Research Paper on "International Business (the Aftermath of Madoff Ponzi"

Research Paper 5 pages (1509 words) Sources: 3

[EXCERPT] . . . .

International Business (the Aftermath of Madoff Ponzi Scheme)

On December 11, 2008 the world was stunned to find out that the investment advisory division of Bernard Madoff Securities was nothing more than a large Ponzi scheme. This is following a revelation by his sons to federal authorities about the scope of their activities. What made the incident so shocking; is that Madoff was the Chairman of the NASDAQ and a respected member of the Wall Street community. After pleading guilty to 11 different counts of fraud, he was sentenced to 150 years in prison. (Kirtzman)

For the victims, these events are particularly troubling with many placing large amounts of their personal fortunes with Madoff and his associates. This has resulted in many affluent families and individuals having to adjust their lifestyles. At the same time, a number of nonprofit charities were forced to close. In response to these issues a trustee was appointed (i.e. Irving Pickard). His job is to go after everyone who benefited from the fraud and collect these assets for the victims. This had led to a number of high profile settlements. However, to understand the way these events affected the victims requires examining how they were impacted and the regulatory environment after the fraud. Together, these elements will provide specific insights that will highlight the way the scandal reshaped the legal atmosphere and investor confidence. (Kirtzman)

The Fraud and its Impact on the Victims

In the popular press, many people assumed that Madoff's victims were people of modest means (who were swindled out of their life savings). While there are a certain number of individuals that are in this condition, others are considered to be sophisticated investors. This means that they were liquid for at least $1 million to $2 million per idea and could take large risks. What lured them, were the higher returns that Madoff was delivering to his clients. To increase their profits, many of these individuals gave him large sums of money. (Kirtzman)

At the same time, there were a number of multi-national banks, hedge / pension funds and nonprofit organizations who were clients of the firm. They believed that he had a consistent track record of delivering above average results. In an effort to diversify and reduce risk, these customers had Madoff managing large portions of their portfolios. (Kirtzman)

After the scandal, a number of charities were forced out of business. This is because they were overly exposed to Madoff and his demise made it difficult to continue funding various activities. Moreover, the fact that they lost so much money was considered to be an embarrassment. This made it challenging in raising additional financing through philanthropy. At which point, several different nonprofits were forced to close their doors. (Kirtzman)

While other institutions, were forced to change their operating procedures. This is because the total losses are a sign of how fund managers were not carefully evaluating the practices of various firms. Instead, they were only looking at the potential return they could receive. This resulted in many institutions imposing internal procedures that increased disclosure and verification. (Kirtzman)

In case of individual investors, these challenges have been having varying effects. For those who are from more modest backgrounds, the collapse of Madoff Securities meant that they lost their entire fortune. This forced many to sell their homes and move to areas that were more affordable. These transformations caused some people to commit suicide, as they could not handle these kinds of sudden lifestyle changes. (Kirtzman)

However, there are others (who are more affluent) that were able to continue working and move on with the course of their lives. In a number of cases, celebrities and wealthy individuals were harmed by the firm's collapse. The difference is they had only a select amount of assets with Madoff and other business interests elsewhere. This meant that their losses were limited to those activities that were tied directly to the company. After the firm's downfall, this protected them against having more severe impacts to their liquidity position and personal net worth. (Kirtzman)

Like what was stated previously, a trustee was established to go after those individuals and organizations that benefited from the fraud. Since its beginnings in 2009, there have been court challenges as to the method and the scope of the tactics utilized by the trustee. What he has been doing is to sue those individuals and organizations (which profited financially). This has led to claims that the trustee is aggressively targeting other victims. ("$2.48 Billion") (Kirtzman)

After a lengthy legal battle, the U.S. Supreme Court ruled in favor of Pickard. They determined that the methods he used were reasonable. This is considering the overall scope of the fraud and the damage it caused. Since that time, he has been successful in collecting at total $9.15 billion (i.e. 53%) of the $17.3 billion that was lost. Recently, he was approved by the bankruptcy court judge to make the first distribution to the victims for $2.48 billion. The average payout is $2.02 million. ("$2.48 Billion") (Kirtzman)

This is showing how investors have been through a tremendous amount of ups and downs from the Madoff scandal. In some cases, these individuals lost everything and were forced to radically change their lifestyle. While at other times, they took a loss from their exposure but were not ruined by the collapse. Recently, everyone began receiving some of the money that was lost (via the trustee). This is illustrating how the victims experienced volatility and losses that impacted their net worth. However, as time goes by more of these assets are being recovered which is offsetting the negative impacts. ("$2.48 Billion") (Kirtzman)

The Fraud and its Effects on the Regulatory Environment

The aftermath of the Madoff fraud led to changes in the operating procedures and regulations of government agencies. For example, the Securities and Exchange Commission (SEC) was responsible for regulating the financial industry. Their inability to detect and deal with the issue is what allowed it to become so large. This is following a report that raised many different red flags of a potential Ponzi scheme over ten years earlier. If the SEC had responded quickly, they would have prevented the fraud and limited the damage to the financial industry. ("The Securities and Exchange Commission")

To address these challenges, the SEC began focusing on other areas which could increase their ability to monitor and investigate these crimes in the future. A few of the most notable include: reorganizing the enforcement division, how the agency deals with complaints, improved internal controls / training, integrating broker dealer / advisor examinations, enhanced oversight / aggressive enforcement and proactively protecting the interests of investors. This is illustrating how the regulatory environment is shifting from one that was focused on self-regulation to aggressive enforcement. ("The Securities and Exchange Commission")

In the future, this means that the federal government will play an active role in going after anyone who is suspected of fraud. For example, the Dodd Frank Wall Street Reform and Consumer Protection Act gave regulators the power to limit the size of financial firms. This is designed to prevent companies from becoming too big to fail. However, in the process of enforcement, their activities will be more aggressive. The long-term results are that Wall Street firms will be dealing with these realities for many years. ("Dodd Frank")

Once the economy has improved, is when they will try to reduce these regulations. Their arguments will be that the laws are hindering competiveness on a global scale. The problem is that when they are allowed to engage in these activities. The underlying risks to the financial system increase exponentially. ("Dodd Frank")

These factors are showing how the regulatory environment has become very stringent. This is designed to restore confidence in the markets and prevent… READ MORE

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