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4. Bernie Madoff Scandal – The King of the Ponzi Schemes (Chapter 2, pages 127-
136)
What this case has to offer
Bernie Madoff’s investment scandal is the most recent high-profile corporate fraud in the U.S. As stated
in the case, the story of how Mr. Madoff began his scheme, what he actually did, who suspected he was
Teaching suggestions
I start this case by asking students what a Ponzi scheme is. According to the SEC:
“A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing
investors from funds contributed by new investors. Ponzi scheme organizers often solicit new
I continue explaining students that this is one of the oldest known forms of securities fraud. Following, I
ask students what are the potential red flags to identify a Ponzi scheme and whether or not these flags
where evident in Madoff’s operation, for example:
• High investment returns with little or no risk (i.e. “guaranteed” returns).
Finally, I close the case highlighting that, as it was the case with other corporate scandals, several parties
failed to detect and act on the potential signs of fraud.
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Discussion of ethical issues
1. Is Madoff’s sentence too long?
The 150 years sentence was the maximum possible penalty for Bernie Madoff’s crimes. A week
before the sentencing took place, Judge Denny Chin received a letter from Mr. Madoff’s lawyer,
Judge Chin explained in a series of interviews that 20 or 25 years would have effectively been a
life sentence, and that any additional years would have been purely symbolic. Yet symbolism
was important, given the enormity of Mr. Madoff’s crimes. The judge weighted the fraud’s
unprecedented scale, its duration over two decades and its thousands of victims. At that point,
the judge said, symbolism “carried more weight.”
2. Some SEC personnel were derelict in their duty. What should happen to them?
Arguably, the SEC personnel that failed in their duties should be punished; however, it is difficult
to determine the extent of the SEC’s negligence in investigating this fraud.
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Overall, the investigation uncovered that this case was a failure of the SEC’s policies, procedures
and internal controls but, according to the OIG, it appears not to be the direct result of
professional negligence of the investigators. The fact that most investigators were lawyers, fresh
not to investigate the fraud in depth.
3. Are the reforms undertaken by the SEC (“The Securities and Exchange Commission Post-Madoff
The reforms undertaken by the SEC include:
• Revitalizing the Enforcement Division
• Revamping the handling of complaints and tips
• Encouraging greater cooperation by ‘insiders’
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4. Does it matter that Madoff’s auditor, Friehling, was his brother–in-law?
It matters because it is a clear conflict of interest. Auditing Standards and professional
accountants Codes of Ethics require auditors to be free of conflicts of interests in order to be
5. Does it matter that Friehling did no audit work?
Not conducting any audit work was in clear violation of the auditing standards that require that
the auditor exercise professional judgment and maintain professional skepticism throughout the
planning and performance of the audit. Moreover, it is the auditor’s responsibility to:
• Identify and assess risks of material misstatement, whether due to fraud or error, based
6. Comment on the efficacy of self-regulation in the form of Federal Industry Regulatory Authority
(FINRA), and in respect of the audit profession. What are the possible solutions to this?
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Professional self‐regulation is the regulation of a profession by its members. A central purpose
of professional self-regulation is protection of the public from harm. Professional self‐regulation
The self-regulation of the accounting profession, and particularly in regard to audit standards,
was put to test after the scandals that led to the passage of the Sarbanes Oxley Act of 2002. In
essence, the US government decided that self-regulation was not enough to protect the public
interest and created the Public Company Accounting Oversight Board (PCAOB), this organization
is:
“…a nonprofit corporation established by Congress to oversee the audits of public
7. Answer Markopolos’ questions: “How can we go forward without assurance that others will not
shirk their civic duty? We can ask ourselves would the result have been different if those others had
raised their voices and what does that say about self-regulated markets?”
There is no straight forward answer to these questions. In principle, it is an individual decision to
8. How could Markopolos and the other whistleblowers have gotten action on their concerns earlier
than they did?
Being a whistleblower is not an easy task. In this case, Markopolos contacted the SEC, which is
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9. Did Markopolos act ethically at all times?
Arguably, Markopolos was driven not only by the public interest, but also by its personal interest
as Madoff’s competitor. Markopolos was a former chief investment officer at Rampart
10. What were the most surprising aspects of Markopolos’ verbal testimony on YouTube at “Madoff
Fraud Allegations & Financial Markets Regulation: Harry Markopolos [testimony] .”
Markopolos’ statement highlights that:
• The SEC repeatedly ignored Markopolos’ detailed warnings.
11. Did those who invested with Madoff have a responsibility to ensure that he was a legitimate and
registered investment advisor? If not, what did they base their investment decision on?
It seems like the decision to invest in Madoff’s fund was a result of affinity, greed and trust in
other investment advisors recommending Madoff’s fund. Individuals should do some research
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The article continues: “Madoff extended his reach from New York to Palm Beach, Florida, where
he enlisted hundreds of wealthy clients, many of them recruited from his own country clubs.
And he also made connections that gave him entree to Europe, and the hedge funds capital of
America, Greenwich, Conn.”
12. Should investors who make a lot of money (1% per month while markets are falling) say “Thank you
very much”, or should they query the unusually large rate of return they are receiving?
The SEC guidance recommends that when individuals consider their next investment
opportunity, they should start with these five questions:
• Is the seller licensed?
• Is the investment registered?
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13. Should investors who made money from “investing” with Madoff be forced to give up their gains to
compensate those who lost monies?
U.S. bankruptcy laws authorize a trustee to recover money that was distributed as part of a
fraud and share it among the victims. The purpose of these provisions is to balance the losses
14. Is this simply a case of “buyer beware”?
This is a case involving a massive fraud and negligence of various government agencies in charge
of investor protection. It is not just a case of “buyer beware,” and it should be a clear call for
Useful Articles, Links and Videos
Berenson, Alex (December 19, 2008). “Even Winners May Lose With Madoff.” The New York Times
“The Man Who Figured Out Madoff’s Scheme: Tells 60 Minutes Many Suspected Madoff Fraud; Says SEC
Is Incapable of Finding Fraud.” (March 1, 2009). Wired New York,
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Kolker, Carlyn, Kary, Carlyn and Kishan, Saijel. (December 23, 2008). “Madoff Victims May Have to
Return Profits, Principal.” Bloomberg News,
Public Company Accounting Oversight Board (PCAOB) (2003-2017). “About the PCAOB.”
U.S. Securities and Exchange Commission. Office of Investigations. 2009. “Investigation of Failure of the
U.S. Securities and Exchange Commission (last update October 16, 2014). “The Securities and Exchange
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5. Wal-Mart Bribery in Mexico (Chapter 2, pages 137-138)
What this case has to offer
This case shows how executives can thwart the strategic objectives of the company’s owners for their
own enrichment, or for corporate goals that seem to make sense in the short term, but not in the longer
term. Wal-Mart has been under pressure for unfair business practices, unfair treatment of labor, and
It is an excellent case that illustrates:
• The impact of bribery/unethical acts on a company and its owners, including the actions of
highly sensitive stakeholders such as the news media, investors, and government agencies.
• How bribes are used and the use of agents (“gestores”) to make them.
Teaching suggestions
I would suggest introducing the Wal-Mart Bribery Case by providing a brief overview about the
company, its owners, size, challenges, criticisms, and interested stakeholders. That will provide a
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background to set up and understand the learning experiences mentioned in the first paragraph above.
Discussion of ethical issues
1. Where were Wal-Mart’s questionable payments made, and where did this result in serious damage
to the company and its executives? Why?
Wal-Mart’s questionable payments were made in Mexico, but the reputational fall-out,
2. The ‘gestores’ payments were made to third parties, who then bribed local officials. How would a
company ensure that its third party vendors are operating within the law?
A company should include its agents (the gestores) in its policies, protocols, training and annual
3. Some of Wal-Mart’s senior executives knew about the bribes, but did not take any effective actions
to curtail this activity. What steps should the Board of Directors take to ensure that systems and
internal controls are in place so that they are informed about questionable managerial activities and
actions?
The Board should ensure that company policies and systems are robust and comprehensive, and
that the internal controls, that ensure compliance, are operating properly. This usually involves