The Financial Crisis And White-Collar Crime - Myassignmenthelp.Com

Question: Discuss about the The Financial Crisis And White-Collar Crime. Answer: Introduction: Earning money is essential for everyone because it aids to fulfil the necessary requirements of living. People try to earn more and the lust to earn more let them towards the trap of Ponzi schemes, which is acknowledged as a financial trap (Crey Webb, 2016). Since the 1919, there have been various Ponzi schemes around the world but some of them made headlines owing to their magnitude of fraud and loss to the financial stability of the economy (Cortes, Santamaria Vargas, 2016). Among many, one of such rarest case is Bernard Madoff Ponzi scheme, which lead him loot approximately $65 billion from the market and ending up with 150 years of imprisonment (Gibson, 2016). Due to the lack of researches and academic journals on the Ponzi schemes, this are still treated as the loopholes of the existing financial system of the economy, however recent trend has highlighted various researches is going on the financial traps like Ponzi schemes. This paper is aimed to provide a detailed descriptio n of the Ponzi schemes and explain the case of Bernard Madoff. Besides this, the report will discuss the outcome of the Bernards case and the repercussion effect on the shareholders. Moreover, the research is aimed to provide recommendations to avoid any cases like this in future. Analysis of Ponzi scheme: Ponzi scheme, which is also acknowledged as the pyramid scheme is one of the illegal financial activities that loots money from the investors. Generally, Ponzi schemes lures the investors to save more amount of money into the scheme highlighting higher amount of return compared to the authorised financial institutions for the same amount of investment (Zhu et al., 2017). In general banking structure, bank as a mediator provides loan from the money that has been saved by the depositors. However, when it comes to Ponzi schemes, then the fraudsters do not invest their money that they gain from the investment. Rather, during the initial days, they pay the return with that money and after few days when a desired lump sum amount has been collected, they run away from the business leading to a huge loss in front of the investors who invested with an eager to earn more (Deason, Rajgopal Waymire, 2015). The name Ponzi scheme came after the name of Charles Ponzi who led the investors accept that it is possible to earn 50% return from a said amount of investment within 90 days period (Albrecht et al., 2017). Since 1919, there have been various Ponzi schemes, which rocked the financial stability of the economy, where it had taken place and among them, the case of Bernard Madoff is notable (Reis, 2015). Ponzi schemes are structured in a pyramidal shape, where more amount of money is required in each level as the business grows to provide the payment toward the existing investors (Cortes, Santamaria Vargas, 2016). Figure 1 shows a hypothetical scenario of a Ponzi scheme, where the number of participants is higher at the lower level and the highest level has the lowest amount of participants, who are mainly business owners or the stakeholders of the business. Figure 1: Ponzi pyramid Source: (Roden, 2018) In order to understand the Ponzi schemes more well an example can be taken into consideration. For instance, consider the figure 2, where a Ponzi perpetrator creates a Ponzi scheme and approaches to an investor to invest $100,000 for a year with an interest rate of 20%. The investor agrees to invest in the scheme with a desire to earn $120,000 at the end of one year. Once the time of payment arrives, the scammer approaches to a new investor with a same policy and manages him to invest $120,000 in the business. The perpetrator now has the $120,000 to repay the first investor and he continues the cycle until the flow of investment falls. In this cyclical way, the Ponzi scheme perpetrator pockets the initial $100,000 and once there is any fall in investment, he will run out of the operation looting all the money of the investors. Figure 2: Investment pyramid of Ponzi scheme Source: (Created by Author) With geometrical expansion of funding requirements Ponzi schemes are dooms and the weak strategies to maintain the business of the Ponzi scheme perpetrator makes it breakable in front of the ever growing demand of returns (Keep Vander Nat, 2014). There are various types of Ponzi schemes; however, most of them have same characteristics. Common characteristics of Ponzi schemes are as follows (Springer, 2017): High return with little amount of risk: Legalised investment caries some amount of risks and investments with higher risks earn higher amount of return. When it comes to Ponzi schemes, then the risk factor is very high, however the perpetrators are potent enough to make it look like a risk free investment with guaranteed highest return. Unlicensed and unregistered: If the Ponzi schemes are not issued by the government and are not rational Ponzi game, then they do not have any license and registration to curtail investment and return of the investors (Carey Webb, 2016). Free entry no free exit: It is a common phenomenon of every Ponzi scheme is that they allow free entry but they try to retain the investment by highlighting the new schemes with better return. Bernard Madoff case details: Ponzi schemes are one of the forms of financial fraud that lead to curtailing the share market and investment of investors. There have been many cases of Ponzi schemes around the world since 1921, but when it comes to the biggest one, and then the case of Bernard Madoff is the second largest after the Ponzi case of 1919 (Jain, 2015). During the 1960, Bernard Madoff founded Bernard Madoff Investment Securities and one of its extensive hand used to promote Ponzi schemes (Stolowy et al., 2014). During 1960, he started his company as a Penny Stock traded with a amount of $5,000 and since then the business fledged to a great extent to become where it was during the 2008 (Azim Azam, 2016). With the help of his father in law, Madoff made his business wider and employed his various family members into his business. For instance, he had employed his brother Peter as the senior managing director and his sons worked in the trading section. It is estimated that there were more than 25 family me mbers of Madoffs business who were positioned in the directorate of the operation (Lewis, 2016). During 1980, Madoffs company was one of the highest market maker and it was contained about 5% of New York Stock Exchange transaction volume. One decade later, during 1990, the business reached to its zenith and it has almost 15% market capitalisation of the NYSE making it one of the largest NYSE listed broker (Eren, 2017). During the 1992 to 2006, there were various charges against the Madoff and his business house and on December 11 of 2008, he was charged for running Ponzi schemes. Madoff took a strategy to shape his portfolios look like that it was aligned with the SP 500 rules of returns that constrained him to pay large amount of return to the existing investors. Besides this, he chose elite customers who are close to him and kept his action less aroused to look it less suspicious in front of the Securities and Exchange Commission (SEC). Though the business was running good until 2 006 with the flood of investment, it started to fall apart during the 2008. With the rise of recession during the 2008, there was huge demand to liquidate the assets saved as the securities that forced Madoff to borrow more from the market and return it to the existing stockholders (Bruin, 2014). However, with higher amount of recession fund was not available and Madoff failed to cope up with the demand of the investors. In 2009, his son Andrew and Mark disclosed their fathers business to FBI and the court convicted him with an imprisonment of 150 years. Gantt chart: Figure 3: Timeline of Madoffs fraud Source: ("After the Fraud", 2018) The timeline shows that ponzi business of Madoff became fully fledged since 1995 and it ran successfully until the 2006 and since then the business started to fall. Outcome of the fraud and affected investors: While the business of the Madoff was going well, the investors were rewarded well; however, once the Ponzi business was busted, many people get affected to a great amount. For instance, it is estimated that there were more than 4,500 investors who were affected by the Ponzi scheme of the Madoff and the amount of loss is estimated at $64.8 billion (Brody et al., 2016). People who were highly affected by this Ponzi scheme were the investors, which include the citizen of USA, other countries and political leaders of the USA. Owing to the fact of this financial disaster on average investors, lose 12 to 20 million dollars. In this fraud, investor invested almost $36 billion, $18 billion were returned, and there were no trace of other $18 billion (Eren, 2017). In the pyramidal structure of Ponzi scheme, Madoff enjoyed almost half of the investment and once the fraud was busted, the amount of embracement for the family is beyond imagination. Later, there were several legal actions were also taken by the FBI and the SEC against the Madoff family with the charges of breaching fiduciary duty, negligence, theft, trust fraud and mail fraud. Besides this, their bank account has been frozen and it has been inevitable for the family to live in the country (Azim Azam, 2016). Outcome of the case and future implication: Once the Ponzi scheme of the Madoff has been busted, several cases were lodged against the Aurelia Finance and the assets of the director are also frozen. Besides this, on December 2008, International Advisors LLC Ren-Thierry Magon de la Villehuchet found dead owing to the fact he has invested all of his money and 20% money of his brother, which is accounted more than $1.2 billion (Brody et al., 2016). Following the magnitude and the vastness of the Ponzi scheme circulated by the Madoff, SEC conducted an internal investigation under its inspector general. During the 2009 September, SEC found its eight employees guilty for misuse of their posts and negligence of their duty. SEC released a report of 477 pages and there they mentioned how the organisation has missed the scope of to identify the Ponzi scheme running since 1990 and depending upon the result there has been various steps taken by the organisation (Stolowy et al., 2014). Recommendation: It is a common practice with the SEC that they do not pay much amount of attention to the hedge fund of the financial institution like bank compared to the hedge funding industry making it one of the soft point to penetrate for the Ponzi scheme makers. Using this loop hole Madoff operate his business of Ponzi scheme and it aided the fraudster to transfer investors money to his account. In order to overcome this situation following measures can be taken: Proper auditing of the financial institution Diversification of risk by investing in various portfolios Refraining from greed and invest into such schemes that has lower amount of risk and legalised Judging the broker or the organisation before investing into its shares Steps taken by the authority to stop case like this: Madoffs case of financial fraud is one of the large one around the world that has ever-lasting effect on its investors. SEC in his report found various loopholes in its system that leads to this devastating situation. After the massacre, SEC has taken various corrective measures and these are aimed to reduce the scope of any Ponzi scheme in future. SEC has mentioned five questions before investing into any new stock to avoid the scope of fraud. The questions are as follows (Nashat, Abdullah Abdullah, 2014): Is the seller is license? Registration information of the investment How well I understand the investment What is the comparison of potential awards with the risks? Where to ask for help? Conclusion: The report has analyzed the Bernard Madoff Ponzi scheme and it has been found that the mastermind used various loopholes in the system to make his business grow. The report has stated various recommendations to overcome any situation like this in future that lead to suicide, death and loss of almost 16 billion dollars. To conclude the report has stated various steps taken by the SEC to correct the financial structure of the scheme making it strong enough to crowd out Ponzi schemes from the US economy. Reference: Roden, B. (2018).Classic 'gifting circle' pyramid scheme is back - Abbotsford News.Abbotsford News. Retrieved 6 January 2018, from https://www.abbynews.com/our-town/classic-gifting-circle-pyramid-scheme-is-back/ Carey, C., Webb, J. K. (2016). Trust, but Verify? The Roles of Trust and Deceit in the Sustainability of Illegal Ponzi Schemes. Corts, D., Santamara, J., Vargas, J. F. (2016). Economic shocks and crime: Evidence from the crash of Ponzi schemes.Journal of Economic Behavior Organization,131, 263-275. Gibson, D. R. (2016). Ignorance at Risk: Interaction at the Epistemic Boundary of Bernard Madoffs Ponzi Scheme.Qualitative Sociology,39(3), 221-246. Zhu, A., Fu, P., Zhang, Q., Chen, Z. (2017). Ponzi scheme diffusion in complex networks.Physica A: Statistical Mechanics and its Applications,479, 128-136. Jain, A. (2015). Easy Money: The greatest Ponzi scheme ever and how it is set to destroy the global financial system.Abhigyan,33(2), 79-80. Deason, S., Rajgopal, S., Waymire, G. B. (2015). Who gets swindled in Ponzi schemes?. Albrecht, C., Albrecht, C., Morales, V., Morales, V., Baldwin, J. K., Baldwin, J. K., ... Scott, S. D. (2017). Ezubao: a Chinese Ponzi scheme with a twist.Journal of Financial Crime,24(2), 256-259. Reis, R. (2015). Comment on:When does a central banks balance sheet require fiscal support? by Marco Del Negro and Christopher A. Sims.Journal of Monetary Economics,73, 20-25. Corts, D., Santamara, J., Vargas, J. F. (2016). Economic shocks and crime: Evidence from the crash of Ponzi schemes.Journal of Economic Behavior Organization,131, 263-275. Keep, W., J. Vander Nat, P. (2014). Multilevel marketing and pyramid schemes in the United States: An historical analysis.Journal of Historical Research in Marketing,6(2), 188-210. Springer, M. (2017). The Financial Crisis and White-Collar Crime: An Examination of Brokerage-Failure and Its Link to Ponzi Schemes. Carey, C., Webb, J. K. (2016). Trust, but Verify? The Roles of Trust and Deceit in the Sustainability of Illegal Ponzi Schemes. Stolowy, H., Messner, M., Jeanjean, T., Richard Baker, C. (2014). The construction of a trustworthy investment opportunity: Insights from the Madoff fraud.Contemporary Accounting Research,31(2), 354-397. Azim, M., Azam, M. (2016). Bernard Madoff's' Ponzi scheme': Fraudulent behaviour and the role of auditors.Accountancy Business and the Public Interest,15(122-137). Lewis, L. S. (2016).Bernard Madoff and His Accomplices: Anatomy of a Con: Anatomy of a Con. ABC-CLIO. Eren, C. P. (2017).Bernie Madoff and the Crisis: The Public Trial of Capitalism. Stanford University Press. de Bruin, B. (2014). Epistemically virtuous risk management: Financial due diligence and uncovering the Madoff fraud. InBusiness Ethics and Risk Management(pp. 27-42). Springer Netherlands. Brody, R. G., Brody, R. G., Perri, F. S., Perri, F. S. (2016). Fraud detection suicide: The dark side of white-collar crime.Journal of Financial Crime,23(4), 786-797. Stolowy, H., Messner, M., Jeanjean, T., Richard Baker, C. (2014). The construction of a trustworthy investment opportunity: Insights from the Madoff fraud.Contemporary Accounting Research,31(2), 354-397. Nashat, S., Abdullah, A., Abdullah, M. Z. (2014). Machine vision for crack inspection of biscuits featuring pyramid detection scheme.Journal of Food Engineering,120, 233-247. After the Fraud. (2018).Thinkadvisor.com. Retrieved 6 January 2018, from https://www.thinkadvisor.com/2009/05/01/after-the-fraud