Three Types of Illegal Business Behavior against Madoff

Madoff was accused with various charges of violation of business ethics that were legally incorrect. One of the illegal acts Madoff was charged with involved defrauding of clients, which was also against the acceptable business ethics. Henriques, and Berenson, (2008) also brings out the fact that “Mr. Madoff himself described as a $50 billion fraud, federal authorities took control of what remained of his firm and began to pore over its books.” He fraud his clients of $50 billion dollars which as the United States Securities and Exchange Commission found from his books could not be traced to any business activities according to the firms operations. This was unethical and for what it’s worth, an illegal business activity punishable by the American Court of law.

Secondly, he had a private firm that managed finances which was not mentioned to those he worked with. According to Creswell, and Thomas, (2009), “This Bernie also ran a money management business on the side for decades that he kept hidden far from colleagues, competitors and regulators.” It is unethical for a leader in a firm such as a Chief Executive Officer to run a private organization of the same nature parallel with or without the knowledge of the investors and relevant authorities. This was clearly an illegal act and totally against the code of conduct in the business world. This is especially sine the company was a popularly known investment management firm.

According to Creswell, and Thomas, (2009) financial analysts also argue that, “While he managed billions of dollars for individuals and foundations, he shunned one-on-one meetings with most of his investors, wrapping himself in an Oz-like aura, making him even more desirable to those seeking access.” He plotted ways that he would make much more money by defrauding investors. This is different from the client fraud since in this case, the shareholders’ investments were at stake which he illegally influenced from what is called inside trading. Aware of the sinking finances, he went ahead to allow the trading of the introduced bonds. This is clearer in the sense that before stock or bonds are released to the market, full information including the anticipated risks should be released. This was not the case as the shortcomings were not made public to the potential investors. Reports also show that he filed vague reports to his shareholders of the trade market (Henriques, and Berenson, 2008).

Parties Impacted by Actions of Mr. Madoff

Firstly, the clients of the organization were affected by the acts especially fraud. The Madoff Investment and Security Company was founded and managed by Bernard Madoff himself in the year 1969. It was a very reputable organization that had received positive criticism by financial analysts regarding its good performance. For it to reach its level of growth and client base, it must have done some commendable work for the market. Therefore, its acts impacted the clients very negatively where it would be difficult to retain the trust they had in Madoff and the investment industry.

The other group that was affected was the investors. This is the group of people and other companies that put their money to support and fund some of the activities of the organization. However, the offer that was brought to the market was very promising. Further investigations proved that the scheme was pre planned with the prices set by an insider who was aware of the anticipated reduction. Thus, the lack of release of sufficient information impacted the investors negatively.

The other party that was affected was the stock market of the state that took charge of the exchange of the shares. According Henriques, and Berenson, (2008) “Investors may have been duped because Mr. Madoff sent detailed brokerage statements to investors whose money he managed, sometimes reporting hundreds of individual stock trades per month.” The unreliable and untruthful reports compromised on the stock exchange. Similarly, the Madoff Company was a significant player, thus its failure after the flotation of the bonds had negative impacts on the market.

Three Business Safeguards (Risk Management) That May Have Prevented the Harm Caused By Mr. Madoff.

All businesses are encouraged to take up risk management policies that will cater for possible losses should there be any financial lapse (Schultz, 2009). The same would have ensured security of the affected parties or reduced the ramifications had they been considered. Some include investment insurance. Insurance firms do not insure against frauds by organizations to clients, clients can however get the cover against the risk. The harm against the clients could not be as big with an insurance cover.

Investors could also safeguard against the losses incurred in the Madoff scandal. Therefore, an insurance cover against risk of investment loss could manage the damages. Excessive losses would not have been incurred by the company workers unaware of the plot and the investors. Lastly, investors are the financiers of a company’s operations. They therefore have a representation and a significant say in some of the activities. However, they could lack insight on some of the management and financial issues taking place since the organization may intentionally shut them off. Due to their influence, especially majority shareholders, they could hire or demand the hire of a risk manager. This would have prevented the occurrence of the massive losses experienced (Schultz, 2009).

How Private Investors Could Have Protected Themselves from the Risk

As earlier discusses, hiring of a risk manager could be a business risk management strategy (Schultz, 2009). This could also be used by the private investors to prevent negative outcome of investments. Not all private investors have adequate knowledge of the firm’s operations and may have a sole intention of maximizing wealth. Insight from the risk manger working under their supervision and representation could make a huge difference towards taking the risk, thus fewer losses.

Besides this, private investors are the biggest financiers of the firms operations and have adequate influence. Without any guarantee of the firm’s competence, the suggestion of an auditor to confirm possible fears could have been necessary. It is worth mentioning that the stability of a firm listed on the stock exchange depends on the shareholders’ investments. Therefore, with their influence and representation, they could use the services of an external and private auditor who could have discovered the fraudulent flotation of the bonds. The anticipation of failure could also be revealed.

Legal Actions that Possibly May be Brought against Mr. Madoff

For the more than eleven charges brought against Madoff, he pleaded guilty to eleven than them which were to be punished (Henrique, and Healy, 2009). His apology to the losers in the scandal did however deter the court from proceeding with the sentencing. First, he was charged with a jail term for what he described himself as robbing of clients and a criminal case. This was defrauding the public and betraying the trust they had in the company.

The second legal action could be to compensate the clients who were cheated and the investors who filed a law suit against him for squandering their finances which could have been their life savings. With the much money initially found to be $50 billion dollars and later on revealed to be $65 billion, the losers deserved to be compensated. Lastly, the court could take away any right for him to run such an organization and revoke his business license and certificate of incorporation should he survive the jail term and get his freedom back. This could also be and adequate legal action that the court could take on him.

References:

Creswell, J., & Thomas, L. (2009). The Talented Mr. Madoff. The New York Times. Retrieved from http://www.nytimes.com/2009/01/25/business/25bernie.html

Henrique, D., & Berenson, A. (2008). Look at Wall St. Wizard Finds Magic Had Skeptics. The New York Times. Retrieved from http://www.nytimes.com/2008/12/13/business/13fraud.html?fta=y

Henrique, D., & Healy, J. (2009). Madoff Goes to Jail after Guilty Pleas. The New York Times. Retrieved from http://www.nytimes.com/2009/03/13/business/13madoff.html

Schultz, J. (2009). An Education in Risk Management Can Offer a Leg up. The New York Times. Retrieved from http://www.nytimes.com/2009/08/20/education/20FINANCE.html