Fraud at the Top: The Costly Effect of Fraud Committed by Owners and Executives

Fraud at the Top: The Costly Effect of Fraud Committed by Owners and Executives

Olympus scandal: $1.7 billion. Bernie Madoff’s Ponzi scheme: $65 billion. Enron’s estimated total losses: $74 billion. Occupational frauds committed by owners and executives tend to be extremely costly, but why are they more costly and how do they differ from other types of fraud?

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Episode Notes for Fraud Talk Podcast: Mailing Madoff


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.

Traveling Fraud Museum Looks at Fraud on the Big Screen


Courtney Babin
ACFE Communications Coordinator

While the Fraud Museum’s permanent home is at ACFE headquarters in Austin, Texas, each year a traveling exhibit featuring selected pieces goes on display at the ACFE Global Fraud Conference. Made up of artifacts, memorabilia, documents, and other pieces of fraud history collected by ACFE founder and Chairman Dr. Joseph T. Wells, CFE, CPA, this year’s Fraud Museum displays financial frauds depicted on Hollywood’s big screen. The pieces reflect on productions like The Wolf of Wall Street, The Big Short and the recent ABC miniseries, Madoff. 

A must-see piece at the 27th Annual ACFE Global Fraud Conference, June 12-17 in Las Vegas is “Fraudulent Russian Investment Notes” from the Russian company MMM. The notes feature a portrait of Sergei Mavrodi, one of three founders of the company. These notes — which are worthless — are a reminder of Russia’s biggest Ponzi scheme. At the peak of its performance, MMM was collecting $11 million daily. Ponzi schemes are distinguished by paying the principal and interest for old investors with money collected from new victims. Because of the multiplier effect, all Ponzi schemes are destined to eventually fail. For this particular scheme, losses eventually reached $1.5 billion, collected from several million investors.

Another piece to check out is the tongue-in-cheek “Wall Street ‘Most Wanted’ Playing Cards” in the Wolves of Wall Street display. This card set hosts caricatures of many corporate titans who have been charged with major accounting frauds. Some of the fraudsters include Ken Lay of Enron, Martha Stewart and Scott Sullivan of WorldCom.

Check out the other fascinating pieces from the far — and recent — past when you stop by the Fraud Museum exhibit. Remember to bring this conference guide with you and take the quiz on the next page. Be sure to submit your answer sheet in the submission box located at the Fraud Museum exhibit and you will be entered to win a $250 gift card (one answer sheet will be drawn at the end of the conference to determine the winner). Good luck! 

Why Hollywood Loves Fraud


Sarah Hofmann
ACFE Public Relations Specialist

On the big screen and small screen alike, it appears that there’s a new villain in town — fraud. From ABC’s miniseries Madoff, Oscar winner The Big Short, Showtime’s thriller Billions and many more projects in production, fraud seems to be the new hot topic for studios to explore.

The timing of pop culture tackling fraud is undoubtedly tied in some way to the Great Recession of 2008. While fraud is a crime that, by definition, is mainly hidden, the entire world saw how far-reaching the effects can be when big banks began to fail. Script analyst Mars Incrucio explained, “The subprime mortgage crisis in the states left the American public in a state of outrage, and it needed someone to blame. The words ‘banker’ and ‘Wall Street’ suddenly became even more vile and rapacious than they had before. All of this is to say, bankers, brokers, hedge fund managers, and any one percent figures now make for a great bad guy.”

As the dust began to settle on the destruction caused by unethical businessmen, there was another side of human nature that lent itself to being interested in stories of fraud and corruption. Vice President of Education for the ACFE, John Gill, J.D., CFE, explained that movies and shows about fraud can also appeal to a basic curiosity in people. “I think part of it is [the audience asking], ‘Would I ever do something like that?’... People find themselves facing ethical dilemmas more than they think.”

Luckily, Hollywood is beginning to pay attention not only to the greedy villains responsible for fraud; they are celebrating the men and women who uncover these schemes. Incrucio said, “Be on the lookout for the new hero motif, the investigator. These characters use research, wit and hard work to bring down ostensibly greedy and negligent corporate figures. Films such as Spotlight and Truth utilize this character as a direct challenge to the villains beget by the same public outrage.”

In addition to raising awareness about the investigators that ferret out these crimes, seeing more tales of fraud on the screen can lead to the public having an increased awareness of what to lookout for. Gill said, “Many stories are real and the ones that aren’t show an accurate depiction … they’re very helpful to get the word out about some of these schemes … [they] put a face to some of the realities of fraud.”

Whether they serve as PSAs for the general public on red flags to avoid or show entertaining tales of dogged investigators defeating the “evil fraudster,” it’s a safe assumption to make that there will be even more movies and shows in the coming years that show what we already know: fraud is a real issue that needs to be tackled.

The Drug Trade Ruins Lives, But Why Is Fraud Ignored?


Martin Kenney
Managing Partner of Martin Kenney & Co., Solicitors

Fraud has become a global “pandemic.” That was the view of bestselling author and organized crime and fraud expert, Jeffrey Robinson, when he spoke at the 2016 ACFE Middle East Fraud Conference last week.

Robinson said, “If fraud were a disease, political leaders of all our nations would have to declare a global health emergency.” I couldn’t agree more. I know that many of my colleagues attending the conference would also concur with Robinson’s perspective.

What I particularly liked was Robinson’s overview concerning drug trafficking and fraud, with the comparative cost of both crimes. Law enforcement focuses on terrorism first, he said, then drug trafficking, followed by firearms and sex offenses. In terms of monetary impact, fraud was second only to drug trafficking, yet it remained far down on the list of crimes that get investigated.  I personally consider fraud as having the greatest intrinsic value of the two crimes. I will explain why.

The former U.K. detectives who lead my investigations unit described how “value is attached to a consignment of drugs. Effectively, the pure drugs (let’s use cocaine as the example) leave the shores of South America/wherever in a nearly 100 percent pure state. The wholesale value of the drugs is what the next purchaser values them at, currently in the region of $1,800 per kilo of cocaine.

As the drugs pass through the marketing chain, they are constantly being “cut” or “bashed,” meaning they are mixed with other materials to bulk them up. So the kilo of cocaine reaches New York, for example, and will now be represented by multiple kilos of the cut drugs — one can see the fiscal sense this makes to a drug dealer. The new price per kilo of the bashed cocaine is now approximately $30,000. This figure can be extrapolated further when we commence talking about the street value of the drug.

Once we apply this rationale to the equation, it is easy to see why the drug business is a multi-billion-dollar enterprise. But herein lies the paradox: if a fraudster like Bernie Madoff steals $17.5 billion, the value of the loss to the victims is $17.5 billion (putting aside damages claims). If the Drug Enforcement Agency (DEA) intercepts a $17.5 billion shipment of cocaine, they actually acquire nothing (other than a problem over how to safely destroy the consignment) — the drugs are effectively worthless in law enforcement hands, and only acquire a value once they hit the streets.

However, the losses in fraud cases are tangible. They are made up of real money that has a face value. Therefore, by any comparison, fraud should be dealt with as a policing priority.

Drugs ruin lives, but so does fraud. When pensioners invest their savings in a boiler room scam, the effects on both the pensioners and their families are devastating (and they have done nothing illegal, either). The impact is compounded by families having to bail out elderly relatives and the state having to contribute to their welfare. Businesses, too, that are ripped off may end up having to lay-off employees, leading to severe hardship. The effects of fraud can be endless.

So while the drug trade is a major issue, fraud is real money and real dollars, with genuine innocent victims. It deserves to be a law enforcement priority.

Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors of the British Virgin Islands, a specialist investigative and asset recovery practice focused on multi–jurisdictional fraud and grand corruption cases | @MKSolicitors