Outline of Financial Fraud by Bernie Madoff Essay

Outline of Financial Fraud by Bernie Madoff - Essay Example The fraud crime committed by Bernie Madoff remains the biggest fraud crime ever committed by anyone. It was beyond anybody’s imagination that a single person could trick so many intelligent and smart investors. Mr Madoff’s Ponzi scheme involved fraud of $65 billion, making a huge impact on the areas of the financial services industry. This was an example of a Ponzi scheme. A Ponzi scheme refers to the idea of using the new money to pay off old investors (Brigham & Ehrhardt 2013, p.265). Even though Mr Madoff was later on arrested in 2008 and is currently serving his 150-year imprisonment sentence, investors are still afraid of a recurrence of such a fraudulent scheme. Questions without answers continue streaming onto how even his close family members like his wife and two sons were unable to detect his fraudulent means. Madoff claimed that he carried out the fraud by himself, but there was a total of five others who had pleaded guilty to criminal charges by December 201 1 (Giles 2012, p.10). The Ponzi scheme like the one by Bernie Madoff was perpetrated based on the theory of rational expectations, mainly built on trust. His massive investment fraud was as a result of the trust investors had on him, built on his success in the Wall Street. It is common for general to rely on the judgements of others when making their investment decisions. Madoff would, for instance, use the word of mouth to popularise his investment ventures. For years, he had been a well-respected figure in the investment community. The success of his fraud could, therefore, be attributed to trust many people had on him. He used the many people who trusted him, so as to gain the trust of others. A small amount of initial trust grew into a large amount of trust, even though most of the trust was based on the little first-hand information. Instead of scrutinizing the primary source materials behind his venture, the investors tended to rely on the identities and the reputations of those who already trusted Madoff.