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Bernard Madoff, a financier and former Nasdaq Stock Market chairman was sentenced to jail when he pleaded guilty to a number of criminal charges which included securities fraud, wire fraud, mail fraud, false SEC filing and also money laundering. This man rose to fame during the 1960s when he founded Bernard L. Madoff Investment Securities LLC.
1. Describe three types of illegal business behavior alleged against Mr. Madoff and for each type of behavior; explain how the behavior is illegal or unethical in the conduct of business.
As it emerged after the sentencing of Mr. Madoff, he had been involved in a number of illegal business activities all those years he was in business. During the sentencing, Madoff was charged with eleven counts of illegal business behavior. In this paper we will look at three of these illegal behaviors. These are; securities fraud, wire fraud and money laundering.
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This is a crime whereby businessmen violate the laws set to protect securities traders and investors. Businesses or businessmen that are mostly culprits of this crime include analysts, stockbrokers, corporations, brokerage firms, private investors and investment banks. An example of such an irregularity can happen where an analyst in a brokerage firm is compelled to give a favorable rating to a stock in order to get a company's investment banking business, while knowing that such a move is not a good for investors. Or a private investor can commit securities fraud if he acts on inside information of a business. It is therefore a practice where investors are coerced into making purchases or sale decisions basing on information that is forged, a practice that in most cases lead to big loses and infringing on the securities laws. It is a practice that dishonors the laws set to protect the securities traders and investors. This is a very serious offense that can carry both criminal and civil punishments whereby investigations can lead in one being imprisoned. The Securities and Exchange Commission (SEC) mostly regulates against the following forms of securities fraud; misrepresentation, insider trading, and accounting fraud. In this case, Madoff's business used investments made by new clients to pay for fictitious profits on the old clients' investments (Repex 2009).
This is a business crime which occurs when electronic means like the telephone computer and many others, are used by a person in order to achieve an economic advantage via fraudulent activities. Wire fraud laws are frequently used where emails, text messages or phone calls are used with the aim of defrauding innocent investors through a criminal scheme. Wire fraud crimes are more often charged against individuals alongside other crimes. An individual commits wire fraud when he or she invents or intends to come up with a system to trick a person into investing in false businesses through interstate wire services. Wire fraud charges in this case were filed against Bernard Madoff in relation to his Ponzi scheme. His crimes were based on his use of the phone and mail to swindle money from investors (Ganshaw 2009).
This is a process where an individual engages in financial dealings to hide the identity, source, and destination of money that has been unlawful gained. It can also be the gaining of material benefit of any form that is entirely or in part proceeds from a felony thereby masking the fact that they are profits as a result of a crime that denies the right beneficiaries from enjoying the profits. Madoff was charged with counts of money laundering, for instance it was alleged that he channeled not les than $250m that were fraudulently gained through the Mayfair division of his businesses. His used money from his London businesses to enrich himself therefore, denying his clients the right to benefit from their investments (Ganshaw 2009).
2. Name three types of parties who were impacted by the actions of Mr. Madoff and describe how they were impacted.
The number of those affected by the Bernard Madoff's fraudulent deals apparently continues to grow. A least released as part of a bankruptcy filing showed thousands of names of those who had invested with Madoff. Three of these parties include the Jews' Philanthropies and Philanthropists, the Chais Family Foundation and finally the Wunderkinder Foundation.
Philanthropies and philanthropists
This group delegated most of their money to Madoff's businesses spreading their surplus which was 10% around the world. Most of that amount went to Jewish institutions and causes with a large proportion involving orthodox institutions and Zionist causes. The Madoff's business collapse was in fact termed as an atomic bomb in the Jewish philanthropy world by the Jewish Funders Network President. A sentiment that was echoed by the President of the Institute for Jewish and Community Research who said that for the many that had invested with Madoff, the means they would have used to give to others for the many years to come, had gone with Madoff. The absence of the many dollars that would have been contributed would definitely be severe (Rathe 2010).
The Chais Family Foundation
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This is an institution that sustained many learning programs that amounted to $12.5 million annually. This was wiped out entirely losing about $178 million in the process and leading to its closure. One can imagine what effects this has on the public, in fact one chief Israeli newspaper showed a photo of the Chais Family Foundation library in Mevasseret, Israel that clearly brought out the increasing philanthropic loses that the scandal has caused (Prins N. 2009).
The Wunderkinder Foundation
This is Spielberg's charity that apparently had invested large portion of its possessions with Madoff that was based on regulatory filings. It is even alleged that the 2006 profits from Bernie's firm accounted for 70% of the interest and dividend income of this firm. It is estimated that this firm has lost millions of dollars. The US tax returns indicated that in 2007 alone, this organization gave out a total of $ 8.6 million to hospitals, synagogues, the US Holocaust Memorial Museum, Universities and other institutions. All these have gone down with the collapse of Bernie's company (Prins N. 2009).
3. Describe three business safeguards (risk management) that may have prevented the harm caused by Mr. Madoff.
Risk management is a process that evaluates risks that businesses encounter and take measures to protect against their effects. The safeguards that could have avoided the harm caused Mr. Madoff include; market diversification, stock market position hedging, and employing the use of automatic stop loss orders to reduce risk and protect capital. Market diversification involves grasping the investment in different sectors of a stock market. It is more efficient for one to spread a portfolio over a scope of entirely different markets. It has emerged that most of the investors with Madoff had invested almost their all in one company. If only they had diversified their investment, they would not have been entirely affected by its fall (Rezaee & Riley, 2009).
Hedging of stock market position is good measure that protects a business againstt unfavorable fluctuations in stock. Most businesses use the buying put options method of position hedging. Through put options, the owner is given the right but not the compulsion, to sell shares at prearranged prices. If this strategy had been employed at the Firm of Mr. Bernie then his clients would not have run into the big loses that they got (Rezaee & Riley, 2009).
Stop loss orders are orders that are introduced into markets at laid down prices. They mechanically come into place whenever the price of shares drops to that particular level. For instance in a situation where a particular investor seeks to cut short his loss due to a drop in his stock pile price, he can place in his order, this way when the price falls, it will automatically be prompted and his shares sold. This reduces the worry of one losing his investment because the capital will be sheltered and also one does not need to monitor the market regularly to see how it is moving (Rezaee & Riley, 2009).
4. Describe three ways private investors might have better protected themselves from risk.
Investors should always ensure that they have selected the right broker and make sure that the broker is doing his or her job with the aim of protecting their financial interests. The first thing that an investor should do is to know his broker, should not invest with someone he doesn't know. Should check him out, by asking friends, through referrals, or look him up on the NASD website. If discovered to have issues, then he or she should be ignored and another broker sought. Should always seek for a second opinion if in doubt or if having concerns with the investment. This reduces the risk of plunging into problems that could have been avoided if one had inquired about it. Lastly, investors should not concentrate all their investment in one portfolio. Because in doing so, one will be exposing the investment to a much higher risk level violating the common rule of not putting all the eggs in one basket. But investing in different areas ensures that even if one area experiences problems then the other areas will save the situation (Rezaee & Riley, 2009).
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5. Describe three legal actions that possibly may be brought against Mr. Madoff under criminal or civil law.
Because Bernard knowingly engaged in more than one dishonest and unethical practice in the securities business, running an investment advisory business that was insolvent where he used a scheme to defraud investors. This is reason enough under the law for the suspension and revocation of his registration for the services pursuant to RCW 21.20.110(1) (g). Failure for the firm to supervise its securities salesperson, who was engaging in dishonest and unethical activities by overseeing a fraudulent investment scheme for many years, is reason enough for the law to suspend or revoke his broker-dealer registration in pursuant to RCW 21.20.110(1) (J). Because Bernard L. Madoff Investment securities LLC was insolvent and had been placed under receivership, under the law, Mr. Bernie's broker-dealer registration was bound to be suspended or revoked. This is pursuant to RCW 21.20.110 (1) (h). These are just some of the actions besides the charges of fraud brought against him in court and eventually caused his sentencing to 150 years in prison (Bernard 2008).
Mr. Bernie's scandal was one of a kind, the largest fraud of all time, one that will live on for years. It effects have affected many people's lives, a people who had invested their future in his business. Even if he was punished with the 150 years in prison, he will have to live with the fact that his actions have ruined millions of lives.
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