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Has the Financial World Learned its Lesson from Madoff?

Personal_Finance / Scams Apr 05, 2016 - 10:31 AM GMT

By: Boris_Dzhingarov

Personal_Finance

The idea of anything as devastating as the Madoff scandal ever happening in the financial world again is a terrifying one; the Ponzi scheme is considered one of the biggest economic crimes of recent years, affecting thousands of private and corporate investors. Many of its victims are still attempting to rebuild their lives, despite almost eight years passing since Bernie Madoff’s tearful confession to his sons one December evening in 2008. It’s therefore not difficult to see why so many are fearful of history repeating itself. Two big questions remain unanswered though; why was Madoff allowed to get away with his scheme for so long, and has the financial world really learned its lesson?


How was the Madoff Scandal allowed to happen?

If you work within the financial sector, or keep up to date with the latest business news you’ll no doubt be familiar with this particular Ponzi scheme, which involved the theft of some $50billion from Madoff’s investors over a twenty-year period. What many are still unsure of, though, is how the entrepreneur’s dealings went unnoticed for so long, and whether those failings still exist today; could we be on the verge of another significant scheme at any moment? First of all, it’s important to note that significant attempts were made to uncover Bernie Madoff’s dealings, with concerns raised as early as 1999. During his trial Bernie Madoff blamed auditors, and the Securities and Exchange Commission for the extent of his deception, citing their inability to verify the existence of transactions as akin to negligence. It’s also believed that the status of Madoff’s company, and his own standing in the industry, registered him almost invisible to those watching; anybody that did choose to dig just wasn’t able to take it far enough. This is, of course, mere speculation more often than not, and you would do well to follow The Madoff Chronicles to learn the details of the case for yourself.

Spotting the warning signs

As you’d expect, and are no doubt aware, the investment industry has made some dramatic changes in the wake of the Madoff scandal, predominantly in an attempt to prevent anything of the like from happening again. The SEC was particularly criticised in the immediate aftermath of the scheme, and was quick to introduce a series of reforms; ‘thanks’ to Bernie Madoff’s operation there is now far greater transparency and co-ordination between regional offices, while a central department tasked with handling market intelligence was introduced thereafter. Additionally, there is now greater emphasis on encouraging whistleblowers, while fraud detection procedures and independent custody requirements have been greatly improved. Acknowledging and protecting whistleblowers will be essential to keep a watchful eye on what often appears to be the ‘sealed knot’ of the investment banking sector. All too late for many, the SEC has made quarterly reports and financial analysis compulsory – but do these measures go far enough?

One thing is for sure, even with such reforms in place unscrupulous members of the investment industry are always going to try their luck, although, perhaps, not to the same scale as Madoff. Investors are far savvier these days, in part due to the tough lessons that were learned directly after Madoff’s arrest, and during his trial; while they were once reliant upon third parties to inform them something was amiss investors take far more interest in, and control over, their money these days. The internet, and the access to financial analysis that it provides, has meant that many potential investors are now well versed in spotting the warning signs that often signal a ponzi scheme. Investors should look out for overly consistent figures, which could be a symptom of attempts to cover up fraudulent activity; secretive or incomprehensible banking strategies that are designed to deceive and confuse; difficulty accessing paperwork, or being met with silence; and unlicensed sellers. While no single red flag is an immediate indication of such a scheme, it certainly pays to be wary. Fraudsters will often use a subtle mix of all of these strategies to lull people into a false sense of security, but hopefully now at least part of the spell has been broken and the public will prove harder to fool.

The revelation that Bernard “Bernie” Madoff, chairman of Bernard L. Madoff Investment Securities LLC had been frittering away his investors’ money to the tune of $50billion over a twenty-year period came as a huge blow to the financial industry, and to private and corporate investors around the world. A dark shadow was suddenly cast over the sector as professionals and the public alike queried how safe our money really is. Important lessons have had to be learned in the years subsequent to Madoff’s confession and arrest, and it’s only now that investors are beginning to trust again. Perhaps Madoff was the test case we needed, a scheme so brash and far reaching that everyone had wake up and pay attention. Whatever the case, the financial sector’s road to redemption has been a long and difficult one.

By Boris Dzhingarov

© 2016 Copyright Boris Dzhingarov - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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