What are the ethical issues involved in the Madoff case?
The fraud perpetrated by Bernard Madoff that was discovered in December 2008 was what is known as a Ponzi scheme. A Ponzi scheme works similarly to a pyramid scheme. Madoff took money from new investors to pay earnings for existing customers, without ever actually investing the money. In order to keep making payouts to older clients, Madoff had to continually attract new investors. The Ponzi scheme was named after Charles Ponzi, who in the early twentieth century saw a way to profit from international reply coupons. International reply coupons were a guarantee of return postage in response to an international letter. Charles Ponzi determined that he could make money by swapping out these coupons for more expensive postage stamps in countries where the stamps were of higher value. Ponzi convinced investors to provide him with capital to trade coupons for higher-priced postage stamps. His promise to investors who joined in his scheme was a 50 percent profit in a few days.
Touted as a financial wizard, Ponzi lived a fairly opulent life outside of Boston. He would often bring in as much as $250,000 a day. Part of Ponzi’s success came from his personal charisma and ability to con even savvy investors. People trusted Ponzi because he created an image of power, trust, and responsibility—much like Bernard Madoff did nearly a century later. The largest problem with his scheme is that it did not work, much like Madoff’s did not. In order to keep giving earlier investors their promised return, he had to continually draw new people into the scheme. In July of 1920, the Boston Post ran an article exposing the scheme, and soon after that regulators raided his offices and charged him with mail fraud, knowing that his fabricated investment reports were mailed to his clients. Most Ponzi schemes self-destruct fairly quickly as the ability to keep attracting new investors dwindles. Bernard Madoff’s case was unusual because he was able to continue his fraud for many years.