Stanwick, Understanding Business Ethics, 3e Instructor Resource
All Cases for Understanding Business Ethics 3rd Edition by Peter A. Stanwick, Sarah D. Stanwick Case 1-26
Table of Contents Case 1 Bernard Madoff
Case 10 De Beers
Case 19 Patagonia
Case 2 Siemens
Case 11 Interface
Case 20 Tokyo Fukushima
Case 3 TOMS
Case 12 Facebook
Case 21 Tyco
Case 4 Disney
Case 13 Mattel
Case 22 Olympus
Case 5 WFP
Case 14 GM
Case 23 Wal-Mart
Case 6 News Corporation
Case 15 McWane
Case 24 WorldCom
Case 7 Enron
Case 16 Vioxx
Case 25 BP
Case 8 Google
Case 17 Music Industry
Case 26 Greyston Bakery
Case 9 HealthSouth
Case 18 Apple
Case 1: Bernard Madoff: How “One Big Lie” Can Destroy Thousands of Lives Case Summary The name of Bernard Madoff will forever be linked with Charles Ponzi. Madoff had created the largest Ponzi scheme in the history of commerce. A former chairman of NASDAQ with a sterling reputation, Madoff was able to convince thousands of individuals and organizations that he had a secret strategy that would guarantee above normal returns for the investors. The Ponzi scheme went on for almost two decades which is unbelievable since Ponzi schemes usually can survive for only a few years before the scheme breaks down. As was stated in the case, a Ponzi scheme is only successful by focusing on self-interest or greed of the investor. Madoff promised 1
Stanwick, Understanding Business Ethics, 3e Instructor Resource
returns that were not feasible but “showed” the results of his secret strategy by giving money back to the investors. However, Madoff would pay off previous investors with new cash flows from newer investors. Madoff would keep part of the money and provide “dividends” back to the investors. However, most of the returns were based solely on the account statement sent to the investor. In actuality, Madoff would create false account balances to keep the investors satisfied. Therefore, every Ponzi scheme will eventually collapse when investors demand their “money” from the accounts and the total amount demanded by the investors is more than the schemer can distribute. It is estimated that Madoff took approximately $65 billion from his investors. Madoff also used “feeder” firms to get new investors. Feeder firms are smaller brokerage firms that would set up accounts for the clients with Madoff. The feeder firms would get a commission for the new investors and Madoff could continue to pump money into the Ponzi scheme. Madoff was an excellent marketer of his scheme. He would target wealthy clients and those connected to the Jewish community. He would make the process of taking the money from the investors an exclusive act by purposely rejecting some investors to increase the “hype” of having Bernie invest their money. There were a series of red flags that were not noticed by government regulators, including the SEC. The first is that it was impossible to guarantee above average return on an investment due to the volatility of the stock market. The second red flag was that Madoff had strict control on the information pertaining to the investor accounts. This control was critical to ensure the Ponzi scheme was not exposed. The third factor is that is the SEC matched the declared transactions by Madoff and the transactions which actually occurred in the marketplace, but they would not reconcile since Madoff did not actually make the transactions. Another red flag is that Madoff was dealing with billions of dollars but only used an accounting firm with three employees to manage his transactions. Bernard Madoff was arrested on December 11, 2008 and plead guilty to all 11 felony charges on March 12, 2009. The charges included securities fraud, money laundering and perjury.
Teaching Note Bernard Madoff is a good case to use in the beginning of the semester. While some of the cases have multiple ethical issues, this case is clearer cut. The unethical behavior of one individual has had a fundamental negative impact on thousands of individuals and organizations. The enormity of the fraud is one of the keys to this case. As was mentioned previously Ponzi schemes usually have a relatively short time frame due to cash flow issues. It is truly remarkable that Madoff was able to continue to scheme for almost 20 years. An underlying theme of this case is greed. Greed from the perspective of both Madoff and the investors. Greed must occur on both sides of the transactions for a Ponzi scheme to work. Another important area of discussion for the students is the impact on the Madoff family. The actions of his father lead Mark Madoff to no longer be able to cope with the potential lawsuits and the shame of the Madoff name. In addition, Madoff was in prison when his other son died of 2
Stanwick, Understanding Business Ethics, 3e Instructor Resource
cancer. Madoff‟s wife was “shocked” when she heard about the fraud and distanced herself from Bernard‟s actions. These family dynamics highlight that unethical behavior not only impacts the people receiving the fraud but also the family members connected to the person committing the unethical actions. An additional point of discussion was Madoff using his religious faith as an opportunity to enhance his fraud. An interesting question to ask the students is how could someone create such a disconnect between the values and beliefs of his religion and his actions in which he used religion as the connection. How could someone commit fraud against numerous religious organizations that became financially insolvent due to the actions of Madoff?
Questions for Thought 1. Trust is extremely important in business transactions. Greed also plays a role in some business transactions. Discuss how these two concepts were intertwined in this case. Madoff was a master of combining trust and greed. As was stated previously, greed must be present from both Madoff‟s and the investor‟s perspective in order for a Ponzi scheme to work. Trust is used to ensure that the actions by the investor will result in the expected results of higher returns on their investment than alternative investments. Trust is also critical for Madoff to execute the Ponzi scheme. That could be a primary reason why Madoff used his family to help run the organization and assigned his brother and niece to be the two people in charge of the compliance aspects of Madoff‟s operations. Trust is also the reason why Madoff was able to convince many Jewish organizations to give Madoff money to invest. By establishing a strong religious bond with these organizations, Madoff was able to use trust to ensure that there would be no questions as to how Madoff was able to guarantee these above average returns. 2. Describe a Ponzi scheme. Find several examples of Ponzi schemes that have occurred in recent years. As was mentioned in the case summary, a Ponzi scheme is the same idea as a Pyramid scheme. The schemer promises higher than average returns that are guaranteed. In order to prove their capability of producing these returns, the scheme attracts new investors and pays some of the money from these investors to the old investors. The schemer usually does not make any actual investments but shifts money from one level of investors to another. Each level that must be supported by more investors. This is why it is described as a Pyramid since the schemer is at the top and the levels below the schemer continue to build as more and more investors are needed to support the cash flow demands of the Ponzi scheme. A good source of current Ponzi schemes is the web site called PonziTracker. http://www.ponzitracker.com/
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Stanwick, Understanding Business Ethics, 3e Instructor Resource
3. In this case, it appears that Madoff had many friends and family members who were involved in the fraud. Speculate about how likely is that Madoff’s own sons, who were employees of the firm, knew nothing of the fraud, as they stated. It would seem very likely that both the sons and Madoff‟s wife knew about the fraud. Due to the “phenomenal” success of Madoff‟s investments, it is probable that both the sons and Ruth would ask Bernard how he was able to guarantee these type of returns. In addition, since both sons were actively involved in the operations of the firm, it is highly likely that the sons would talk to the staff members would were also involved in the fraud. Therefore, it is difficult to believe that information related to a Ponzi scheme that lasted almost 20 years would never be received by the sons at some point, at work or at home. 4. Explain the ethical issues associated with running a family-owned business. Were these issues present at Madoff’s firm? There are numerous benefits of having a family owned business including the value of trust that was mentioned in question 1. Family owned business allows the owners to have complete control of their operations. While this is a positive for issues such as strategy development and resource allocation, it also creates opportunities to execute unethical behavior without the traditional check and balances of a publicly traded firm. Madoff was not only able to control the information related to the fraud, but, ensured it would not be detected by having his brother and niece be the compliance department of the firm. In addition, Madoff selected an accounting firm knowing that would not have the resources necessary to investigate whether Madoff was committing fraud or not.
Case Update On March 23, 2015, the trustee liquidating Bernard Madoff‟s assets announced that he had recouped $10.65 billion to be distributed to the victims.i On May 7, 2015, former Madoff employee Frank DiPascali died of lung cancer at the age of 58. DiPascali and other staff members used a random number generator to help create false trading orders. DiPascali was still waiting to be sentence for his actions in the Madoff fraud. He had plead guilty to 10 criminal charges and could have faced a maximum of 125 years in prison.ii David Kugel, a long time trader of Madoff‟s who plead guilty to conspiracy, securities fraud, bank fraud and falsifying documents was sentenced to 10 months of home confinement for his crimes. He was not given any jail time since his testimony helped the prosecutors to convict five Madoff employees for their role in the fraud. He could have received up to 85 years in prison for his convictions. Kugel also was sentenced to 200 hours of community service and forfeited $7.17 million to the government. He told the judge that “The guilt, embarrassment and humiliation have become part of my DNA…In my mind, I‟ve gone from being an American success story to being an American tragedy.”iii On May 28, 2015, Maddoff‟s chief accountant, David Friehling was sentenced to a year of home detention. Friehling had started to co-operate with the authorities before prosecutors charged him with the certification of Madoff‟s false financial records.iv On June 18, 2015, it was announced the personal assets of Peter Madoff, Bernard‟s 4
Stanwick, Understanding Business Ethics, 3e Instructor Resource
brother, would be auctioned online by the federal government. The government authorities also had sold his Long Island mansion for $3.5 million.v On August 5, 2015, Madoff‟s longtime friend, Irwin Lipkin, was sentenced to six months in prison. Lipkin had helped conceal the fraud by creating false records in his role of comptroller of Madoff‟s firm.vi
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Reuters. “Madoff Feeder Fund Settles; Victims' Recovery Tops $10.6 Billion”. The New York Times. March 23, 2015. ii Stephanie Yang. “Former Madoff Add Frank DiPascali Dies at Age 58 of Lung Cancer. The Wall Street Journal. May 11, 2015. iii Associated Press. “Ex-Madoff Trader Testifies Against Co-Workers, Avoids Prison”. The New York Times. May 27, 2015. iv Associated Press. “Madoff Accountant Sentenced to Home Detention.” The Wall Street Journal. May 28, 2015. v Associated Press. “Peter Madoff’s Assets for Sale on Online Auction.” The Wall Street Journal. June 18, 2015. vi Associated Press. “Irwin Lipkin Sentenced to Six Months in Prison in Madoff Case.” The Wall Street Journal. August 5, 2015.
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