Money And Capital Financial Market Analysis - Myassignmenthelp.Com

Question: Discuss about the Money And Capital Financial Market Analysis. Answer: Introduction The purpose of this report is to highlight on the Ponzi Scheme and the case on the Bernard Madoff relating to this scheme. This study exploits the Ponzi scheme crash for estimating the impact of negative economic shocks on the criminal result. Ponzi scheme refers to the financial scheme created in the year 1920 and has been named after Charles Ponzi in the US. This scheme offered high returns to the costumers with the aim Doubling the cash within three months. This paper also elucidates on the findings of institutions and investors impacted. The outcome of this case in terms of recommendation and implication for future is also discussed in this report. Ponzi Scheme Ponzi Schme is basically a fraudulent investing scam that promises higher return rates with less risk to the investors. In this scheme, the returns are usually paid to the depositor either from their own cash or from the money paid by subsequent investors (Frankel, 2012). The organization that is engaged in this Ponzi scheme focuses to attract new clients for making investments. This new income has been utilized in paying returns to the investors, marked as profit from genuine transactions. This scheme mainly relies on the constant investment flow in order to give returns to older depositors. There at times when these schemes commence operations in terms of rightful investment vehicles that includes hedge funds. This hedge funds easily degenerate into Ponzi scheme if they fail in legitimately earn expected returns (Rantala, 2012). The investors within this scheme might face huge difficulties when they try to take money out of investment. Even the promoters tries to reduce withdrawals by providing new plans to depositors in which the cash cannot be taken out for specific time period in exchange of higher returns. Bernard Mandoffs financial fraud had been one of the biggest lasting Ponzi scheme. He implemented same strategy as that of Charles Ponzi (Aliber Kindleberger, 2015). As former chairman of NASDAQ stock market and founder of wall street firm, he had drawn promising result and also guaranteed proper rate of return. He did not disclosed the origin of money that came in business and went. Background of the Bernard Madoff case Bernard Madoff had started his organization in the year 1960 as stock trader with the total amount of $5000. His business started to develop by taking assistance from accountant. Madaff operated Ponzi scheme under the investment advisory business for near about 40 years. He took the assets of clients, transferred their cash to his personal accounts and even mailed fictitious statement of their account for hiding ruse. However, when his clients withdrew their funds, he utilized obtained capital from other depositors in paying out redemptions. Madoff sold his commodity to his clients as hedge fund (Deason, Rajgopal Waymire, 2015). Even he did not met with his investors and refused in divulging any data pertaining to his companys practices. In 1980, the market creator division of Madoff traded up to 5% of total volume that is made on NYSE. The scheme mainly began in 1990. In the early 1990, he suffered losses with European bank. Despite admitting this losses to his customer, he started in giving false returns. The analysis of Madoff case was basically performed by Markopolos, before this scheme collapsed. He started to send report to SEC in the year 2000 about the operations of Madoff. By the year 2005, Markopolos gave detail about Madoff fund in the letter to SEC titled The largest Hedge Fund is Fraud. The red flags reflected by Markopolos showed that the Madoff fund earned 16% average annual returns by applying strategy of spilt strike conversion (Kull, 2012). In the year 2008, he started to receive huge redemption amount from clients. In December 2008, the Madoffs firm faced $7 billion in request of redemption from investment , which did not exist. His brother and two sons engaged some of positions in Madoff organization. On 9 the December, he told his sons and his brother about the fraud and that his business was Ponzi scheme (Smith,, 2012). However, on 11th December 2008, he was arrested by FBI ( Federal Bureau of Investigation). On 12th March 2009, he plead ed guilty to 11 number of securities fraud and hence received 150 years of imprisonment. There were several factors that kept this scheme running for long time: Firstly, His firm aid in developing NASDAQ and was the biggest market marker. Moreover, the investors took him on trust. Secondly, The inspectors of SEC had conducted certain investigations, but did not check trades with their counterparties. Thirdly, Madoff offered 13% per annum returns in product market and told his customers that he generated returns with split-strike conversion strategy. Fourthly, he relied on feeder funds for steering investor funds, for which the investors were paid 1.5% per annum as management fee as well as profit share. Timeline of events YEAR BACKGROUND EVENTS 1960 Bernard Madoff starts trading operation named as Bernad Madoff Investment securities (BLMIS) 1960-1970 BLMIS had been known for creating third market trades, which uses creative computer technology as well as bypass NYSE in making markets. In fact, some of this technology had also been used to create NASDAQ. The corporation also started investment portfolio sector, where he managed cash for the investors. 1989 BLMIS handled 5% of the trading volume on NYSE. 1990 Bernard Madoff had been appointed non executive chairperson of NASDAQ. In this year, the investment accounts of the organization continued to develop and hence reported constant positive growth returns (Mauboussin, 2012). These investors involve hedge funds, pension plans, charitable foundations etc. 1992 Madoffs fame as investment manager becomes widespread in the nation. Owing to increase in his fame, Madoff had been asked to disclose his strategy that is described as split strike conversion. He created false account records for Avelliom and Bienes (AV) accounts reflecting profitable trade. YEAR CENTRAL EVENTS 1999 A portfolio manager (named Harry Markopolos) at trading organization in Boston had been asked by his manager in designing investment product, which could copy Madoffs success. After analyzing it, he concluded that Madoff could not earn the returns without any fraud. 2000 Harry filed complaint with Boston office of SEC (Securities and Exchange commission), but it does not take any action on this complaint. They was no clue that tip off was transmitted to SEC. 2001 Markopolos sent another report to SEC in order to undercover the evidences that Bernard Madoff had committed fraud. The enforcement director thought that they did not want further investigation. In May 2001, the feeder fund was called by Madoff for inspecting his assets and hence was shown bad trading records. 2002 Harry Markpolos met with the depositors in Madoffs fund who gave the information about Madoff that he was usually operating a Ponzi. Still there was no discernable effect. 2005 Another report was also sent to SEC by Markopolos that suggested that BLMIS is the Ponzi scheme (Moore, Han Clayton, 2012). Two SEC had spent long time in examining his records. After investigating it, SEC does not find any proof of fraud and hence this case wounded up in this year. In September, the bank had asked KPMG to see operational risk of his business. This report outlined several possibilities that include fraud. In October , SEC chief person spoke to Harry but still was not influenced by him. In fact, SEC team thought that it might good idea for ascertaining the counterparties to reported trade. 2008 In March, HSBC bank had asked KPMG in undertaking further risk assessment of doing business with Bernard Madoff (Pozza Jr, Cox Morad, 2012). In August, risk officer of Fairfield Greenwich conceded that few aspects of his operation remained unclear. He also told his two sons as well as his brother that his business was a Ponzi scheme and hence was unable in fulfilling the request of his clients. His sons also reported this revelation to the authorities. On the 11 th December, Madoff had been arrested with securities fraud. YEAR AFTERMATH Janurary, 2009 The customers of Madoff began filing claim against BLMIS February, 2009 The customer account of Madoff had been released 12 March 2009 Madoff had been pleaded guilty to 11 federal states that he was the only person responsible for fraud. As a result, he was sentenced prison to 150 years. Findings of institutions and investors affected Madoffs fraudulent firm affected biggest international banks, charities, hedge funds, investors and other institutions. Owing to loss of trust, the investors exposed to this scheme moved their fund out of any risky assets into the bank accounts (Dodge Steele, 2015). Even the loss from this scheme was mainly felt in Jewish community and charities and hence they were forced in cutting back operations. One of the investors who lost $1.4 billion in Madoffs Ponzi scheme committed suicide. In addition, several financial institutions had shut down as they lost huge endowments. HSBC had been emerged as the biggest victim of this scheme, which lost more than $1 billion. As a result, this bank collapsed as their client suffered from huge losses. Thus, all the victims underwent huge trauma owing to this Madoffs Ponzi scam. Outcome of the case in terms of recommendations and implication for future The outcome of the case was that Mandoff was imprisoned for 150 years and was forced to surrender $170 billion in the year 2009. His three residents and all accessories were auctioned off. Even the employees of Mandffs firm, who were found culpable for their work in Ponzi scheme also imprisoned for 30 years. The recommendations and implication for future regarding this case are illustrated below: The firm must hire ethical minded staffs, promote their core values, staff Chief compliance officer and have good business culture for avoiding fraudulent schemes as of Mandoff. The accounting practices in the company should also be transparent and all transactions in business must be publicly revealed (Freshman, 2012). It is suggested that the investors must also perform detailed research before making investment in any fund or scheme. The organizations must always check the credentials of the financial adviser and hence must be sure that the adviser is legit. This can help the firm in avoiding Ponzi scheme. On the utilization of advanced technology in firm, the investors must carefully inquire about these particular systems as well as infrastructure that is to be used for securing and protecting their assets. Reducing the chance of occurring again The ways of reducing the chance of occurring Madoff scam again are given below: A well defined investment strategy should be determined when writing it to specific clients The financial statement must be audited if the fund has been registered as well as regulated by SEC GIPS (Global Investment Performance Standards) must be determined as it includes accurate depiction of historical performance of clients. Each firm must adopt this standard for receiving honest reporting as well as accountability. The present prospectus and outline of companys assets under management, risk taken must be checked in diligence process (Levmore, 2012). However, these documents must include details regarding investment valuations especially the investments that have been not traded in current market. Conclusion From the above study, it can be concluded that Mdoffs scam had not adversely impacted all victims including investors, organizations, charities etc. It has been seen from this scandal that due diligence of auditors is vital than relying on others opinions. One of lessons that this scheme had taught the investors was that this Ponzi schemes might be legitimate. The auditors must also make certain that the management of the company had conducted test on risk assessment. In fact, they are also responsible for examining management risk evaluation. While dealing with the companys financial reports, they should be sceptical about internal control system as well as business risk that might lead to material misstatement. They should also report the companys management about fraudulent action taken place in business. References Aliber, R. Z., Kindleberger, C. P. (2015). Bernie Madoff: Frauds, Swindles, and the Credit Cycle. InManias, Panics, and Crashes(pp. 143-182). 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