Financial Fraud

In the article, “Revealed: desperate final hours of the world’s biggest ever financial fraud,” Jill Treanor talks about the biggest financial fraud ever experienced in the world. This was about the Madoff scandal, where one of the most investments turned out to be a fraud. The article talks about the man behind the fraud, Bernard Madoff, a renowned financier in the Wall Street. Madoff tried giving about $300 million to his family members and friends just before the whole fraud collapsed with losses estimated at about $50 billion and above. His investment promised investors 10-12% annual returns, which attracted many investors across the world. The article reveals that several investors were counting their losses after the announcement of the collapse. Some if these investors were corporate institutions such as Spanish bank Santander, which had an investment of €2.33 billion with around €2.01 billion belonging to its institutional investors. Other corporate investors were such as the Royal Bank of Scotland, owned by several institutions as well as UK taxpayer. In addition, many wealthy individuals especially Jews in New York and Florida lost significant amounts of money. Many people sought their lawyers help immediately they learn that Madoff had been arrested and released on a $10 million bond. The arrest happened after he had confessed to his sons Mark and Andrew, and Theodore Cacioppi, a Federal Bureau Investigation agent that the investment had been a result of fraud for all this time. It turned out to be a Ponzi scheme, one that ends at a particular time when no more payments can be made to the investors (Krantz 363).

A ponzi scheme is a form of a pyramid scheme designed to take money from unsuspecting investors by promising them huge returns. However, there is usually no investment made with their money (Freer and Eric 6). Rather, the scheme will rely on new investors joining, who will provide money to pay off those who invested first. When no more people can join or more people ask for their returns, the scheme collapses. This happens because Ponzi schemes do not enter into real trade, but rather depend of recruiting of new investors. This is not possible for quite a long time. Therefore, the scheme is doomed to end at one time. It usually has several generations, where those who come in will pay those who were there earlier. In addition, when it collapses, the last generation is worst hit as they lose all their investments (Albrecht 546). This was the case with the Madoff investment, which attracted so many people around the world, including countries such as Spain, Japan, Britain, and France and among others.

The article goes further to reveal accusations against the United States Regulator charged with ensuring such fraud does not occur through checking the books of the company. It was alleged that the regulator had not done so since it was launched in 2006. In the United Kingdom, the Financial Services Authority was thought to be holding back information about the fraud. This was because the Financial Services Authority, FSA, was in charge of regulating Madoff, his two sons, brother, and other registered individuals of the company, which Madoff registered in 2006.

The article cites Madoff’s words after he realized the scheme could not go on. He confessed to have paid investors with illusionary money. He further said it could not go on further than that. His scheme started collapsing when unknowing investors started withdrawing their investment du to the financial crises of the time. Thus, the investment needed to pay many investors who already felt the pinch of financial crisis. Considering there was no investment or any trading by the company, Madoff’s company could not make to pay up all the investors. Realizing this, he said he was done, and revealed that this had been a Ponzi scheme since it was registered. It was the form of scheme invented by Charles Ponzi, who invented it after World War I that, “involves disbursing “returns” to investors out of money from new entrants” (Treanor, 2008).

He further talked about handing himself over to authorities, which he had planned to do after dividing up the $200 million that he had left to several people and employee in addition to family members. After this, he was taken to court. However, so many people blamed regulatory authorities that were responsible for ensuring such schemes do not exist. Lack of regular checks by the regulatory groups caused this scheme to go for a few years before people could realize (Sarna 76). However, it is worth noting that the scheme could only have stopped if there were no new recruits. However, to the financial crisis of the year, people felt the effect of increased rates and had to get their money only to realize there was no money.

Treanor further cites the astonishing fact that the Ponzi had been going on for several decades without people finding out. This could have been negligence by the authority regulators for failing to do their work well. Further, the article wide up by warning that such fraud will be more likely in the future especially during tricky financial market conditions (Fisher and Lara 56).

The Madoff scandal took the whole of the world into shock, realizing a fraud that has been going on for decades. The Ponzi utilizes a highly deceitful trick, one that lures investors through its promises of massive returns. The returns only come to those joined the club in the initial stage when it was started. However, at one time, Ponzi scheme will run out of funds when no one can join to pay others. The scheme is based on investing and paying off debts to other investors. Nevertheless, without any form of investment on the company side to make earnings, it remains reliant on new recruits.

Work cited

Fisher, Kenneth L, and Lara Hoffmans. How to Smell a Rat: The Five Signs of Financial Fraud. Hoboken, N.J: John Wiley & Sons, 2009. Print.

Frantz, Matt. Investing Online for Dummies. Hoboken, N.J: Wiley, 2010. Print.

Freer, Dave, and Eric Flint. Pyramid Scheme. Riverdale, N.Y: Baen Books, 2001. Print.

Sarna, David E. Y. History of Greed: Financial Fraud from Tulip Mania to Bernie Madoff. Hoboken, N.J: Wiley, 2010. Print.

Treanor, Jill. Revealed: desperate final hours of the world’s biggest ever financial fraud. The Gurdian, December 25, 2008. Web. July 26, 2012.