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.

Naughty or Nice: Who Made the List in 2016?

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Emily Primeaux, CFE
Assistant Editor, Fraud Magazine

He sees you when you're sleeping. He knows when you're awake. He knows when you've been bad or good...

"He," or "she," of course, is the ever present fraud fighter. And in 2016, fraud fighters saw a slew of unsavory characters who clearly ignored the elf on the shelf and instead stole, bribed or colluded to illegally line their own pockets. But for every bad apple, there are unsung heroes — the whistleblowers, journalists, investigators ... the list goes on and on. These heroes go to battle in the trenches every day to root out the crooks and thieves.

In honor of the holiday season, let's ruminate on the past year and the characters that made it onto either the naughty or the nice list.

Naughty

1. Wells Fargo: On Sept. 9, 2016, Wells Fargo negotiated a deal to settle a lawsuit filed by the U.S. Consumer Financial Protection Bureau, the Office of Comptroller of Currency, and the City and County of Los Angeles. Though Wells Fargo didn't admit to any wrongdoing, it did confirm that employees had opened more than two million checking, savings and credit card accounts without customer approval. And in a stunning turn of events, former employees then came forward to say they had called the ethics hotline to report dubious sales practices. However, according to these accounts, some whistleblowers claimed that the bank's strategy for dealing with whistleblowers was to find ways to fire them in retaliation. Though the case is ongoing, John Stumpf has stepped down as the bank's chief executive.
    
2. Andrew Caspersen: On Nov. 4, 2016, this disgraced scion of a wealthy Wall Street family was sentenced to four years in prison for robbing his friends, family and a large hedge-fund foundation in a Ponzi-like scheme. The judge who sentenced him? None other than the ACFE's 2016 Cressey Award winner, Senior U.S. District Judge Jed S. Rakoff. Looks like Caspersen most likely received coal in his stocking this year.
    
3. The Panama Papers: A giant leak of more than 11.5 million financial and legal records from the world's fourth biggest offshore law firm, Mossack Fonseca, detailing financial and attorney-client information for more than 214,488 offshore entities ... otherwise known as the Panama Papers. According to the papers, the leak "exposes a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies." The leaked documents outed scores of politicians, business leaders and celebrities for fraudulent business practices, including Iceland's Prime Minister, Sigmundur David Gunnlaugsson. He stepped down after documents revealed that he and his wealthy wife had sheltered money offshore.

Nice

1. The Panama Papers: The papers themselves were a great feat of international cooperation when the International Consortium of Investigative Journalists, the German newspaper Süddeutsche Zeitung and more than 100 news organizations released the Panama Papers. These are the good guys.
    
2. Tyler Schultz: When he discovered that Theranos, a health technology and blood-testing company, was using proprietary Edison machines that frequently failed quality-control checks and produced widely varying results, Schultz (an employee of the company at the time) decided to speak up. He drafted an email to founder Elizabeth Holmes to complain that Theranos had doctored research and ignored failed quality-control checks. What makes this move even more incredible is that Schultz is the grandson of George Schultz, a Theranos board member. Since then, a major investor has sued Theranos for fraud and the company has had to stop blood tests, shut down labs and cut jobs. 
    
3. Clare Rewcastle Brown: In 2010, Rewcastle Brown founded The Sarawak Report and Radio Free Sarawak to disseminate news that concerned the Sarawak region of Malaysia and eventually, news surrounding the emerging 1MDB (1Malaysia Development Bhd) scandal. 1MDB is currently being investigated by Swiss, Singh and U.S. authorities. And she's not backing down, despite a Malaysian court issuing a warrant for her arrest for "activities detrimental to parliamentary democracy" and the "dissemination of false reports." She'll be speaking about the scandal at the 2017 ACFE Fraud Conference Europe in London, March 19-21.

The naughty list may never be empty, but at least we have those on the nice list to turn to. And while 2016 saw some pretty egregious schemes, we can enter 2017 knowing that there are those willing to investigate and speak up. Here's to the new year!

When Football Stars Turn Into Fraudsters

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Sarah Hofmann
ACFE Public Relations Specialist

Although still not officially a U.S. holiday, the Super Bowl ranks up there with the Fourth of July and Thanksgiving as one of the most American days of the year. Families and friends gather around food and yell at the television as if the players can hear them. While football players are often lauded as heroes on the field, some players fall far from grace by turning to fraud when their sometimes short careers are over. Here are some of the most notable footballers-turned-fraudsters.

Will Allen
After 11 years in the NFL as a cornerback, Allen found himself intercepted by the SEC when he was arrested for orchestrating a $32 million Ponzi scheme. The former New York Giant and Miami Dolphin ran Capital Financial Partners LLC with his partner Susan Daub. Allen convinced investors the company would provide short-term, high-interest loans to athletes, while he pocketed nearly $4 million for himself. When questioned by the SEC, Allen allegedly forged signatures on important documents to cover up his crimes. He has yet to be formally charged but faces 23 felony counts and up to 240 years in prison.

Irving Fryar
Fryar may have been lucky enough to score the only touchdown for the New England Patriots in Super Bowl XX in 1986, but the wide receiver’s luck ran out 15 years after he retired from the league. In 2015, Fryar and his mother were found guilty of mortgage fraud in New Jersey Superior. In 2009, they obtained multiple home equity loans while using the same property as collateral. Fryar was ordered to pay $615,600 in restitution to the banks affected by the fraud and was sentenced to five years in prison.

Freddie Mitchell
He played in Super bowl XXXIX, but former Philadelphia Eagles wide receiver Mitchell may have flown a little too high when he created the company Chameleon LLC. That company, along with him as an individual, filed a number of fraudulent tax returns, amounting up to $3.3 million. He pleaded guilty and, according to Accounting Web, he blames multiple concussions he sustained during his football career for making him too trusting of a person. He alleges that he was the victim of a fraudster posing as an IRS agent. He was sentenced to 37 months in prison in 2013.

Arthur J. Marshall Jr.
Marshall Jr. never made a splash on the field, spending only five years in the NFL from 1991-1996, but he managed to leave his mark in another way when he was convicted of an elaborate mortgage fraud scheme in 2009. He was charged with 22 felonies including falsifying sales contracts and personal finance records that left multiple banks on the hook for millions in bad debt. He was ordered to pay $3.6 in restitution and was sentenced to 69 months in prison.

Mark Ingram Sr.
Ingram Sr. may have a Super Bowl ring from being a wide receiver for the Super Bowl XXV champion New York Giants, but he also has a less impressive record as a felon. He retired from football in 1996 and was charged with federal money laundering and bank fraud charges in 2008. He was sentenced to seven years in prison and was ordered to pay $252,000 in restitution. His son, Mark Ingram Jr. is currently a running back for the New Orleans Saints; he was picked in the same round and at the same number as his father.

So while you cheer on your favored team in the big game, keep in mind that there may be a future fraudster playing on that field.

Excuses Don’t Hold Up in Court: Madoff 5 Found Guilty

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John Gill, J.D., CFE
ACFE VP of Education

“The only thing necessary for the triumph of evil is for good men to do nothing.” 

This quote has been attributed to the philosopher Edmund Burke. The verdict this week convicting five of Bernard Madoff’s former employees reinforces this wise observation.

No one reasonably believed that Madoff could have pulled off a multi-billion dollar Ponzi scheme for decades without assistance. The employees’ defense consisted of basically, “we did as we were told and we never knew the whole picture.” Similar defenses were tried during the war crimes trials after World War II, and they didn’t succeed then either.

I hope that the verdict will be noticed by employees who at this very minute are being asked to do things that they believe may be wrong, or at least questionable. Individuals, regardless of where they are on the organizational chart, must be held accountable for their actions. If an employee suspects that her boss is falsifying financial statements, stealing company funds, or lying to the government and does nothing, then she should be held accountable.

Thankfully the jury in this case did not buy the “I just did as I was told” defense. The U.S. Department of Justice is doing the right thing by sending the message to employees who are complicit in fraud schemes that if they know of wrongdoing and don’t come forward, they too can be prosecuted.

However, it’s not just about saying no to fraud; in many cases, it is about standing up to fraud. Both the Sarbanes-Oxley Act and the Dodd-Frank Act provide for substantial rewards for those who blow the whistle on fraud. Last October, the Securities and Exchange Commission (SEC) announced that it had awarded more than $14 million to a whistleblower who provided information that led to a successful enforcement action.

I sincerely hope that this verdict will cause employees across the U.S. and beyond to consider what they are doing or being told to do and ask themselves, “Am I assisting in breaking the law even though I’m just doing what I was told?” If the answer is yes, I hope they will not allow evil to triumph by doing nothing. Ignoring the problem may land them in jail.