Essay on Madoff Ponzi Scheme

Ponzi scheme is an investment operation, which is a deceit in nature. Investors participate in a fraud scheme unknowingly whereby they invest their money in a high returns investment scheme, which pays highly above other programs in the market, but using the subsequent investors money instead of the profits made from the investment. It, therefore, becomes unsustainable in the long-run when many investors withdraw their investments, the number of investors increases and the enrolment of new investors slows down. Ponzi scheme has no legitimate investment scheme. It has high short-term returns. The two core rules of a Ponzi scheme are making high returns over a short period and high recruitment of new investors to continue paying the old investors. The scheme exists as long as there are a high number of new investors or the existing investors do invest back their money.

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The SEC took time to act on the Madoffs case because, until 2006, SEC had not registered his firm as an investment advisor, there were challenges with the legal system, and there was poor coordination among the enforcing agencies. SEC was also short of staffs, and therefore, system failure largely carries the blame. Additionally, Madoff was a senior investment manager and one of the people who designed the electronic Nasdaq stock market; he used his knowledge to bypass the regulators system checks and security. SEC executed its mandate poorly; this is because it took a long time bringing the Madoff to book despite being tipped off about the scheme by Harry Markopolos. However, despite taking time before detecting the case, the schemes design was complicated bearing in mind that Madoff had designed it and it had been working for years without detection. Additionally, he was a senior member in the securities industry. In between 2006 and 2008, the Securities and Exchange Commission (SEC) probed the company only to find nothing. Some of the ways that Madoff hid his scheme was by failing to collect fees for management from his clients. The firm operated as a wholesale market-making company and thus did not hold customers account. Rather, the firm executed orders from other brokerage firms and carried trade for its own accounts. This made it hard for FINTRA to detect any abnormities in its operations. Therefore, it took its time to act on the reports made by Harry Markopolos. Madoffs sons reported his scheme to the authorities after Madoff shared with them his secret about the Madoff Ponzi Scheme. The tip off added weight on the other reports made by Markopolos and the regulator could now connect the missing dots. To prevent an occurrence of another Ponzi scheme, the U.S. government has come up with strict regulations on investment. For example, the Senate committee on investment requires the FINRA and SEC to file a report in every three months. The U.S government should also raise awareness to the public through the concerned departments such as FINRA and SEC. This has been done in their websites but they should further raise awareness on Ponzi Schemes through the popular media such as newspaper, televisions, radios, and the social media among others. The regulator should reduce bureaucracy in its structure to make it easy for Ponzi scheme cases to be detected early upon reports by the whistle blowers. The perpetrators of the scheme should also receive tough indictment like the case of Madoff to dissuade others.