The Rise And Fall Of Bernie Madoff By Erin Arvedlund

The world has experienced numerous financial frauds, but the Ponzi scheme executed by Bernard Madoff perhaps remain the biggest scheme the globe has ever seen. Bernard Madoff used the asset management unit of his investment securities firm to dupe hundreds of investors. In 2009, Erin Arvedlund wrote the book, Too good to be true: The rise and fall of Bernie Madoff detailing the operation of stock market and hedge funds. By showing how hedge funds operate, Arvedlund manage to illustrate how Madoff gained the trust of investors to rip them off. The book is a thrilling read, especially for a student looking to build a career in financial management. Besides, the book provides the intricacies and technical details of stock market, hence illustrating how most Ponzi schemes operate. Analyzing the book enables one to take heed of major points as well as offer an opportunity to understand the basis for how a massive fraud scheme thrived in a regulated operating environment.

Main Points of Arvedlund’s Book

Erin Arvedlund’s book details how Bernard Madoff together with his associates easily duped the American financial system. Bernie Madoff ran business that worked on an unbelievably simple premise. Arvedlund (2009) work on unraveling the massive financial fiasco is based on years of professional and meticulous research. As a financial journalist, she identified significant red flags that pointed a finger to the fact that Madoff’s billion-dollar enterprises constituted the worst case of financial fraud in the nation’s history. From the book, it is apparent that Madoff did not invest the money he obtained from investors but instead used it to live large. From the onset of the book, Arvedlund makes it clear that Madoff used the simple premise used by other Ponzi scheme operatives which is to pay earlier investors with money provided by later financiers.

The main points offered by Arvedlund include the operations of Ponzi schemes, failure by federal agencies to identify major gaps in frauds, and the steps investors should take when investing their money. Through deception, Madoff started off by endearing to his wealthy father in law to encourage family members as well as close friends to back his daughter’s husband stock options business by investing there. His entire organizational successes were fictitious since the billionaire operated a Ponzi scheme. All this happened under the noses of the Securities and Exchange Commission (SEC). Its primary purpose is to protect the American investor against unscrupulous individuals and entities operating in the vast economy. This implies that it literally failed in its mandate and function to ensure that the country’s investors were safe from a deceptive individual such as Bernie Madoff.

The fictitious payments paid out to investors registered with Bernie Madoff’s infamous Ponzi scheme laid bare the fact that the government had created an environment as well as a form of culture that cultivated malpractice. For instance, the government benefited via the Internal Revenue Service (IRS) since investors also paid huge amounts in taxes derived from the Bernard L. Madoff Investment Securities LLC (BLMIS).

A second overarching point consistently highlighted throughout the narrative involves Bernie’s little regard for keeping to financially sound work ethic. Madoff established BLMIS in 1960 after acquiring a loan worth 50, 000 dollars from his wife’s father. Almost immediately, Madoff began engaging in ventures that involves financial malpractice. One of his affiliate trading firms, Gibralter Securities was involved in a business engaging people to purchase stock options that were dubiously priced. At the time, the SEC considered it a bucket shop given that it used a sales method that lied to investors to trade in falsely rated stocks. Arvedlund (2009) points that Bernie collaborated with his brother Peter to adopt a state-of-the-art automated settlement system. The collaboration started in 1971 after the creation of the National Association of Security Dealers Automatic Quotation System (NASDAQ). Their enterprise appeared to be a radical invention allowing for another market to evolve alongside the ASE and NYSE. BLMIS opted not to engage in business with individual investors.

NASDAQ has been created to bring about greater competition in the securities trading markets in line to government policy but was considerably troubled after it was caught in the middle of a price-rigging syndicate during the early 1990s. While several houses in the securities market agreed to settle suits amounting to 910 billion dollars for price rigging, BLMIS was not in any way implicated in the avoidance of proper price quoting to the NASDAQ. It is apparent that Bernie’s BLMIS innovative computerized stock trading system served to make the SEC endear to the increased degree of competition it brought into the American financial system. The government opted to have a lawyer head the SEC to ensure nothing hindered finance professionals from attaining the objectives towards a flourishing American securities market environment. Christopher Cox as leader of the SEC allowed the agency to become somewhat complacent in the manner it examined reports on financial fraud. Harry Markopolos understood that Madoff was nothing but a fraud. He repeatedly made attempts to make the SEC investigate fraud at BLMIS but the agency ignored his pleas. It was not until 2008 when the market upheavals ensured that the Ponzi scheme could not meet client redemptions resulting in the exposure of the long running fraudulent business.

Lessons Learned from the Book

Reading Arvedlund’s book one aspect became apparent. Madoff took advantage of people’s greed and their incapacity to uncover or investigate issues. For instance, Arvedlund (2009) asserts that numerous of her contacts mentioned that Madoff’s hedge fund was “churning out consistent 15 percent annual returns on investments despite fluctuations of the market”. A prudent investor would have asked questions regarding the returns and where Madoff invested the money. The provision of steady returns despite instabilities in the market would have made me avoid Madoff’s investment.

I have learned an important lesson through Arvedlund’s overview of Madoff’s ‘investment strategy’ such as it is difficult for a firm to offer consistent returns to investors irrespective of how the economy is doing. Arvedlund (2009) further states that no magazine or database showed numbers on Madoff’s hedge fund performance, which shows that the investors were not cautious. Arvedlund’s book helps individuals to understand that that they must conduct research on firms they wish to invest as well as avoid companies shrouded in secrecy or those that do not provide data on their performance. It is confounding that when Arvedlund asked Madoff about his business all he said was, “I can’t go it in great details. It’s a proprietary strategy”. Consequently, I will always be suspicious of people who do not provide enough financial or performance information on their business. There were several instances where members of the public privy to the under workings of the securities market raised red flags on BMLIS operations.

However, none of them were heeded to. This was largely based on the reputation Madoff and his hedge fund marketed as a brokerage firm had gained over the course of 40 years. For instance, his works towards developing a computerized system to increase competition in the American financial markets appeased policy makers within the government. In cases where it was deemed necessary that the SEC performed due diligence regarding Madoff’s business strategy, junior agents were assigned this arduous task. As opposed to verifying BMLIS earnings and operational legitimacy, the agents were normally entreated to great pep talks by Madoff that served to hide the fraud from exposure. Other companies working in the financial services industry also decried the fact that they could not understand how BMLIS was consistently ensuring profitable returns on investments to its clients.

Although their main aim was to replicate Bernie’s strategy, what they found out was that none of what he was doing made any sense to them at all. However, the suspicion raised by people such as Michael Ocrant and Arvedlund was enough evidence to prudent investors. What I have learned regarding this course of events is that people should be cognizant of the failures of government systems. When it comes to money and investment, it is not wise to put one’s confidence in a single entity irrespective of what the organization says. The SEC projected a weak organizational culture that ensured that compliance was not duly ascertained for an exclusive firm such as BMLIS. The competitive environment which the government so diligently sought after in the 1970 allowed Bernie Madoff to emerge as its savior. He appeased the policy makers and by extension resulted in a situation where the SEC endeared to him.

The aspect of exclusivity allowed Madoff to operate without exhibiting any transparency in his operations. The issue of exclusivity allowed Madoff to lie to investors that they could gain high return even though they were taking low risks. By cleverly gaining the trust of the SEC as he did with the investors, he managed to keep regulators at bay. I have gained an important lesson in that most fraudsters come out as charismatic, connected, and always on the news. However, the entities they lead do not provide any information on their performance or where they have invested clients’ money. Despite his extensive involvement in policy making in the U. S. money market, investors ought to have been wary of his dealings. For example, Arvedlund (2009) asserts that Madoff, “swore investors to secrecy, making them promise not to tell anyone he was managing their money”. Swearing investor to silence is one of the surest ways of conning them since they cannot discuss issues relating to the firm with their friends or colleagues. Reading the book, I realized that scammers do not publish their returns, lack structures in organization, and promise huge returns with few risks.

Conclusion

Bernie Madoff operations were inherently criminal to which people have not fully understood how such a massive fraud syndicate could exist over duration of 40 years. It essentially preyed on investors desire to make earnings without risking any losses. Although such a perspective does not make sense today, the limited information and lack of knowledge amongst many investors allowed the fraudulent enterprise to continue even in instances where there were red flags. BMLIS was an open secret to many big houses as a fraud yet the SEC failed to do its job and regulate the industry accordingly. Challenging biases, making analysis of assessments, and gathering data was what the SEC did thus allowing for a questionable character to defraud American and international investors of billions of dollars.