Business Research Ethics – The Madoff Scandal

Business Research Ethics

Perhaps the most widely recognized example of unethical business research, Bernie Madoff managed to build a multi-billion dollar investment firm based on skewed research and false financial data. The wealth management company eluded the SEC and other authorities for decades before finally being shut down in 2008.  Unethical business research played a large role in the company’s ability to hide their criminal conduct. Eventually, the actions of the company were uncovered and federal charges were filed against Madoff. This incident has provided one of the best examples of how additional safeguards can be implemented to prevent similar actions in the future.

 

About this Essay

  • Student: Arnie L.
  • Textbook: N/A
  • Course: RES/351
  • About:  Find an article that discusses unethical business research conduct that has resulted in individuals or a firm being convicted, or at least tried for, this conduct. Some examples include the following;
 

In terms of unethical research behavior, the Madoff’s wealth management company skewed research and performance results. Highly positive results were provided to new potential investors to attract new money to be invested into the firm (Henriques 2011). However, these results were completely fictitious. In fact, there were many companies in the wealth management industry that viewed these results with suspicion, and refused to conduct businesses with Madoff’s company. When the financial downturn of 2008 started to get worse, investors in the company started to withdrawn funds at an accelerating rate. Had the research data been reported accurately in the first place, investors would have the ability to make a logical choice when choosing the company to manage their investments. However, the skewed data that was reported was unable to be verified independently and Madoff’ strong reputation within the financial industry was enough to keep investors confident.

As one of the largest financial frauds in modern history, there were many injured parties involved. A net amount of $18 billion in investor funds was lost as a result of the scheme (CBSNews 2009). The primary victims of the fraud included individual investors, pension funds, and non-profit organizations. Many middle class citizens lost a significant percentage of their total retirement assets. Since the fraud, some investors have filed lawsuits against investors who saw a net gain from investing in Madoff’s company. These lawsuits are known as “Clawbacks” and seek repayment of gains from early investors. Although it is unlikely these lawsuits will provide much success, it is the only hope for some investors who experienced massive losses from the fraud.

Bernie Madoff himself took sole responsibility for the crimes and pled guilty to a total of 11 federal felonies. Although other people are suspected to be involved, he was sentenced to a 150 year prison sentence (Henriques 2009). The wealth management company is now defunct and most of the fake returns paid to early investors are unrecoverable by those who lost their entire investment. The scam was one of the most widely covered financial frauds in American history. Madoff is now a household name and people are more aware of the widespread impact that white-collar crimes can create. The actions of a single man have negatively affected tens of thousands of people from all over the world.

In the aftermath of the scandal, the Securities and Exchange Commission admitted to several shortcomings that allowed the scheme to thrive for so long. One of the most important aspects the SEC listed was a failure to follow up on inquires related to suspected fraud (Hilzenrath 2011). A 477-page report was created by SEC that identified the red flags that were missed in the years leading up to the eventual shutdown of Madoff’s company. In addition, the case has called for additional regulation and transparency among wealth management companies. Companies like this are privately owned, and thus exempt from much of the regulation that public companies face. A proposed solution is to require additional financial regulation on hedge funds and wealth management companies.

The Madoff scandal highlighted the highest potential negative outcome when business research ethics are not followed. If the research data and financial results were reported accurately to investors this scam would have been avoided entirely. On a positive note, the scandal has provided a good example of opportunities to prevent fraud in the future. Regulating bodies have recognized their shortcomings and can use this as a model to reform existing laws on private wealth management companies. The victims will never recover their entire investment, but the experience can hopefully be prevented in the future. In the end, Madoff received a sentence that will ensures the rest of his life will be spent in a prison cell.

References

CBSNews. (2009) The Man Who Figured Out Madoff’s Scheme.

Henriques, D. (2011) Examining Bernie Madoff, ‘The Wizard Of Lies’

Hilzenrath, D. (2011). Eight SEC employees disciplined over failures in Madoff fraud case; none are fired. 

 

 

Your browser is out of date. It has security vulnerabilities and may not display all features on this site and other sites.

Please update your browser using one of modern browsers (Google Chrome, Opera, Firefox, IE 10).

X