1. If Madoff had 2 categories of risks, what would they contain? Hint: looking for types of risks, not risks themselves
2. Madoff, DiPascalli, and Markopolos had different stakeholder types as illustrated in the stakeholder cube.
   • mention these types
   • and describe the risk attitude of each of these 3 individuals.
   • Relate how those types influenced they way they communicated risks.
3. Identify and explain, one tactic Madoff used to avoid communicating risks to potential clients.
4. CASE STUDY: Bernard Madoff was an American financier. His firm (established in 1960) was responsible for helping his clients invest large amounts of money in the New York Stock exchange. Sometime in the company's history, Madoff decided to defraud his clients by adopting the Ponzi scheme. The scheme is named after Charles Ponzi, who defrauded his clients in the 1920s, but he was caught within a year of his operation. Madoff's scheme likely ran for decades.

• Investors put their trust in Madoff because he created a front of respectability, his returns were high but not outlandish, and he claimed to use a legitimate strategy.

Madoff never invested any of his clients' money. He printed and sent fraudulent reports that showed a 10% to 20% return on investment. In reality, all he had was other people's money. Whenever his clients needed money, he gave from a bank account that contained other clients' capital principle, minus a cut for Madoff. The 2008 depression had too many people asking for their investments. Madoff did not have enough capital to pay them all as he had never made them any real money. He admitted this to his sons who turned him in. A sick Madoff made a request for clemency amid the Covid-19 constraints. On June 4 2020, federal Judge Denny Chin denied this request insisting that he should die in prison. A Small beginning Madoff started Bernard L. Madoff Investment Securities LLC, in 1960, at age 22. At first, he traded penny stocks with $5,000 (worth around $41,000 in 2017) he had earned installing sprinklers and working as a lifeguard. He soon persuaded family friends and others to invest with him. When the "Kennedy Slide" lopped 20% off the market in 1962, Madoff's bets soured and his father-in-law had to bail him out. Madoff had a chip on his shoulder and felt constantly reminded that he was not part of the Wall Street in- crowd. "We were a small firm, we weren't a member of the New York Stock Exchange," he said, "It was very obvious." According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he said, giving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but Madoff's would complete it. Success finally came when he and his brother Peter began to build electronic trading capabilities "artificial intelligence" in Madoff's wordsthat attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming down, entertaining me." He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow controversially, he paid for much of itand by the late 1980s, Madoff was making in the vicinity of $100 million a year. He would become chairman of the Nasdaq in 1990, and also served in 1991 and 1993.

• All the money, and more It is not certain exactly when Madoff's Ponzi scheme began. He testified in court that it started in 1991, but his account manager, Frank DiPascali, who had been working at the firm since 1975, said the fraud had been occurring "for as long as I remember." Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my lifestyle and my family's lifestyle. I didn't need to make this for that." The legitimate wings of the business were extremely lucrative, and Madoff could have earned the Wall Street elites' respect solely as a market maker and electronic trading pioneer.
• Madoff repeatedly suggested that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he said, without making it clear who talked him into it. "I thought I could extricate myself after a period. I thought it would be a very short period of time, but I just couldn't." The so-called Big Four Carl Shapiro, Jeffry Picower, Stanley Chais, and Norm Levyhave attracted attention for their long and profitable involvement with Bernard L. Madoff Investment Securities LLC. Madoff's relationships with these men go back to the 1960s and 1970s, and his scheme netted them hundreds of millions of dollars each. "Everybody was greedy, everybody wanted to go on and I just went along with it," said Madoff. He has indicated that the Big Four and othersa number of feeder funds pumped client funds to him, some all but outsourcing their management of clients' assetsmust have suspected the returns he produced or at least should have. "How can you be making 15 or 18% when everyone is making less money?" Madoff said.
• Charisma and nothing else: Madoff's apparently ultra-high returns persuaded clients to look the other way. In fact, he simply deposited their funds in an account at Chase Manhattan Bankwhich merged to become JPMorgan Chase & Co. in 2000and let them sit. The bank, according to one estimate, may have made as much as $483 million from those deposits, so it, too, was not inclined to inquire. When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Madoff also cultivated an image of exclusivity, often initially turning clients away. This model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money. Madoff created a front of respectability and generosity, wooing investors through his charitable work. He also defrauded several nonprofits, and some had their funds nearly wiped out, including the Elie Wiesel Foundation for Peace and the global women's charity Hadassah. He used his friendship with J. Ezra Merkin, an officer at Manhattan's Fifth Avenue Synagogue, to approach congregants. By various accounts, Madoff swindled between $1 billion and $2 billion from its members. Madoff's plausibility to investors was based on several factors: 1. His principal, public portfolio appeared to stick to safe investments in blue-chip stocks. 2. His returns were high (10 to 20% per annum) but consistent, and not outlandish. As the Wall Street Journal reported in a now-famous interview with Madoff, from 1992: "[Madoff] insists the returns were really nothing special, given that the Standard & Poor's 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992, I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,' he says." 3. He claimed to be using a collar strategy, also known as a split-strike conversion. A collar is a way of minimizing risk, whereby the underlying shares are protected by the purchase of an out-of-the-money put option. Something fishy in New York The SEC had been investigating Madoff and his securities firm on and off since 1999a fact that frustrated many after he was finally prosecuted, since it was felt that the biggest damage could have been prevented if the initial investigations had been rigorous enough.
• Financial analyst Harry Markopolos was one of the earliest. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in 2000, but the regulator ignored him.
• In a scathing 2005 letter to the Securities and Exchange Commission (SEC), Markopolos wrote, "Madoff Securities is the world's largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I'm turning this case in because it's the right thing to do." Many felt that Madoff's worst damage could have been prevented if the SEC had been more rigorous in its initial investigations. Madoff's firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in. The biggest red flag of all, in Markopolos's words, was that Madoff Securities was earning "undisclosed commissions" instead of the standard hedge fund fee (1% of the total plus 20% of the profits). The bottom line, concluded by Markopolos, was that "the investors that pony up the money don't know that BM [Bernie Madoff] is managing their money." Markopolos also learned Madoff was applying for huge loans from European banks (seemingly unnecessary if Madoff's returns were as high as he said)
• It was not until 2005shortly after Madoff nearly went belly-up due to a wave of redemptionsthat the regulator asked Madoff for documentation on his trading accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed but didn't send them, and that was that. "The lie was simply too large to fit into the agency's limited imagination," Diana Henriques, author of the book wrote "The Wizard of Lies: Bernie Madoff and the Death of Trust," which documents the episode.
• The money stops here In November 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6%; the S&P 500 had dropped 39% percent over the same period. As the selling continued, Madoff became unable to keep up with a cascade of client redemption requests and, on Dec. 10, he confessed to his sons Mark and Andy, who worked at their father's firm. "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, 'You gotta turn your father in,' they went, did that, and then I never saw them again." Bernie Madoff was arrested Dec. 11, 2008. Madoff has insisted he acted alone, though several of his colleagues were sent to prison. His elder son Mark Madoff committed suicide exactly two years after his father's fraud was exposed. Several of Madoff's investors also killed themselves. Andy Madoff died of cancer in 2014. Madoff was sentenced to 150 years in prison and forced to forfeit $170 billion in 2009. His three homes and yacht were auctioned off by the U.S. Marshals