which he could use to bring them more profits on their respective investments. All this was a lie altogether.

(III) Madoff is also facing charges which are concerned with the issuance of fraudulent financial statements, which he used in deceiving not only the clients but also the entire public with the aim of attracting even more unsuspecting investors.

All in all, Mr. Madoff has been reprimanded and has been sentenced to 150 years in prison (Weiner, 2005).