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Ponzi scheme and Madoff Fraud

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Ponzi scheme is a fraudulent undertaking whereby the investors are duped into a seemingly profitable deal. The clients are asked to “invest” their money in a venture to earn huge interest rates. This normally works through the payment of the earlier investors’ interests and principals by using the later investors’ principal amount. This illegal activity got its name after Charles Ponzi of England. Bernard L. Madoff and Ponzi scheme Bernard Madoff, 70, is the former chairman of the Nasdaq Stock Market. He held the position till December 2008 when he was arrested over alleged possibly the largest fraud ever in history. He is the founder of Bernard L. Madoff Investment Securities, which undertakes market-making, and acting as a middleman in buying and selling of securities, but is since under receivership after a court order was obtained to place an injunction on its operations by the Security Exchange Commission. It was revealed that Madoff had a separate and secretive investment arm of his firm which was running on a separate floor of their premises. The firm’s financial statements were kept “under lock and key” and Madoff was “cryptic” about the firm’s investment arm, according to some top-level management employees of the firm.

This secret investment arm is the one under investigation due to the belief that it is where the Ponzi scheme was perpetrated. Madoff was very smart in playing the Ponzi scheme. He filed false returns with the Securities Exchange Commission, and fabricated gains claiming that its investments together with the accounting and audit firms it ran were highly lucrative. At some point, for example, Fairfield Sentry Ltd, Madoff’s hedge fund ran by Madoff Investment Services to invest in the shares in Standards & Poor’s 500. Fairfield claimed that its share index had risen by 5.6%, while that of the S&P 500 had fallen by more than 30%. Fairfield was later said to be down by 0. 06% when that of the S&P 500 had fallen by about16%. The firm was averaging 10. 5% annually since its inception in 1990. These statistics are quite illogical to believe and is one way in which Mr. Madoff managed to survive through his Ponzi scheme. The firm’s losses accrued up to $50 billion since it was no longer able to meet its customer demands. This is after clients requested about $7 billion when they had only about $250 million in the account.

Prevention of similar frauds The SEC should be made more proactive. For instance, warnings such as those of Harry Markopoulos, a financial analyst, should have been taken seriously by the SEC since he started his revelation back in 1999. The hedge fund of Mr. Madoff too didn’t register till September 2006, which is too late. Recommendation for enforcement of the law, such as Sec. 17

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  • (a) of the Securities Act 1933, Sec. 10
  • (b) of Securities Exchange Act of 1934

and Rule 10b-5 thereunder, and sections 206(1&2) of the Advisors Act of 1940, will also help prevent such frauds. It is worth to make public the reality of rates of interest offered by a firm to its clients. This creates transparency and some sense of genuineness of a firm’s undertaking. The accounting professionals also should be made to learn from such cases to prevent future occurrences of the same vice. Public awareness programs can be broadcasted through media too. This will warn investors to be careful in their choice of an investment portfolio.


  1. Mike, S. (2008, December 13th).
  2. Biggest Fraud in History $50 billion Madoff Ponzi Scheme. Retrieved April 4th, 2009, from The Market Oracle:
Ponzi scheme and Madoff Fraud essay

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