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The purpose of this exam is to demonstrate an understanding of the class materials presented to me during weeks 4,5, and 6 of the course by applying the case study presented in the film, The Madoff Affair, to the ideas and concepts that I have learned in this course.
This will be done by answering the following questions:
- List and describe at least eight law enforcement (guardianship) agencies (both public and private) that had jurisdiction in the Madoff case that could have helped prevent this massive crime from being perpetrated. (PART 1)
- Discuss the type of victimization and its extent in this massive white collar crime and then speculate on the various roles of the victims in this famous case. (PART 2)
- What are at least 6 available sanctions that could be applied to each of the parties in this white collar crime including individuals and the organization as a whole. Then choose the sanction (s) that you feel to be the most effective when considering the purposes of the sanction process. Explain your choice in detail? (PART 3)
Being a part of the social control process, the police are there to provide guardianship to make sure that acceptable behavior is adhered to. According to LeClair (2014), "Social control processes provide the guardianship that is required in order to define and monitor acceptable parameters for behaviors in societies, and provide the enforcement that is required when those parameters have been violated."
There are several agencies that participate in this social control process by providing guardianship. The following law enforcement agencies had jurisdiction in the Madoff case. I believe that they all were influenced by political pressure. As noted by Frederichs (2010, p. 283), "Such agencies are always vulnerable to political pressures in relation to pursuing criminal cases."
1). Securities and Exchange Commission (SEC). According to Frederichs (2010), the SEC is an independent regulatory agency composed of five commissions. It "was given broad responsibilities to regulate and police the securities markets," noted Frederichs (2010, p. 293). It failed to prevent the Madoff Affair because it has limited enforcement powers. According to Frederichs (2010, p. 293), "It does not have legal access to evidence developed in grand inquiries into securities cases, and it must go to court and have a judge authorize any restraining orders or injunctions it seeks to impose."
Additionally, the agency missed a lot of warnings. According an article published by Reuters (2013),entitled, "Victims of Madoff fraud can't sue SEC: appeals court," the agency missed red flags and failed to follow up properly on leads that he was running a massive scam at his firm, Bernard L. Madoff Investment Securities LLC.
2) Federal Bureau of Investigation (FBI). According to the its website, the FBI is an intelligence-driven and a threat-focused national security organization with both intelligence and law enforcement responsibilities, the mission of the FBI is to protect and defend the United States against terrorist and foreign intelligence threats, to uphold and enforce the criminal laws of the United States, and to provide leadership and criminal justice services to federal, state, municipal, and international agencies and partners. The FBI had no role in preventing the Madoff Affair. It did its job after Madoff's sons reported the criminal act.
3). Federal Trade Commission (FTC). According to Frederichs (2010, p. 293), it was created to be a weapon against trust. "It has also been empowered to contend with unfair and deceptive business practices, including deceptive advertising, that defraud consumers," noted Frederichs (2010, p. 293). The FTC failed to prevent the Madoff Affair because, according to the watch dog organization called Pyramid Scheme Alert ( 2009, January 5), " 30 years of FTC policy was reversed and investigations and prosecutions of pyramid selling schemes abruptly ended."
The FTC failed to investigate thoroughly.
4. National Association of Securities Dealers (NASD). National Association of Securities Dealers (NASD) to detect Madoff's huge scandal. The NASD and its successor the Financial Industry Regulatory Authority (FINRA) also failed to detect the huge Madoff fraud. According to Profutures Investiments (2009, January 20)NASD/FINRA is a securities industry "self-regulatory" agency that conducts more frequent examinations of securities firms and broker-dealers.
According to Frederichs (2010, p. 304), "Many corporate crimes are instigated or inspired by the highest level of authority in the corporation, and obviously these executives are unlikely to encourage investigation of such activity. Compliance programs may be more cosmetic than real; whether they have an impact has been difficult to assess; in some cases, they may actually increase the levels of corporate offenses."
5. Auditor. The purpose of an auditor is to conduct audits to certify the soundness and accuracy of financial statement and reports (Frederichs, 2010). "Annual audits are required by the SEC for all companies traded on the stock market," noted Frederichs (2010, p. 302). The accounting firm used by Madoff, according to the video, entitled, "The Madoff Affair," was owned by David Friehling. Friehling's firm, Friehling & Horowitz, did not conduct a single audit of the Madoff books despite being paid about $14,000/month to certify that he did. This auditor helped to perpetuate the Madoff Affair.
6. Internal Revenue Service (IRS). According to Frederichs (2010), its purpose is to investigate tax frauds or misrepresentations involving corporations, businesses, and individuals. "Tax audits and investigations may precipitate investigations of other types of corporate or occupational crime when they uncover evidence of substantial income that cannot be ascribed to legitimate sources," noted Frederichs (2010, p. 282).
The IRS failed to prevent the Madoff Affair because it did not follow its regulations. Had the IRS followed certain steps "to determine compliance with its own regulations regarding becoming an approved nonbank custodian for IRAs, had it done these things which it seems that it must not have done, it almost surely would have discovered Madoff was a fraud," noted Velvel on National Affairs (2009, April 17).
Additionally, the failure to prevent the Madoff Affair took place because as noted by Frederichs (2010, p. 283), "In 2007, IRS auditors complained that they had been forced by their superiors to close corporate crime cases prematurely, with potential losses of billions of dollars of tax revenue."
7). U.S. Postal Inspection Service. According to Frederichs (2010, p. 281), "The U.S. Postal Inspection Service, which is charged with maintaining the overall security and integrity of the mail system, has played an important role in investigating white collar crimes that involve the use of the mail."
It has jurisdiction over embezzlements, identity frauds, lotteries, mail frauds, money laundering, and worker's compensation frauds involving a postal element, and now it has jurisdiction over electronic frauds as well (Frederichs, 2010, p. 281).
Because this agency had not reason to believe a crime was being committed, it had no role in preventing the Madoff Affair. Once it received information from other agencies that a crime was committed, it collaborated with them and found that Madoff was acting criminally.
8). The Justice Department. According to the Department of Justice's website, its purpose is to enforce the law and defend the interests of the United States according to the law; to ensure public safety against threats foreign and domestic; to provide federal leadership in preventing and controlling crime; to seek just punishment for those guilty of unlawful behavior; and to ensure fair and impartial administration of justice for all Americans.
This agency failed to stop the Madoff Affair because the SEC lawyers failed to report their concerns to the Justice Department. They had no reason to be involved.
According to an article written in Fortune Magazine (2011, May 10) entitled, "How they failed to catch Madoff," an SEC investigator thought that the Madoff case should be referred to the Justice Department. "Peter Lamore thought that there was enough to refer the case to the Justice Department immediately. At the least, Madoff was lying under oath, which raised the question why. But the enforcement lawyers, especially Cheung and her superior, didn't seriously entertain the possibility.
It appears that had the SEC did its job, all of the other guardians would have been able to make sure that acceptable behavior was adhered to.
According to an article published by the Economist (2008, Dec 20) entitled, "Finance and economics: Con of the century; the Madoff Affair," there were a diversity of victims. The article (2008, Dec 20) noted that the known list of victims grows longer and more star-studded by the day. "Among them are prominent billionaires, including Steven Spielberg; the owner of the New York Mets baseball team; Carl Shapiro, a nonagenarian clothing magnate who may have lost $545m; thousands of wealthy retirees; and a cluster of mostly Jewish charities, some of which face closure. Dozens of supposedly sophisticated financial firms were caught out too, including banks such as Santander and HSBC, and Fairfield Greenwich, an alternative-investment specialist that had funneled no less than $7.5 billion to Mr. Madoff."
Clearly there are indications that the following took place in the Madoff Affair:
-Individuals were being victimized by an organization. Madoff stole the money of many individuals from prominent billionaires, the owner of a major league baseball team, and thousands of wealthy retirees.
-Organizations were being victimized by an organization. Madoff stole money from charities and financial firms.
-An individual was victimizing his organization from within. Madoff actions caused his employees their jobs and one of his sons committed suicide because of Madoff actions.
These victims played a big role in their victimization. They did not mind being kept in the dark about what was going on with Madoff. All they wanted was the money. "They seemed not to mind as long as the returns remained strong, accepting that to ask Bernie to reveal his strategy would be as crass as demanding to see Coca-Cola's magic formula. Mr. Madoff reinforced the message by occasionally ejecting a client who asked awkward questions," according to an article in the Economist (2008, Dec 20).
According to Nolasco et al (2013), "Studies show that investors rationally decide to participate continuously in the Ponzi scheme because, at later rounds of the scheme, they expect to recover their investments (along with sizeable profits)."
They refused to look at the warning signs which was the secrecy with which the investment business was conducted. According to the Economist (2008, Dec. 20), "It was a black box, run by a tiny team at a very long arm's length from the group's much bigger broker-dealer. Clients too were kept in the dark."
Professor LeClair (2014) states that the following goals of sanctioning are:
1. Punishment- The goal is a punishment that is appropriate for crimes committed.
2. Retribution- Professor LeClair (2014) explained that the "goal is characterized by the belief that it is necessary for a society to express condemnation and outrage when important norms and values have been violated. Retribution is an act of reaffirming standards and a censuring of those who have violated those standards."
3. Deterrence- There are two types of deterrence: general and specific. Specific Deterrence refers to the goal of preventing an individual or organization from committing future criminal/harmful behavior. General Deterrence refers to the goal of preventing other individuals or organizations from continuing or beginning in similar types of white collar crime activities.
4. Incapacitation-refers to the removal of an individual from situations where he/she can continue their harmful behavior. Incapacitation refers to confinement, death penalty, etc.
5. Rehabilitation-the goal of rehabilitation is to prevent future criminal acts.
6. Restorative justice- refers to the sanctioning process attempting to assist, restore and rehabilitate the victims of white collar crimes. This would involve the assessment of the nature and extent of the victimization. The types of sanctioning most commonly used for white collar crime convictions include fines, restitution, community service, occupational disqualification, incarceration, organized reform and corporate dissolution.
Bernie Madoff Ponzi scheme. I would hold the individual responsible. As noted by Criminal Justice USA (2011, June 5), "The former lifeguard, sprinkler installer and chairman of NASDAQ managed to build a multi-billion dollar investment firm with false trading reports and without assistance from the major derivatives firms, each of which refused to trade with him. Although he had been suspected of being a sham a decade before, it wasn't until 2008 that he was arrested after his misdeeds were reported by one of his sons. In 2009, he pled guilty to 11 federal crimes including securities fraud, money laundering, and theft from an employee benefit plan. The penalty: 150 years in prison and $170 billion in restitution — investors lost billions of dollars due to the scandal, and three people involved with the business, including Bernie's son Mark, committed suicide."
Based on the information provided above, sanctioning would be for punishment, retribution, and incapacitation.
Madoff should be punished for his actions. According to the article entitled, "An affair to remember," written in The Economist (2010, Dec 15), Madoff "has adamantly maintained he acted alone." Because Madoff gave the orders to Michael Bienes and Jeffery Tucker, he and his colleagues should be held more responsible than the organization. As described by Bienes in the film, Madoff carried himself with such confidence that they trusted his every move. Madoff was credentialed. According to Nolasco et al. (2013), Bernard Madoff was one of the most respected investment brokers in the United States. He was a former president of NASDAQ and board member of the Securities Industry and Financial Markets Association (SIMFA) (the body charged with regulation of the riskiest financial investments in the
His victims should have known that something was "fishy" when the major derivatives firms refused to trade with him. Their greed blinded them. They wanted fast money without laboring for it. They did not investigate. Because of this lack of investigation, Madoff's actions resulted in people losing their pensions and their livelihood. The punishment he received fits the crime. Madoff's penalty, according to Criminal Justice USA (2011, June 5) was, "150 years in prison and $170 billion in restitution — investors lost billions of dollars due to the scandal, and three people involved with the business, including Bernie's son Mark, committed suicide."
Retribution is should be administered as well. As noted earlier by LeClair (2014), "Retribution is an act of reaffirming standards and a censuring of those who have violated those standards." Madoff clearly violated the standards. According to Criminal Justice USA (2011, June 5), Madoff was not looked upon kindly that is why major derivatives firms refused to trade with him. "He had been suspected of being a sham a decade before," noted Criminal Justice USA (2011, June 5).
In order to stop him, Madoff had to be incapacitated. His removal had to take place in order to stop the harmful behavior. This was facilitated by his sons when they reported him to the authorities. This resulted in his confinement.
Nolasco, C. A., R., I., Vaughn, M. S., & Del Carmen, R.,V. (2013). Revisiting the choice model of ponzi and pyramid schemes: Analysis of case law. Crime, Law and Social Change, 60(4), 375-400. doi:http://dx.doi.org/10.1007/s10611-013-9456-8
An affair to remember. (2010, Dec 15). The Economist (Online), Retrieved from http://search.proquest.com/docview/851253250?accountid=32521
Finance and economics: Con of the century; the Madoff affair. (2008, Dec 20). The Economist, 389, 119-120. Retrieved from http://search.proquest.com/docview/223976239?accountid=32521
LeClair, D. P. (2014). Week 1-6 lecture. Boston University. Boston, MA. Retrieved from https://onlinecampus.bu.edu/webapps/portal/frameset.jsp?tab_group=courses&url=%2Fwebapps%2Fblackboard%2Fexecute%2FdisplayLearningUnit%3Fcourse_id%3D_18127_1%26content_id%3D_2480147_1%26framesetWrapped%3Dtrue
Frederichs, D.O. (2010). Trusted Criminals: White Collar Crime in Contemporary Society. Belmont, CA: Wadsworth Cengage Learning.
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- Boston University Master Criminal Justice Louis Howell Jr (Autor), 2014, The White Collar Crime in the Film "The Madoff Affair", München, GRIN Verlag, https://www.grin.com/document/293431