Ethics of Bernie Madoff Expository Essay

Introduction

Ethics training mainly involves well-organized programs that aid attendants of these programs to have a better insight of ethical grounds in decision-making. These programs can be conducted through various methods in seminars, workshops and forums, but the method of presentation does not matter provided the participants grasp the intended information and message perspective.

Training is generally used by organizations in effort to develop good work ethics within the organizations’ culture. Though most of organizations have ethics and conducts policies, and conduct training on ethics to their employees and other stakeholders, breach of code of ethics may occur in some instances since monitoring and enforcing them is quite difficult.

Therefore, ethics are there to ensure that businesses observe proper business etiquette and do not engage in exploitative, illegal or harmful trade acts, thus they largely are intended to safe guard the customer interests. Ethics are essential for all businesses and organizations thus each organization should come up with an appropriate way of evaluating the qualitative data regarding its level of ethics observance.

In learning regarding business ethics, Bernie Madoff Ponzi scheme scandal is sometimes used as a case study to aid in understanding and developing proper ethics, and assist in highlighting some unethical business practices that are shielded by the ‘good’ intentions that a particular business can be founded upon.

Bernard (Bernie) Madoff is well known financial consultant and stockbroker, who established the Madoff Investment Securities LLC in 1960 and served as its leader until he was arrested in December 2008 for committing various financial frauds such as money laundering, securities fraud, and wire fraud (Schermerhorn 64).

He is recognized as the mastermind of the largest Ponzi scheme in history. Upon his arrest, he was found guilty of 11 offenses and was sentenced to jail for 150 years in 2009 (Schermerhorn 64).

Moral problem and it impacts

The Madoff investment and securities business relied on using Ponzi scheme strategies, in which the owner/company places huge returns on investments through creating profitable proxies that actually do not invest in anything but rather pay off the older investors with the income from the fresh investors and the owner(s) take some of those funds for their personal use.

The common moral problem of these investments is that the scammers are not completely able to finance the financial obligations of their risky ventures. In Madoff case, his firm continued to rake huge returns on investments for over a decade, with most of the investors’ funds being channeled through feeder funds firms such as the Fairfield Greenwich Group that provided hedge fund products to investors.

These investors invested in Madoff‘s firm and feeder funds mangers who brought more fresh investors were rewarded abundantly (Peck 5). The new investors were required to wait for a given period to ensure that their funds have accumulated to a sizeable return and have matured; these were efforts to wade off early withdrawals.

More so, Madoff’s funds were mostly reported as being open to only new investors due to special considerations. Older investors continued to keep their funds in the firm, believing they were earning mega returns, something that occurred only in the statements only.

This way, Madoff was able to sustain his firm for a long time and woo in fresh investors (Peck 5). Through manipulation of financial statements, paying off older investors who wanted to taste a portion of return to their investment and a steady inflow of new investors, he was able to ensure that there was sufficient inflow of fund to take care of the losses, hence achieving a balancing act through dubious ways.

By maintaining a good return on invest even when other investments businesses were not generally doing well Madoff was able to attract high profile clients such as the rich and famous, major banks, hedge fund companies and many other interested investors.

Economic outcomes

Following the onset of the financial crisis in 2008, majority of investors rushed to redeem their investment, a thing that made the firm bankrupt. However, before investors realized the financial situation of the firm, Madoff turned himself to the authority and he was arrested (Peck 5).

Having used a lot of the investors and feeder funds to finance the sustainability and operations of the firm, most of the hedge fund firms and financial institutions that had invested in the Madoff’s funds either experienced financial crisis or collapsed when the firm became bankrupt

Individuals and companies that had invested in Madoff’s funds did not feel the pinch of the firm’s collapse alone, but they also dragged others into the scam including those who had invested in their ventures, their businesses and families, leading to huge financial constrains.

This contributed significantly to the recent collapse of financial markets that adversely affected the economy bringing it on it knees (Peck 6). This scam and others from risky investments contributed to many economic problems that even spilled to social level including jobs loses, businesses collapse, properties being auctioned and deteriorating house prices.

These are in addition to family finances being extremely strained, economic stress and depression setting in and the investment environment was largely curtailed, hence the financial crisis hitting the economy.

The legal requirements

Currently, “the most sustainable true rates of return from legal activities is between 5 percent and 20 percent annually, with most long term investments going at a rate of 8 percent per annum” (CFR Para.2). There can be deviations from these rates though they do not occur often. For Ponzi schemes, they mostly offer huge return rates that are mostly above 20 percent and over short periods in schemes that are crafted to attract new members.

For financial fraud to be recognized by the law as was in the case on Madoff’s scam, the following four basic legal elements must be present. A material false statement must be legally present; secondly, the scammers must have been aware that the statement was false when made; additionally, the victim must rely on the false statement; and finally, the victim must suffer damages upon relying on the false statement (Nicole, 2010).

In the Madoff’s case, the legal requirements for fraud were met since Madoff pretended that he was taking victims money and investing it in highly successful investment ventures while that was not true.

Secondly, Madoff was very aware that his firm was Ponzi scheme out to con the public through promises of high return on investment. Thirdly, the victims relied on fake bank statement from Madoff’s bank and his pay offs. Finally, the victims lost a lot of funds upon relying the Madoff’s false statements.

The ethical duties

The ethical duties of a business are intended to ensure that a business observes the appropriate business ethics. Failure of businesses to meet their ethical duties lead to businesses that practice unethical and illegal activities in order to cement their position in the market or wrongly exploit customers or make super-profits through unfair competitive practices in the market.

The Madoff’s firm is a good example of a business that does not meet the expected ethical duties as implied in the following ethical issues. First, the Madoff’s firm was founded on principles that lacked honesty since the business idea was based on conning and deceiving people for personal gain.

Secondly, in the running of the business there was no fairness as only older investors were able to access the returns of their investment and the investments were mainly open only to new investors. Thirdly, the firm was completely lacking in integrity since the financial statements of investments were fake and there were no real investment of the investors’ funds as they were led to believe.

Moreover, the whole investment scheme was a consumer fraud meant for personal gains. Lastly, during it collapse the firm did not advice it clients thus most were left in dilemma not knowing what to do next or how cope with the situation.

Conclusion

The most appropriate moral solution to this situation, is for the investors, investment companies and the general public to seek to clearly grasp the ethical principles that are involved in investments and how they are suitable for given investments.

Additionally, the investment businesses should be run and monitored by professionals who are keen on their ethical approaches in order to be able to evaluate themselves and other leading to better observance of business ethics. Lastly, the government after learning from the recent financial crisis should put more emphasis on adherence to business ethics and empower agencies for monitoring business ethics to be more watchful in their surveillances.

Works Cited

CFR. Ponzi Schemes: What Are Ponzi Schemes and How Do They Work. 2010. Web

Nicole C. Financial Fraud 101: Legal elements of fraud. 2010. Web.

Peck, Sarah. Investment Ethics. NJ: John Wiley and Sons, 2010. Web.

Schermerhorn, John R. Management. NJ: John Wiley and Sons, 2010. Web.