2 Ethical Principles, Quick Tests, and Decision-Making G

2 Ethical Principles, Quick Tests, and Decision-Making
Guidelines 91
Cases
Case 3
Ford’s Pinto Fires: The Retrospective View of Ford’s
Field Recall Coordinator
Brief Overview of the Ford Pinto Fires
Determined to compete with fuel- effi cient Volkswagen and
Japa nese imports, the
Ford Motor Company introduced the subcompact Pinto in the
1971 model year.
Lee Iacocca, Ford’s president at the time, insisted that the Pinto
weigh no more
than 2,000 pounds and cost no more than $2,000. Even with
these restrictions,
the Pinto met federal safety standards, although some people
have argued that
strict adherence to the restrictions led Ford engineers to
compromise safety.
Some 2 million units were sold during the 10- year life of the
Pinto.
The Pinto’s major design fl aw— a fuel tank prone to rupturing
with moderate-
speed rear- end collisions— surfaced not too long after the
Pinto’s entrance to the
market. In April 1974, the Center for Auto Safety petitioned the
National Highway

Traffi c Safety Administration (NHTSA) to recall Ford Pintos
due to the fuel tank
design defect. The Center for Auto Safety’s petition was based
on reports from
attorneys of three deaths and four serious injuries in moderate-
speed rear- end
collisions involving Pintos. The NHTSA did not act on this
petition until 1977.
As a result of tests performed for the NHTSA, as well as the
extraordinary
amount of publicity generated by the problem, Ford agreed, on
June 9, 1978, to
recall 1.5 million 1971– 1976 Ford Pintos and 30,000 1975–
1976 Mercury Bobcat
sedan and hatchback models for modifi cations to the fuel tank.
Recall notices were
mailed to the affected Pinto and Bobcat own ers in September
1978. Repair parts
were to be delivered to all dealers by September 15, 1978.
Unfortunately, the recall was initiated too late for six people.
Between June 9
and September 15, 1978, six people died in Pinto fi res after a
rear impact. Three
of these people were teenage girls killed in Indiana in August
1978 when their
1973 Pinto burst into fl ames after being rear- ended by a van.
The fi ery deaths of
the Indiana teenagers led to criminal prosecution of the Ford
Motor Company on
charges of reckless hom i cide, marking the fi rst time that an
American corporation
was prosecuted on criminal charges. In the trial, which
commenced on January 15,
1980, “Indiana state prosecutors alleged that Ford knew Pinto

gasoline tanks were
prone to catch fi re during rear- end collisions but failed to
warn the public or fi x the
problem out of concern for profi ts.” On March 13, 1980, a jury
found Ford innocent
of the charges. Production of the Pinto was discontinued in the
fall of 1980.
Enter Ford’s Field Recall Coordinator
Dennis A. Gioia, currently a professor in the Department of
Management and
Or ga ni za tion at Pennsylvania State University, was the fi eld
recall coordinator
at Ford Motor Company as the Pinto fuel tank defect began
unfolding. Gioia’s
responsibilities included the operational coordination of all the
current recall
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92 Business Ethics
campaigns, tracking incoming information to identify
developing problems, and
reviewing fi eld reports of alleged component failures that led
to accidents. Gioia
left Ford in 1975. Subsequently, “reports of Pinto fi res
escalated, attracting in-
creasing media attention.” The remainder of this case, written in
Gioia’s own
words in the early 1990s, is his personal refl ection on lessons
learned from his
experiences involving the Pinto fuel tank problem.
Why Revisit Decisions from the Early 1970s?
I take this case very personally, even though my name seldom
comes up in its
many recountings. I was one of those “faceless bureaucrats”
who is often por-
trayed as making decisions without accountability and then

walking away from
them— even decisions with life- and- death implications. That
characterization is, of
course, far too stark and superfi cial. I certainly don’t consider
myself faceless,
and I have always chafed at the label of bureaucrat as applied to
me, even though
I have found myself unfairly applying it to others. Furthermore,
I have been unable
to walk away from my decisions in this case. They have a
tendency to haunt—
especially when they have had such public airings as those
involved in the Pinto
fi res debacle have had.
But why revisit 20- year- old decisions, and why take them so
personally?
Here’s why: because I was in a position to do something about
a serious prob-
lem . . . and didn’t. That simple observation gives me pause for
personal refl ec-
tion and also makes me think about the many diffi culties
people face in trying to
be ethical decision makers in organizations. It also helps me to
keep in mind the
features of modern business and or gan i za tion al life that
would infl uence some-
one like me (me of all people, who purposely set out to be an
ethical decision
maker!) to overlook basic moral issues in arriving at decisions
that, when viewed
retrospectively, look absurdly easy to make. But they are not
easy to make, and
that is perhaps the most important lesson of all.
The Personal Aspect

I would like to refl ect on my own experience mainly to
emphasize the personal
dimensions involved in ethical decision making. Although I
recognize that there
are strong or gan i za tion al infl uences at work as well, I
would like to keep the criti-
cal lens focused for a moment on me (and you) as individuals. I
believe that there
are insights and lessons from my experience that can help you
think about your
own likely involvement in issues with ethical overtones.
First, however, a little personal background. In the late 1960s
and early 1970s,
I was an engineering/MBA student; I also was an “activist,”
engaged in protests
of social injustice and the social irresponsibility of business,
among other things.
I held some pretty strong values, and I thought they would stand
up to virtually
any challenge and enable me to “do the right thing” when I took
a career job. I
suspect that most of you feel that you also have developed a
strongly held value
system that will enable you to resist or gan i za tion al
inducements to do something
unethical. Perhaps. Unfortunately, the challenges do not often
come in overt
forms that shout the need for re sis tance or ethical righ
teousness. They are much
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Guidelines 93
more subtle than that, and thus doubly diffi cult to deal with
because they do not
make it easy to see that a situation you are confronting might
actually involve an
ethical dilemma.
After school, I got the job of my dreams with Ford and,
predictably enough,
ended up on the fast track to promotion. That fast track enabled
me to progress
quickly into positions of some notable responsibility. Within
two years I became
Ford’s fi eld recall coordinator, with fi rst- level responsibility
for tracking fi eld safety
problems. It was the most intense, information- overloaded job
you can imagine,
frequently dealing with some of the most serious problems in
the company. Di-
sasters were a phone call away, and action was the hallmark of
the offi ce where I
worked. We all knew we were engaged in serious business, and
we all took the
job seriously. There were no irresponsible bureaucratic ogres
there, contrary to
pop u lar portrayal.
In this context, I fi rst encountered the neophyte Pinto fi res
problem— in the
form of infrequent reports of cars erupting into horrendous fi
reballs in very low-
speed crashes and the shuddering personal experience of
inspecting a car that

had burned, killing its trapped occupants. Over the space of a
year, I had two
distinct opportunities to initiate recall activities concerning the
fuel tank prob-
lems, but on both occasions, I voted not to recall, despite my
activist history and
advocacy of business social responsibility.
The key question is how, after two short years, could I have
engaged in a
decision pro cess that appeared to violate my own strong
values— a decision pro-
cess whose subsequent manifestations continue to be cited by
many observers
as a supposedly defi nitive study of corporate unethical
behavior? I tend to dis-
count the obvious accusations: that my values weren’t really
strongly held; that I
had turned my back on my values in the interest of loyalty to
Ford; that I was some-
how intimidated into making decisions in the best interest of the
company; that
despite my principled statements, I had not actually achieved a
high stage of
moral development; and so on. Instead, I believe a more
plausible explanation for
my own actions looks to the foibles of normal human
information pro cessing.
I would argue that the complexity and intensity of the recall
coordinator’s job
required that I develop cognitive strategies for simplifying the
overwhelming
amount of information I had to deal with. The best way to do
that is to structure
the information into cognitive “schemas,” or more specifi cally

“script schemas,”
that guide understanding and action when facing common or
repetitive situa-
tions. Scripts offer marvelous cognitive shortcuts because they
allow you to act
virtually unconsciously and automatically, and thus permit you
to handle compli-
cated situations without being paralyzed by needing to think
consciously about
every little thing. Such scripts enabled me to discern the
characteristic hallmarks
of problem cases likely to result in recall and to execute a
complicated series of
steps required to initiate a recall.
All of us structure information all of the time; we could hardly
get through the
workday without doing so. But there is a penalty to be paid for
this wonderful
cognitive effi ciency: we do not give suffi cient attention to
important information
that requires special treatment because the general information
pattern has
94 Business Ethics
surface appearances that indicate that automatic pro cessing will
suffi ce. That, I
think, is what happened to me. The beginning stages of the
Pinto case looked

for all the world like a normal sort of problem. Lurking beneath
the cognitive ve-
neer, however, was a nasty set of circumstances waiting to
conspire into a dan-
gerous situation. Despite the awful nature of the accidents, the
Pinto problem did
not fi t an existing script; the accidents were relatively rare by
recall standards,
and the accidents were not initially traceable to a specifi c
component failure.
Even when a failure mode suggesting a design fl aw was identifi
ed, the cars did
not perform signifi cantly worse in crash tests than competitor
vehicles. One
might easily argue that I should have been jolted out of my
script by the unusual
nature of the accidents (very low speed, otherwise unharmed
passengers
trapped in a horrifi c fi re), but those facts did not penetrate a
script cued for other
features. (It also is diffi cult to convey to the lay person that
bad accidents are not
a particularly unusual feature of the recall coordinator’s
information fi eld. Acci-
dent severity is not necessarily a recall cue; frequently repeated
patterns and
identifi able causes are.)
The Corporate Milieu
In addition to the personalized scripting of information pro
cessing, there is an-
other important infl uence on the decisions that led to the Pinto
fi res mess: the
fact that decisions are made by individuals working within a
corporate context. It
has escaped almost no one’s notice that the decisions made by

corporate em-
ployees tend to be in the best interest of the corporation, even
by people who
mean to do better. Why? Because the socialization pro cess and
the overriding
infl uence of or gan i za tion al culture provide a strong, if
generally subtle, context
for defi ning appropriate ways of seeing and understanding.
Because or gan i za-
tion al culture can be viewed as a collection of scripts, scripted
information pro-
cessing relates even to organizational- level considerations.
Scripts are context
bound; they are not free- fl oating general cognitive structures
that apply universally.
They are tailored to specifi c contexts. And there are few more
potent contexts
than or gan i za tion al settings.
There is no question that my perspective changed after joining
Ford. In retro-
spect, I would be very surprised if it hadn’t. In my former
incarnation as a social
activist, I had internalized values for doing what was right— as
I understood righ-
teousness in grand terms, but I had not internalized a script for
applying my values
in a pragmatic business context. Ford and the recall coordinator
role provided a
powerful context for developing scripts— scripts that were
inevitably and undeni-
ably oriented toward ways of making sense that were infl
uenced by the corporate
and industry culture.
I wanted to do a good job, and I wanted to do what was right.

Those are not
mutually exclusive desires, but the corporate context affects
their synthesis. I
came to accept the idea that it was not feasible to fi x
everything that someone
might construe as a problem. I therefore shifted to a value of
wanting to do the
greatest good for the greatest number (an ethical value tempered
by the practi-
cal constraints of an economic enterprise). Doing the greatest
good for the
Guidelines 95
greatest number meant working with intensity and responsibility
on those prob-
lems that would spare the most people from injury. It also
meant developing
scripts that responded to typical problems, not odd patterns like
those pre-
sented by the Pinto.
Another way of noting how the or gan i za tion al context so
strongly affects in-
dividuals is to recognize that one’s personal identity becomes
heavily infl uenced
by corporate identity. As a student, my identity centered on
being a “good per-
son” (with a certain dose of moral righ teousness associated

with it). As recall
coordinator, my identity shifted to a more corporate defi nition.
This is an extraor-
dinarily important point, especially for students who have not
yet held a perma-
nent job role, and I would like to emphasize it. Before assuming
your career role,
identity derives mainly from social relationships. Upon putting
on the mantle of a
profession or a responsible position, identity begins to align
with your role. And
information pro cessing perspective follows from the identity.
I remember accepting the portrayal of the auto industry and
Ford as “under
attack” from many quarters (oil crises, burgeoning government
regulation, infl a-
tion, litigious customers, etc.). As we know, groups under
assault develop into
more cohesive communities that emphasize commonalities and
shared identi-
ties. I was by then an insider in the industry and the company,
sharing some of
their beleaguered perceptions that there were signifi cant forces
arrayed against
us and that the well- being of the company might be threatened.
What happened to the original perception that Ford was a
socially irrespon-
sible giant that needed a comeuppance? Well, it looks different
from the inside.
Over time, a responsible value for action against corporate
dominance became
tempered by another reasonable value that corporations serve
social needs and
are not automatically the villains of society. I saw a need for

balance among mul-
tiple values, and as a result, my identity shifted in degrees
toward a more corporate
identity.
The Torch Passes to You
So, given my experiences, what would I recommend to you, as a
budding or gan-
i za tion al decision maker? I have some strong opinions. First,
develop your ethi-
cal base now! Too many people do not give serious attention to
assessing and
articulating their own values. People simply do not know what
they stand for
because they haven’t thought about it seriously. Even the
ethical scenarios pre-
sented in classes or executive programs are treated as
interesting little games
without apparent implications for deciding how you intend to
think or act. These
exercises should be used to develop a principled, personal code
that you will try
to live by. Consciously decide your values. If you don’t decide
your values now,
you are easy prey for others who will gladly decide them for
you or infl uence you
implicitly to accept theirs.
Second, recognize that everyone, including you, is an unwitting
victim of his
or her cognitive structuring. Many people are surprised and
fascinated to learn
that they use schemas and scripts to understand and act in the or
gan i za tion al
world. The idea that we automatically pro cess so much
information so much of

96 Business Ethics
the time intrigues us. Indeed, we would all turn into blithering
idiots if we did not
structure information and expectations, but that very structuring
hides informa-
tion that might be important— information that could require
you to confront your
values. We get lulled into thinking that automatic information
pro cessing is great
stuff that obviates the necessity for trying to resolve so many
frustrating deci-
sional dilemmas.
Actually, I think too much ethical training focuses on supplying
standards for
contemplating dilemmas. The far greater problem, as I see it, is
recognizing that a
dilemma exists in the fi rst place. The insidious problem of
people not being aware
that they are dealing with a situation that might have ethical
overtones is another
consequence of schema usage. I would venture that scripted
routines seldom
include ethical dimensions. Is a person behaving unethically if
the situation is not
even construed as having ethical implications? People are not
necessarily stu-
pid, ill- intentioned, or Machiavellian, but they are often

unaware. They do indeed
spend much of their time cruising on automatic, but the true
hallmark of human
information pro cessing is the ability to switch from automatic
to controlled infor-
mation pro cessing. What we really need to do is to encourage
people to recog-
nize cues that build a “Now Think!” step into their scripts—
waving red fl ags at
yourself, so to speak— even though you are engaged in
essentially automatic cog-
nition and action.
Third, because scripts are context bound and organizations are
potent con-
texts, be aware of how strongly, yet how subtly, your job role
and your or gan i za-
tion al culture affect the ways you interpret and make sense of
information (and
thus affect the ways you develop the scripts that will guide you
in unguarded
moments). Or gan i za tion al culture has a much greater effect
on individual cogni-
tion than you would ever suspect.
Last, be prepared to face critical responsibility at a relatively
young age, as I
did. You need to know what your values are and you need to
know how you think
so that you can know how to make a good decision. Before you
can do that, you
need to articulate and affi rm your values now, before you enter
the fray. I wasn’t
really ready. Are you?
Questions for Discussion

1. The Ford Pinto met federal safety standards, yet it had a
design fl aw that
resulted in serious injuries and deaths. Is simply meeting safety
standards a
suffi cient product design goal of ethical companies?
2. Gioia uses the notion of script schemas to help explain why
he voted to
not initiate a recall of the Ford Pinto. In your opinion, is this a
justifi able
explanation?
3. How can or gan i za tion al context infl uence the decisions
made by or gan i za-
tion al members?
4. If you had been in Gioia’s position, what would you have
done? Why?
5. Describe the four key decision- making lessons that Gioia
identifi es for
neophyte decision makers. Discuss how you expect or intend to
use these
four lessons in your own career.
Guidelines 97
Sources

This case was developed from material contained in the
following sources:
Ford Pinto fuel- fed fi res. (n.d.). The Center for Auto Safety.
http:// www .autosafety
.org /article .php ?scid =145 & did = 522, accessed January 20,
2005.
Ford Pinto reckless hom i cide trial. HistoryChannel.com.
http:// www .historychannel
.com /speeches /archive /speech _465 .html, accessed January
20, 2005.
Gioia, D. A. (May 1992). Pinto fi res and personal ethics: A
script analysis of missed
opportunities. Journal of Business Ethics, 11(5– 6), 379– 390.
1 The Changing Environment and Stakeholder Management
33
Cases
Case 1
Bernard L. Madoff Investment Securities LLC:
Wall Street Trading Firm
Bernard L. Madoff Investment Securities LLC was founded in
the 1960s as a

small investment fi rm on Wall Street. With $5,000 in savings
from summer jobs
and at the age of 22, Madoff launched the fi rm that in the
1980s would later rank
with some of the most prestigious and powerful fi rms on Wall
Street. Madoff
began as a single stock trader before starting a family- operated
business that
included his brother, nephew, niece, and his two sons. Each
held a position that
was quite valuable within the company.
Madoff had also created “an investment- advisory business that
managed
money for high- net- worth individuals, hedge funds and other
institutions.” He
made profi table and consistent returns by repaying early
investors from the money
received from new investors. Instead of running an actual hedge
fund, Madoff held
this investment operation inside his fi rm on the seventeenth fl
oor of the building
where only two dozen staff members were permitted to enter
the secured area.
No employee dared question the security and confi dentiality of
the “hedge fund”
fl oor due to the prestige and power that Madoff held. The $65
billion investment
fund was later discovered to be fraudulent, involving one of the
largest Ponzi
schemes in history and shattering the lives of thousands of
individuals, institu-
tions, organizations, and stakeholders worldwide.
The Man with All the Power
Bernard Madoff’s charisma and amiable personality were

important traits that
helped him gain power in the fi nancial community and become
one of the largest
key players on Wall Street. He became a notable authoritative fi
gure by securing
important roles on boards and commissions, helping him bypass
securities reg-
ulations. One of the roles included serving as the chairman of
the board and
directors of the NASDAQ stock exchange during the early
1990s. Madoff was
knowledgeable and smart enough to understand that the more
involved he
became with regulators, the more “you could shape
regulations.” He used his
reputation as a respected trader and perceived “honest”
businessman to take
advantage of investors and manipulate them fraudulently.
Investors were hood-
winked into believing that it was a privilege to take part in
Madoff’s elite invest-
ments, since Madoff never accepted many clients and used
exclusively selective
recruiting in order to keep this part of his business a secret.
Madoff was even able to keep his employees quiet, telling them
not to speak
to the media regarding any of the business activities. While
several understood
something was not right, they ignored suspicions due to
Madoff’s perceived
clean record and aura: “He appeared to believe in family,
loyalty, and honesty. . . .
Never in your wildest imagination would you think he was a
fraudster.”

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed
on 5/15/2021 8:52 AM via POST UNIVERSITY (TRAURIG
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AN: 667095 ; Joseph W. Weiss.; Business Ethics : A
Stakeholder and Issues Management Approach
Account: ns017336.main.eds
34 Business Ethics

Dr. Meloy, author of the textbook The Psychopathic Mind,
states that “typi-
cally people with psychopathic personalities don’t fear getting
caught. . . . They
tend to be very narcissistic with a strong sense of entitlement.”
This led many
analysts of criminal behavior to observe similar traits between
Madoff and serial
killers like Ted Bundy. Analysts discovered several factors
motivating Madoff to-
ward a Ponzi scheme: “A desire to accumulate vast wealth, a
need to dominate
others, and a need to prove that he was smarter than everyone
else.” What ever
the motivating factors were, Madoff’s behavior was still
criminal and affected a
large pool of stakeholders.
Early Suspicions Arise
Despite the unrealistic returns and questionable nature of
Madoff’s business
operations, investors continued to invest money. In 2000, a
whistle-blower from a
competing fi rm— Harry Markopolos, CFE, CFA— discovered
Madoff’s Ponzi scheme.
Markopolos and his small team developed and presented an
eight- page docu-
ment that provided evidence and red fl ags of the fraud to the
Securities and
Exchange Commission (SEC)’s Boston Regional Offi ce in May
2000. Despite
the SEC’s lack of response, Markopolos resubmitted the
documents again in
2001, 2005, 2007 and 2008. His fi ndings were not taken
seriously: “My team and
I tried our best to get the Securities and Exchange Commission

(SEC) to inves-
tigate and shut down the Madoff Ponzi scheme with repeated
and credible warn-
ings.” Because Madoff was well respected and powerful on Wall
Street, few
suspected his fraudulent actions. The status and wealth that
Madoff had created
gave him the means to manipulate the SEC and regulators alike.
Negligence on All Sides
The negligence and gaps in governmental regulation make it
very diffi cult to
point to only one guilty party in the Madoff scandal. The SEC
played a crucial
role by allowing Madoff’s operations to carry out for as long as
they did. For
over 10 years, the SEC received numerous warnings that
Madoff’s steady re-
turns were anything but ordinary and nearly impossible. The
SEC and the Finan-
cial Industry Regulatory Authority, “a non- government agency
that oversees all
securities fi rms,” were known to have investigated Madoff’s fi
rm over eight times
but brought no charges of criminal activity. Despite the red fl
ags and mathemat-
ical proof that Markopolos presented, SEC staff allowed
Madoff’s operations to
continue unchallenged. Spencer Bachus, a politician and a
Republican mem-
ber of the U.S. House of Representatives, stated that “What we
may have in the
Madoff case is not necessarily a lack of enforcement and
oversight tools, but a
failure to use them.” Unfortunately, there could be another side
to the story. David

Kotz, currently the SEC’s inspector general, planned an ongoing
internal investi-
gation to understand the reasoning behind the negligence and to
determine if any
confl ict of interest between SEC staff and the Madoff family
could have been part
of the problem. Arthur Levitt Jr., who was part of the SEC and a
chairman from
1993 to 2001, had close connections with Madoff himself. He
would rely on
35
Madoff’s advice about the functioning of the market, although
Levitt denies all ac-
cusations. In September 2009, it was offi cially stated that no
evidence was found
relating to any confl ict of interest: “The OIG [Offi ce of
Inspector General] investi-
gation did not fi nd evidence that any SEC personnel who
worked on an SEC ex-
amination or investigation of Bernard L. Madoff Investment
Securities LLC had
any fi nancial or other inappropriate connection with Bernard
Madoff or the Madoff
family that infl uenced the conduct of their examination or
investigatory work.”
Unfortunately, the SEC is not the only party to blame.

JPMorgan Chase has
also been criticized for its actions regarding the Madoff
scandal. Instead of in-
vesting client’s money in securities, as Madoff had promised to
do, he deposited
the funds in a Chase bank account. In 2008, federal court
documents show that
“the account had mushroomed to $5.5 billion. . . . This
translates to $483 million
in after- tax profi ts for the bank holding the Madoff funds.” As
one of Chase’s larg-
est customers, Madoff’s account should have been monitored
closely. Internal
bank compliance systems should have detected such red fl ags.
Unfortunately,
Madoff was savvy enough to move millions of dollars between
his U.S. and Lon-
don operations, making it seem like he was actively investing
clients’ money. The
massive account balances of investors should not have been
diffi cult to overlook.
Don Jackson, director of the SecureWorks Counter Threat Unit
Intelligence Ser-
vices, noted that “The only way to stop this kind of fraud is for
the bank to know
its clients better and to report things that might be suspicious. It
really comes
down to human control.” This was an area of weakness for
JPMorgan Chase at
the time.
Where Were the Auditors?
For Madoff to successfully perpetrate such a large scam
spanning more than
a de cade, he needed the help of auditors to certify the fi nancial
statements of

Bernard L. Madoff Investment Securities. The company’s
auditing ser vices were
provided by a three- person accounting fi rm, Friehling &
Horowitz, formerly run
by David Friehling. For over 15 years, Friehling confi rmed to
the American Insti-
tute of Certifi ed Public Accountants (AICPA) that his fi rm did
not conduct any
type of audit work. Because of this confi rmation, Friehling did
not have to “enroll
in the AICPA’s peer review program, in which experienced
auditors assess each
fi rm’s audit quality every year . . . to maintain their licenses to
practice.” Friehling
& Horowitz had in fact been auditing the books of Madoff for
over 17 years, pro-
viding a clean bill of health each year from 1991 through 2008.
Authorities state
that if Friehling provided integrity in his fi ndings, the scandal
would not have
continued for as long as it did: “Mr. Friehling’s deception
helped foster the illu-
sion that Mr. Madoff legitimately invested his client’s money,”
stated U.S. Attorney
Lev Dassin. In addition to receiving total fees of $186,000
annually from the au-
diting ser vices provided to Madoff, Friehling also had accounts
in Madoff’s fi rm
totaling more than $14 million and had withdrawn over $5.5
million since the year
2000. Friehling deceived investors and regulators by providing
unauthorized
audit work and verifying fraudulent fi nancial statements. Given
the size of the

36 Business Ethics
accounting fi rm, a red fl ag should have been raised. Madoff’s
operations were
too large in size and complexity for the resources of a three-
person account-
ing fi rm.
Revealing the Fraud
As the U.S. economy entered the 2008 recession period,
investors began to panic
and withdraw their money from Madoff’s accounts, totaling
more than $7 billion.
Madoff was unable to cover the redemptions and struggled “to
obtain the liquidity
necessary to meet those obligations.” He confessed to his sons
that the busi-
ness he was running was a scam. On December 11, 2008,
Bernard Madoff was
arrested by federal agents— one day after his sons reported his
confession to the
authorities.
Global Crisis
The Ponzi scheme that Madoff ran for more than a de cade
affected the lives of
thousands of individuals, institutions, organizations, and
stakeholders world-
wide. A 162- page list was submitted to the U.S. Bankruptcy
Court in Manhattan
detailing the affected parties. The lengthy list consisted of some

of the wealthi-
est investors and well- known names around the region: “They
reportedly include
Philadelphia Ea gles own er Norman Braman, New York Mets
own er Fred Wilpon
and J. Ezra Merkin, the chairman of GMAC Financial Ser
vices.” Talk show host
Larry King and actor John Malkovich were on the list, among
others. Many
investment- management fi rms, such as Tremont Capital
Management and Fair-
fi eld Greenwich Advisors, had invested large amounts in
Madoff’s funds and
were hit the hardest fi nancially. Major global banks,
“including Royal Bank of
Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC
Holdings PLC and
Spain’s Santander” were also known to have lost milli ons.
Charitable foundations,
such as the Lautenberg foundation; and fi nancial institutions,
including Bank of
America Corp., Citigroup, and JPMorgan Chase were all
stakeholders in the
Madoff scandal. Ordinary individuals also invested much of
their life savings into
what they believed was a “once in a lifetime opportunity.”
William Woessner, a
retiree from the State Department’s Foreign Ser vice, agreed
that the investors
“were made to feel that it was a big favor to be let in if you
didn’t have a lot of
money. It was an exclusive club to belong to.” It has been
reported that individual
losses were between $40,000 to over $1 million in total. There
were 3,500 inves-
tors from New York and more than 1,700 from Florida.

The repercussions of Madoff’s Ponzi scheme have been
emotional as well
as fi nancial. A French aristocrat and professional investor
living within the sub-
urbs of New York, Rene- Thierry Magon de la Villehuchet, had
invested almost
$1.4 billion in Madoff’s accounts. He had invested both his and
his client’s money,
only to lose everything. Villehuchet felt personally responsible
for the loss of his
clients’ money: “He had a true concept of capitalism. . . . He
felt responsible and
he felt guilty,” said his brother Bertrand de la Villehuchet.
Villehuchet’s depres-
sion grew to such a point that he committed suicide on
December 22, 2008.
37
Consequences and Aftermath
On June 29, 2009, Judge Denny Chin found Madoff guilty on
eleven criminal
counts and sentenced him to 150 years in prison, the maximum
possible sen-
tence allowed at the time. Chin’s severe sentence was infl
uenced by the state-
ments given by Madoff’s victims and the 113 letters received
and fi led with the

federal court: “A substantial sentence may in some small mea
sure help the vic-
tims in their healing pro cess,” stated Judge Chin. Madoff was
also forced to pay
a $170- billion legal judgment passed by the government,
stating that this amount
of money “was handled by his fi rm since its founding in the
1960s.” David Frieh-
ling, the auditor for Madoff’s books, was also arrested on fraud
charges. He was
initially “released on a $2.5- million bond and had to surrender
his passport.”
Friehling lost his CPA license in 2010, and his sentencing has
since been post-
poned four times. He faces a sentence of more than 100 years in
prison.
Lawyer Irving H. Picard is a bankruptcy trustee in the Madoff
scandal. As a
court- appointed trustee, Picard has fi led numerous lawsuits
and has collected
$1.2 billion in recovered funds from “banks, personal property,
and funds around
the world.” It is estimated that from this $1.2 billion, Picard has
earned approxi-
mately $15 million. More than $116 million has been given to
237 Madoff victims,
each receiving up to $500,000. In order to help the victims of
the Madoff scan-
dal, Picard started a program called “Hardship Case.” He has
also fi led a $199
million lawsuit against the Madoff family, including Madoff’s
brother, his two
sons, and niece, all of whom worked alongside Madoff. An
additional lawsuit was
fi led against Madoff’s wife for $44.8 million, stating that she

had transferred large
amounts of money from the fi rm “over a six- year period.” As
of now, none of the
family members— Madoff’s two sons, brother, niece, and
wife— have been found
guilty on any of the charges. Madoff’s oldest son, Mark, 46,
committed suicide in
December 2010. Madoff’s victims took swift action against the
negligence of SEC
and JPMorgan Chase. U.S. District Court Judge Colleen
McMahon threw out
most of the $19.9 million charges against JPMorgan in
November 2011, however.
The New York Mets own ers paid a settlement of $162 million
in March of 2012 to
avoid going to trial to answer the allegations made by Irving
Picard.
Hidden Secrets?
Despite the accusations of negligence that JPMorgan Chase
received from the
public, it was one of the biggest- profi ting fi nancial fi rms in
the Madoff scandal.
As stated earlier in the case, JPMorgan made a profi t of $483
million. During
2006, “the bank had started offering investors a way to leverage
their bets on
the future per for mance of two hedge funds that invested with
Mr. Madoff” and
decided to place $250 million of their own money inside these
funds. A few
months before Madoff’s arrest in 2008, JPMorgan withdrew its
$250 million,
stating that it had become “concerned about the lack of
transparency and its
due diligence raised doubts about Madoff’s operations.” It is

surprising that the
bank was suspicious and apprehensive toward investments with
Madoff, but
at the same time raised no concerns about the large amount of
money being
38 Business Ethics
deposited in Madoff’s accounts within the bank. JPMorgan also
failed to alert
investors to move their money, stating that “The issues did not
meet the thresh-
old necessary to permit the bank to restructure the notes. . . .
We did not have
the right to disclose our concerns.” Regardless of the public
statements made
by JPMorgan in support of its actions, many lawyers and
investors believe that
the bank had knowledge of Madoff’s scam but wanted to secure
high returns for
as long as possible.
Ethical Flaws
In a 2011 New York Magazine interview, Madoff stated that he
never thought the
collapse of his Ponzi scheme would cause the sort of destruction
that has befallen
his family. He asserted that unidentifi ed banks and hedge funds
were somehow
“complicit” in his elaborate fraud, an about- face from earlier

claims that he was the
only person involved. “They had to know,” Mr. Madoff said.
“But the attitude was
sort of, ‘If you’re doing something wrong, we don’t want to
know.’ ” To date, none
of the major banks or hedge funds that did business with Mr.
Madoff have been
accused by federal prosecutors of knowingly investing in his
Ponzi scheme.
However, in civil lawsuits Picard has asserted that executives at
some banks
expressed suspicions for years, yet continued to do business
with Madoff and
steer their clients’ money into his hands.
In some ways, Madoff has not tried to evade blame. He has
made a full con-
fession, saying that nothing justifi es what he did. And yet, for
Madoff, that doesn’t
settle the matter. He feels misunderstood. He can’t bear the
thought that people
think he’s evil. “I’m not the kind of person I’m being portrayed
as,” he told New
York Magazine.
A main issue in this controversy is the continuous fraudulent
operations that
Madoff was able to maintain for a de cade that created a $65
billion Ponzi scheme
and shattered the lives of thousands around the world. For most
of the world,
Bernie Madoff is a monster: he betrayed thousands of investors,
and bankrupted
charities and hedge funds. On paper, his Ponzi scheme lost
nearly $65 billion;
the effects spread across fi ve continents. And he brought down

his own family
with him, a more intimate kind of betrayal.
Bernard Madoff was the central stakeholder who manipulated
and involved
his brother, two sons, and niece, all of whom worked inside the
Bernard L. Madoff
Investment Securities LLC. Other key stakeholders included
Madoff’s employ-
ees, who had invested their money into an operation they
believed was legal and
ethical. The fi nancial community were also major players,
including fi nancial in-
stitutions, investment management fi rms, charitable
organizations, and global
banks. The government, specifi cally the SEC, and the justice
department, were
also heavily involved. The lawyer Irving Picard was a key
player, as was the whistle-
blower Harry Markopolos and his team who revealed the nature
of the scam
early on, even though the SEC and other government regulators
did not move on
the evidence.
As of October 2013, Federal authorities are working toward
mounting a
criminal investigation into JPMorgan Chase, believing that the
bank may have

39
intentionally neglected Madoff’s Ponzi scheme. Having recently
agreed to a $13
billion settlement with the U.S. government to settle charges
that the bank over-
stated the quality of mortgages it was selling to investors in the
run- up to the
fi nancial crisis, the threat of criminal charges over the Madoff
case represents
another major threat to the reputation of the nation’s largest
bank. The resolution
of this scheme is not over.
Questions for Discussion
1. What did Madoff do that was illegal and unethical?
2. Identify some of the main reasons that Madoff was able to
start and sustain
such an enormous Ponzi scheme for as long as he did?
3. Who were/are the major stakeholders involved and affected
by Madoff’s
scheme and scandal?
4. Did Madoff have accomplices in starting and sustaining his
scheme or was
he able to do it alone? Explain.
5. How was he caught?
6. What lessons can be learned from Madoff’s scandal?
Sources
This case was developed from material contained in the
following sources:

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41
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