1. Schemes & Scoundrels: Why America Fails to Prevent
Fraud as Seen Through Bernie Madoff
By:
Lauren Baker

2. •Class: see Outline
•Introduction
•Topic/Thesis
•Ponzi Scheme Basics
•Bernie Madoff
Background
•SEC Failures
•Possible Solutions
•Other Considerations

3. Fonzi Scheme

4. Fraudulent investment schemes occur because of the lack of regulation and
inadequate oversight of certain financial intermediaries and opportunistic behavior.
The following paper will view the problems and issues related to this topic as seen
through the recent Ponzi Scheme conducted by Bernard Madoff from 1960-2008.
The financial regulatory scheme in the United States needs to be restructured in
order to become effective at preventing fraudulent investment schemes.

6. •1857 Little Dorie by Charles Dickens
•1920s Charles Ponzi
•1960 Madoff Securities founded
•1992 SEC Investigation
•1999 Frank Casey & Harry Markopolos
•2000 SEC Investigation
•2001 SEC Investigation
•2002 SEC Investigation
•2005 SEC Investigation
•2006 SEC Investigation
•2007 SEC Investigation
•2008 Madoff Securities is largest market maker on Wall Street
•December 10th, 2008 Madoff confesses to his sons
•December 11, 2008 Madoff is arrested by FBI officers
•December 23, 2008 Thierry de Villehuchet commits suicide
•June 29th, 2009 Madoff sentenced to 150 years in prison
•December 11th, 2009 Madoff’s son commits suicide

7. •Secrecy and exclusion
•Split-strike conversion
•Part I Basket or Grouping
•Part II Call Options
•Part III Put Options
•Feeder Funds, Funds of Funds, Hedge •Income
•Stock Price Appreciation
Funds •Stock Dividends
•Marketing Firms raising capital •Income from Selling Call
versus Hedge Funds Options
•Loss
•17th floor vs. 19th floor of the Lipstick •Stock basket or grouping
Building declines
•Purchase of put options
•Keep your friends close and your enemies (which protect your stock
closer? basket from market price
declines)

9. View Real Client Statement

11. Congressional Hearing-
Markopolos

12. •SEC
•FSOC (Sec. 112 Council Authority)
•Good because links various financial regulatory bodies in the United States
together
•Cross-Pollination of Tips
•FSOC should promote sharing information, tips, information, and evidence to
protect the United States financial industry against fraudulent investment
schemes
•Employees of the SEC
•Comparable Salaries to draw more qualified employees
•Results Bonuses based upon successful and meritorious investigations
•Qualifying Test in order to become an employee (i.e. CPA exam, Patent Bar exam)
•More Economic/Financial Backgrounds versus Over-Lawyering the Commission
•Fraternization, Continuing Education, and Piercing the Financial Industry
•Evaluation/Review of employees
•Turnover/Revolving Door
•Pink Slips to employees who do not perform consistently
•Investment/Financial Advisors
•Current registration requirements need to be changed (all persons that purport to be
investment advisors or financial advisors need certification, qualification standards, and
registration requirements in their State of practice and Nationally through the SEC
pursuant to Investment Advisors Act of 1940)
•Examples of Associations:
•National Association of Personal Financial Advisers
•Financial Planning Association
•Certified Financial Board of Standards
•American Institute of Certified Public Accountants
•Funding (need more of it; average around $1 billion annually from Congress, but there are
statutory maximums under the Dodd-Frank Act)
•Funding comes from Congress approved budget and from activities internal to the SEC
(i.e., Similar to the DEA)
•Company registration (investment firms and other entities have SEC fees) which
go to the General Treasury when they should go to the SEC
•3 times the penalty and goes straight to SEC versus IRS coffers
•Impoundment of assets

13. •Why are Ponzi schemes
successful?
•Opportunistic Behavior and
Greed
•Trust
•Over-optimism (i.e., Due
Diligence diminished because
naïve and over-optimistic)
•Procrastination (i.e.,
Inadequate monitoring and
sitting idly by)
•Bounded Rationality due to
complexity (i.e., Split Strike
Conversion strategy)

14. Not a Ponzi Scheme
PBS-The Madoff Affair
Scam of the Century