Question

Option #2: Bernie Madoff Reference the Scam of the Century?: Bernie Madoff and the $50 Billion Heisto video. A Ponzi scheme occurs when a fraudster uses deposits of new investors to payoff previous investors; no real investing is happening. A Ponzi scheme will collapse if new clients don't invest, or their investments are too small to fund a decent return to previous investors. Ponzi schemes are based on trust and greed. The fraudster develops trust by building a relationship with the investors. The fraudster usually gains trust through their actions, their professional, social, or religious affiliations, and personal references. Fraudsters exploit the greed of their investors, who see a chance to obtain higher returns than usual. Because the investors trust the fraudster, they do not perform their normal due diligence. In March 2009, Madoff pled guilty to 11 federal crimes and acknowledged turning his broker- dealer business into a substantial Ponzi scheme that defrauded investors out of billions. Federal investigators believe that the fraud began as early as the 1980s and the whole things was possibly never legitimate. The fraud totaled almost $65. On June 29, 2009, Madoff was sentenced to the maximum 150 years. He is still in prison. once the chair of NASDAQ and often spoke about the securities industry on Madoff was CNBC. Madoff took advantage of his connections in the investment community and made it seem like it was an honor to invest with him. A Ponzi scheme can only work if plenty of funds are brought in year after year to pay off previous past investors; as such, Ponzi schemes grow exponentially until they collapse. Until that collapse, Madoff had a luxurious lifestyle. Madoff pulled this off by omitting all the transactions from his formal books. He hired a CPA firm to audit the books, but that audit didn't really occur. In fact, the CPA was violating independence requirements by being an investor in the fund himself. For a fund of its size, it would normally be audited by a very large, high-quality audit firm. The investors were greedy and enjoyed the higher returns instead. They trusted Madoff, so they didn't perform the typical due diligence with a verifiable external audit. It is alleged (as reported on a CNBC Primetime Special) that one of Madoff's investors was with the Russian mob and Madoff chose to turn himself in and plead guilty because he feared for both his life and that of his sons. Many have speculated that his sons helped him orchestrate the fraud: both died within a few years of the fraud being revealed. As a result of this fraud, the Public Company Accounting Oversight Board (PCAOB) began requiring broker-dealers to obtain audits using firms registered with the PCAOB, and the PCAOB now sets standards for audits of broker-dealers. Required: Please respond to the following questions: a. How would you describe a Ponzi scheme? What are some other examples of this type of scheme outside of this case? b. Describe the essential elements of the Bernie Madoff fraud. What made it so effective? c. Is this fraud primarily a case of asset misappropriation or fraudulent financial reporting? Explain the reason for your answer. d. Do you believe the PCAOB actions in this case will keep this from occurring in the future? Explain

Answer 1

a. Ponzi schemes spring up much of the time, however not every one of them are enormous enough to stand out as truly newsworthy. However, like clockwork, a news story turns out telling how experts have uncovered a broad and long-running Ponzi scheme.

What Is a Ponzi Scheme?

A Ponzi scheme is a false contributing scam promising high rates of come back with little risk to investors. The Ponzi scheme produces returns for early investors by getting new investors. This is like a fraudulent business model in that both depend on utilizing new investors' assets to pay the prior patrons. Both Ponzi schemes and fraudulent business models inevitably hit rock bottom when the surge of new investors evaporates and there isn't sufficient cash to go around.

A Ponzi scheme is a venture misrepresentation where clients are guaranteed a huge benefit at practically no risk. Organizations that participate in a Ponzi scheme concentrate the majority of their vitality into drawing in new clients to make ventures.

Example - Charles Ponzi

Ponzi schemes are named for Charles Ponzi, an Italian worker who lived in the United States during the 1920s. Ponzi found a manner by which he could exploit universal mail coupon to make a huge benefit. Seeing a chance, he get his arrangement under way and started requesting investors.

Very quickly, Ponzi kept running into trouble working his arrangement. In spite of the fact that he stopped the real activity of the arrangement, he kept on selecting new investors. By mid-1920, Ponzi was gaining about $250,000 every day and was paying the profits for his current investors with assets contributed by new investors.

The scheme in the end crumbled as investors ended up educated that the sum regarding cash Ponzi had supposedly put resources into worldwide mail coupons far surpassed the measure of coupons entirely dissemination, and Ponzi went through four years in government jail.