Category Archives: Arrogant Fraudster

Kong Hee, charismatic or fraudster?

Photo: Straits Times

Photo: Straits Times, Kong Hee in the middle.

There has been some ruffled feathers in the City Harvest Church after their leader and founder has been found guilty of fraud 20th Nov 2015 in Singapore. He will serve 8 years in prison and has taken with him, 5 of his trusted followers. It all boils down to the question, did he use the Church’s money to fund his wife’s singing career illegally or not? The Judge was clear, it was an illegal use of church funds and handed down a harsh prison sentence on him. A rich man to live in a Singapore prison for 8 years is certainly a challenge, I understand that there is no air-conditioning or TV neither is there exercise more than 1 hour a day, there are no beds, inmates sleep on the floor.

Now the verdict has been handed down after a 2 year trial and review of thousands of files. As noted by the ABC news:

After a two-year trial that captivated Singapore with tales of lavish spending and financial deceit, pastor Kong Hee and five aides were found guilty of diverting $Sg24 million (A$24 million) to finance his wife Sun Ho’s music career, which was portrayed as a religious mission.

The six were also found guilty of misappropriating another $Sg26m from City Harvest Church to cover their tracks, prosecutors said. (http://tinyurl.com/poyswvo)

Now is the time to consider the question: is Kong Hee an Arrogant Fraudster or a Likeable Fraudster? And a very interesting case he is too. He is certainly liked by the thousands of churchgoers, but Likeable Fraudsters upon discovery confess to their wrongdoing and never plead ‘not guilty’. They also show a deep and real remorse, so deep that they consider that they are unworthy to live and commit or attempt to commit suicide. This too is missing in the news reports.

Kong Hee does say that he is sorry to his congregation, this was captured by mothership.sg on video.

I am so sorry for all the pain and the turmoil you have had to endure under my leadership, under my watch. You have had to answer questions, and criticisms from family, from friends, from colleagues. Pastor is so very sorry. So so sorry. That you have to endure through all these under my leadership. (http://mothership.sg/2015/10/here-was-how-kong-hee-said-sorry-to-the-city-harvest-church-congregation/)

But is this a real apology? Where is the admission of guilt? And what about saying sorry that the $26 million which has been spent, will be returned? Nothing. In fact, this is not a real apology. Reason why? He only apologises to the poor congregation who have been dragged through the limelight by the media. What does a real apology contain? Taking full responsibility of the wrongdoing! That it was wrong and it will never be done again.

In my view, what is happening with this apology is that the congregation was expecting a not guilty verdict and he had to do something to assuage their feelings yet stay in control. In other words, this is not the behaviour of a Likeable Fraudster. I am left with the conclusion that Kong Hee must be an Arrogant fraudster. This will be an unpopular decision with his congregation but not with the whistle-blowers, Chew Eng Han, who was the person who thought up the scheme of how to siphon off funds, and Roland Poon Swee Kay, who blew the whistle on Kong Hee’s behaviour – 12 years ago, and I gather most of the Singaporean community.

And to rub salt into the wounds of the congregation, the acting Pastor ends the apology speech with this.

Thank you Church, I just want to collect God’s tithes and offering. I want to thank you for your love for City Harvest Church… you see there is an envelope that look like this, I want you to just take it out, and put your offering inside, and you can, if you are making a cheque make it payable to ‘City Harvest Church’, I want to encourage you to fulfill your tithe, your building fund. Thank you for your giving, thank you for your love towards City Harvest Church. God loves you, let’s give with a big wide smile. Amen? Praise God. (ibid.)

Photo: Straits Times

Photo: Straits Times

Interestingly Kong Hee has put his penthouse apartment up for sale in July of this year, for Sg$10,000,000. But nothing is mentioned about where the proceeds will go. Kong Hee has been reported to have knocked back offers. It is a jointly financed deal with an Indonesian developer Wahju Hanafi.

A Likeable Fraudster would have accepted anything and repay the debt owed, even though it is far less than was misappropriated.

One thing that I have learnt from this case is that the Arrogant Fraudsters Executive Impression Management can hold tremendous power over many people and rely on their stunning image of success that has worked for them for years, to use again for the future.

Amen.

 

 

 

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Andy Fastow: A Smartest Arrogant Fraudster in the Room about to be released

Mr Fastow of Enron fame, jailed for 10 years and forfeiting $23.8M in assets in 2006 is about to be released from prison next month. The date is anticipated is the 17thDec 2011, after serving most of his time in a low-security prison and more recently a halfway house prior to his release.

Originally faced with a maximum of 140 years in jail, he received lenient sentencing thanks to some good plea-bargaining based on informing on his colleagues (notably Kenneth Lay and Jeff Skilling) at Enron.

Interestingly, Fastow was the only executive fired by the Enron Board just days prior to the collapse due to the Board finding out that he made $45M for himself in his off balance sheet deals. Apparently the Board thought his financial wizardry as excessive. So not only has he been able to receive a lighter sentence he gets to keep at least $20M of his fraudulently obtained money.

From what I have researched in the media it would seem that Andy Fastow would fit the type of Arrogant Fraudster.  It was said about him long ago that his critics:

‘…labeled him ”fast Andy” and the ”Betty Crocker of cooked books.” People who grew up with him judged him as extremely ambitious and recall how he quarreled with high school teachers over his grades.

Former Enron colleagues have called him prickly and a bully. They say that during angry bouts, he was known to leave profanity-laced messages on the voice mail of colleagues.

He could also be charming and generous, former colleagues said. (reported by David Barboza, 2002). His drive for power was noted very early on in school with these comments:

”High school politics wasn’t a big deal at our school but it was a big deal to him,” said Mark Liss, a classmate at New Providence High who beat him in a race for class president. ”I remember how depressed he was; student government meant everything to him.”

A year later, Andy Fastow was elected president of the student council…. Dwight Boud, [his English teacher] described Andy Fastow as a ”wheeler-dealer” who even negotiated to get his grades changed. (Barboza, 2002). He married an heiress to a large fortune in 1985, which gave him a platform to meet wealthy and influential individuals and was head hunted by an executive recruiter (nameless unfortunately), as one of Jeff Skilling’s first recruits. He became the mastermind behind the schemes that defrauded millions of dollars out of Enron into the pockets of Enron executives, including his own.

Apparently he was able to show convincing signs of remorse to the trial judge and this assisted in his lower sentence.

From the findings of the Arrogant Fraudster type there are indeed some parallels with corporate psychopathy. Lack of remorse is seen as one of those characteristics, however I found in my research that they tended used remorse at trial to reduce their sentences. Most times the judges in the cases would see through the mitigation attempts by the fraudster and it would be remarked upon in their judgements that the ploy did not work.

So it could still be argued that Fastow demonstrated signs of being a corporate psychopath by being able to persuade an experienced trial judge such as Ken Hoyt the US District Judge in attendance at the trial, despite the remorse shown.

The ability to charm people is one of the noted characteristics of psychopaths, even fooling Robert D. Hare the well-known psychologist who has studied imprisoned psychopaths for over 30 years who admits that even he has had the wool pulled over his eyes. This uncanny ability to charm is how the individual is able to succeed in pulling off frauds of this magnitude. Anyone else would fall apart with keeping up the charm, but not Mr Fastow, he managed to beam the charm to the right quarters for 11 years at Enron and this is despite the constant cry that his efforts to keep Enron afloat went unrecognised.

Fastow was part of the Enron dream team of the smartest guys in the room, Skilling may have had the vision, but it was Fastow who admitted giving them the means to implement the vision.

Psychopaths do not change, their unrelenting behaviour is meant to be able to be harnessed (Snakes in Suits) with their immense energy put into side projects. This may happen to Andy Fastow upon his release, that he may undertake projects that he feels will be satisfying. However, generally such satisfaction is grounded in their own needs being fulfilled and with a psychopath it is the need of power over others. Certainly the Arrogant Fraudsters in my research went on to repeat their offending behaviour even while on bail, convincing new employers that they were much maligned.

The outlook for Fastow would seem to be the same pathway as before, set in his early days of seeking power, perhaps it will be moderated to some degree, but more likely that we will be hearing more about Andy Fastow after his release. As they say in the media, “Watch this space…” it will be very interesting to see how this Arrogant Fraudster develops after his stint in prison.

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Fraudster Lee Farkas gets 30 years for “doing nothing wrong”

A 30 year sentence – the maximum sentence allowed for fraud has been meted out to Lee Farkas who defrauded the US government funds of about $3.5 billion (TARP program of  $550,000 and the Federal Housing Authority of the rest).

Photo: Marion County, Fla via bloomberg.com

For those who don’t know, Farkas was Chairman of Taylor Bean and Whitaker Mortgage Corp based in Florida, US. And was one of the contributors of the GFC crisis in 2009 bringing down Colonial Bank, the 6th largest US bank in the process.

‘Farkas used Taylor Bean as his own “personal piggy-bank” and stole more than $30 million from the company he built to buy homes, cars, airplanes, restaurants and other side businesses, said Assistant U.S. Attorney Charles Connolly during closing arguments.’

With the verdict, prosecutors were keen to seize valuable properties and cars as well as a jet. These were already hidden under friends’ names, but it will be unlikely to stop the seizure as well as the fine of $38 million that is set by the Court.

Farkas hid shortfalls by shifting money in between accounts from the end of 2007 to 2009, first of all internally then later externally to the Colonial Bank, the shortfalls spun out from half a million dollars to nearly three billion. Farkas and his co-conspirators known as Plan B also defrauded the US government of funds which were diverted elsewhere. In Project Squirrel Farkas took $50 million for his own benefit and poured money into his own separate businesses.

Interestingly, throughout the trial and in 5 hours of testimony, Farkas insisted that he did nothing wrong. There was no showing of remorse or even regret for what he had done. No statements whatsoever. This was remarked upon by the trial Judge:

I do not detect one bit of actual remorse,” Judge Leonie M. Brinkema told Mr. Farkas in a federal courtroom in Alexandria, Va., on Thursday. “You regret getting caught.”

In my research I found a type of executive fraudster which was named by respondents as Arrogant who showed no remorse. Although the Arrogant Fraudster characteristics were typical of psychopathy there was no definitive link found in the interviews with co-workers.

One of the most telling indicators of psychopathy is the lack of remorse and is used in Robert D. Hare’s list – the gold standard of detecting psychopaths. Another indicator of psychopathy is ‘grandiose sense of self’. Farkas awarded himself large bonuses and salary appears to indicate this together with the purchasing of boy’s toys such as the personal jet and expensive rare cars, plus business ventures and several homes.

Unfortunately even after a substantive amount of research, there is little evidence prior to the bankruptcy and fraud charges that is known about Farkas. The only bit of evidence that is a bit odd that strikes me as being also indicative of an Arrogant Fraudster is the fact that he hired Stuart Scott within two weeks of being fired by Microsoft. Scott was CIO of this vast corporation and then was suddenly, and very publicly fired – something that is rare in business today. Microsoft only states that he was fired due to violations of company policies. A quote at the time reveals why Scott may have been so appealing to Farkas:

“Stuart’s credentials are impressive,” Farkas said in a statement. “Having someone of his caliber join us further solidifies our ability to deliver innovative technology solutions.” It was by using these innovative technologies that Taylor Bean and Whitaker were able to do cross deals with other banks. This is not to say that Scott is a fraudster, far from it, Scott that he would have been used as a vehicle for this type of dealing.

Sweet-talking and using people are another mark of the psychopath/Arrogant Fraudster type as they use people ruthlessly to meet their own ends. Being labeled as a philanthropist in the local community for instance is no testament to the real person underneath the mask.

Tragically, Lee Farkas and his sister Terri Huber lost their parents at a very young age (WSJ June 2011), I have no other details to go by on the effect that this trauma must have had on their lives. Becoming an orphan does not mean that the individual is destined to be a fraudster, however, Post Traumatic Stress Disorder can disrupt normal behaviour patterns for the rest of his or her life. In addition, there is evidence to support that the loss of maternal attachment at a young age results in a higher proportion of adults in jails and psychiatric wards (see the adoption literature).

However, the most telling indicator is the lack of remorse. The other alternative type of Fraudster I found in my research is the Likeable Fraudster, but once their fraudulent behaviour is discovered they are extremely quick to show true and overwhelming remorse – to the point of wanting to commit suicide. On the contrary, Farkas has been sending out letters to the media via his sister protesting his innocence since he has been in jail. He sees himself as a scapegoat of the US government and nothing less than a CEO who held the reins of a successful mortgage company during the tumultuous GFC crisis. This is not the mark of a Likeable Fraudster.

In the absence of other evidence, my conclusion that Farkas, now in jail for 30 years, is very likely of the Arrogant Fraudster type and could possibly be psychopathic as well. We do know that there is a far greater proportion of psychopaths in management than in the general population and selection committees and executive recruiters like the charm and the ‘results driven’ résumé that such people would possess.

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Bernie Madoff: Predator of his own kind

(This article is available through SSRN)

Introduction

There were two types of executive fraudster that emerged from my qualitative exploration of fraudster and non-fraudster executives: The Arrogant Fraudster and the Likeable Fraudster (Sheridan 2010). This paper is concerned with the profile of the Arrogant and Bernie Madoff. Two years after the Madoff Ponzi scheme hit the headlines, there is a large amount of information that is found in the media and there seemed to be many similarities to the Predator executive fraudsters. While my own doctoral research was based on cases drawn from convicted executives who stole from their employer’s company and Madoff was never an employee, there still was a strong pattern that emerged which pointed to Madoff being an archetype Predator – a career senior corporate fraudster. If this is the case, then the typology appears likely to have implications for future due diligence processes accorded by risk managers and investors.

Trawling through the media it came with some surprise to this researcher that there was so much information about Madoff, which was strikingly similar to that shown in the Arrogant profile. Although Bernard L. Madoff ran his own investment firm and never worked for others, the typology could easily be extended from executive to an employer. The executive steals from the employer and the employer steals from customers/ creditors employees.

What is particularly gruesome– although quite logical to the type, is about the modus operandii – Madoff preyed on his own people first. He grew up in a Jewish enclave in New York and continued in life to prey on Jewish individuals and institutions. With much success there, outside money poured into his Ponzi scheme from hedge fund investors and the like. It is estimated that there were 16,000 aggrieved investors who were bilked of an amount closer to $20 billion rather than the $50-60 billion as first reported (Vinod, 2009).

Bernie Madoff's mugshot. Photo from:money.cnn.com/2009

My research into Mr Madoff’s life was aimed at looking for early childhood accounts. My hypothesis is that those children who have a Dismissive attachment type grow up to be Sociopaths/Psychopaths and some of these will be executive fraudsters. So my objective was to get as much information about Madoff’s childhood as possible. Much had been written and regurgitated in the media about Bernie Madoff, but there very little about his childhood. I am somewhat surprised that no one has taken an investigative approach to what happened to the little boy as he grew up in the care of two ‘hustler’ parents: Ralph and Sylvia Madoff. He was the middle child, Sondra (Sonnie) was the oldest and Peter the youngest. We only know that Bernie dominated his brother Peter and treated him badly in front of staff.[1] As well as later in life, he cheated his sister, Sondra, who invested money with Madoff as well as her son and nephew Charles, and they lost millions along with thousands of others.[2]

Scholarly work

There is not much published at this point in time, given the lengthy timeframes for publication in journals and books it would be expected that more will be published in 2011. The work that is available can be categorised into two areas: The normative or prescription approach to the problem and the second area focussed on the investment decisions – as people ignored the Red Flags or other warning signs.

Normative Approach

Risk managers concentrating purely on the financial returns, says Scharfman (2009), is illusory. The Madoff scandal has elevated due diligence to higher levels – to include non-investment risks, that is, operational risks in their assessments.  Whereas Clauss, Roncalli, and Weisang  (2009) argued that greater regulatory control, coordination and direct supervision of hedge funds would have avoided such a disaster.

An interesting observation by Hurt (2009) is that the Madoff case has redefined white collar crime into a victim-based crime, this has always been contentious by many scholars including the Australian Institute of Criminology (2004)and Freiburg (2000), the large sentence handed out by Judge Chin was in part based on the public’s redefinition of fraud in the media.

Red Flag or Warning Signs Approach

The collapse has brought attention from some authors about basic performance issues. Easy to say after the horse has bolted say Bernard and Boyle (2009) but anyone looking at the miracle “split-strike conversion strategy” used by Madoff to explain high profitability and low volatility attracting even more investors – will see that analysis of earnings data would have proved otherwise. The authors conclude:  “We find that Madoff’s returns lie well outside their theoretical bounds and should have raised suspicions about Madoff’s performance”. Furthermore, Fuerman (2009) states that the use of a low quality solo auditor for a substantial hedge fund should have been regarded as the Red Flag that it truly was. Whereas Dimmock and Gerken (2010) conclude that investors could have simply used a review of the intended fund’s past regulatory and legal violations, conflicts of interest, and monitoring, as these are significantly associated with fund fraud, explaining 24% of total variation.

Madoff an Arrogant Fraudster?

Because my work is new and unpublished I was not expecting to see scholars working from the theory of impression management and this was indeed the case. So I set about looking at what available information there was on Bernie Madoff . From this initial trawl the information began to fit into the categories developed from my thesis as the Arrogant Fraudster. This was drawn from what the co-workers reportedly said in the media. This is an exploratory account, and cannot be used in a quantitative context for example, a “sample of 1”.

Despite the fact that  I was looking for any information I realised that the amassed collection of opinion and news reports began to describe an Arrogant fraudster. Below  is a review of those categories borrowed from my executive impression management study.

Wife and children kept in the dark

One of the most contentious issues today, is that those closest to him deny that they had knowledge of, or involvement with Madoff’s fraudulent investment scheme. His wife and sons Mark and Andrew denied all knowledge. In fact, it was the sons who turned him in. This ignorance was common in all spouses and younger children with my investigation’s executive fraudsters. Indeed, upon finding out what is really going on most spouses disconnect from the fraudster entirely.[3] And this proved true with the Madoff sons.

It is very likely that Bernard Madoff spun a tale to his family around the fortune that he was making. If Madoff could make a poor elderly widow part with her money, it is very likely that the façade was convincing enough at home. And with that, their father would have fiercely contested any questioning. The sons obviously were taken in with the story in as they borrowed millions of dollars from their father. Also they worked on a different floor away from the fraud perpetrated on the 17th, given other tasks to do with software development and marketing. There have been no criminal charges laid against them and their mother Ruth issued the following statement in June 2009: “I am breaking my silence now because my reluctance to speak has been interpreted as indifference or lack of sympathy for the victims of my husband Bernie’s crime, which is exactly the opposite of the truth,” she said. “I am embarrassed and ashamed. Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.” [4]

Wikipedia reports that Peter, Madoff’s brother: “Since 1995, Peter Madoff had invested only $14M, but withdrew over $16 million. Mark and Andrew Madoff withdrew more than $35 million from a small original investment.”[5] But this could have been on the falsehood that this was their return on their investment. At this point we do not know. Furthermore, the closest henchman to Madoff, DiPascali is said to be “…telling prosecutors they [the sons] were not participants in the scam. After all, nobody, apart from Bernie Madoff, is better positioned to describe who took part.”[6] Apparently he loved his sons, but he never showed it.[7]

Need to look successful

Arrogant Fraudsters in my study exhibited a preoccupation with looking successful. Similarly Madoff developed such a concern. According to Creswell and Landon, (2009) his offices were immaculate and furnished down to the last black push in tacks and black pens.[8] The private jet, the multi-million dollar mansions were all part of the success look. They report that Bernie Madoff “…was closely attuned to his image…” He wore Saville Row suits and expensive watches. There is a wealth of media attention spent on the successful look of the Madoffs. Suffice to say Bernard Madoff played his part well.

Lack of trust/ secrecy

Madoff demonstrated his lack of trust by installing two cameras in the New York Office. This was meant to be so he could view tradings from overseas. No one was allowed to go to the 17th Floor except for trusted lieutenants such as DiPascali. As one trader remembered: “…Employees in those parts of the firm knew there was a different, lucrative business on half of the 17th floor, but they didn’t know exactly what it did. “We were all aware of this hedge fund that had had great returns for 20 years,” recalls one trader. “We knew it was statistically impossible [to have the steady gains for which Madoff became famous]. As a collective, we always kind of wondered: How the hell does he do it? Every person was curious.”[9]

Fear of him

According to Seal (2009), many feared Madoff: “People were afraid of Bernie. He wielded this influence. They were afraid of his temper.” This would be for his sons (and probably for his wife too), as he never showed his love to his sons, he ruled by tough love and fear[10]. This observation is reinforced by another story of his vehement and strong reaction to a hedge fund manager’s death: The employees recoiled. “I never saw him react like that before,” says a Madoff trader who witnessed the outburst.[11]

Lying

This came out a number of times in front of the media and important bodies like the SEC. One issue was about Madoff himself developing the technology for the NASDAQ. According to Dick Justice: “except for Madoff’s role in it. Says Charles “Dick” Justice, who started with the National Association of Securities Dealers in 1968 and was its chief technology officer for decades (and knows Madoff), “he wasn’t involved in the founding of Nasdaq at all.” Asked about a separate Madoff comment that he was “involved in the design of the Nasdaq technology,” Justice says, “No, he wasn’t.”[12]

Dishonesty

This became apparent on the home front when, according to Oppenheimer, Madoff had several affairs. He was a serial Casanova caught by his wife Ruth and allegedly had to pay out “hush money” to at least one female employee. And indeed, one alleged mistress came out of the woodwork afterwards and claimed an affair that lasted many years (Weinstein, 2009).[13] Oppenheimer (2009) claimed that Madoff’s parents were not honest people, due to some small time stock manipulations that were in his mother’s name. But it laid the ground for Bernie’s similar behaviour.

Obsessions

These were on several fronts: the typical OCD concern with cleanliness and the sense of orderliness. It should be noted that only one of the executive fraudster cases in my research exhibited this behaviour as seen by the co-workers. That too was hand-washing.

Cleanliness

It was reported that: “The offices had to be spotless. An employee said he would put a piece of thread on the floor and wait for Madoff to notice and “freak.”[14]

Washing hands in jail. Photo from: Life.com

While Creswell and Landon (2009) related that: “…Madoff scouted the office for potential filth. Once, when he spotted an employee eating a pear at his desk in New York, this person said, Mr. Madoff spied some juice dripping onto the gray carpet. “What do you think you are doing?” this person recalls Mr. Madoff demanding. Eating a pear, the employee replied. Mr. Madoff ripped the soiled carpet tile from the floor, then rushed to a closet to retrieve a similar swatch to replace it.” Others related that: “…it was not uncommon to see him dusting his office or the two-foot sculpture of a screw behind his desk. One staffer recalls getting off the elevator to find Madoff, clad in one of his innumerable tailored suits, on his hands and knees in the lobby, straightening the rugs so that they were aligned perfectly.” [15]

Orderliness

Which leads to another fixation that they described, an obsession with orderliness: “Everything needed to be symmetrical and in straight lines. When Madoff was in the office, all window blinds had to be aligned at the same height, all computer screens had to be arrayed at the same angle and position, and on and on. So insistent was he on perfect alignment that, more than once, he dropped his trousers in the office — startling female employees — to ensure that the line of his shirt buttons was precisely vertical.” [16] And according to an article in The Independent newspaper: “A former secretary has described how he remodelled offices to eliminate semi-circular shapes, detailing how he squared off the interior of his New York office which had moved into the desirable, elliptical skyscraper nicknamed the Lipstick Building.” Also it was noted “…any chipped paint would have to be filled in with marker pen.”[17]

Creswell and Landon (2009) mention that: “He was, for instance, an avid collector of vintage watches and took time each morning to match his wedding ring — he owned at least two — to the platinum or gold watch band he was wearing that day.”

They go on to say that: “Associates and others acquainted with him said his punctilious ways sometimes veered into obsessive-compulsive behavior.”

Odd behaviours

These were not noted as obsessive, but odd behaviours. Again this had a parallel to the executives in my study. Some co-workers observed that there were inexplicable but odd behaviours that they saw from time to time. Madoff’s co-workers explained it as eccentricity. One employee recalled, “We were always like one big, happy family. Bernie was our god, a wonderful boss, eccentric, sometimes scary eccentric, but still wonderful.”[18]

Blinking

Weinstein (2009) related how she and her friends called Madoff “Winky Dink” as he would blink rapidly at times. Others reported that: “During an allocution he read in a steady voice, but with his eyes blinking rapidly, Madoff told Southern District Judge Denny Chin that he was “so deeply sorry and ashamed” for his crimes.”[19]

Email records

There were other idiosyncrasies in Madoff’s world that might have raised suspicions. Around 2002 he proposed eliminating e-mail throughout his firm but was persuaded not to. Many Wall Street firms were talking about restricting it in the wake of corporate scandals featuring incendiary messages, but Madoff ultimately did the opposite of what would have been expected. He allowed e-mail for staffers at his trading business — the one the SEC regulated — while abolishing it for the people working in the unregulated investment business on Floor 17.

“Madoff took another step. He decreed that e-mails would no longer be stored electronically. First he decided that each of the firm’s e-mails would be printed and then stored in boxes, but he was persuaded by others that such a plan was impractical. In the end, Madoff ordered that old e-mails be transferred to microfiche, a cumbersome process that costs much more than archiving the records digitally. Why would Madoff want to increase his archiving costs? Perhaps it had to do with the fact that microfiche is orders of magnitude more difficult to search than electronic records.”[20]

No Apology

This is another aspect that the respondents picked up in the impression management study: that no apology was given by the fraudsters, apart from a dismal self-serving one made in court to mitigate sentencing. The website TalkLeft states: “Based on interviews with two dozen current and former inmates, and a lawyer he gave an interview to after his arrival, a portrait emerges: Repentent? Not one bit. He’s had enough of that. “F*ck my victims,” he said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”[21]

Much earlier in the story, Creswell and Landon (2009) noted that “Television footage of Mr. Madoff entering his apartment building on East 64th Street at Lexington Avenue after federal authorities charged him with fraud in December [2008] doesn’t seem to show a man exhibiting any sorrow or regret.”

And even more telling, an accidental observer in the court where Madoff is tried, tells how: “Next Madoff himself addressed the Court and the crowd. He did not mean to hurt anybody he said. He said some other things that were just wasted words. He apologized and said he did not ask for forgiveness. But it was all very odd. He said he was sorry, but he spoke of his crimes as if he were removed from them. Like they happened, and he did them, but I never heard him take responsibility for them. He bewailed the harm that he caused to his family, not to mention those who trusted him with their money, but I never heard him say those simple words: “I know I did wrong.” He never said that he knew it was wrong to steal money and that he did it anyway, knowing that it was wrong and that it was hurting people. How could he not say these things, and still say he was sorry? The observer asks.  He went on to note that even the Judge thought that there was no remorse.[22]

Stress creates cracks in the mask to appear

This was found with the Arrogant Fraudsters in the study, that stress occured and with that, corresponding cracks in the persona that was projected to others. The New York Magazine reported: “For Bernie Madoff, living a lie had once been a full-time job, which carried with it a constant, nagging anxiety. “It was a nightmare for me,” he told investigators, using the word over and over, as if he were the real victim. “I wish they caught me six years ago, eight years ago,” he said in a little-noticed interview with them.”

One telling crack was seen but not recognised, at best just a temper tantrum, happened when hearing the news of a possible murder of a hedge fund operator in 2007, was the over-reaction by Madoff as reported by one of his staff: “”Bernie,” someone casually asked as Madoff happened to walk by, “have you heard of this guy?” Madoff glanced at the screen, blanched, and exploded: “Why the f**k would I be interested in some s**t like that?” The employees recoiled. “I never saw him react like that before,” says a Madoff trader who witnessed the outburst. “It obviously hit a nerve.”[23] The outburst was very likely a stress reaction to his underlying difficulties of maintaining the impression management mask.

Continuing the façade after discovery

The Arrogant type of fraudster but not the Likeable Fraudster, the other type that was found in my study, always displayed this characteristic.  The Likeable Fraudster gave themselves up or if caught surrendered immediately and pronounced that they were guilty. The Arrogant Fraudsters, however protested their innocence strongly after discovery of the fraud. In fact, in my study they continued with the façade even after being caught red-handed. They easily explain their stealing away to the owners or Boards of Directors, and even at times that they tried to make out that they were the victim.

In prison, it is reported that Madoff crafted his own version of events. Madoff explained the trap he was in. “People just kept throwing money at me,” Madoff related to a prison consultant who advised him on how to endure prison life. “Some guy wanted to invest, and if I said no, the guy said, ‘What, I’m not good enough?’ ”[24]

Remarkably, his inflated ego appears to have survived intact. H. David Kotz, the Security and Exchange Commission’s inspector general, investigated his agency’s failure to uncover Madoff’s Ponzi scheme, and Madoff volunteered to speak to him—he is, no doubt, the world’s expert on the subject.

Wall Street. Photo from: Wikipedia

He quickly reminded Kotz of his stature—“I wrote a good portion of the rules when it comes to trading,” Madoff said. He insisted that he’d been “a good trader” with a solid strategy, explaining that he’d stumbled into trouble because of his success. Hedge funds—“just marketers,” he said with evident disgust—pushed cash on him. He overcommitted, got behind, and generated a few imaginary trades, figuring he’d make it up—and never did. Whatever his own missteps, Madoff saved his scorn for the SEC. He did impressions of its agents, leaning back with his hands behind his head just as one self-serious agent did—“a guy who comes on like he’s Columbo,” but who was “an idiot,” Madoff said, as recorded in the extraordinary exhibit 104, a twelve-page account of the interview that is part of Kotz’s report. Madoff is no ironist. His disdain for the SEC is professional, even if the agency’s incompetence saved his skin for years—all Columbo had to do was make one phone call. “[It’s] accounting 101,” Madoff told Kotz, still amazed.[25]

The TalkLeft website referred to Madoff in prison: “… Ego: Fully intact. Everyone wants his opinion about business. His closest buddies: those doing huge sentences like him, including convicted spy Jonathan Pollard and Mob Boss Carmine Persico.” [26]

Superiority

Being in prison allowed his sense of arrogance and superiority to be displayed outside of his corporate persona. This is the feature that characterises the Arrogant Fraudster well: that they know best, know everything and or they are always right. According to The New York Magazine, he was bragging in prison: “He said something to me one day,” recalls an ex–drug trafficker, released in February. “He could spin the globe and stop it anywhere with his finger, and chances are he had a house there or he’d been there. I was pretty blown away.” And in regards to a 60 Minutes TV program: Bowler removed one earpiece. “ ‘Bernie, you got ’em for millions,’ I said to him. ‘No, billions,’ he told me.” [27]

Psychopath

Despite my own study being inconclusive about psychopathic traits identified by the co-workers, there was a slight trend that the Superior types, the Arrogant Fraudsters tended to show these features. Interestingly, several commentators that Creswell and Landon (2009) interviewed suggested that Madoff had psychopathic tendencies. …“Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims,” says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioural profiles. [28] Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives. “People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”  This of course was a striking feature with the owner/managers and Boards who trusted the Arrogant Fraudsters, their trust in their own judgement was destroyed along with their self-esteem and entrepreneurial enthusiasm.

Fundamentally psychopaths believe: “ ‘I’m above the law,’ and they believe they cannot be caught,” Dr.J. Meloy says. “But the Achilles’ heel of the psychopath is his sense of impunity. That is, eventually, what will bring him down.” Dr Meloy says it makes complete sense that Mr. Madoff would have courted regulators, even if he ran the risk of exposing his own actions by doing so.

“In a scheme like this, it’s very important to keep those who could threaten you very close to you,” Dr. Meloy explains. “You want to develop them as allies and shape how they go about their business and their attitudes toward you.” Which is precisely what Madoff did with the NASDAQ and the SEC and what the Predators did with the owners of the businesses and their Boards.

Conclusion

For all of the information that is available on the internet, not much was avaliable about Bernie Madoff’s childhood. Certainly nothing about the first two years of his life that described the type of maternal attachment that he had with his mother, Sylvia.

However, my research on Madoff outlined evidence that leads to a conclusion that Madoff is an Arrogant  – using the typology from my doctoral research on executive impression management. The media supplied information about the likelihood of keeping his wife and children in the dark about his nefarious activities; the need to look successful; his lack of trust and need for secrecy; he generated fear around him; he is attributed as being dishonest and a liar; he exhibited signs of odd behaviour – obsessions and eccentricities; he never gave a sincere apology; he showed minute signs of stress; he continued the façade after discovery as well as his overall sense of superiority lay Madoff’s profile firmly with the Predator type.

What this means is that investors and fund managers as part of their due diligence, can investigate to see if their owners fit this fraudster profile.  Bernie Madoff managed to hoodwink the SEC, Wall Street and some of the major global banks and financial institutions. But this latest research offers a new way of investigation to identify if the person of interest is a fraudster. This should be used in addition to the Red Flags and the Fraud Triangle criteria that auditors use to verify authentic funds management. The Arrogant Fraudster profile is easy enough to identify once you know what you are looking for, and who knows how many of these Predators remain out there causing financial ruin wherever they go.


[1] J. Oppenheimer (2009) ‘Madoff with the Money’ Wiley and Sons Inc

[7] Mark Seal. “Madoff’s World.” VanityFair.com. 4/2009

[8] Julie Creswell, Landon Thomas Jr. “The Talented Mr. Madoff.” NYTimes.com. 1/24/2009

[9] op cit..

[10] Mark Seal op. cit..

[11] CNN op.cit..

[12]ibid..

[13] Sheryl Weinstein, “Madoff’s Other Secret: Love, Money, Bernie and Me” St. Martin’s Press, 2009

[15] CNN op. cit..

[16] CNN ibid..

[18] ibid..

[20] CNN op. cit..

[23] CNN op cit..

[24] ibid..

[26] Talk Left op. cit..

[27] New York Magazine 2009 op. cit..

28 New York Times 2009 op.cit..

References

Australian Institute of Criminology. 2004. Crimes against business: A review of victimisation, predictors and prevention. Canberra: Australian Institute of Criminology.

Bernard, Carole, and Phelim Boyle. 2009. Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy. Journal of Derivatives 17 (1):62- 78.

Clauss, Pierre, Thierry Roncalli, and Guillaume Weisang. 2009. Risk Management Lessons from Madoff Fraud. SSRN eLibrary:1-39.

Creswell, Julie, and Thomas Landon. 2009. The Talented Mr Madoff. New York Times, 24th Jan 2009.

Dimmock, Stephen G., and William C. Gerken. 2010. Finding Bernie Madoff: Detecting Fraud by Investment Managers. SSRN eLibrary.

Freiberg, Arie. 2000. Sentencing white-collar criminals. In Fraud Prevention and Control Conference. Surfers Paradise, Queensland.

Scharfman, Jason. 2009. The Madoff Identity: A New Operational Due Diligence Paradigm in a Post-Madoff World. SSRN eLibrary.

Sheridan, Terry A. 2010. Exploring recipients’ perceptions of impression management in the workplace: Insights from comparing fraudster and non-fraudster executives, PhD Thesis, Graduate School of Business, Curtin University, Perth, WA.

Vinod, Hrishikesh D. 2009. Preventing Madoff-Style Ponzi Enabled by Jewish Reputation, Incompetent Regulators and Auditors. SSRN eLibrary:1-8.

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Joyti De-Laurey: Dear Joyti, help yourself to my money. Edward Scott Mead

We are continually told that with the 3 facets of the Fraud Triangle theory (Cressey 1973) of opportunity, pressure and justification there will be, inevitably, fraud (a recent statement is at http://www2.northumberland.gov.uk/fraud/Corporate%20pages/employee_fraud.htm).

I disagree.

This does not apply for the raison d’etre for fraud in many cases, and certainly did not apply to Joyti De-Laurey. In my books she is a classic Predator type fraudster from the content posted on the internet -which is surprisingly in favour of her actions, similar to Herve Falciani with the Societe Generale bank. This allows the perpetrators to re-emerge in society and can reform their image and commence their activities in a different manner. I am not saying that they will naturally defraud again, but there is a very strong potential and people should be aware. Why? We know that the recidivism rate for imprisoned criminals is high and we know that this is particularly so for certain types of fraudsters.

Having identified two types of fraudster executives from my doctoral research: the Predator and the Timebomb, it is my view that the Predator is much more likely to re-offend. To balance this statement, as I do support offenders in the community to be given a chance to establish themselves in a better way, it is my belief that Timebombs if given effective therapy are extremely unlikely to re-offend and can be put in positions of trust.

How she did it

Goldman Sachs London. Photo: Graham Turner for The Guardian http://www.guardian.co.uk

De-Laurey worked for Goldman Sachs in London as a personal assistant. So not an executive in the sense of my research, however, she held privileges, power and status ‘ lent’ to her by being the PA of a star investment banker, Edward Scott Mead. It must be realised that Goldman Sachs tend to reward their bankers at the very top end of the scale and have earned considerable opprobrium for their remuneration policies- which still exists. (See: http://www.guardian.co.uk/business/2009/nov/20/goldman-sachs-bonus-shareholder-row). So although she was not herself an executive she was able to use the ‘borrowed’ power from her boss (Lammers 2009) in order to get things done. This would be especially true if the definition of power is the ability to control resources (Galinsky and others 2003) is used.

De-Laurey had access to Mead’s personal bank accounts in her role in organising the private and professional lives of her boss. She came to Mead after being recommended by fellow bankers Jennifer Moses and Ron Beller. This resulted in a total of almost £4.5 million pounds being stolen from the three individuals (1998-2002) and Mead’s dormant account thefts took place over a period of 18 months. The discovery was made when Mead went to his account and realised the theft had taken place. Apparently De-Laurey was just about to make her exit from Goldman Sachs and live a life of luxury in Cyprus. When confronted by Mead she made a very telling attempt to blackmail him by threatening to expose his affair to his wife. In the trial she accomplished this to no avail.

Hiding stolen assets

Only a £1 million were recovered the rest remained ‘lost or hidden’. My guess is that most of the remaining £3.5 million is hidden, put aside to be accessed later. This appears to be confirmed by a report in the UK Daily Mail newspaper (2008):

“Joyti De-Laurey, 38, moved into the £250,000 apartment two weeks ago after being released just half-way through her seven-year sentence.” (http://www.dailymail.co.uk/news/article-477947/Freed-early-PA-stole-4-3m-broke-prison-rules.html#ixzz14mD569QE)

Goldman Sachs apparently did not pursue to seize their assets due to the negative publicity that she successfully manipulated through her lawyer and the many interviews that she gave to the press. So much so that she was painted as a Robin Hood character in the media.

Predator executive fraudsters were found in my study to be doing this in almost every case: hiding, manipulating the truth and putting out a hard luck story to justify their actions. Below are some other interesting points of what I found Predators do compared to what De-Laurey reportedly said to the media.

Parasitical Behaviour

I dispute the fact that she said that she was going to leave. The Predators that were examined in my research never gave up their parasitical behaviour in drawing money out for themselves. My suspicion is that this was only a face saving device. Indeed, her ‘Diary to God’ which was found in her desk said in her own handwriting, written when she worked for Jennifer Moses her first boss at Goldman Sachs circa 2000:

“Please protect me I have only to secure another 40 and I’m done as far as GS [Goldman Sachs] are concerned”

The other ‘Dear God’ note written in February 2001 pleaded:

“Please help me. I need one more helping of what’s mine and then I must cut down and cease in time all the plundering”

Unfortunately for Mead, she continued stealing even larger sums. The largest, written after this note, was in December 2001 for £2.25 million in one hit (Daily Mail interview 2008).

But she could not stop her addiction to thieving and the parasitic behaviour continued until she was caught red-handed.

Moulding to the affect of the listener

Another telling sign of her fraudster type of Predator is reported in the media when she was asked in an interview in 2008 (http://www.dailymail.co.uk/home/you/article-548068/Britains-Biggest-Female-Fraudster-Admits-It-fun-lasted.html) about her ‘addiction to spend’ the interviewer laughed at the response from De-Laurey. The interviewer noted that: “…she starts to laugh too – a first sign that she tailors her reactions to her audiences.” If this is true, then we have a classic sign of psychopathology (Babiak & Hare 2007), and this is behaviour is prevalent in the Predator type in my study. Another aspect of psychopathology is that their lack of true bonding with friends or family. De-Laurey managed to implicate her husband and her mother and were both put on trial as accessories. Her cover story to them  (Daily Mail 2008) was:

“Neither Mummy or [husband] Tony knew that I was stealing. They just assumed I was doing so brilliantly at work that I was being greatly rewarded.”

The Daily Mail (2008) reported that Tony served 6 months in jail and her own mother received a suspended sentence, both for money laundering.

Suicide attempt

This feature of Predator fraudsters is another manipulative game to create sympathy (unlike Timebombs who do it for real). She admitted taking the pills in with her to prison. The reader can make up his or her own mind about the result of this suicide attempt. In 2005, when she was in prison another interviewer noted that: “…she was alert and full or energy… she had lost none of the vibrancy in her trial.” (Julie Bindel, http://www.guardian.co.uk/theguardian/2005/sep/17/weekend7.weekend)

Sense of superiority

The most commonly reported characteristic of Predator executive fraudsters was their sense of superiority, arrogance and ‘pulling one over’ the boss. Early in 2005 De-Laurey reportedly said to The Guardian that:

“I got a huge buzz from knowing that they had no idea what I was doing…. I did not steal the money because I needed it, but because I could.”

During her imprisonment she crowed to the Julie Bindel in the same 2005 interview that:

“I don’t want to sound arrogant, I know I committed a crime, but I received over 700 letters of support after I was convicted.”

In the Daily Mail interview (2008), after her release from prison she claims that:

“I could go on to be the Pope and I will still be the woman who stole the most…”

In my view therefore, I do not see any changes in her pre and post prison sentence behaviour. She is still exhibiting signs of being a Predator.

If I was a fraud asset recovery investigator, I would be following Ms De-Laurey very closely. I would imagine that transactions would be complex because her previous behaviour demonstrated the use of her intelligence with “the amount of transfer requests that followed between other [of her] accounts … were endless” Malcolm Driscoll a City of London Police investigating offider was lauded after the trial for providing the jury with an map that “clearly showed the money trail around the world.” (SFO, 2005)

Did not stop defrauding others while on trial

To me this is another classic behaviour, every Predator in my study went on to defraud other companies while they were on bail after their arrest. It was reported by Danielle Dimetriou for The Independent newspaper (2004) that De-Laurey stole £16,000 from her mother while waiting for trial.

Can Predators reform?

I cannot state categorically that Predator fraudsters are unable to reform. At best we see in Clarke’s (2005) book on corporate psychopaths that an organisation may be able to harness their energy into projects that have no access to funds. To me that is like a training a tarantula to kiss. As Judge Christopher Elwen told De-Laurey at her judgment, it was clear that: “…lying is woven into the fabric of your being.” (The Independent,  2004)

Well said. And that is the fundamental reason why the lying and manipulation is unlikely to stop. It is part of the Predator make up. Possibly in years ahead we will find out that this is due to a bio-chemical imbalance of the brain or the result of maternal attachment disorder. Either way I wouldn’t be recommending tarantula kissing.

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Herve Falciani: Case of the Disappearing Truth?

Since the news broke Falciani’s escapade has focused on countries getting their hands on the stolen data. However, I wish to comment here on the person: Herve Falciani himself.

Herve Falciani. Photo from: http://www.theepochtimes.com/n2/content/view/27369

According to my doctoral research (2010 see  website for more details) it is possible that Falciani is showing signs of the Predator type of fraudster. A Predator (who could have a psychopathic personality) will show the following behaviour:

1)     Their sense of superiority is maintained throughout the post discovery phase: Falciani has given frequent interviews with the media and online, giving his version over the banks and the Swiss Police.

2)     The Predator will adapt the truth to his or circumstances and has no hesitation in doing it. Falciani has changed his story from being a whistleblower to being interrogated by Mossad, to just wanting to expose to HSBC the risks in their data protection system. He also has lied that he only copied the data. In a logic defying statement to the Le Matin Dimanche newspaper he says: “I’m not against banking secrecy,” he told the newspaper. “On the contrary, I say there is none. HSBC clients were deceived, and harmed, because of a lack of computing standards.”

3)     Predators will drag out legal proceedings as long as possible, in a bid to outrun their opponents. The discovery of Falciani’s theft was back in 2007, and the story is not over by any means.

4)     Predators will show no signs of genuine remorse. Falciani has not said he was sorry for the theft from HSBC.

This brings up another issue that most whistleblowers would have copied the data but not stolen it – there is no point, a copy is enough to go public with. Falciani went to several governments to sell his stolen information.

From research by Lynn Clements (2005 Clements, L. 2005. Whistleblowing: Who, what, when, where, why and how? Journal of Forensic Accounting 6 (2): 429-440): “A universal truth about whistleblowers is that all whistleblowers act at moral risk to themselves, and most pay a heavy price. In a year-long discussion group of 12 whistleblowers, all but one lost both his or her job and career, eight lost their homes, seven lost their families, and many suffered from alcoholism and depression at some point after blowing the whistle.”

Rather than seeing Falciani suffering we see him delighting audiences around the world on TV and online.

Finally there is the observation that this man is inconsistent in his recounting of what has happened to him. At best my typology of a malevolent manager would fit, at worst we have a sinister fraudster on our hands.

Easy enough to identify after the horse has bolted…

Predators (and the other type of fraudster) can now be relatively easily uncovered beforehand using screening and profiling techniques. Ideally this would have happened at the point of entry into the organisation – in Falciani’s case in 2006. Then again when he was the senior manager in charge of the migration to a more secure IT environment, achieved circa 2006-07. In this manner an assessment would have discovered a likelihood of the planned theft and internal security and senior management could have minimised the risk. Unfortunately for HSBC, I had not completed my research and these identifiers were not known at that point.

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