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

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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. 

A Few Halloween Treats to Enjoy

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Cora Bullock
Asst. Editor, Fraud Magazine

Halloween may come once a year, but the tricks of fraudsters unfortunately happen year-round. I am happy, however, to report that there are some treats to be celebrated this year.

Trick: Countrywide, later bought by Bank of America, used a program called "The Hustle" to fast track mortgage loans without checking for fraud, then sold the loans to Freddie Mac and Fannie Mae, where they often defaulted, to the tune of a cool $1 billion. Countrywide did this while at the same time telling officials that they had tightened their standards.

Treat: A jury voted unanimously that Bank of America was guilty of fraud because of that program.

Trick: Abbott Laboratories actively marketed their drug Depakote, used for bipolar disorder, migraines, and epileptic seizures, for uses other than those the FDA approved. It claimed that doctors could prescribe the drug for schizophrenia and for the aggression that stems from the beginning stages of dementia. This wasn't the case that it had good evidence backing up their claims — it had conducted no studies or trials testing Depakote for these other uses. It "had in fact halted clinical trials that had been undertaken to determine if Depakote was useful in treating other issues because it found that the drug caused some concerning side effects."

Treat: The Justice Department ordered the company to pay more than $1.5 billion.

Trick: Tax return fraud is rampant - someone here at the ACFE discovered that he had been a victim when he tried to file his tax return and was told that a tax return with his Social Security number had already been filed. The Wall Street Journal reported in January that, "The Treasury Inspector General for Tax Administration last summer reported discovering an additional 1.5 million potentially fraudulent 2011 tax refunds totaling in excess of $5.2 billion."

Treat: Recently, a sting in Miami nabbed 45 people accused of running a huge tax fraud scheme in which the group stole at least 22,000 identities to attempt to receive $38 million in tax refunds (around $11 million was paid).

So as you continue to fight fraud tricksters, remember that there are always treats in the form of prosecutions, arrests and restitution.

Fraud Week: Resources You May Have Missed

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Mandy Moody
ACFE Social Media Specialist

The ACFE would like to send an enormous “thank you” to all International Fraud Awareness Week Official Supporters, supporting media, bloggers, tweeters and posters for the great success of Fraud Week, Nov. 6-12. Even late night talk show host Jimmy Fallon spread awareness by mentioning Fraud Week in his monologue last Thursday (2:58 mark): "Next week is International Fraud Awareness Week... I fooled you, it's actually this week." Even with the many articles and resources shared, you may not have seen all that was done to spread the word about fraud detection and prevention.

Here are some Fraud Week highlights you may have missed:

• The Wall Street Journal's "Q/A: Pam Verick On International Fraud Awareness." Verick is director and solution leader of fraud risk management for Protiviti, an Official Supporter of Fraud Week.
• Lifehacker.com’s, "How to Protect Yourself from Online Fraud and Identity Theft"
• NBC News in South Dakota presented a three-part series on Fraud Week, beginning with "Fraud, it's Looking for Your Business."
• 5 Proven Analytic Methods to Discover Fraud in Data (ACFE Insights)
• 10 Red Flags for Fraud in the Bidding Process (ACFE Insights)
• Director Notes: "The Role of the Board in Fraud Risk Management" (PDF) Written by ACFE Director of Research Andi McNeal, CFE, CPA, for the Conference Board, this paper provides an in-depth look at the impact a fully engaged board of directors can have in helping to protect an organization from fraud.

Did we miss any resources or highlights? Let us know! Email us at spatterson@acfe.com.

Two New Films, One Old Scheme

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Mandy Moody
ACFE Social Media Specialist

Tuesday, the Huffington Post released the trailer for the new documentary, "Chasing Madoff," starring whistleblower and CFE, Harry Markopolos. Even though I wasn’t working for the ACFE when Bernie Madoff turned himself in and the Wall Street Journal (finally) exposed Harry’s decade-long investigation, many of my coworkers were. In fact, several ACFE staff members were present for the tail-end of Harry’s journey and have continued to “listen,” support and honor a fraud fighter who brought new meaning to the phrase “going above and beyond.”

“Chasing Madoff,” based on Harry’s book, No One Would Listen, details the discovery, the investigation, the initial SEC filing, a second SEC filing, one more SEC filing, a scathing Barron’s expose, and, finally, the conviction and sentencing of the biggest Ponzi scheme to date. You can look for it in select theaters Aug. 26.

Fellow Ponzi schemer Marc Dreier will have to share the limelight once again with Madoff. The documentary, “Unraveled,” was shown this month at the 2011 Los Angeles Film Festival. Director Marc Simon, a a former employee of Dreier’s who lost his job (yeah, I reread that, too), films the former attorney and philanthropist for 60 days. The arbitrary number was not chosen for cinematic reasons, but rather ordered by a court. Simon decided to film Drier during the 60-day house-arrest period he served while awaiting sentencing.

“Unraveled” focuses more on the fraudster; his motives, greed and scam. Harry’s movie is almost solely focused on the fraud fighters, the good guys, which attempted to take down Madoff and save a lot of heartache and money. Oh yeah, did I mention Harry is a CFE?

I’m anxious to see both films and will definitely report back later. Let me know any thoughts below.

A Fraud Report for Europe

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Scott Patterson
ACFE Media Relations Specialist

According to ACFE research, the median fraud loss for European organisations is €420,780 – significantly higher than any other world region. In our 2010 Global Fraud Study, European statistics have been presented and analyzed for the first-ever ACFE Report to the Nations on Occupational Fraud and Abuse, European Edition. We’ve published the Report online, as the ACFE European Fraud Conference in Brussels convened Tuesday. As the Wall Street Journal outlined on Tuesday, the European Edition of the Report to the Nations on Occupational Fraud and Abuse focuses exclusively on the 157 cases of occupational fraud from Europe that were included in the study.

A few of the other interesting findings for Europe include the following:

• The most common type of occupational fraud is asset misappropriation, which occurred in 78 percent of all cases. Fraudulent financial statements caused the highest median loss in our study (€16,410,420), though there was a small sample of only 10 cases.
• Occupational frauds were much more likely to be detected by a tip than by any other means. We found that 40 percent of all frauds were detected by a tip, while internal audit (17 percent of cases) and management review (16 percent of cases) ranked second and third, respectively.
• Small organisations were disproportionately affected by occupational fraud. The median loss for organisations with fewer than 100 employees was €613,638, while the median loss for organisations with more than 10,000 employees was €231,429.
• The median age of a fraud perpetrator in this study was 43 years old. In addition, perpetrators tended to be male (82 percent of cases), to be managers (50 percent of cases) and to have a university degree or postgraduate degree (55 percent of cases).
• Approximately 82 percent of the perpetrators in this study had never been charged with or convicted of a prior fraud-related offence.

While such figures can seem discouraging in certain ways, they provide important insight for anti-fraud professionals and any business or government leaders in understanding the nature of fraud. Knowing that tips are the leading method of detection, for example, tells us that hotlines are an important part of any fraud prevention strategy.

What do you think are some of the other important conclusions that we can draw from this study?