The largest investment and financial scandals
The Madoff Ponzi Scheme was one of the largest investment and financial scandals of U.S. history which came to an end in 2008 when Bernie Madoff was charged on 11 counts of fraud, money laundering, theft, and perjury. Over the years, Madoff who was a well-respected investor conned more than $65 billion from his clients by running a typical Ponzi scheme where investors were promised high returns and attracting by attracting new investments, old returns were paid off, with Madoff pocketing any percentages and extra cash. Madoff was able to continue the scheme for decades due to his prolific stature in the financial industry as a broker, firm owner, board member of regulatory bodies, and advisor to the SEC (Yang).
The biggest impact of Madoff’s scheme
After the scandal and to this very day, the biggest impact of Madoff’s scheme was eroded trust in the system which was combined with the 2009 financial crisis that also demonstrated the predatory and irresponsible nature of the financial industry. The immediate effect was $363 billion being pulled from financial advisors. Investments are commonly made based on certain affinity groups, such as Madoff’s scheme targeted wealthy Jews as religion as the second-most common source of affinity link in Ponzi schemes. Social connections that unified investments deteriorated along with trust in intermediary investors. As a result, decreased capital flows that stem from a distrust of investors rather than the investment channels themselves may lead to suboptimal allocations as individuals attempt to make uneducated choices on the market (Kelley).
The SEC began to take steps after the Madoff conviction to combat similar occurrences. The Dodd-Frank Act also addressed many of the issues that caused the 2009 financial crisis, including new regulations for investments. These included additional registration requirements, fewer exemptions, and extensive reporting requirements. The SEC also gained authority to monitor firms that have the potential to pose a systemic risk to the financial and investment system. Several safeguards came into place for investor assets including surprise audits, third-party reviews, and a new program for handling complaints and whistle-blowers. In 2013, the SEC adopted further reporting requirements where brokers were required to file quarterly reports on their maintenance of client securities and cash. Since the Madoff scandal, the SEC continues to file record a record number of investigations and enforcement actions against risky investors and firms (“The Securities and Exchange Commission Post-Madoff Reforms”).
Kelley, Susan. ” Trust in financial markets was biggest victim of Madoff case.” Cornell Chronicle, 2017, Web.
“The Securities and Exchange Commission Post-Madoff Reforms.” U.S. Securities and Exchange Commission, 2019, Web.
Yang, Stephanie. “5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Here’s How His Scheme Worked.” Business Insider, Web.