One of the largest financial frauds in history came to an end in late 2008 when Bernard Madoff was arrested and charged with operating a major Ponzi scheme through his wealth management company. Madoff pleaded guilty to 11 counts of financial fraud and theft in March 2009 and three months later was sentenced to 150 years in prison. Madoff's fraud was thought to have cost clients more than $10 billion.

A Ponzi scheme is a fraud that lures investors with the promise of high returns, which are initially paid from investments made by subsequent clients rather than legitimate profits made from the initial investment. The success of these initial investments attracts future investors and, in many cases, reinvestment by the original investors. Because returns are based on the ability to attract future investors to the scheme rather than legitimate profits, the scheme may last only as long as the perpetrator can attract an increasing number of investors, all of whom wait longer than usual. returns.

A Ponzi scheme resembles a house of cards that is destined to collapse every time the flow of money into the scheme decreases. The perpetrator benefits either by disappearing with the money before the system collapses or, as in Madoff's case, by living a wealthy lifestyle by extracting money from the significant cash flow generated by the fraud. The size of Madoff's fraud was just one of the reasons this case attracted media attention. Madoff and his family were also prominent public figures (Madoff was a former chairman of the NASDAQ stock exchange) and known as very generous philanthropists. The fraud also involved his family; Madoff's wife, two children and brother were all involved in the case.

Many of his victims were also prominent people, many were personal friends and several charities lost a significant amount of money in the fraud. Another aspect of this case involved the role, many would say complete failure, of government regulators. Beginning in 1992, the Securities and

Exchange Commission (SEC) had received complaints and suggestions about Madoff's investments. In most cases, the SEC failed to investigate or followed through with a cursory investigation. A report issued by the SEC's own inspector general in September 2009 concluded: “Despite numerous credible and detailed reports

complaints, the SEC never adequately examined or investigated Madoff's transactions and never took the necessary, but basic, steps to determine whether Madoff was operating a Ponzi scheme.” As happened amid the financial collapse and recession of 2008-2009, this failure by government regulators was another reminder of the limitations of legal regulations in providing sufficient oversight over unethical business practices.

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Madoff apologized for his sentencing, telling the judge: “I am responsible for a great deal of suffering and pain. I understand that. I live in a tormented state now knowing of all the pain and suffering I have created. I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. That's something I'll live with for the rest of my life.

That's a horrible guilt to live with. There is nothing I can do that will make anyone feel better for the pain and suffering I caused them, but I will live with this pain, with this torment for the rest of my life. I apologize to my victims. I will turn around and face you. I'm sorry. I know that doesn't help you. Your Honor, thank you for listening to me.”

Questions:

1. Identify what ethical issues and issues are involved in the Madoff case.
2. Identify all the people you believe may have been harmed and how they were harmed by Madoff's fraud.
3. Do you think a scandal like this is the result primarily of unethical people, or are there organizational issues that allowed, encouraged, or were responsible for the damage? To what extent was this case primarily a failure of the individuals, the organizational structure, or the government?

4. Can you imagine anything that would have prevented Madoff's fraud?