BERNARD LAWRENCE BERNIE MADOFF GROUP 3, THURSDAY 9-11

1.0 PONZI SCHEME

Ponzi scheme is fraudulent investment that promises high rate of return but at little risk to

the investor. It also can be classified as scam investment or scheme. Ponzi scheme generates

their return, from acquiring new investor. Besides that, this scheme, its focus more on attracting

new investor as well as money. This is to make sure the fraudster able to make payment for the

older investor. This scheme need consistent flow of money from new investor to continue

operates. This scheme tends to collapse, when it‘s difficult to find out new investor or a large

number of investor want to cash out their investment.

Diagram of Ponzi scheme below shows how it actually works.

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For the 1st month, planner takes $200 from 2 new investors and for the 2nd month, planner is

required to find out $800 from 4 new investors, because $400 out of $800 is for planner‘s pocket.

Next for the 3rd month, planner is required to find out $1600 from 8 new investors, because $800

out of $800 is for planner‘s pocket. This process will be continuously until this scheme collapse.

It tend to collapse, when unable to attract new investors.

1.1 History of Ponzi Scheme

Charles Ponzi

These scheme is named after Charles Ponzi, who become famous for using this scheme in

early 1920. Charles Ponzi is not the founder of this Ponzi scheme, but he used this scheme as his

career in order to find out the faster way to make a lot of money. Charles Ponzi was born in Italy

and emigrate to Boston, United stated. The original scheme is basically about arbitraging

international reply coupons for postage stamps, but soon manipulated investors‘ money to

support payment to early investors and Ponzi‘s personal wealth. Arbitraging international reply

coupons for postage stamps is the process of buying international coupons in one nation and

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selling its immediately in another nation, inorder to make a profit from difference prices. This

coupon can be redeemable at the fixed rate, even the currency for every nation are changeable.

This coupon can be bought for the cheapest pries, in the nation with week economies or the

nation that face dropped for their currency and can be redeem in the nation that have strong

economies or stable in term their currency. This scheme it more focus on attracting new investor

by promised with high return on their investment, around 40% to 50% return will be paid back

within 90 days. Within a few month, Charles Ponzi able to collect a large amount of money and

huge number of investor, until he forced to hiring a employees to manage this investment.

Actually this scheme, there is no transaction involved, it‘s only paid the return for older investor

by using new investor fund.

1.2 Characteristics of Ponzi Scheme

According to the U.S Securities and Exchange Commission, they have list several

characteristics of Ponzi scheme. We can use it as a guide line, especially for new investor to

make sure that the investment companies that offer the investment services are really on the right

track. The characteristics are, when the investment are offered high investment return with a little

or no risk. As we know that, every investment made must involve a certain level of risk.

Generally, high returns typically involve high risk.

Second character is overly consistent returns. Generally, every investment is not

consistently positive. Sometimes it‘s tended to goes up and turns down base on market condition.

Be careful with the investment scheme that is continuously constant for the return and also

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always have positive return. New investors are required to have a knowledge related investment

also market condition.

Next is unregistered investment. Usually Ponzi scheme involve investment that not been

registered with regulatory bodies such as Securities and Exchange Commission (SEC), State

regulatory and others. Information about the registration is the most important part, because its

provide information to investor, such as operations, product and also management.

Fourth character is unlicensed seller. For the new investor, always make sure that

investment firm have legal title, licensed or registration, because federal and state securities law

required all investment firm to have legal licensed. The licensed is only for the firm but also for

person who operate it.

Besides that, others character is a complex strategies. Try to understand the flow of the

investment strategies before make any decision. Try to get complete information such as a

background of the company, formation of the company, and have clear information related the

strategies.

Next is an issue with paperwork. Black and white document is important. Read all

document related the scheme. Review all documents that relate an investment, especially in

writing, like investment prospectus and others.

Finally, usually Ponzi scheme, have difficulty in receiving payment. Be careful if we

faced some difficulties in chasing out our investment, it‘s must be something wrong some where.

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Usually the fraudster encourages investor to roll over the money and promised pay for the high

return.

1.3 Similar Schemes

1.3.1 Pyramid Scheme

Ponzi scheme is similar with the Pyramid scheme, because both scheme using new

investor‘s fund to pay the return for older investor. The differences between Ponzi and Pyramid

scheme is, for Ponzi Scheme, the mastermind or the planner will gather all the fund from new

investor and then distribute the fund. In other word, the new investor fund is paid to the planner.

But for the Pyramid scheme, it‘s allowing each investor to directly benefits (get the return)

depending on how many new investors invested.

Recruit

Recruit

Recruit

Diagram of Pyramid scheme below show how it actually works.

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New fund is paid to the next level upward in the Pyramid. Beside that, the planner or person at

the top does not directly access to all money in the system. To get the earning, the planner needs

to recruit other person, so that the planner will get the money. This Pyramid scheme requires the

recruiter to recruit another two others (new members). To

1.3.2 Matrix Scheme

Matrix scheme is one of the schemes that also classified as fraudulent or scam scheme.

The operation is similar to the Pyramid scheme. People will pay or invest certain amount of

money to be added in the waiting list. But its also have a little bit differences between them.

Matrix scheme is scheme that involved product for their investment. This scheme operate by

having a long queue waited line, where sometimes people will get small token or small product

for their money, but the interesting part for this scheme is where people that invest is more attract

on waiting for a large price to be received on the future.

Once a new investor signed for this scheme, his name will be added at the bottom of the

waiting list. This investor will move up the list when they have a new investor sign in for this

scheme. As many people join this scheme, so others name will move quickly to reach at the top

of the waiting line. Usually person on the top of waiting line will get the luxury price, and the

most popular is like car, house, and trips. The planner will make profit from the money paid by

the new investor, in others word, amount paid by new investor is far exceeding from the cost that

spend for person at the font. This scheme also needs continuous new investor to sign in, in order

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to make sure all the person in the waiting list move up to the next level. It tend to be collapse

when the planner unable to attract new investor.

Luxury price
Paid for
Worthless item Expensive
items

Waiting list

Diagram of Pyramid scheme below show how it actually works.

For example, the planner needs certain amount for the person at the front to receive their prize,

he required another new investor. After the people get the prize he will leave out from the

waiting list. For the new investor, they are required to buy an expensive items or product but

worthless items.

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2.0 BERNARD LAWRENCE ‘BERNIE’ MADOFF

Bernard Lawrence ―Bernie‖ Madoff, a graduate from Hofstra University, was 22 when he

started his firm, Bernard L. Madoff Investment Securities in 1960 with $5,000.

It began as a classic American success story, when in the early of 1980s; his firm,

Bernard L. Madoff Investment Securities manage to be one of the largest independent trading

operations in the securities industry. Madoff Securities opened at London office in 1983, and was

one of the first American companies to trade on the London Stock Exchange. During this time,

he is enjoying a spectacular rise on Wall Street when he was labelled as the market maker during

1989 because his firm handled more than 5 percent of the trading volume on the New York

Stock Exchange. In addition, Financial World magazine ranked him as the highest paid people in

the Wall Street, together with Michael Milken and George Soros. He was one of the founding

members of the NASDAQ, the electronic stock market operated by the National Association of

Securities Dealers and he emerged as one of the key leaders in that trading market, eventually

becoming Nonexecutive Chairman of the Board. His firm was one of the top five market makers

on Wall Street, and his estimated net worth grew to between $200 and $300 million. Madoff also

served as the Chairman of the Board of the Sy Syms School of Business at Yeshiva University,

as well as Treasurer of its Board of Trustees.

Another reason of his fame is he is one of the early innovators who believe that stocks

could be traded by people who actually never saw each other but connected through electronics.

To stand up in his belief, he spend USD 250,000 to upgrade the computer equipment at the

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Cincinnati Stock Exchange in the mid 1970s, where he began offering to buy and sell stocks that

were listed on the Big Board. The exchange, in effect, was transformed into the first all-

electronic computerized stock exchange. He also invested in his firm for the new electronic

trading technology which offers cheaper price to the brokerage firms in filling their stock orders.

This investment actually paid off when he got a large amount of business from big firms such as

A. G. Edwards & Sons, Charles Schwab & Company, Quick & Reilly and Fidelity Brokerage

Services. Madoff also pioneered a practice called payment for order flow. He would pay the big

players to send their customer orders to his firm instead of going through New York Exchange or

other regional exchanges. This practice was claimed as bribe by the floor traders at the traditional

exchange. In defence, Madoff said that payment for order flow could help in having greater

competition in the marketplace and could avoid near monopoly by the Big Board. SEC does not

prohibit this practice. He is in the peak of his life in the year 2000, when his firm was the largest

market maker on the Nasdaq electronic market, and he was a member of the Securities Industry

Association, now known as the Securities Industry and Financial Markets Association, Wall

Street‘s principal lobbying arm.

While he was climbing to the top, there were several suspicions on whether he is

involved in the ponzi scheme run by Frank Avellino and his partner, Michael Bienes. The

suspicions were raised because Mr. Avellino is the person who funnelled investors to Mr.

Madoff since 1960s. After the truth revealed, Mr. Avellino and Mr. Bienes need to close their

firms and after that there we no further inquiry on Mr. Madoff. However, some of Mr. Avellino;s

foundations invested their money with Mr. Madoff. These two connections could raise some

suspicions at that time but there were no actions from the Federal investigators.

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Bernard Madoff was implemented the ponzi scheme. This system or scheme usually

offers investors with high returns where other investments cannot guarantee it. He demonstrates

the ability of a Ponzi scheme to delude both individual and institutional investors as well as

securities authorities for long periods.

Mr. Harry Markopolos, a private fraud investigator from Boston, is the one who raising

red flags about Madoff‘s scheme. He‘s been trying to get SEC to investigate Madoff since 1999.

However, after a cursory investigation, the SEC decided that Madoff is free from fraud.

According to a investigation report produce by SEC, SEC actually receive six substantive

complaints and two articles about Madoff‘s investment operations published in 2001 between

1992 and Dcember 2008. These complaints and articles could help SEC investigate Madoff and

caught him before the confession. However, because of the inefficiency, Madoff didn‘t get

caught by the SEC but been caught because of his own confession.

The subprime mortgage happen in United Stated that led to the global financial crisis

impacted Madoff as well. During this financial crisis, investors taking out their money from

Madoff faster than Madoff get fresh cash. This financial crisis has led to the confession of

Madoff about his scheme during December 2008. He first confessed to his brother, Peter and to

his two sons, Andy and Mark, the next day. He told his sons that his business is just ―a big lie‖

and ―basically, giant ponzi scheme‖. He was arrested on December 11, 2008 when his sons turn

his father out to the authorities.

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Despite of his scheme, Madoff and his wife, Ruth, were very particular and care with

societies and also citizens. Through the Madoff Family Foundation, they supported theatres,

colleges and arts foundations. They also made significant donations to the Jewish charitable

organisations.

However when Bernard Madoff pleaded guilty to running the biggest Ponzi scheme in

history, he insisted he was the lone perpetrator, asserting that no one and not his family, not his

colleagues, not his friends are knew of the fraud.

It is very doubtful that the words ―high ethical standards‖ will ever again be linked to

Madoff. For even as his Ponzi scheme was unraveling, his ―high ethical standards‖ led him to try

and distribute his $200 to $300 million to family, friends, and employees—before the victims of

his crimes could attempt to recover some of their money. Madoff pleaded guilty in March to 11

counts of fraud, theft and money laundering. The potential sentence of 20 years in prison and a

$5 million fine does not seem equal to the pain caused by this man‘s immoral and evil actions.

Therefore he had been pressing for 150 years. It is too soon to conclude what the long term

effects of this scandal will have on our financial system. But it seems likely that the name

Bernard Madoff will go down in the history of ignominy with Michael Milken, Ivan Boesky,

Ken Lay, Bernie Ebbers, and Dennis Kazlowski as examples of the most disgraceful behavior in

the history of our financial markets.

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3.0 HOW MADOFF COMMIT FRAUD?

Bernard Madoff was conducted the fraud in many ways. In order for Madoff to conduct

fraud, he needs to have certain personality that could make people trust him. Madoff is said to be

a person that full of charisma. A source added, he is really good in giving first impression.

One of the reasons Madoff was able to perpetrate his fraud for so long was his preference

for marketing his investment business by word of mouth. It was private clubs, locker rooms, golf

courses and country clubs. His friends help him a lot in spreading the words throughout New

York. As an example, Mike Engler, one of Madoff‘s friend. He is the one responsible for

introducing the member of Oak Ridge Country Club to Madoff firm.

Next, Bernard Madoff conducted his fraud by never email an account statement, or

provides online account access, just the nice paper documents. That would have involved too

many people and a digital trail with computers and hard drives. By providing these paper

documents, he could easily fake all those transactions that he made. Bernard Madoff only

authorize certain people to print up monthly statements in the maids quarters of his apartment on

the Upper East Side. They also had a copy machine on yacht, and another one at his home in

South Hampton, New York. It shows that he has good control on who are the people that could

access his documents, if not; his scam could be easily be reveal by a whistle-blower.

Besides that, Bernard Madoff has build good relationship with several fund Managers.

This is easy for him to get more potential investors by making fund Manager as an intermediary.

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Fund Manager will take money from investor and will allocate the money to the Bernard Madoff

because for fund Manager‘s perception, Bernard Madoff security investment is a good

investment place. He sometimes used his 55- foot fishing boat to entertain his clients. Making

the customers happy help him more in the investment because when the customers are happy,

they tend to spend more on buying our product. It applies in this Madoff tactics, to win his

customers heart.

In addition, his image as a local hero helped him in finding richer or wealthier investors.

According to The New York Times, he was the prominent Jewish philanthropist. He donated

nearly USD 6 million to lymphoma research after his son, Andrew was diagnosed with

lymphoma. By using his philanthropic image, he used that to deceive his potential investors.

Many charities entrusted Madoff to invest their money to Madoff, include North Shore – Long

Island Jewish Health System, nevertheless led them to loss of USD 5.7 milliion after the scam

was out.

Apart from that, Madoff has some help from his loyal employees that never questions

what he did. They only follow what Madoff instructed them to do. To name a few, let‘s start with

Mr. Frank DiPascali, Madoff‘s CFO. Mr. DiPascali help Madoff in terms of faking the account

statement and trade slips that were never happen; shuffles money between account banks or

which is known as wire transfer to create an impression that they are earning commissions from

stock trades; designing a fake computer stock – trading platform; and using a random number

generator to assign times and amounts to trade records, so that it does not appear a pattern.

People number two is Mr. David Friehling. Mr. Friehling was an auditor to Madoff for more than

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10 years. Mr. Friehling has violated one of the auditing standards which is an auditor should be

independent from the client. In this case, Mr. Friehling cannot be considered as independent

auditor because he had put some money in Madoff as one of his investments. There is an issue of

conflict of interest. Mr. Friehling also never adequately audit Madoff operations and produce

professional and independent audits that help Madoff in concealing his scheme. Besides Mr.

DiPascali and Mr. Friehling, there is this person called Ezra Merkin. Mr. Merkin is the lion of

Wall Street that could be the president in the Fifth Avenue Synagogue. It a place for Jewish to

practice their modern Orthodox Judaism. Mr. Merkin holds many positions (positions that

philanthropist adore and embrace him) that could made people believe him to manage their

money. However, there is one thing that they did not realize. The money that they entrust Mr.

Merkin to manage it, was flowing into Madoff‘s pocket. This is why, journalist quote Mr.

Merkin as Madoff‘s best recruiter.

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4.0 REGULATORS

There have a lot of regulatory agencies in the world in order to preserve in operation of

companies in by following the law and regulation.

From Bernard Madoff cases, the main regulatory agency is SEC (United State Securities

and Exchange Commission). SEC holds responsibilities to interpret federal securities laws. Other

than that, SEC plays their roles to issue any new rules and amend the existing rules. This will

protect the investors, maintain orderly, fair and efficient market and simplified the capital

formation. Beside that, SEC will make the investors facilitate in term or evaluate the companies

before make the investments. This can happen by oversee the inspection of securities in any

firms, rating the agencies, brokers and the investments advisers. They also will oversee the

private regulatory organization in the auditing, accounting and securities fields. SEC will

coordinate U.S securities regulation with foreign, federal and state authorities. For any criminal

violation, SEC wills works with criminal law enforcement agencies in order to prosecute peoples

either individual or companies. Investors can online access any companies information filed with

SEC by looking at the database called EDGAR (Electronic Data Gathering Analysis and

Retrieval System).

The chairman of SEC has admitted that organization was faced several failure in relation

of the case of Bernard Madoff. According to the Report of Investigation by United State

Securities and Exchange Commission, Office of Inspector General (OIG), there have many

reasons. From the OIG investigation, they find that, SEC were received a lot of information. The

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information is in the detailed and substantive complaints about the Bernard Madoff operating

which called as Ponzi scheme. SEC aware about the two articles appeared in reputable

publication in 2001 regarding Madoffs investment operations.

However, that always question in our mind, why SEC still cannot detect the fraud?

These are the reasons. Even SEC received more than five complaints, they still cannot detect

fraud because of the complaints contained specific information and cannot adequately resolve.

In 1992, SEC were conducted the first investigation after received information and it

were led to suspect that a Madoff had been conducting a Ponzi Schme. However, when SEC

ensured that Mandoffs customer has received their money back, so SEC stop to investigate

Mandoff. At this time, SEC unable to detect the fraud because of the investigation is too narrow

down. SEC just got the record copies from Madoff himself rather than from the Depository Trust

Company (DTC). It shows the mistake here because Mandoff still can manipulate and change the

record by himself before pass the copies to SEC.

SEC examination units, OCIE were conducted two examinations of Madoff in 2004 and

2005. This examination was caused by the Hedge Fund Manager‘s complaint. Again, they

cannot detect anything because of the scopes of the examinations are too narrow down and teams

are inexperienced and also was insufficient planning for the examinations. Actually, during the

examinations, the teams discovered suspicious of the inconsistencies, however they simply asked

Madoff about it and SEC examiner just accepted them at face value even Madoffs was answered

implausible. Madoffs was making significantly more money by using the mysterious hedge fund

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business. However, no one will concern about this revelation. OCIE was drafted a letter to

NASD (National Association of Securities Dealers) which are independent third-party in the first

examination in order to asked about the trade data. However, they cancel to send the letter

because of too time consuming to review that data. This action also one of the factor that SEC

unable to reveal the ponzi scheme.

The Enforcement staff failed to follow up on inconsistencies even they found Madoff in

misrepresentations and lies. The staff simply accepted Madoffs explanation even after they found

that answers are evasive or contradictory answers. They asked to NASD about the information

on Madoff in position date, then they did not take any further step after got the answered of ―no‖.

In 2000, SEC Boston District Office (BDO) also received eight-page complaint by Harry

Markopolos,(Fraud Investigator). This complaint is about questioning the legitimacy of Madoffs

reported returns. However, BDO‘s Assistant District Administrator did not pursue this complaint

because of not understand the information presented by the Markopolos. Then, Markopolos

delivered the second complaint with updated information and analysis from the first complaint.

This analysis was supported by Neil Chelo and Frank Casey, which are two of his colleagues that

have knowledge about investment fund. .However, SEC‘s Northeast Regional Office was not

pursue this matter because of Madoff was not register as an investment adviser and SEC

acknowledge more detailed than that complaint.

In term of the complaint made by Hedge Fund Manager, he said that ―Madoff might be

lying about trading and laid out issues of ponzi scheme”. This complaint was examined.

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However, still fail to uncover the fraud because of OCIE was not conduct the adequately and

people who conduct the examination was inexperienced. OCIE staff also less training and was

not familiar with the securities laws. Then this issue was delay and no reason was given for the

delay.

Now, by referring the NERO broker-dealer examination team, they prepare for on-site

examination of Madoff. They simply asking Madoff about the issues of Madoff not collect fees

for the hedge fund and Madoff response was accepted. Madoff not greedy and just receive

commissions. NERO also was not investigating Madoffs auditor. Only after the Ponzi scheme

uncover, then the auditor was investigated. Negative result found when there is no audit work

had is done by David Friehling.

Again, Merkopolos provided SEC‘s BOD with third complaint. This complaint entaitled

“The World’s Largest Hedge Fund is a Fraud”. This complaints show the detailed of Mandoff

was operating a Ponzi Schme. Then, BDO took this complaint seriously and allow NERO to

conduct the investigation of Madoff. However, this is not the right time for NERO to make an

investigation because of the new staff which are recently graduated and only joined the company

19 months. They have less experience and just involved in very few of investigation. Because of

the staff‘s investigation was too limited, they delayed opening a mater under inquiry ( MUI) for

two months.

In 2006, SEC OEA( Office of Economic Analysis) make analyzing of Madoffs trading.

However, they fail to respond and never obtain any useful information. From the Mandoff

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operation, enforcement staffs were confused about certain fundamental aspect. This is about the

trading strategy and staff cannot understand about Mandoff operation worked. This situation

shows that the staffs were not sufficiently prepared for this case of Mandoff.

The other regulator that should play the role is Public Company Accounting Oversight

Board (PCAOB) formerly known as Public Oversight Board. It is a private sector, nonprofit

corporation and created by the Sarbanes-Oxley 2002. PCAOB roles are mainly for the purpose

of oversee the auditors of companies in order to protect the interests of investors and further the

public interest in the preparation of informative, fair and independent audit reports. During this

Madoff‘s scandal, people keep pointing finger to SEC but how about the PCAOB? We can see

clearly that, one of the reasons that Madoff could get away with his scam is because of Mr.

Freihling, who does not doing his job properly. Mr. Freihling is not fully independent. He took

the financial records handed by Madoff at ―face value‖. It shows that, the auditor fail to

independently verify the Madoff assets of the company‘s investment. He also fails to ensure that

the bank account records and purchase listing of securities were accurate. He just follows what

Mandoff want. Even he knew that the tax returns of madoff are not accurate, but he keep on

prepared without any protest.

With this case happened, it shows that PCAOB does not enforce the law that auditor

should be independent. In the PCAOB job scope, inspection is apart from it. If PCAOB did their

job well, they could detect this fraud before it getting larger. It raise two questions, did PCAOB

really inspect Madoff‘s firm? Do they really do their job? If PCAOB fails to detect these kind of

white-collar crimes, that what are the purposes that we having PCAOB?

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5.0 IMPACT ON THE ECONOMY

The Ponzi scheme effects to US and global economy are not only during the financial

crisis when the scheme collapsed. The scheme is so enormous that it affects the US economy

during the early stage, growth stage and during the collapse stage especially.

During the initial growth of Ponzi scheme, the investors start to save more to invest their

money in the scheme because they thought they will earn very high return from the schemes. The

situation will cause the saving rate to increase and consumption rate to decrease because the

saving rate and consumption rate are adversely related. After a major part of the investment

went to Madoff‘s pocket, surplus of the fund invested left in the schemes will be placed in the

domestic banking system which will be used to cater any withdrawals by investors. Thus, it will

tend to a higher demand for money and money supply growth would probably also incline.

Since the apparent return from the scheme is around 20% compared to central bank

interest rate which generally 3-4%, bank borrowing will be used to fund investment in the

scheme whether directly or indirectly. As a result, money growth rate will be higher and

consequently the central bank‘s response will be increasing the interest rate. Apart from that, the

growth of the Ponzi scheme itself results higher employment since the economy is stimulated.

The economy is stimulated in ways that the investors used the return from their investment to

invest in some other place. In addition, Madoff himself have donated to many charities and

foundations around the world such as Chais Family Foundation, the Robert I. Lappin Charitable

Foundation, the Picower Foundation, the JEHT Foundation and a number of other educational,

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cultural, and health charities. Therefore, that will contribute to stronger economic growth

initially.

As Madoff gained confidence from the investors as the schemes grows, investors believe

that their wealth have increased and start to reduce their saving which tend will caused the saving

rate decline. Investors will start to spend more and consumption rate will increase due to the high

perceived wealth. In ―Ponzi Finance and Mis-Pricing of Risk (2007), Tim Lee stated that

―Although apparent returns are very high, the fact that people are achieving or exceeding their

‗wealth targets‘ will ultimately cause the savings rate to fall. This then creates the danger of

flows into the schemes dropping below the level necessary to finance the schemes and their

promoters, but collapse can be postponed perhaps for some time if there is a resort to credit. If

credit and money growth in the economy keeps rising the central bank will tend to keep raising

interest rates, but of course these will still be far below the Ponzi rate of return.‖

Tim Lee also added that ―The growth of the Ponzi schemes naturally ‗crowds out‘ the

rest of the economy, taking employment and resources away from the rest of the economy. One

likely result, in contrast I think to Minsky‘s analysis of Ponzi finance units, is that investment

will suffer in particular. Consumption will rise as a share of the economy (because of high

perceived wealth) but the central bank‘s interest rate will have been influenced upwards by the

Ponzi rate of return. As a result, interest rates will be too high – perhaps far too high – for those

areas of the economy which do not benefit much from the Ponzi scheme growth. This is likely to

be the investment industries, particularly manufacturing, which will be negatively impacted by

lower savings and higher interest rates across the economy.‖

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During the global economic crisis in 2007, large number of investors needed money and

began asking to cash in their investment. Obviously that was the time when the scheme burst

because he did not have enough money to cover his investors‘ requests and new investor money

was hard to be found in the economic downturn. At that time, the perceived wealth by investors

have collapsed because investors cannot recover their investment.

Affected institutions include Yeshiva University, the Women's Zionist Organization of

America, the Elie Wiesel Foundation and Steven Spielberg's Wunderkinder Foundation. Jewish

federations and hospitals have lost millions of dollars, forcing some organizations to close. The

Lappin Foundation, for instance, was temporarily forced to halt operations because it had

invested its entire $8 million endowment with Madoff. In addition, David Sheehan, chief counsel

to trustee Picard, stated on September 27, 2009, that about $36 billion was invested into the

scam, returning $18 billion to investors, with $18 billion missing. This will cause their

consumption rate to drop while the saving rate escalate drastically. In response to that situation,

central banks have to lower the interest rate to set off deflation and begin to restore an

appropriate allocation of resources in the economy.

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BERNARD LAWRENCE BERNIE MADOFF GROUP 3, THURSDAY 9-11

6.0 SUGGESTIONS

In order to avoid the Ponzi scheme happened again, it is important for investors to be careful

to avoid costly mistake. Program such as investment education awareness for investors should be

organized to increase awareness. In the program, steps such as background check, verify

investment detail, don‘t rely on reputation alone, separation of portfolio manager and custodial

duty should be exposed to investors. The program also should be organize continuously to keep

all investors alert.

Investors should always do background check of the investment‘s promoters before making

investment decision. For example, if the promoters are located in Washington, investors must

check with Washington Department of Financial Institution to determine if the individuals and

firms selling the investment are properly registered with the State of Washington. Besides,

investors should request for the promoter‘s complaint history to ensure whether the promoter is

reliable or not.

Verify the investment detail is another necessary check list that has to be done by investors.

Investor must carefully examine what information the company provides because a suspicious

lack of details should be a red flag. In the Madoff case, clients were told that the investment

strategy was proprietary and would not be disclosed. Investors should aware that if the

investments are not explained in detail, they should not invest.

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BERNARD LAWRENCE BERNIE MADOFF GROUP 3, THURSDAY 9-11

In addition, investors should never rely in reputation or word of mouth alone. Con artists are

experts at building networks of trust, making investors think they are getting an ―inside‖ track on

a hot investment. Many of Madoff‘s victims invested because people they knew and trusted, such

as friends and even family members, encouraged them to do so.

Investors should bear in mind that a client's funds and assets are always held by a third

party custodian, who is not the portfolio manager. Accounts are segregated from all other

investor funds and institutional funds. The portfolio manager only has the authority to execute

trades, and can't withdraw or transfer money. In the Madoff case, the manager and custodian is

the same person which means that Madoff have complete control of his client‘s money.

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APPENDIX

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BERNARD LAWRENCE BERNIE MADOFF GROUP 3, THURSDAY 9-11

REFERENCES

1. http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/

2.http://www.nytimes.com/2009/01/25/business/25bernie.html?pagewanted=2&_r=2

3. http://www.msnbc.msn.com/id/37474851/

4. http://bernard-madoff-scam.blogspot.com/search?updated-min=2008-01-01T00:00:00-

05:00&updated-max=2009-01-01T00:00:00-05:00&max-results=25

5.http://online.wsj.com/public/page/bernard-madoff.html

6.http://www.nytimes.com/2009/08/12/business/12madoff.html?_r=1&scp=5&sq=timeline%20bernard

%20madoff&st=cse

7. http://www.scribd.com/doc/13159043/Madoff-Criminal-Information

8. http://www.foxbusiness.com/story/markets/market-overview/friehling-scrutiny-madoffs-accountant/

9.file:///F:/KKB/Why%20did%20the%20SEC%20fail%20to%20spot%20the%20Madoff%20cas

e%20%20_%20Analysis%20&%20Opinion%20_.htm

10. im Lee (2007), Ponzi Finance and Mis-Pricing of Risk, www.pieconomics.com

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