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Bernard Madoff is the author of the biggest rip off in the history of Wall Street. Following his arrest, he pleaded guilty to eleven counts of felony. The eleven felony charges were investment adviser fraud, securities fraud, three counts of money laundering, wire fraud, mail fraud, false filings with the US Securities and Exchange Commission ("SEC"), perjury, theft from employee benefit and false statements, and theft from an employee benefit plan. He was sentenced 150 years in prison, the maximum sentence the crime could have attracted.

Illegal business behavior alleged against Mr. Madoff

The first illegal business is Securities fraud. This is a crime where an individual or company, e.g. a brokerage firm, stockbroker, investment bank, or corporation, misrepresents information used by investors to make conclusions. Independent persons can also commit security frauds (e.g. by involvement in insider trading). Misrepresentation of information includes giving false information, holding back vital information, presenting misleading advice, and giving or acting on inside information. The term also includes a range of other actions; stock prices manipulation, front running, accounting fraud, and lying on SEC filings (Thomsen, 2006) Securities fraud extends to falsehoods in financial reports of a public company. Committing security fraud is unethical because it stimulates investors to base purchase or sale decisions on false information, therefore incurring losses, in contravention of securities laws. Security fraud can carry both criminal and civil penalties, resulting in incarceration and fines.


The second illegal activity is Investment adviser fraud. A fiduciary duty on investment advisers requires them to perform in the best interest of their clients by disclosing fully all possible conflicts of interest is required legally in the US. Failure to disclose potential conflicts of interest by advisers to their clients or failure to act in their clients' best interest constitutes an investment advisor fraud. It would be grossly unethical for an advisor to receive a fee from the client only to engage in conduct that benefits the adviser or some other preferred client therefore putting his client at a risk of loosing money. The third illegal activity is Money laundering. Money laundering is largely carrying out financial transactions with the aim of hiding the source, identity, and/or destination of illegally gained money. Money laundering is the process by which income from crime is converted into assets, which seem to have a genuine origin. The definition is often extended to denote any financial transaction, which produces an asset or a value as the outcome of an illegal act. This may make practices such as tax evasion or false accounting money laundering. Money laundering is ipso facto illegal. The acts from which the money is generated are always criminal in some way; otherwise, there would be no need for laundering).

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The parties impacted by the actions of Mr. Madoff and the type of impact

One party that was hard hit by Mr. Madoffs' actions was the investors. Companies worldwide reported losses associated to the Madoff fraud case, including in excess of 4 billion dollars from Geneva-based banks. Individual investors were not spared either. Real estate mogul Mortimer Zuckerman and a charity of movie director Steven Spielberg and ordinary people from Florida to Minnesota included profiles of investors who gave Madoff their money. The losses incurred ranged from $40,000 to an entire nest egg worth well over $1 million (Black, 2007). Another party that surely felt the heat was Mr Madoff's employees. Though details are sketchy, the abrupt collapse of Madoff's firm affected far past the world of the ultra-wealthy with employees losing their jobs. Business partners were also impacted by the swindle as they lost their reputations. The requirement that those that profited from the swindle forfeit the money so it can be redistributed to those who did not, certainly affected the business partners.

Business safeguards, which could have prevented the harm caused by Mr. Madoff

One of the key risk management that may have prevented Mr. Madoffs' harm is a risk governance formation, which provides suitable superior level oversight, separation of functions, autonomous control groups, and organizational checks and balances within a risk conscious environment. This would have bore regulations that assure investors' better information concerning their investments (Black, 2007). Madoff would have had to reveal their operational and perhaps their investments processes. The second business safeguard relates to the need for diverse risk controls at the portfolio level. Tim (2005) asserts that it would tackle liquidity and market risk, valuations, leverage, and other facets of investment risk through performance analysis. Performance analysis is a central aspect of investment risk management. The rethinking of the due diligence processes of funds could have stopped Madoffs' harm. Due diligence includes examining and appraising the operation and management of fund managers with the aim of indentifying managers to invest with and afterwards monitoring those managers to insure alignment with the investors' interest. The third business safeguard is related the operational risk section. This section contains risk principles relating to diverse array of risks that arise in the normal course of business and in disasters. It tackles the value of identifying, assessing, and monitoring these risks, placing sufficient systems and reducing manual processes, managing counterparty credit risk, and guaranteeing business continuity even in a disaster.

Ways in which private investors might have better protected themselves from risk

The majority of the investors who lost their savings were introduced to Madoff through personal recommendations. Private investors might have protected themselves better had they left due diligence on investment managers to the professionals. An investor just following the recommendation of a friend or adviser cannot identify risks. Another way private investors would have protected themselves is by ensuring that their accounts have an independent (of the investment manager) custodian holding the funds. Madoff owned and ran both the investment as a manager and custodian. His clients' statements come from Bernard L. Madoff Investment Securities, LLC. He controlled what the statements said. Thirdly, private investors could have protected themselves by watching out for conflicts of interest. Madoff had his brother-in-law as his accountant and his sons working for him. He owned the investment firm and the brokerage firm that was doing all the trades. It was much easy to fabricate the figures. They should have checked whether the financial incentive of the investment manager/advisor was aligned with their interests.

Legal actions that may be brought against Mr. Madoff under criminal or civil law

The first legal action that can be taken against Mr. Madoff is under criminal law. He would be forced to forfeit the property he will be presumed to have acquired from the fraud as partial penalty after a conviction. More retribution, say imprisonment, will accompany the forfeiture. The second legal action that can be brought against Madoff falls under civil law. His property technically would be seen as the guilty party since it was acquired with tainted money. Therefore, he would only surrender the property acquired with the dirty money. Thirdly, the SEC could institute investigations and prosecutions against Mr. Madoff. This would reduce the damage of Madoff's actions and maximize investors' assets recovery. Such a legal option would be appropriate as an emergency action as it often seeks a provisional restraining order and an asset freeze.

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