How the Bernie Madoff Ponzi Scheme Impacted the Sec

How the Bernie Madoff Ponzi Scheme Impacted the SEC

Heather Pearsall

Lakeland University

Bernie Madoff perpetrated one of the largest Ponzi schemes known by defrauding thousands of investors out of billions of dollars.  This Ponzi scheme single handedly wreaked havoc into the Wall Street investment industry that questioned why and how this scheme was able to take place unnoticed for several decades.  “An investigator at the Securities and Exchange Commission warned superiors as far back as 2004 about irregularities at Bernard L. Madoff's financial management firm, but she was told to focus on an unrelated matter, according to agency documents and sources familiar with the investigation” (Goldfarb, 2009).  The SEC is responsible to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” as stated in the first sentence of their Mission Statement (United States Government).  The following will summarize the role of the SEC, show how the Bernie Madoff incident violated the ASPA Code of Ethics, and state the impact that the Ponzi scheme had on SEC regulations.

The SEC originally came into existence in 1934 (Securities Exchange Act) in response to the great stock market crash of 1929 because there was no regulation as well as the lack of verification of actual stocks.  The Securities Exchange Act of 1933 and 1934 restored confidence in the market by monitoring “two common-sense notions: (1) Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing, and (2) People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first” (United States Government).  The Great Depression and crash of the stock market was a catastrophe that the government saw need to regulate the industry by putting in regulations that further protected investors, requiring companies to disclose all information, as well as the inherent risks involved.  “A regulatory commission is an independent agency established by Congress to regulate some aspect of U.S. economic life… [including] the Exchange Commission (SEC)... they are, of course, not independent of the U.S. government… [and are] important regulators and watchdogs” (Shafritz, J. M., Russell, E.W., & Borick, C., 2013).  The government is not above the people, they are included in it, therefore, they are responsible to the people as a whole to inform them of anything and everything that could possibly affect them.

ASPA developed a Code of Ethics for public administrators to abide by that consisted of five categories.  The five overall objectives, or principles, serve as a how-to guide, such as how-to Serve the Public Interest, how-to Respect the Constitution and the Law, how-to Demonstrate Personal Integrity, how-to Promote Ethical Organizations, and how-to Strive for Professional Excellence (Geuras, 2011, pp. 33-35).  Bernie Madoff violated all principles in a blatant attempt to defraud millions to his own benefit.  The Institute of Management Accountants (IMA) has a similar code called a Statement of Ethical Professional Practice, for the Accounting industry, which contains four overarching principles consisting of Honesty, Fairness, Objectivity, and Responsibility (Institute of Management Accountants, 2015).  

As a result of Bernie Madoff’s Ponzi scheme, the Securities and Exchange Commission has since made, “decisive and comprehensive steps to reduce the chances that such frauds would occur or be undetected in the future” (United States Government).  The SEC began, “Revitalizing the Enforcement Division, Revamping the handling of complaints and tips, Encouraging greater cooperation by 'insiders', Enhancing safeguards for investors' assets, Improving risk assessment capabilities, Conducting risk-based examinations of financial firms, Improving fraud detection procedures for examiners, Recruiting staff with specialized experience, Expanding and targeting training, Improving internal controls, Advocating for a whistleblower program, Seeking more resources, Integrating broker-dealer and investment adviser examinations, and Enhancing the licensing, education and oversight regime for 'back-office' personnel” (United States Government).  Although Madoff’s investment firm had been investigated, at least five times over nearly 20 years… it never discovered the tremendous fraud”  (Goldfarb, 2009).  It is likely that SEC investigators were highly encouraged (monetarily motivated) to look the other way as there were plenty of warning signs that could have discovered the fraud many years before it was unveiled.