Economics dissertation introduction example

Financial & cost accouting


Bernard Madoff had misappropriated US$64.8 billion through a hedge fund. In promising to pay investors double-digit returns annually and with his reputation as a former non-executive NASDAQ Chairman, Madoff attracted several affluent investors. However, not a penny of investor’s money was traded in the stock market. How, then, did Madoff manage to pay all his investors such high returns?

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BLMIS – A Giant Ponzi Scheme

Not all investors were paid high returns. Only those investors whose money was in Bernard L Madoff Investment Securities (BLMIS) for a year were paid returns. The investments of newer clients were used to pay off the returns of his earlier clients. This is called a Ponzi scheme, named after a similar swindler, Charles Ponzi. While other Ponzi schemes run for hardly a year or so, Madoff’s game perpetuated for two to four decades, arguably.

The fraud is that of purchases that were never made and of profits that were never accrued. The capital sum, which should have been used to purchase US-issued securities, was used to disburse profits. Hence, no goods or equivalents were purchased and were never, naturally, sold either.

Modus Operandi

Despite knowing that markets fluctuate, Madoff doctored his fund’s performance curve to show an upward trend 96% of the time. If he did not, he knew, once the fund went “up” enough, some investors would withdraw their money to reap returns. As this was a Ponzi scheme, returning anyone’s money will result in lesser working capital. So, he cleverly fabricated an upward trend of how the fund performed.There were so-called feeder funds, wherein other investment firms would invest in BLMIS – money that belonged to their own investors. Fairfield Greenwich was one such, which fed BLMIS with US$7.5 billion of the US$14.1 billion total worth. This firm claimed it had “an unusual degree of access” checking BLMIS records before investing the huge sum.

Madoff never entertained questions from clients nor clients who questioned a lot. Charities, including universities, were targeted for they rarely withdraw their investment. Not wanting to be questioned by auditors either, Madoff hired a lean three-member firm called Freiling & Horowitz to check the books of BLMIS. This audit firm had written to AICPA every year that it does not conduct audits. Hence, Madoff hired a firm, which never conducts audits, to conduct audits. There must be some regulation that prevents such tiny firms from auditing a giant firm; BLMIS was valued at US$17 billion.

How it came to light

Markopolos, a financial fraud investigator, interpreted that if a fund performs so well that its trend is predominantly upwards, there must be either insider information influences or it is a giant Ponzi scheme, illegal either way. He mathematically proved that Madoff’s returns were impossible. Having studied this fund, Markopolos wrote to SEC five times, since 2001. Then, Madoff’s hedge fund showed that he had traded a certain number of options which was more than the total options available in the market. Besides, Markopolos did business with the major traders in the market, none of whom recollected ever having done business with Madoff.

Madoff paid two software professionals well to program an IBM machine such that it would generate the data that would satisfy the terms of SEC or any other regulatory body. SEC employees, Markopolos notes, who specialize in law and other areas, cannot identify fraud this way, because they lack financial industry experience. Hence, any number of reports that could be sent by external investigators like Markopolos may get rejected.

Impact on regulators

If the SEC is a robust enough regulatory body, how did it allow itself to be misled by Madoff’s manipulation of accounts? Despite eight audits between 15 years, SEC said that the records at BLMIS were clean. Clearly, if a regulatory body is as gullible as one of those many investors, investors need a more fool-proof system that insulates them from burning their fingers. In 2006, however, when Madoff provided SEC officials with false information about trading registration and other details, he thought he was in trouble. Yet, so negligent and obtuse, the SEC never investigated Madoff’s trading transactions. SEC missed the 29 red flags that Markopolos had raised in his report. Madoff gave up only in 2008, when he could not mobilize funds to pay an investor who suddenly demanded all of his US$10 million back. Sadly enough, SEC could not nab Madoff until he surrendered himself and confessed his crimes. Recently, SEC looked into defining better regulations to provide better protection for its investors. A bill was hence introduced in the senate, which requires hedge funds to file an annual disclosure and enhance transparency in the system. But the impact of the fraud is transnational. The EU is considering a review of their regulations governing hedge fund investments that flow in and out of the EU. This follows France’s having lost at least €600 million due to this scam.


SEC should not stop with merely adding newer clauses but enforce against such impermissible frauds. If the following suggestions are considered, investors may receive better protection:

  1. Norms must be set with regard to the size of a client organization that an audit firm can perform an audit on. For instance, if an audit firm’s largest client has only a net worth of US$1,000,000, the next biggest client they can acquire should be limited to US$1,300,000 so that audit firms systematically rise to the ability to audit bigger organization. This is because bigger organizations have more scope for fraud. Hence only experienced firms should audit bigger organizations.
  2. Whether a company’s shares are sold to mutual funds or other organizations, as long as the money actually belongs to an end-investor, companies must take up the responsibility of informing these end-investors about how much share they have bought. If the Fairfield Greenwich investors were in a position to check which end-companies are their money invested in, US$7.5 billion would have been safe. Such transparency, despite difficulty, if mandated by the SEC or other regulators can help protect investors.
  3. What lawyers view as a violation of the regulations, is limited to their knowledge in financial industry dynamics. SEC must hire more professionals with financial industry experience, who not only know the laws governing trade, but also how loopholes in the framework can be abused.
  4. Due diligence must be put into action. Fairfield Greenwich never studied how Madoff’s fund performed so well or its portfolio. Had they done it, the impact of the scam would have been lesser by US$7.5 billion.

Bernard L Madoff Investment Securities Page 7

N Prana C0918 Phase 1 Financial & Cost Accounting


List of Madoff Victims – Courtesy Wall Street Journal

Fairfield Greenwich Advisors

An investment management firm – $7,500,000,000

More than half of Fairfield Greenwich’s $14.1 billion in assets under management, or about $7.5 billion was connected to Madoff.

Tremont Group Holdings

Asset management firm – $3,300,000,000

The investment firm is owned by OppenheimerFunds and Massachusetts Mutual Life Insurance Co. Tremont’s Rye Investment Management business had $3.1 billion invested, and its fund of funds group invested another $200 million. The loss is more than half of all assets overseen by Tremont.

Banco Santander

Spanish bank – $2,870,000,000

Santander is offering its private banking clients 1.38 billion euros in compensation for Madoff-related losses. The offer doesn’t apply to institutional investors. Latin American clients were approached with an offer to return their original investments via preferred stock with a 2% interest rate, in return for a promise not to sue. Santander customers Mar Octava Limitada and Marcelo Guillermo Testa filed a class-action lawsuit in a U.S. court, lawyers said Jan. 27. The losses were first disclosed Dec. 14. 2.01 billion euros belongs to institutional investors and international private banking clients; 320 euros million belongs to private banking customers in Spain.

Bank Medici

Austrian bank – $2,100,000,000

The bank had two funds with $2.1 billion (1.5 billion euros) invested with Madoff. Bank Medici is 25% owned by Unicredit SpA and 75% owned by chairwoman Sonja Kohn. Hedge funds run by the bank had almost all their money invested with Madoff.

Ascot Partners

A hedge fund founded by billionaire investor, philanthropist and GMAC chief J. Ezra Merkin


The hedge fund had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff. Austria’s government named Gerhard Altenberger to manage the bank, but won’t supply it with funds.

Access International Advisors

A New York-based investment firm


The investment-advisory firm’s co-founder Thierry Magon de La Villehuchet, 65, was found dead in his Manhattan office on Dec. 24, 2008, in an apparent suicide. Mr. De La Villehuchet lost about $50 million, the bulk of his personal wealth.


Dutch bank


Fortis Bank and its subsidiaries have no direct exposure to Bernard Madoff Investment Securities LLC, but parts of the group do have a risk exposure to certain funds it provides collateralized lending to. If, as a result of the alleged fraud, the value of the assets of these funds is nil and the respective clients cannot meet their obligations, Fortis Bank Nederland (Holding) N.V.’s loss could amount to around EUR 850 million to EUR 1 billion. The continuity of Fortis Bank Nederland (Holding) N.V.and its subsidiaries is not at stake in any way.

Union Bancaire Privee

Swiss bank


Half of UBP’s 22 funds of funds put at least some of their money into Madoff-related investment vehicles, including one run by J. Ezra Merkin. The principal fund, Dinvest Total Return, had about 3% of its more than $1 billion of assets in Madoff-related funds. One fund of funds had as much as 6.9% of assets in Madoff-related funds. The bank had most recently met with Madoff Nov. 25 as part of an ongoing vetting process.


British bank


HSBC provided financing to a small number of institutional clients who invested in funds with Madoff; some clients in its global custody business have invested with Madoff, but the company doesn’t believe these arrangements should be a source of exposure to the group.

Natixis SA

A French investment bank


The company says it didn’t make direct investment in Madoff-managed funds; some investments made on behalf of customers could have ended up being managed by Madoff. Exposure is about 450 million euros.

Carl Shapiro

The founder and former chairman of apparel company Kay Windsor Inc., and his wife


Mr. Shapiro, a 95-year-old apparel entrepreneur and investor, has personally lost an estimated $400 million from the Madoff fraud, including $250 million he gave Mr. Madoff on Dec. 1. His charitable foundation, the Carl and Ruth Shapiro Family Foundation, has lost an estimated $100 million or more. Mr. Shapiro, a widely respected philanthropist, was one of Mr. Madoff’s earliest and largest investors.

Royal Bank of Scotland Group PLC

British bank


The bank had exposure of about 400 million pounds to Madoff through trading, collateralized lending.

BNP Paribas

French bank


The company said it has no investment of its own in Madoff-managed hedge fund but it does have risk exposure (up to 350 million euros) through its trading business and collateralized lending to funds of hedge funds.


Spanish bank


The company reiterated it doesn’t have direct exposure to Madoff but would face losses of 300 million euros if Madoff funds were found not to exist.

Man Group PLC

A U.K. hedge fund


IInvested in funds directly and indirectly sub-advised by Madoff Securities and for which Madoff acts as broker-dealer. Madoff investment represents 1.5% of the company’s RMF fund-of-funds business’s funds under management and 0.5% of funds under management for Man Group itself, according to a Dec. 15 disclosure. Man Group is considering taking legal action to recover some of its investments.

Reichmuth & Co.

A Swiss private bank


The Lucerne-based private bank warned investors that around 385 million Swiss francs, or 3.5% of its assets under management, were affected.

Nomura Holdings

Japanese brokerage firm


The 32.2 billion yen exposure is through Fairfield Sentry; That amount represents 0.2% of assets under management. Nomura originally said it had 27.5 billion yen in exposure on Dec. 14.

Maxam Capital Management

A fund of funds based in Darien, Connecticut


The fund reported a combined loss of $280 million on funds they had invested.


A European investment manager with about $11 billion in assets


The European investment manager with about $11 billion in assets. Overall, EIM assets at risk are less than 2% of what it manages.


French insurance giant


Exposure is well below 100 million euros.

UniCredit SpA

Italian Bank


The company’s total exposure is about 75 million euros. Dublin-based Pioneer Alternative Investments is indirectly exposed to Madoff via feeders; Italian clients have zero exposure.

Nordea Bank AB

Swedish Bank


The amount of exposure is about 48 million euros.


A Swiss private bank owned by St. Galler Kantonalbank


Hyposwiss said roughly 0.1% of its overall assets was invested in Madoff products through managed accounts. Another $100 million is exposed through clients who chose to invest in Madoff funds. St. Galler Kantonalbank said its financial situation and liquidity aren’t hurt by Hyposwiss’ exposure.

Banque Benedict Hentsch & Cie. SA

A Swiss-based private bank


Banque Benedict Hentsch said its clients have 56 million Swiss francs at risk. Benedict Hentsch had also recently agreed to merge with Fairfield Greenwich Group, a major Madoff distributor. When the news of Mr. Madoff’s arrest broke, it scrambled to undo that deal.

Fairfield, Conn.

town pension fund


The town’s employees board and police and fire board, which cover 971 workers, had $41.9 million invested with Madoff, said Paul Hiller, Fairfield’s chief fiscal officer.

Bramdean Alternatives

An asset manager


The exposure is about 9.5% of assets.

Jewish Community Foundation of Los Angeles

The largest manager of charitable gift assets for Los Angeles Jewish philanthropists


The amount invested with Madoff represented less than 5% of the Foundation’s assets.

Harel Insurance Investments & Financial Services Ltd.

Israel-based insurance firm



Baloise Holding AG

Swiss insurer



Societe Generale

French Bank


The company says its exposure, which is less than 10 million euros, is “negligible.”

Groupama SA

French insurer


Exposure is around 10 million euros.

Credit Agricole SA

French bank


Exposure is less than 10 million euros.

Richard Spring

individual investor


A Boca Raton resident and former securities analyst, says he had about 95% of his net worth invested with Mr. Madoff. Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions.

RAB Capital

hedge fund



Banco Popolare

Italian bank


The company says it had indirect exposure of up to 8 million euros; maximum lost on funds distributed to institutional, private clients is about 60 million euros.

Korea Teachers Pension

A 10 trillion won Korean pension fund



Swiss Life Holding

Swiss insurer


Swiss Life said it has indirectly invested assets worth around 90 million Swiss francs through funds of funds managed by Madoff Investment Securities.

North Shore-Long Island Jewish Health System

health system


Exposure represents less than 1% of the health system’s investment portfolio. A donor agreed to reimburse the system for any losses.

Neue Privat Bank

Swiss bank


The bank invested in a certificate based on a hedge fund with exposure to Madoff

Clal Insurance Enterprise Holdings

An Israel-based financial services company



Ira Roth

individual investor


Mr. Roth, a New Jersey resident, says his family has about $1 million invested through Mr. Madoff’s firm.

Mediobanca SpA

via its subsidiary Compagnie Monegasque de Banque.


Limited to $671,000 via its Compagnie Monegasque de Banque. via its subsidiary Compagnie Monegasque de Banque.

Fred Wilpon

owner of New York Mets



Steven Spielberg

The Spielberg charity — the Wunderkinder Foundation



JEHT Foundation

A New York foundation focused on electoral and criminal justice reform


The foundation, which stands for Justice, Equality, Human dignity and Tolerance, will close its doors at the end of January 2009. Major donors Jeanne Levy-Church and Kenneth Levy-Church had all their funds managed through Madoff.

Mortimer B. Zuckerman Charitable Remainder Trust

The charitable trust of real-estate magnate, who owns the Daily News and U.S. News & World Report


Funds exposed represented 11% of the value of that charitable trust.

Robert I. Lappin Charitable Foundation

A Massachusetts-based Jewish charity


The group, which financed trips for Jewish youth to Israel, was forced to close because the money that supported its programs was invested with Madoff.

Chais Family Foundation

A charity that gave to Jewish causes


Money manager Stanley Chais managed investments he called “the arbitrage partnerships,” according to investors and firm correspondence. His California-based charity group invested entirely with Madoff, and was forced to shut down operations after years of donating some $12.5 million annually to Jewish causes in Israel and Eastern Europe.

KBC Group NV

Belgian banking and insurance group


No direct exposure; some indirect exposure through collateralized loans, but the exposure is very limited and immaterial to KBC’s earnings. KBC has also made some loan advances to institutional customers who have invested in funds managed by Madoff Investment Securities, but this shouldn’t have any material impact either, the company said.

Barclays PLC

British bank


The bank says it has “minimal” exposure” and is “fully collateralized”


French bank


No direct investments in funds managed by Madoff,; private banking clients have total exposure of 78 million euros to funds primarily invested in Madoff funds. Indirectly, Dexia is exposed through partially collateralized lending operations to funds exposed to Madoff funds for a gross amount of 164 million euros. If the assets managed by Madoff Investment Securities were nil, the above mentioned lending operations could trigger an after tax loss of about 85 million euros for Dexia.

Allianz Global Investors

The asset management unit of German insurer Allianz SE


The unit says exposure “is not significant.”

Banco Espanol de Credito SA (Banesto)

A Spanish bank contolled by Banco Santander


Its clients have a total 2 million euro exposure; The amount is included in the 2.33 billion euros already disclosed by parent company Banco Santander.

CNP Assurances

French insurer


No direct exposure. Indirect exposure of 3 million euros via a fund of funds


Swiss bank


The bank says is has “no material exposure.” It declined to comment on press reports that its funds-of-funds for clients had $1.4 billion in exposure

Yeshiva University

A New York-based private university


The university’s chief financial officer said that the school’s actual principal investment in a hedge fund linked to Madoff had been only $14.5 million. On paper, that stake had exploded in value over the past 15 years to $110 million. Although the university had “no direct investments” in Madoff’s firm, a portion of its endowment had been invested for 15 years with Ascot Partners, which had “substantially all its assets invested with Madoff.” J. Ezra Merkin had been a University trustee but has resigned. Madoff was also on the school’s board but has resigned.

The Elie Wiesel Foundation for Humanity

The charitable foundation of Nobel laureate


The Foundation’s mission, rooted in the memory of the Holocaust, is to combat indifference, intolerance and injustice through international dialogue and youth-focused programs that promote acceptance, understanding and equality. It said it invested “substantially all” of its assets.

Leonard Feinstein

The co-founder of retailer Bed Bath & Beyond



Sen. Frank Lautenberg

The charitable foundation of the New Jersey Senator’s family



Norman Braman

former owner of Philadelphia Eagles



Jeffrey Katzenberg

The chief executive of DreamWorks Animation SKG Inc.


Mr. Katzenberg’s financial affairs along with those of Mr. Spielberg were managed by Mr. Breslauer, Mr. Katzenberg has suffered millions in Madoff-connected losses, say people familiar with the matter.

Gerald Breslauer

The Hollywood financial advisor to Steven Spielberg and Jeffrey Katzenberg


Along Messrs Katzenberg and Spielberg, Mr. Breslauer himself has likely sustained heavy losses in the Madoff affair. He customarily invests alongside his clients, say these people, and has sometimes been a larger investor than the people he represented

Kingate Management

hedge fund


Kingate’s $2.8 billion hedge fund Kiingate Global Fund reportedly invested heavily with Madoff

Julian J. Levitt Foundation

Texas-based charity



Loeb family




Lawrence Velvel

individual investor


Mr. Velvel is dean of the Massachusetts School of Law

Fix Asset Management.

hedge fund


reportedly invested heavily in Madoff’s portfolios

Genevalor, Benbassat & Cie.

money manager in Geneva


Members of the Benbassat family, which run the firm, have long known Mr. Madoff. In a statement on its Web site, Genevalor said it “has been reviewing the potential damages caused to its clients” by the alleged Madoff fraud. A statement from the Thema fund said it had assets with Madoff that were now frozen, but did not elaborate.

Banco Espirito Santo

Portugese bank


The amount represents about 0.1% of assets under management.

Great Eastern Holding

Singapore insurer


Great Eastern said S$7.7 million of its S$64 million exposure is invested from its Life Fund. Great Eastern is 87% owned ny Oversea-Chinese Banking Corp.

M&B Capital Advisers

Spanish brokerage


The firm is run by the son and son-in-law of the chairman of Banco Santander. Through M&B, private and institutional investors bought more than $214 million in Madoff’s funds.

Oddo et Cie

French financial services firm


Oddo had invested the money in Lux Alpha fund, for which UBS Luxembourg was custodian. Lux Alpha invested the money in Madoff’s funds. Luxembourg authorities ordered UBS Luxembourg to compensate Oddo et Cie for the funds within 24 hours, as well as EUR10,000 for Oddo’s legal fees.

Royal Dutch Shell pension fund

Global energy and petrochemical company


The pension fund fund has an indirect investment that may be affected. The fund originally invested $45 million. The alleged fraud won’t affect the financial position and funding status of the fund.

Phoenix Holdings

Israeli financial services company


Phoenix’s insurance unit invested $15 million over the last three years in funds managed by Thema, which made investments through Madoff. In November, the company requested to redeem $10 million. The payment was due Dec. 12 but Phoenix hasn’t received it.


Peruvian financial services company


Credicorp’s Atlantic Security Bank unit has $1 million in direct exposure and up to $3.5 million in potential contingencies “related to transactions secured by these investments.”

Fukoku Mutual Life Co.

Japanese insurer


The company said it holds similar investments trusts to those held by Sumitomo Life Insurance Co. but declined to specify the balance. Sumitomo disclosed that it has about 2 billion yen, or about $22 million, exposed via trusts.

New York Law School

law school in New York City


The school invested the money through its endowment entity. The school filed an investor lawsuit against J. Ezra Merkin, Ascot Partners and BDO Seidman.

Nipponkoa Insurance

Japanese insurer


The company said it holds similar investments trusts to those held by Sumitomo Life Insurance Co. but declined to specify the balance. Sumitomo disclosed that it has about Y2 billion exposed via trusts.

Sumitomo Life Insurance Co.

Japanese insurer


Sumitomo Life didn’t invest directly in the Madoff fund but part of its investment trust holdings were linked to it.

Swiss Reinsurance Co.

Swiss insurer


Indirect exposure, less than $3 million, is through hedge fund investments; no direct exposure.

Aozora Bank Ltd

Japanese lender


Aozora entrusted 12.4 billion yen to investment funds, which invested with Madoff. Cerberus Capital Management LP owns a majority stake in Aozora.

UBI Banca

Italian bank


The bank said the exposure is linked to proprietary investments. UBI Pramerica and Capitalgest Alternative Investments, the assets-under-management units, have no exposure.

Taiyo Life Insurance Co.

Japanese insurer


Taiyo Life didn’t invest directly in the Madoff fund.

Caisse d’Epargne

French bank


Caisse d’Epargne said 1 million euros was for Caisse Nationale des Caisses d’Epargne, the central hub, and “under 7 million euros” was from its regional level.

J. Gurwin Foundation



$28 million charity invested heavily in Madoff funds. Gurwin said, “We got a body blow. We did not get killed.”

EFG International

Swiss private bank


EFG clients have $130 million invested in Madoff through third-party funds sold by EFG. In addition, 0.3% of the bank’s total invested assets, held in custody, are invested in Madoff.

Fire and Police Pension Association of Colorado

Pension fund


Fund, with $2.5 billion under management, had $60 million invested with Fairfield Greenwich until six months ago

International Olympic Committee

Olympic organizer


The IOC’s exposure represents about 1% of its total investment portfolio. Organizing committee confirmed they will be able to meet their obligations.

Support Organization for the Madison Cultural Arts District

Wisconsin cultural organization


$18 million invested with Fairfield Greenwich until September. A spokesman for the Overture Center in Madison, Wis., built with SOMCAD funds, said, “Speculation that SOMCAD could be on the hook is not outlandish.”

Credit Industrial et Commercial

French financial-services group



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