Fraudsters are unstoppable

Unfortunately executive fraudster do not stop until they get caught.

Once they are found out they are stopped. But do they ever stop before being caught? My opinion is that they continue until they have bled the company dry then they transfer to find the next victim company. Even if they realise that they are close to being discovered they continue on with their nefarious activities.

My article at SSRN outlines the reasons for my assertions based on my recent research about executive fraudsters.

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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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Filed under Arrogant Fraudster, Creating successful image, Ponzi scheme

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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Kerviel: The Sorcerer’s Apprentice?

Fraudster or non fraudster?

I normally concentrate on fraud perpetrated by executives but this exceptional story needs to have some of the research findings from my doctoral work (2010) applied to make some sense of the situation with accusations flying from all quarters.

Jerome Kerviel. Photo from:http://picses.eu/image/cd35ab46/

Kerviel‘s status qualifies in being a manager of resources and not people. The argument is that Kerviel cannot be a fraudster is that he received no monetary gain out of the massive transactions, although he would have gained a good bonus that year. The French tribunal ruled that this was not a case of fraud. But despite his seemingly altruistic motives of helping the bank to make money, he nevertheless nearly brought down Societe Generale in the process.

The case analysis and verdict.

Malevolent non-fraudsters as well as fraudsters lie. It is reported that he used fictitious emails and fake trades and lied to his senior managers about his losses. But was he a fraudster in fact?

The counter accusations are: that there is scepticism in the banking community that he did this on his own (in cahoots with other fraudsters); that he was a scapegoat for the bank’s own losses of the previous quarter (attributed fraudster) and that he has received cult status for having to put his career on the line as he was only doing his job of making money in the markets (non-fraudster).

From the information that is freely available on the internet, I have come to the conclusion that most likely Kerviel was an ‘Inferior Malevolent’ fraudster-in-the-making. This conclusion is based on:

  1. Kerviel was doing this rogue trading out of a sense of trying to impress his superiors
  2. He was quiet and introverted, and it is reported that he was liked by neighbours.
  3. “His father, who taught apprentices boilermaking in a local training centre, died less than a year ago.” (Jan 2008)
  4. He lost the woman whom he was going to marry about the same time.
  5. These two losses coincide with the beginning of his fictitious emails covering the trades
  6. He lived in a fantasy world where he existed as the Master Trader, duplicating massive amount of trades every 3 days as the losses grew.
  7. It takes a fair amount of time for this type of fraudster to develop; Kerviel’s activity was cut short after one year.

Although Kerviel did not profit directly from the trading at the point he was discovered it is my belief that he fits the profile of what respondents called in their interviews as the ‘Likeable’ fraudster. This type is quiet, friendly and liked by many. However, it takes a deep family crisis to erupt to spur them into the fraudulent activity and they see that the only way out was to gamble with their company’s money to feed his image of the successful trader. His only solution was gaining money in trades to offset his extremely low self image, and he used the bank’s money to do so.

Fraud investigators note: the Likeable Fraudster is the only type that fits with the Cressy Fraud Triangle (1973 Other people’s money: A study in the social psychology of embezzlement. Montclair, N.J.: Patterson-Smith.)

As a shocked neighbour who had known Kerviel since he was a baby reported: “The two things happening at the same time must have been why everything went wrong.” (2008)

The double losses were replicated in his trading, but this was NOT his intention, he wanted to impress his bosses with large earnings. He came from a different and lower echelon of French society – possibly his managers were seen as father figures to him. That of course is up to the psychologists to say and not my area of expertise. Likeable Fraudsters, are also noted in my research for becoming suicidal upon discovery, which is exactly what happened to young Jerome Kerviel.

It was with considerable luck that Societe Generale discovered the losses when they did, as he was unstoppable and would have continued literally until there was no money left in the bank but earning on the way very large bonuses.

Sorcerer’s Apprentice. Photo from: G.B. Ward’s website:http://brainrender.com/gallery/main.php?g2_itemId=353

It is quite clear that the Guardian Angel profiling (Sheridan 2010) would have picked up Kerviel before the major losses. The bank should have completed some pre-employment screening, however he came straight from University and had no work history. These applicants are typical of ones that slip through the normal background screening cracks, and Kerviel’s case demonstrates clearly that thorough screening must take place on an annual basis with key personnel, such as traders and financiers.

Under my assessment profiling, it would have been pointed out to senior management that Kerviel was at risk, and all that was needed was some spot audits on their part to verify and the whole scam would have unravelled.

It is now up to other banks to heed the lesson that Societe Generale learnt so painfully and nearly went broke in the process of Kerviel’s frenzied activity – just like Mickey Mouse did in the Fantasia version of the tale.

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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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‘Delusional’ Senior Accountant, Sonya Causer Stole $20M

From News.com.au website: By Michelle Draper  From: AAP August 19, 2010

“A Melbourne mother who fancied herself as a property guru embezzled almost $20 million from white goods retailer Clive Peeters in one of the largest thefts of its kind in Australia

Sonya Causer was a senior accountant at the head office when she withdrew more than $19 million from the company’s main account between 2007 and 2009 and used it to buy 44 properties.

Sonya Causer. Photo from: http://www.connectedaustralia.com/News/BreakingNews/tabid/119/ArticleId/3925/

Causer pleaded guilty to 24 counts of theft. Today Causer, was jailed for eight years. She also splashed $110,000 on two cars and a motorbike for herself and her husband, while $17,000 was spent on jewellery. But the majority of the funds were funneled into the properties, which Causer, 39, then leased out. In her police record of interview, Causer explained that she became obsessed with buying and selling real estate. “She said it was never about the money, rather it was about the negotiations and dealing with the real estate agents,” Prosecutor Peter Kidd told an earlier hearing.

In sentencing, Justice John Forrest said he accepted Causer suffered from a delusional disorder and regarded herself as a “property wizard”. He said Causer’s job pressures, marriage problems and the stress associated with raising two young children suffering from autism contributed to her fraud. “There was an element of depression generated by your circumstances which played a part in this delusion that you were a property guru,” Justice Forrest said. He said Causer’s theft contributed to the collapse of Clive Peeters, which was placed in administration in May, but was not the primary cause. [At the time Clive Peeters said its operating loss for the three months to March 31 was expected to be $4.5 million compared with a loss of $600,000 for the same period the previous year. The company employed 1300 staff members in 44 stores across Australia and was placed in administration.]

About $16 million of the misappropriated funds have been recovered, leaving a $3 million shortfall. Causer sold the family home to repay some of the stolen funds and had been living in rental accommodation, the court heard. Justice Forrest said while Causer pleaded guilty at the earliest opportunity, cooperated with police and helped recover the stolen funds, her crimes were sophisticated and involved a degree of planning.
“The scale of your embezzlement is significant. For a period of two years, month in month out, you grossly abused the trust of your employer,” he said. “From beginning to end this was a plan of some sophistication over a lengthy period.” Justice Forrest said it was necessary to send a message to all those in a position of trust handling large or small sums of money, that dishonest dealings with those funds must be punished significantly.

She must serve five years before being eligible for parole.”

COMMENTARY

This case is unfortunately a good example of the ‘Likeable Fraudster’, so named in my research (2010), of a particular type of fraudster who has difficulties in the past. They are like timebombs, ticking away to be  set off or detonated by present pressures.

Case study questions

Q. 1. Would you hire this type of person in your accounts department?

No? Well, this will appear as bit of a shock to you as someone did, AFTER Causer had been dismissed and charged for the 24 offences:

“It appears that Causer, who applied for a position as an accountant with the medical product company ITL, used the name Sonya Dollman and omitted the details of her employment with Clive Peeters. It was less than a fortnight ago that ITL CEO Brian Andrews became aware of her background and she was dismissed. Andrews told the media that she had breached company policy by not disclosing that she had been convicted of an offence (although at the time of applying, Causer hadn’t been convicted). Andrews added that he would now review the company’s hiring process.”           By Claire Moffat, http://www.connectedaustralia.com/News/BreakingNews/tabid/119/ArticleId/3925/Sonya-Causer-hired-again-as-accountant.aspx

Q.2 Does your company pre-screen employees as they enter your firm?

Find a good investigative background screening company who can check in-depth the previous employment of a candidate. We work with ORNA (www.orna.com.au) who provide us with accurate information about a person’s past. But we also do intensive screening for senior positions, (http://www.guardianangelexecutives.com). Sadly some screeners and HR departments only go as far as what is put in front of them in terms of names etc, but a thorough check, for instance of Causer’s residence and the electoral rolls, would have exposed her disguise.

Q. 3 Did you know that almost all of the fraudsters arrested in my study worked in different companies (and continued to defraud) while they were waiting for trial?

No? Well that’s the reason for pre-screening all candidates, as they do this and do not seem perturbed that they have been charged for fraud. Take background screening seriously and this risk will be reduced substantially. Use executive profiling for key personnel.

Q. 4 Did the company fail in its duty of care with a senior manager who was for 2 years displaying ‘odd’ behaviour?

After all, are we not charged as transformational managers to influence subordinates attitudes and assumptions and build commitment to the company’s mission and strategies? (Yukl, G., 1989. Managerial leadership: A review of theory and research. Journal of Management 15 (2): 251-289)?

I am not condoning her behaviour however the context of mother with two autistic children, drug addict husband plus senior management duties surely should have called someone’s attention to her plight? To take this argument further, read Martin Parker’s provocative article (Parker, M. 1998. Organisation, Community and Utopia. Studies in Cultures, Organizations & Societies 4 (1): 71-91) where he challenges that businesses who seemingly ‘care’ are creating delusional thoughts in their workers (false consciousness) in terms of their labour being respected and valued. If they do not truly care then this: “…means being against an unarguable collective good and standing for selfishness, individualism, fragmentation and the denial of common value.”

We are left with the final unanswered question that is based on business morality: Did the company Clive Peeters get what they deserved?

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