Episode Notes for Fraud Talk Podcast: Mailing Madoff

GUEST BLOGGER

Sarah Hofmann
ACFE Public Information Officer

When you think of pen pals, you usually think of kids staying in touch after friendships forged at summer camp. In stark contrast of that sunny scene, for David Weber, J.D., CFE, his pen pal was the result of a U.S. Securities and Exchange Commission (SEC) investigation. Weber, academic director of fraud management programs at the Smith School of Business at the University of Maryland, regularly corresponds with infamous fraudster Bernie Madoff.

In the latest episode of Fraud Talk, Weber describes how the two first crossed paths when Weber was working as the assistant inspector general for the SEC and directed the reporting of misconduct in the Madoff case. After leaving the SEC, and becoming a professor, Weber received an email from none other than Madoff. The two began talking on a regular basis and Madoff even answers questions posed by Weber’s students. “He’s very direct in the emails; he’s not a man that minces words,” Weber said. “He really does express remorse, and he does continue to be of the view, and I agree with him, that the regulatory agencies really failed to do their jobs.”

His close relationship with a man who cheated hundreds of people and organizations out of billions may raise eyebrows, but Weber believes there is more to be gained from talking to convicted fraudsters than refusing to on hear their stories.  

“There’s no question that we can learn from fraudsters,” he said. “As fraud fighters, we are frequently in a position where clearly being proactive is part of our role, but in many cases, when there is spectacular fraud, we are not learning of the fraud until the incident has finally occurred. We are part of the response team.”

Weber likened investigating fraud to coming to the scene of a car crash after the fact. “There are injured people, there are people who need to be triaged, there are cars that are damaged, there is debris in the road,” he said. “Many times, it’s hard to figure out through the victims what transpired, so having any person on the scene who is still able to speak is helpful, even if they were a drunk driver. Even if they were somebody who drove recklessly, hearing what they have to say is very important to reconstructing the scene.”

Weber acknowledges that hearing from fraudsters may be controversial, as anti-fraud professionals understandably don’t want to glamourize their actions. “I have been at the fraud conference many times where I have heard some of these convicted felons speak … and I agree it can put some of them on a pedestal,” he said. “But anything we can get from these people to help us reconstruct the scene, and build a better mousetrap in the future — we should embrace the ability to speak to them.”

To hear more from Weber, register for the 28th Annual ACFE Global Fraud Conference June 18-23 in Nashville where he will be teaching a session on the Panama Papers.

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.

Fraud Fighters to Hear From Actor Richard Dreyfuss, U.S. District Judge and More

GUEST BLOGGER

Sarah Hofmann
ACFE Public Relations Specialist

Academy Award-Winning Actor Richard Dreyfuss, Judge Jed S. Rakoff, New York Times investigative journalist David Barboza and other experts will address more than 3,000 anti-fraud professionals gathering for the 27th Annual Association of Certified Fraud Examiners (ACFE) Global Fraud Conference in Las Vegas, June 12-17.

Most recently acclaimed for his portrayal of notorious fraudster Bernie Madoff in ABC’s miniseries Madoff, Dreyfuss immersed himself in the role. On portraying the ringleader of the $18 billion Ponzi scheme that would bankrupt hundreds of people and organizations, he said, “I’ve never played such a vivid and living legend of monstrosity … His ability to inflict pain on others was unbelievable.” Dreyfuss is not only known for his acting, but for his political and social activism as well.

Judge Jed S. Rakoff, U.S. District Judge of the Southern District of New York, has made a name for himself rejecting Securities and Exchange Commission settlements with big banks and fighting for the Department of Justice to crack down on fraud, specifically suggesting individual executives should be held accountable in lieu of the corporation as a whole. In an interview with Fraud Magazine, he explained, “While the government never approved fraud per se, it helped create some of the conditions that invited fraud.”

Other keynote speakers include New York Times investigative journalist and author David Barboza, body language expert Steve van Aperen and Halliburton whistleblower Anthony Menendez, CFE, CPA. Convicted fraudster Roomy Khan, who was involved in the Galleon Group insider trading scandal, will also address attendees. She will speak without receiving compensation from the ACFE.

The conference is the world’s largest gathering of fraud fighters and will feature more than 80 educational sessions presented by top experts in the anti-fraud field. Educational sessions will focus on subjects including cyberfraud and cybersecurity, white-collar crime, anti-bribery and anti-corruption practices, risk management, and fraud detection and prevention.

Don’t miss your chance to hear from experts on today’s most pressing fraud and corruption issues. Visit FraudConference.com for more information, video clips, articles and live updates from the conference.

Time Marches On: Madoff’s Swindle, Five Years Later

GUEST BLOGGER

Scott Patterson
ACFE Senior Media Relations Specialist

In 2008, we were still looking back on the massive accounting frauds at Enron and WorldCom when, almost overnight, Bernie Madoff became a household name. News broke that an enormous Ponzi scheme had unraveled, a scheme orchestrated by Madoff that was rumored to have cost investors tens of billions of dollars.

In case you let the five-year anniversary of Bernie Madoff’s fall from grace sneak up on you this year, chances are that, by now, you’ve noticed at least some of the press coverage surrounding this milestone.

Today, we know the dollar amount lost is close to $18 billion, as estimated by Madoff trustee Irving Picard. About half of that amount has been recovered, though the process of providing burned investors with a portion of their money is a slow, complicated one.

You can read about one those victims, Morton Chalek, whose $2.3 million account with Madoff ended up being nothing more than “fiction,” MSN Money reports. Chalek is 90 years old, and wonders if he will see any of the money before he dies. The Wall Street Journal provides an even more intense look at some of Madoff’s victims in “Madoff Victims Recount the Long Road Back” (please note, however, that the article requires a subscription).

Among the tales in the WSJ piece: A man whose wife died in January after they lost the bulk of their retirement nest egg in the fraud. The sudden loss of financial security left her “wrecked,” according to her husband, her whole mindset having changed since that fateful day. 

Another interesting article comes from CNNMoney: “Five things you didn’t know about Bernie Madoff’s Epic Scam.” Here’s one of them that surprised me (spoiler alert): No one is really sure when Madoff’s scheme began. Madoff has claimed it started in the late 80s, and then later claimed it didn’t begin until the 90s. According to this piece, it is believed to have taken shape many years earlier.

For those who would like to read the comments of a fraudster (arguably) in some degree of denial, those stories are out there, too. Madoff has granted a few prison interviews to eager journalists, including recently. Here are the main points I gleaned from those interviews: he believes his victims should have known better, he says the banks knew what he was up to, and his prison experience is “laid back.” Not exactly the degree of contrition I would be looking for had I lost my retirement fund to his fraud.

I’d rather instead focus on the words of Harry Markopolos, CFE, the whistleblower who, for years, saw straight through Madoff’s smoke and mirrors. Named CFE of the Year in 2009, Markopolos still travels the country speaking about his experience chasing Madoff. Accepting an award last month in Erie, Penn., Markopolos said: "I didn't do it by myself, I assure you that.  I had a lot of help and it (the award) is really for those people … We didn't do it for any kind of glory or any kind of awards.  We just did it to stop Bernie Madoff.”

Markopolos has referred to his helpers as “the bloodhounds,” a tight group of investigators who worked hard (and lost a lot of sleep) trying to expose Madoff. Five years later, it occurs to me that while the world doesn’t need any more Bernie Madoffs, we could sure use a lot more bloodhounds. 

Affinity Fraud: Lower than Low

GUEST BLOGGER

Cora Bullock

Fraud Magazine Assistant Editor

I had a mild experience with a Bernie Madoff-type of sociopath right after college when I moved into an apartment with a girl that was a friend of a friend. She was the life of the party; people flocked to her like moths to a flame. When she chose to be friends with you, you felt honored. But it was all a deceiving façade.

She claimed to be going to school (which she wasn't). She was aghast when I told her that my credit card company sent me past-due notices for bills I had never received. A mutual friend, upon hearing my lament, sat in silence on the other end of the phone and then said, "Check the drawer of her nightstand." Sure enough, there sat my credit card bills full of charges from my card that I had never made. I went to restaurants and businesses around Austin and found copies of the credit card receipts, with a signature that was quite obviously not mine, some during vacations when I was out of town. I confronted her, and she denied, denied, denied, until I waved the receipts in her face. Then she broke down, swearing she'd pay me back. And I believed her because I wanted to.

The final straw came a few months later when I walked into our house and thought we'd been robbed - all of our stuff was missing. Turns out our landlord had taken some furniture, all of the electronics and sporting goods - all of which happened to be mine - as collateral for unpaid rent. Guess who wasn't paying rent?

I eventually got all of my stuff back by involving her parents, but she never reimbursed me for the credit card charges (no more than $600). I consider myself lucky.

Of all the frauds perpetrated in this world, the most heinous is affinity fraud. I envision these people carefully searching and screening their future victims. Once they find the ideal candidates, they set about manipulating them, building rapport, only to take them for all they've got. It makes my blood boil.

I edited the Fraud Magazine March/April 2013 article, "Affinity is only skin deep: Insidious fraud of familiarity." The opening story is outrageous. Seng Tan got in good with the Cambodian community through the shared pain of the Pol Pot regime, during which thousands disappeared and died. These people had lived in terror and escaped with nothing but their lives to the U.S. They met this woman, who " knelt in their temple to pray, and they cried and laughed together over their shared experiences." And what did Tan and her husband do? Robbed them of every precious penny of their life savings, to the tune of $30 million, to live in luxury and comfort. What? Are you kidding me? They are sociopaths and completely disgust me.

The latest video on Fraud-Magazine.com is of Kevin Forrester, a fresh-faced, charming man who stole from his own grandmother. What kind of person steals from their grandmother? Though he was convicted and served time, he's still trying to burnish this lowest of low behavior.