MADOFF SECURITIES

Bernard Lawrence "Bernie" Madoff is an American financier who executed the largest
Ponzi scheme in history, defrauding thousands of investors out of tens of billions of
dollars over the course of at least 17 years, and possibly longer. He was also a pioneer
in electronic securities trading, Wall Street Icon, and former chairman of the NASDAQ.

SEQUENCE OF EVENTS:
1938- Exactly 29th of April Bernard Lawrence Madoff was born in Queens, New York, to
parents Ralph and Sylvia Madoff. Records of Madoff's financial dealings show they
were less than successful with the trade. His mother registered as a broker-dealer in the
1960s, listing the Madoffs' home address in Queens as the office for a company called
Gibraltar Securities. The SEC forced the closure of the business for failing to report its
financial condition. The couple's house also had a tax lien of more than $13,000, which
went unpaid from 1956 until 1965. Many suggested that the company and the loans
were all a front for Ralph's underhanded dealings. Young Madoff showed little interest in
finance during this time.
1956- Madoff graduated from high school and headed to the University of Alabama,
where he stayed for one year before transferring to Hofstra University in Long Island.
1959-He married his high school sweetheart, Ruth, who was attending nearby Queens
College.
Madoff earned his bachelor's degree in political science from Hofstra in 1960 and
enrolled at Brooklyn Law School, but he didn't last long in that endeavor; that year,
using the $5,000 he saved from his lifeguarding job and a side gig installing sprinkler
systems, as well as an additional $50,000 borrowed from his in-laws, he and Ruth
founded an investment firm called Bernard L. Madoff Investment Securities, LLC.

1960- Establishment of Madoff’s one-man brokerage firm which name as Bernard L.

Madoff Investment Securities, LLC

Initially, Madoff’s brokerage firm traded only securities of small over-the-counter

companies, securities commonly referred to as “penny stocks.” At the time, the
securities of most large companies were traded on the New York Stock Exchange
(NYSE). The rules of that exchange made it extremely difficult for small brokerage firms
such as Madoff’s to compete with the cartel of large brokerage firms that effectively
controlled Wall Street. Madoff and many other small brokers insisted that the NYSE’s
rules were anticompetitive and inconsistent with a free market economy. Madoff was
also convinced that the major brokerage firms kept securities transaction costs
artificially high to produce windfall profits for themselves to the detriment of investors,
particularly small investors

Because of Madoff’s resentment of the major Wall Street brokerage firms he made it his
mission to “democratize” the securities markets in the United States while at the same
time reducing the transaction costs of trading securities. “Bernie was the king of
democratization.

Madoff Securities was one of the first brokerage firms to utilize computers to expedite
the processing of securities transactions. Bernie Madoff is also credited as one of the
founders of the NASDAQ stock exchange that was organized in 1971. The NASDAQ
was destined to become the world’s largest electronic stock exchange and the largest
global stock exchange in terms of trading volume. In the late 1980s and early 1990s,
Madoff served three one-year terms as the chairman of the NASDAQ

1962 - Madoff had expanded his firm to include investment advisory services. For
several years, most of the individuals who set up investment accounts with Madoff
Securities were referred to him by his father-in-law. Although the firm was a pioneer in
electronic trading and made sizable profi ts from its brokerage operations, investment
advisory services would prove to be its most important line of business. By late 2008,
the total value of customer accounts that Madoff Securities managed had reached $65
billion.

The key factor that accounted for the incredible growth in the amount of money
entrusted to Madoff’s firm by investors worldwide was the impressive rates of return that
the firm earned annually on the funds that it managed. For decades, those funds earned
an average annual rate of return generally ranging from 10 to 15 percent. Although
impressive, those rates of return were not spectacular. What was spectacular was the
consistency of the returns. In 2001, Barron’s reported that some of the Madoff firm’s
largest investment funds had never experienced a losing year despite significant stock
market declines in several individual years. Even when the stock market collapsed in
late 2008, individual Madoff funds continued to report net gains for the year-to-date
period.

The only substantive information Madoff Securities provided regarding its investment
policies was that it employed a “split-strike conversion” investment model. In simple
terms, this strategy involved purchasing several dozen blue-chip stocks and then
simultaneously selling both put options and call options on those securities.
Supposedly, this strategy ensured a positive rate of return on those investments
whether the stock market went up or down

1960s–1970s –BLMIS become known for making “third-market” OTC trades that use
innovative computer technology and bypass the NYSE trading floor to make markets.
Some BLMIS technology is used in the creation of NASDAQ. The firm also opens a
private investment portfolio division, where Madoff manages money for his investors
(whose trades are processed through his firm).

1989 - Becoming one of the largest independent trading operations in the securities
industry, by 1998, BLMIS is handling approximately 5% of the trading volume on the
NYSE.
1990 – Madoff is appointed as the nonexecutive chairman of NASDAQ. Through 1990s,
the firms’ private investment accounts continue to grow and report consistent growth
with positive returns. Investors include hedge funds, large charitable foundations,
individuals, and pension plans.
1992 – The US SEC investigates a Madoff securities feeder funds run by Frank Avellino
and Michael Bienes, for selling unregistered securities. Avellino and Bienes agree to
shut down the fund, but Madoff is revealed as the fund’s mystery manager, and his
fame as an investment manager becomes even more widespread. As his fame
increases, Madoff is asked to reveal his “strategy” which is generally described as a
“split-strike conversion” that uses options contracts on blue chip stock purchases to
protect the portfolio’s downside potential. Multiple industry pees suspect something is
awry with Madoff; they believe he may be front-running trades in his market-making
unit.

CENTRAL EVENTS:
1999 – Harry Markopolos, a portfolio manager at an options trading company, is asked
by his boss, Fred Casey, to design an investment product that can duplicate Madoff’s
success. After 4 hours of analysis he concluded that Madoff cannot be earning the
returns he claims without some sort of fraud.
2000 – Markopolos files a complaint with the Boston office of the SEC, but the SEC
does not act on the complaint.
2001 – Markopolos sends another report to the SEC and offers to go undercover to
attempt to acquire evidence that Madoff is committing fraud. The SEC does not act on
this report.
2002 – Markopolos meets with European investors in Madoff’s fund who provide
information convincing him that Madoff is actually operating a Ponzi scheme. Next 3
years he continues to investigate independently about Madoff’s operations.
November 7, 2005 – Markopolos sends another report to the SEC suggesting BLMIS is
a Ponzi scheme. The SEC investigates and does not find any evidence of fraud.
2008 – BLMIS has grown into the 6th largest market maker on Wall Street, but the
developing financial crisis leads investors in Madoff’s fund to request redemptions faster
than Madoff can bring in additional funds. Things began to deteriorate after clients
requested a total of $7B back in returns. Unfortunately for Madoff, he only had $200 to
$300 million left to give.
THE CASE

The SEC had been investigating Madoff and his securities firm on and off since 1999 --
a fact that frustrated many after he was finally prosecuted, since it was felt that the
biggest damage could have been prevented if the initial investigations had been
rigorous enough.

Markopolos was one of the earliest whistle-blowers. In 1999, he calculated in the space
of an afternoon that Madoff had to be lying. He filed his first SEC complaint against
Madoff in 2000, but the regulator ignored him.

In his 2005 letter to the SEC, he wrote: "Madoff Securities is the world's largest Ponzi
Scheme. In this case there is no SEC reward payment due the whistle-blower so
basically I'm turning this case in because it's the right thing to do."
Using what he called a "Mosaic Method," Markopolos noted a number of irregularities.
Madoff's firm claimed to be making money even when the S&P was falling, which made
no mathematical sense, based on what Madoff claimed he was investing in. The biggest
red flag of all, in Markopolos's words, was that Madoff Securities was earning
"undisclosed commissions" instead of the standard hedge fund fee (1 percent of the
total plus 20 percent of the profits).

The bottom line, concluded Markopolos, was that "the investors that pony up the money
don't know that BM [Bernie Madoff] is managing their money." Markopolos also learned
Madoff was applying for huge loans from European banks (seemingly unnecessary if
Madoff's returns were as high as he said).

It was not until 2005 -- shortly after Madoff nearly went belly-up due to a wave of
redemptions -- that the regulator asked him for documentation on Madoff's trading
accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed
but didn't send them, and that was that. "The lie was simply too large to fit into the
agency's limited imagination," writes Diana Henriques, author of the book The Wizard of
Lies: Bernie Madoff and the Death of Trust, which documents the episode.

2008- The SEC was excoriated following the revelation of Madoff's fraud as well as
wrongdoing by major banks in the markets for mortgage-backed
securities and collateralized debt obligations.

December 9, 2008-Madoff allegedly told his brother Peter about the fraud.

December 10, 2008- he told his sons that his business was one big Ponzi scheme,
and Madoff’s sons turned him into the FBI.

December 11, 2008- Madoff was arrested by the FBI and charged with securities fraud.
March 12, 2009- Madoff was pleaded guilty to 11 count of securities fraud. He
ultimately received a sentence of 150 years in prison.

BASED OF THE CASE

The Ponzi scheme
Ponzi scheme is a fraudulent investment operation, where the operator, an individual or
an organization, pays returns to its investors from new capital generated from new
investors, rather than from profit earned through legitimate sources. It was named after
Charles Ponzi, who used the strategy in the 1920s using the international reply
coupons.
Unlike pyramid schemes, in which victims unknowingly rope in more targets, Ponzi
schemes rely on a single person or group to coordinate every aspect of the fraud. To
keep the scam going, the masterminds behind the plan convince numerous victims that
they’re investing in a legitimate fund that promises great returns. Then the scam artists
take money from new “investors” and use it to pay off existing investors. But for the
scam to truly work to everyone’s benefit, the orchestrators would need access to an
infinite supply of new victims.
CHARACTERISTICS OF PONZI SHEME:
 High investment returns with little or no risk;
 Overly consistent returns;
 Unregistered investments;
 Unlicensed sellers;
 Secretive and/or complex
 strategies;
 Issues with paperwork;
 Difficulty receiving payments.

 These are all present in Madoff’s investment scam.

PROPOSED
ALTERNATIVE/RECOMMENDATION(S)

Before investing, we should look at the holdings of a fund and make sure that their
performance is consistent with the activity of the stock market.

Here are some signs on how you can spot a ponzi scheme:
 Unclear business models
Crafters of Ponzi schemes will try to distract you with big numbers, hoping that
you don’t notice that the business doesn’t make sense. In hedge funds or
investment pools like Madoff’s, the numbers won’t add up if you take the time to
 look at them. Schemers will often discourage you from asking questions or run
around them every time you do.
 Aggressive sales techniques
Have you noticed how scam artists will go to any length to get someone to sign
up with them? If they were for real, they would just let their results speak for
themselves.
 Promises of high returns for no work
Anyone who tells you that you can get rich quick is probably doing something
illegal. If someone promises you “easy money,” don’t give them a moment of
your time.
 Difficulty withdrawing funds
Madoff’s scheme was unusual, because he made it easy for investors to
withdraw their money fairly easily. Generally, a Ponzi scheme discourages its
investors from withdrawing and creates delays for dispensing funds.

Role as an auditor with investment in Madoff scheme

With professional expertise as a watchdog for financial fraud, we will seek
conducting analytical review of the fast returns yield on investments in the firm. Note,
given the critical nature of the case and the amount of red flags that have been floating
in the air about Madoff’s firm, having read in detail about the Pyramid and Ponzi
schemes, we will ask other investors of certain size, equal to 30% of the total investors
in the firm, to request a withdrawal of part or all of our funds to see what happens to the
firm. Knowing that the Ponzi scheme dies naturally as soon as it gets dry of funds or
there is no more pouring in of new investors.
Audit procedures to apply in order to prevent such schemes
The fundamental audit procedure that could check the scheme was to perform an
unscheduled audit on a recurrent basis for example such as surprise inventory count
and department review to verify fair business practice, as well as review the material
source of the firm’s revenue inflows. Surprise audit has too much to do with preventing
and detecting fraud and risk. Unscheduled audits deter fraudster and restore fair
business practice. By doing this the internal audit department will have matters in their
hands to combat such scheme and safe investor’s funds. Conversely, if top level
management who have the pen-power to authorize and implement internal audit
recommendations, build a collusion with the internal audit department and the external
auditor there is very little that can be done to stop the great evil, as in the case with
Madoff.
Friehling and Horowitz
Madoff’s Ponzi scheme made history because everything works well as if he and
his accomplices were all from different planet with extraordinary skills. Friehling and
Horowitz was another ghost auditing firm that had no more than one and half significant
auditor with a less important clerk in the entire audit firm. How on this earth such firm
could be the one to attest to up to a 65million dollar investment security firm, it seems
laughable but very serious. Now the ghost audit firm was able to deceive investors,
above all, the AICPA that there was no need for a peer review, on grounds that it did not
perform audit of BLMIS. The relevance of a peer review not only pertaining to an audit is
vital in every piece of paper work, for it helps eliminate errors and flaws. As it relates to
Madoff’s Investment securities audit by Friehling and Horowitz, the AICPA was to make
certain that all of the professional works that the 2-men auditing firm did for BLMIS was
to undergo peer review, a move that could have detected the scheme soon before the
total scheme amount reach a thousand dollar. In our opinion, a peer review of Friehling
and Horowitz audit could have provided the cure to Madoff’s Ponzi scheme in its first
year of existence before any greater harms.
Be like Harry Markopolos
Harry Markopolos was seen as a mighty hero for the Madoff’s Ponzi scheme. He
was the whistleblower fought for almost or more than a decade to save investors funds
but the authorities did not gave him listening ears. Our action plan to draw regulators
attention will consist of two major things, which includes: firstly, calling out to the AICPA
which has sat reluctantly to conduct a peer review of one of its members professional
practice perform at Madoff’s Investments Securities firm. Likely, a peer review is a key
component of enforcing auditing standards and professional skepticism when the
independent auditor performs his professional duties. Secondly, identify few potential
Madoff investors, reach out to them and lay an observation of their investment. Any of
the two methods will bring positive result and uncover Madoff deadly Ponzi scheme.
Role of the audit committee
In all respect, the ultimate goal of an audit committee brings some sort of relieve
to investors, creditors, regulatory bodies and capital market participants, while
preventing and detecting corporate fraud and bad governance like the one exhibited by
Madoff restores their confidence in the capital market. As such, the committee
evaluates and police management’s adherence to the internal audit findings and
recommendations. The good thing about the audit committee was its independence
from management’s operation and need not to report to management but to the board
directly. The board entrust the responsibility to the audit committee to select the external
auditors, and it works with the internal audit department to enforce adherence to internal
control procedures and compliance with regulations. An established audit committee
could have been a perfect tool for discovering the so-called Ponzi scheme perpetrated
by Madoff. Owing to the fact that the committee was organized by a vibrant board of
directors who require its findings and recommendations, would never allow Madoff’s
Ponzi scheme to go a day. With an audit committee, the fraud was going to die a natural
death and buried right in the brain of its perpetrators.
 RELATED TO PHILIPPINE SETTING

 Aman futureS GROUP

 Performance investments products corp. (pipc)
 LeGacy group of companies