Malfeasance

What is malfeasance?

  • Malfeasance is an illegal activity performed by an administrator that causes intentional harm to its members.
  • Corporate-related malfeasance harms investors usually by defrauding them.
  • Applying illegal plots such as a Ponzi scheme is one way to commit an act of malfeasance.

What is corporate malfeasance?

Although the term often refers to government officials who commit an unlawful act while on duty, the title can also apply to corporations. A corporate malfeasance is an illegal act committed by a company’s officers. It may involve intentionally putting their members and investors capital at risk or failing to perform their duties inside the corporation and the rules prescribed by the law.

One famous example of corporate malfeasance is the Madoff investment scandal. Bernie Madoff, the founder of multi-billion dollar corporation Bernard L. Madoff Investment Securities LLC, admitted in December 2008 that the company had employed a fraudulent scheme in their business called Ponzi scheme. This elaborate scheme not only involved Bernie Madoff himself but was covered-up by many others inside the company.

In this illegal investment operation, the company created fake financial reports saying that the business had generated a profit and huge returns for their investors. However, the gains that were generated did not come from legitimate sources. The amount of money that the false reports reflected as “profit” only came from new investors who entered the company. Instead of investing it, they used the money to pay off previous investors. In this scheme, there is no real profit because there is no exchange of product and services but solely relies on new investors for their money.

Madoff admitted his role in the entire operation from the start until his arrest in 2008. Thus he was proven to have committed to an act of malfeasance against the investors and was sentenced to 150 years and a financial penalty of $170 billion.

What are the effects of corporate malfeasance on investors?

Often, corporate malfeasance leads to people getting defrauded out of their money. Although questions about the company’s operation had been raised before 2008, Madoff’s investors were left clueless about the illegal activity for decades had he not admitted to it. Many of the investment fraud victims were senior citizens who put all of their retirement money in the company.  Madoff’s scam fell apart when the economy became unstable, and people started withdrawing their money. More than 2,200 people had invested roughly $20 million with the company fell victim to the scheme, leaving them with almost nothing and jeopardizing their future. The scam left many people with no savings in a very shaky economy.

Many laws have been passed to combat the increasing number of corporate malfeasance cases around the world. Some of the cases were big like Madoff’s, but some, despite being smaller, harm investors all the same. Most victims of such activities belong to the lower-income and middle-income groups, making the level of harm inflicted relatively higher because of the percentages of their net worth involved.

Corporate malfeasance is one reason why people should be careful in choosing which companies to invest their money.

 

Disclaimer

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stockpile assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell. There is no guarantee that any strategies discussed will be effective. Each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s