Pratik Chandanshive
TYBMS B, ROLL NO. 34
RISK MANAGEMENT ASSIGNMENT
Bernie Madoff Scam
Bernard Lawrence ‘Bernie’ Madoff (Bernard L. Madoff. Brokerage firm) was an American financer who
was the chair of the Nasdaq from 1990-1993. He pulled off the largest Ponzi Scheme in history,
defrauding thousands of investors for estimated $64.8 Billion over the course of 17 years.
He attracted investors for his brokerage firm by promising to generate large steady returns through
investing strategy called split-strike conversion a Legitimate trading strategy. However, Madoff deposited
client funds into a single bank account that he would use to pay the clients who wanted to cash out. He
funded redemptions by continuously attracting new investors and their capital but was unable to
maintain the fraud when the market turned sharply lower in late 2008.
On December 10, 2008, he confessed his wrongdoing to his sons-who worked at his firm. Bernie
remained adamant that his sons were not aware of his schemes, but his associates and employees were
found guilty. He died in the prison at the age of 82 while serving a 150 year sentence. He was charged for
money laundering securities fraud and several other felonies.
How could this have been avoided?
Ans: The Bernie Madoff scam could have been avoided through thorough regulatory oversight,
independent audits, and transparent investment practices. Stronger due diligence by investors, including
verifying investment strategies and conducting background checks, could have also helped expose the
fraud.
Explain the risks involved in this scam.
Ans: Regulatory Oversight and Compliance Risks: The Madoff scam exposed significant shortcomings in
regulatory oversight and compliance. Despite numerous warnings and suspicions raised by financial
professionals and investigators over the years, Madoff’s operation continued unchecked. The failure of
regulatory bodies, such as the Securities and Exchange Commission (SEC), to uncover the fraud allowed
the scheme to persist, posing risks to the broader financial system and investor confidence.
Reputational Risk: Beyond the immediate financial losses, the Madoff scam caused severe reputational
damage to the individuals and organizations involved. Many investors, including prominent individuals
and institutions, suffered reputational harm due to their association with Madoff’s fraudulent scheme.
This tarnished their credibility and trustworthiness, impacting their business relationships and personal
lives.