Madoff S Ponzi Scheme and How It Could Have Been Prevented

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Business Ethics - Contemporary Case 2: Madoff's Investment Firm

The investment Ponzi scheme of Bernie Madoff and his hedge fund for wealthy clients was a major violation of ethics by Madoff, as he showed a severe lack of transparency (hiding his actions and never divulging how his trades were profitable) and a consistent habit of lying to clients by using one's fund to pay off another. Madoff's investment firm was essentially based on deception: he promised extraordinarily high returns on investments made the world's wealthy elite -- and so long as they did not all attempt to withdraw their investment at the same time, and so long as new investors continued to come to the firm, Madoff had enough capital on hand to pay out the promised returns. The fact that he did not actually make profitable investments with his clients' money, however, while claiming that he did so, is what caused the major problem for Madoff and his clients. Once authorities began to investigate Madoff's firm, clients began to withdraw funds and the house of cards collapsed: Madoff's Ponzi scheme came to a crashing halt and billions of dollars belonging to clients was lost (Schultz, Greenberg, 2009).

The ethical issue at the heart of the Madoff scandal was deception and was manifested in his lack of transparency and in his lies about what he could actually deliver to clients. Using Kidder's Ethical Checkpoints, the issue could have been resolved earlier on in the firm's history by observing the checkpoints and addressing each one accordingly.

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The first of Kidder's Ethical Checkpoints is: "Recognize that there is a moral issue." For Madoff, the moral issue should have been the red flag of outright deception. Not only was he deceiving his clients, he was also deceiving himself with the thought that he could keep the charade going. Madoff was simply robbing Peter to pay Paul, as the maxim goes. His clients entrusted their savings with him with the expectation that they would receive a significant percentage of their investment in return each year. Yet Madoff had no real, legal or verifiable method of doing as he promised. His career was based on a deception. This was the moral issue that he needed to recognize and address in order to save both himself and his clients from loss.

The second checkpoint is: "Determine the Actor." In the case of Madoff's investment firm, he was the principal actor; although members of his family also worked in and for the firm, he was viewed by legal authorities as the primary party responsible for defrauding his clients. He testified that he never let on to what his firm was actually engaged in, and while speculation swirled as to how he could keep the deception from persons involved with the business, he himself was….....

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