Madoff Investment Scandal

Madoff investment scandal

Deyu Sun

hhu214@cityuniversity.edu

City University of Seattle MBA535

Mark Hoover

Current Ethical Issues in Managerial Accounting Case Study

5/12/2016

Madoff investment scandal

Introduction

The Madoff investment scandal was happened in late 2008. It was the chief event of stock and securities deception all over the world. In 1960, Madoff established his company whose business is about sprinkler installer with $5000. At first, the company was trading through the National Quotation Bureau’s Pink Sheets (NQB). NQB is a company that collecting and pushing information of prices to stocks or bonds. With his business developing, his company started using computer information technology to extend his business. It was that technology that helped the the company form the National Association of Securities Dealers Automated Quotations (NASDAQ). At that time, the company was one of the largest buying and selling companies at NASDAQ. According to The Wall Street Journal, the company was the most profitable securities company (Freshman,2012). However, the company took a measure to cheat investors, which is Ponzi scheme. The Ponzi scheme is a deception that using a high return profits to appeal investors to pay a deceitful investment. Ultimately, Madoff was arrested on December 11, 2008.

Sales methods

        The common Ponzi scheme is that through offering high returns to attract almost all interested investors. However, Madoff’s methods are very dissimilar. First of all, since at that time, Madoff was the most remarkable person at Well Street, he only accepted the exclusive patrons instead of all comers. According to the New York Times, “Madoff courted many prominent Jewish executives and organizations” (Greenspan, 2009). As consequences, they trusted Madoff because he is Jewish. Then they followed Madoff, and desired to give him millions of dollars.

Even at that period, people considered that invested on Madoff’s companies were an honor, and could show his or her social status. Secondly, Madoff only offered steady returns instead of refunds. A typical Ponzi scheme often gives around 20% returns or higher, and collapse quickly. Conversely, Madoff usually approved returns around 10%, and consistent (Sternberg, 2009). Meanwhile, it was the key factor that he could maintain the fraud for a long time. An unnamed investors said, “The returns were just amazing and we trusted this guy for decades, if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned.” Thirdly, Madoff kept his business secretive. In other words, Madoff never met his client directly. Moreover, he also did not tell his investors what the company strategies are, and he rarely explained to why he decided to give them 10% returns. However, he would give back their returns on time. Therefore, some of Madoff investors were very cautious when they wanted to withdraw their money from Madoff’s fund because they were afraid of they could not go back later.