Case

Arrested on December 1 0, 2008, Bernie Maddox was sentenced to 150 years In prison on June 29, 2009, ND his son Mark committed suicide exactly two years after his father’s arrest, on December 10, 2010. Let’s now look at the drivers that caused the failure Of two organizations that were supposed to prevent and eventually contrast the emergence of such criminal and dangerous networks; Arthur Andersen was serving as Enron’s auditor at the time of the scandal, while the U.

S. Securities and Exchange Commission (SEC) was supposed to control the activities of Bernie Madam’s firm Arthur Andersen and the Enron Disaster Arthur Andersen served as Enron’s auditor from 1 985 up until October 2001, hen the company filed for bankruptcy. At the time of the scandal, AAA was the oldest auditing company and one of the largest consulting companies in the world: it employed around 85,000 top professionals located on five continents.

According to criminal investigators and specialists who analyzed the Enron disaster, Arthur Andersen played a major role. Experts believe that there are several factors that can explain the behavior professionals. Of Sea’s One point is surely the long relationship developed between AAA and Enron. AAA professionals permanently occupied office space at Enron headquarters ND other buildings, used the same type of badges to access Enron’s infrastructures and were granted the same privileges (e. G. , discount cards, etc. ) as Enron employees.

In such a context, new AAA employees found it difficult to distinguish AS professionals from Enron employees: “If someone had on a grey suit and a tie well you didn’t really know if he was an Enron guy or a consultant. T Moreover, the continuous colonization between Enron’s and AS workforce favored some non-professional relationships that, in some cases, ended in marriages. Another problem was caused by the iatrogenic of services offered by AAA to Enron. The year before the bankruptcy, AAA sold Enron $25 million in auditing services and another $28 million in consulting projects.

It’s worth mentioning that auditing services were not limited only to external auditing: a significant part of Sea’s auditing sales was associated with the activities of internal auditors that were responsible for the preparation of internal and external accounting documents. Some experts have pointed out that additional problems were caused by the professional trajectories of many AAA professionals. It was not that uncommon or a former senior 3 Interview with a former AAA partner. SKIES Business School-University of Naval IQ-J’ manager, AR even partner, of the auditing firm to move into a top management position in the energy company.

This was the case, as we’ve already mentioned, of Richard Causes – a former AAA partner who went on to become Enron’s chief accounting officer. It was not that uncommon, therefore, for an AAA professional to see his or her former boss become the client. The Securities and Exchange Commission & Bernie Maddox the Monster The U. S. Securities and Exchange Commission (SEC) is a US. Deader agency primarily responsible for regulating the securities industry and overseeing the key participants in that market, including securities exchanges, brokers and securities dealers, investment advisors and mutual funds. Given these responsibilities, the SEC had the authority and the duty to control and eventually block Madam’s illegal activities. Since 1 992, the SEC had received six anonymous complaints (see Exhibit 1) about Madam’s firm that raised substantive red flags concerning its trading activities. The most important and detailed complaint was received by the SEC room Harry Marko’s, a derivatives expert who in 2001 worked for trading firm Rampart Securities Management and was asked by a CLC intent to try to design a product similar to Madam’s.

While studying Madam’s investment strategy, Marko’s identified 29 detailed and clear red flags regarding Madam’s investment strategy, which led him to report to the SEC that with all likelihood “Maddox Securities is the world’s largest Opinion scheme. :” The interesting part of the story is that since 1992 the SEC had investigated Madam’s firm at least five times; the SEC, however, always botched the inquiry.

Even more paradoxically, SEC investigators always seemed to be looking in the right places to discover Madam’s Opinion scheme, but they never got to the bottom of the inquiry by checking Madam’s CLC roundhouse account that would have proved that no trading activity was going on. It is worth mentioning that, since the outbreak of the scandal, an SEC internal investigation (in collaboration with the FBI) has proven that no bribery, collusion or deliberate sabotage of those investigations had been carried out by SEC personnel who worked on investigations of Madam’s firm. So, why was the SEC unable to identify Madam’s scheme? As in the Enron case, there are several relevant explanations. A brief explanation might be that a deep, detailed investigation of Madam’s activities was technically complex, time expensive and dangerous for any SEC employee. The scheme 4 http://www. Sec. Gob/about/heehawed. SHTML. 5 Harry Marko’s, “The World’s Largest Hedge Fund is a Fraud,” 21-page report sent anonymously regulators. 6 United States Securities and Exchange Commission Office of Inspector General, “Investigation Beamed Madam’s Opinion Scheme,” http://WV. CE. Gob. In November 2005 to SEC of Failure of the SEC to Uncover JILL’ BE-1 80-E adopted by Maddox was indeed relatively complex and very well hidden through the adoption of multiple companies located in the Lignite States, Europe and several fiscal paradises. Moreover, Bernie Maddox had a well- know reputation as a high-profile businessman in the trading industry: he expounded the Nasdaq, sat on the Board of the Security Industry Association, and advised the SEC on many electronic trading issues.

During all the investigations Maddox did nothing to conceal his power and influence in the financial market: he used well-known “impression management” strategies to embarrass SEC investigators. For example, he used his image as a very well-connected anger for allegedly “stupid and inappropriate questions. ” and powerful person in showing It’s also worth mentioning that SEC investigators were too untrained and unskilled to carry out a complex examination like the one involving Madam’s trading activities.

Most SEC employees were lawyers with no relevant financial industry experience, and thus no technical expertise. According to several expo arts , SEC employees did not deepen the investigations because they w-?re not at all capable of spotting the inconsistencies in Madam’s answers and Some have argued that investigators could have asked for third party consultancy but didn’t, probably because this would have been too time- consuming and “tremendously voluminous and difficult to De al with. 7 Moreover, market and regulator rules didn’t encourage investigators to carefully scrutinize Madam’s firm: during the sass and 20005, unregulated transaction such as the ones managed by Maddox were not only allowed but also deliberately prompted by the U. S. Government. 7 Ibid. SKIES Business School-University Jeffrey Shilling, Bernie Maddox the Monster Exhibit 1 implants Received by the SEC From 1992 to 2006 About Madam’s Activities” Since 1 992, the SEC had received six complaints about Madam’s rum that raised substantive red flags concerning his trading activities.

The first complaint dates to 1 992, when the SEC was informed that an unregistered investment company was offering consistently high rate of returns for” 100%” safe investments. The second complaint dates to 2000 and was resubmitted to the Sect more times, in 2001 and 2005, by financial trader Marko’s. The complaint was very detailed and pointed out significant inconsistencies in Madam’s investment strategy. Several experts declared that the indications of Marko’s would have been sufficient to identify Madam’s criminal activity.

The third complaint was presented by a market trader in 2003 who questioned Madam’s strategy and purported returns on investments, pointing out that neither were technically duplicable. In particular, the complaint showed that Madam’s strategy had no correlation to the overall equity markets of the last 10 years or more. The fourth complaint dates to 2004, when the SEC discovered some internal e-mails of a registrant questioning the truthfulness of Madam’s investment tragedy because of its unrealistically high return of investment and low volatility.