3 Tough Life Lessons From the Bernie Madoff Ponzi Scheme

FROM FRAUD MAGAZINE

Courtney Howell, ACFE Community Manager

On Sept. 9, 2016, Audible released the first episode of “Ponzi Supernova: Madoff Speaks,” a six-part series hosted and reported by Steve Fishman. The series focuses on the $65 billion Ponzi scheme at Bernard L. Madoff Investment Securities LLC, spearheaded by Madoff, which crumbled with the 2008 financial crisis. The last episode aired in February, and I waited until they were all available before diving in and devouring them in less than two days. As many have said before me, this is a great series for fans of the “Serial” podcast, but for anti-fraud professionals this also serves as an in-depth look into a disturbing case of widespread, unchecked fraud.

The series starts with Fishman’s exclusive telephone interviews with an imprisoned Madoff. It then works through the mechanics of the scheme and finishes with Fishman speaking to both perpetrators and victims of the crime. The most shocking aspect of the Madoff scheme is the sheer scope of it. When I first heard about it years ago, the two biggest questions I found myself asking were “how?” and “why?” But as I continued to listen, and as Fishman interviewed several peripherally involved in the scheme, I found myself asking a much tougher question — what would I do if I’d been an investor interested in Madoff’s scheme?

With that in mind, I’ve put together a list of three tough life lessons from the Madoff Ponzi scheme that fraud fighters can implement right now to improve future fraud examinations.

Lesson No. 1: Trust your instincts and don’t ignore red flags

Cynthia Keuppers, one of Fishman’s investigation subjects, once worked in the investment world and now owns a Japanese-Brazilian fast-food restaurant called Uma Temakeria. Fishman wanted to know how a scheme of this magnitude could persist for such a long period of time (more than 40 years) without anyone detecting it. This led him to Keuppers.

In 2006, Keuppers worked for Presidio, a wealth management firm in San Francisco. Some clients came to her asking about Madoff’s fund — they’d heard good things and wanted her to take a look at it. Initially she was impressed by the consistency of the returns, but before she could recommend buying in, she wanted to make sure she understood how the Madoff investment strategy worked.

“If I can’t understand it, I’m not someone that sort of says, ‘Well, if I can’t get it, somebody else must be able to get it, and I’m just not going to get there,’ ” Keuppers tells Fishman. “You have to be able to understand all the way down to where something is coming from. You might have to do a little work to get there, but you should be able to understand what a certain driver is.” This unwavering certainty in her own skills and knowledge is notable. When faced with such a highly regarded investment entity, she didn’t back down or doubt herself.

Keuppers wasn’t dealing with Madoff himself. She was working with Fairfield, the largest of the Madoff feeder funds. She had a meeting with Fairfield’s chief risk officer, and she asked him question after question, trying to drill down into the Madoff strategy. She didn’t need to understand the secret to Madoff’s success. She just needed to know why and how it was so consistent. Her objective was to see data from five years ago, but as Fishman reports, “Fairfield wouldn’t give her anything — red flag.”

The CRO assured her that he’d done the work that she was wanting to do, but he wasn’t at liberty to share the actual data with her. Basically, he wanted her to trust him. Keuppers says, “That right there was also a red flag.”

The final nail in the coffin was when Fairfield told Keuppers that the Madoff fund was closed and wasn’t accepting more investors, but he liked working with Presidio so much that they’d be willing to sell some of its holdings to Keuppers’ investors. You can hear the skepticism in Keuppers’ voice when she rhetorically asks, “Why would you sell me something that you’re not going to sell to anyone else? What makes me special?” Then she laughs and says, “Usually, you’re not that special in this industry.”

Although it wasn’t the information she was looking for, Keuppers had all the information she needed to decide. She advised against investing in the Madoff fund. As anti-fraud professionals, you might be put in similar situations. Clients push you one way, but your gut tells you to go in another. How do you make the hard decision when you know it will disappoint, or even anger, someone?

In “4 Reasons Why People Ignore Red Flags,” Jeffrey Aucoin, CFE, says that trust “is probably the biggest reason why owners and executives ignore red flags.” Keuppers made the right decision not recommending the Madoff shares to her client. Keuppers couldn’t place her trust in the validity of this investment because of Fairfield’s lack of transparency. It might have been a disappointment to her clients in the short run, but in the long run, I’m going to safely assume they’re happy with her recommendation.

Want more? Read Courtney's other two life lessons in the full article on Fraud-Magazine.com.

4 Ways to Protect Your Company’s Pot of Gold

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

Don’t worry; I’m not going to go all Lucky Charms on you this St. Patrick’s Day and toss out a bunch of thinly veiled Irish puns. You would only be so lucky…sorry, I couldn’t resist.

But, I did want to take this opportunity to remind you about the cost of fraud to your organization and how to add four easy best practices that will help protect your company’s hard-earned pot of gold. Organizations worldwide lose an estimated 5 percent of their annual revenues to fraud, according to the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse. A single instance of fraud can be devastating: the median loss per fraud case was $145,000, and more than a fifth of the cases involved losses of at least $1 million.

The good news? There are some basic steps your organization can take to lessen your vulnerability to fraud:

1. Adopt a Code of Ethics.
Be proactive in setting a tone for management and employees. Evaluate your internal controls for effectiveness and identify areas of the business that are vulnerable to fraud.

2. Establish Hiring Procedures.
When hiring staff, conduct thorough background investigations. Check educational, credit and employment history (as permitted by law), as well as references.

3. Implement a Fraud Hotline.
Fraud is still most likely to be detected by a tip. Providing an anonymous reporting system for your employees, contractors and clients will help uncover more fraud.

4. Increase the Perception of Detection.
Communicate regularly to staff about anti-fraud policies, ways to report suspicions of misconduct, and the potential consequences (including termination and prosecution) of fraudulent behavior.

Implementing these tips could help prevent your organization from becoming a statistic, and help keep your pot of gold safe and secure. I leave you with this Irish blessing: “Here’s to you and yours, And to mine and ours, And if mine and ours ever come across you and yours, I hope you and yours will do as much for mine and ours as mine and ours have done for you and yours!” Cheers, everyone!

Et Tu Brute? Heartbreaking Tales of Fraudsters Betraying Friends and Family

Et Tu Brute? Heartbreaking Tales of Fraudsters Betraying Friends and Family

Fraud is always an unfortunate occurrence that shakes the confidence of its victims. They often doubt themselves and wonder how they could have missed the signs. While every type of fraud is damaging to the psyche of those fleeced, insult is added to injury when victims are defrauded by friends or loved ones. In honor of the Ides of March, the infamous day Julius Caesar was stabbed by members of the Roman Senate led by his friend Brutus, let’s look at some fraud cases where personal betrayal may have hurt more than the loss of money.

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