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Tough life lessons from the Bernie Madoff Ponzi scheme



On Sept. 9, 2016, Audible released the first episode of “Ponzi Supernova: Madoff Speaks,” a six-part series hosted and reported by Steve Fishman. The series focuses on the $65 billion Ponzi scheme at Bernard L. Madoff Investment Securities LLC, spearheaded by Madoff, which crumbled with the 2008 financial crisis. The last episode aired in February, and I waited until they were all available before diving in and devouring them in less than two days. As many have said before me, this is a great series for fans of the “Serial” podcast, but for anti-fraud professionals this also serves as an in-depth look into a disturbing case of widespread, unchecked fraud.

The series starts with Fishman’s exclusive telephone interviews with an imprisoned Madoff. It then works through the mechanics of the scheme and finishes with Fishman speaking to both perpetrators and victims of the crime. The most shocking aspect of the Madoff scheme is the sheer scope of it. When I first heard about it years ago, the two biggest questions I found myself asking were “how?” and “why?” But as I continued to listen, and as Fishman interviewed several peripherally involved in the scheme, I found myself asking a much tougher question — what would I do if I’d been an investor interested in Madoff’s scheme?

With that in mind, I’ve put together a list of three tough life lessons from the Madoff Ponzi scheme that fraud fighters can implement right now to improve future fraud examinations.

Lesson No. 1: Trust your instincts and don’t ignore red flags

Cynthia Keuppers, one of Fishman’s investigation subjects, once worked in the investment world and now owns a Japanese-Brazilian fast-food restaurant called Uma Temakeria. Fishman wanted to know how a scheme of this magnitude could persist for such a long period of time (more than 40 years) without anyone detecting it. This led him to Keuppers.

In 2006, Keuppers worked for Presidio, a wealth management firm in San Francisco. Some clients came to her asking about Madoff’s fund — they’d heard good things and wanted her to take a look at it. Initially she was impressed by the consistency of the returns, but before she could recommend buying in, she wanted to make sure she understood how the Madoff investment strategy worked.

“If I can’t understand it, I’m not someone that sort of says, ‘Well, if I can’t get it, somebody else must be able to get it, and I’m just not going to get there,’ ” Keuppers tells Fishman. “You have to be able to understand all the way down to where something is coming from. You might have to do a little work to get there, but you should be able to understand what a certain driver is.” This unwavering certainty in her own skills and knowledge is notable. When faced with such a highly regarded investment entity, she didn’t back down or doubt herself.

Keuppers wasn’t dealing with Madoff himself. She was working with Fairfield, the largest of the Madoff feeder funds. She had a meeting with Fairfield’s chief risk officer, and she asked him question after question, trying to drill down into the Madoff strategy. She didn’t need to understand the secret to Madoff’s success. She just needed to know why and how it was so consistent. Her objective was to see data from five years ago, but as Fishman reports, “Fairfield wouldn’t give her anything — red flag.”

The CRO assured her that he’d done the work that she was wanting to do, but he wasn’t at liberty to share the actual data with her. Basically, he wanted her to trust him. Keuppers says, “That right there was also a red flag.”

The final nail in the coffin was when Fairfield told Keuppers that the Madoff fund was closed and wasn’t accepting more investors, but he liked working with Presidio so much that they’d be willing to sell some of its holdings to Keuppers’ investors. You can hear the skepticism in Keuppers’ voice when she rhetorically asks, “Why would you sell me something that you’re not going to sell to anyone else? What makes me special?” Then she laughs and says, “Usually, you’re not that special in this industry.”

Although it wasn’t the information she was looking for, Keuppers had all the information she needed to decide. She advised against investing in the Madoff fund. As anti-fraud professionals, you might be put in similar situations. Clients push you one way, but your gut tells you to go in another. How do you make the hard decision when you know it will disappoint, or even anger, someone?

In “4 Reasons Why People Ignore Red Flags,” Jeffrey Aucoin, CFE, says that trust “is probably the biggest reason why owners and executives ignore red flags.” Keuppers made the right decision not recommending the Madoff shares to her client. Keuppers couldn’t place her trust in the validity of this investment because of Fairfield’s lack of transparency. It might have been a disappointment to her clients in the short run, but in the long run, I’m going to safely assume they’re happy with her recommendation.

Lesson No. 2: Don’t assume due diligence just because of reputation

Madoff’s reputation and power shielded him from legitimate due diligence efforts. One of the most shocking things I heard in the series was that for most of the Securities and Exchange Commission (SEC) investigations, the company sent junior agents to corroborate Madoff’s earnings and verify the legitimacy of his operations. Madoff would charm these young, impressionable agents, make them feel special and part of an “in crowd.” Then he’d send them on their way, hiding a $65 billion scam right under their noses.

The more I listened, though, the more I realized that the Madoff scheme wasn’t quite as hidden as those entrenched in the scandal would want us to believe. On the hunt for more red flags, Fishman takes us to “the pit” — where traders bought and sold options like chattel — to discuss Madoff with former options trader Mark Cooper.

Cooper tells Fishman that at every meeting with potential investors, someone would invariably bring up Madoff and ask what Cooper thought of him. Madoff’s name came up so much that Cooper wanted to figure out the strategy and replicate it. Unlike Keuppers, Cooper did get his hands on one of Madoff’s monthly statements, which had Madoff’s actual trades on the sheet.

What did Cooper want to know? “Is it possible that this volume traded that day at this price in that strike?” However, what he observed didn’t make sense. Madoff only traded on particular days, but on those days it was in huge volumes. In hindsight, we know that Madoff was essentially cooking his books, going back in time to create false records of shares bought and sold on a certain day, and in such volumes that would show the consistent returns his clients wanted to see. But all Cooper had to go on were these trade sheets, and the sizeable trades on those sheets would’ve had a huge impact on stock value. “It would’ve tilted the pitch tremendously,” says Cooper. “For the volume we figured he’d have to do, prices would’ve changed dramatically. Not even five or 10 percent, but like 30, 40, 50 percent. Maybe more.”

When faced with such a highly regarded investment entity, she didn’t back down or doubt herself.”

Cooper knew there was nothing there. He says at the end of one of his investment meetings, the moment came again when someone asked about Madoff. Cooper and his fellow options traders would say, “Well, we don’t want to call him a fraud or anything …” And because of Madoff’s reputation, they wouldn’t finish that sentence.

If it was this easy for Cooper to uncover serious issues with the Madoff trades, when he wasn’t even risking his money or his employer’s money, there’s no reason why the Madoff scheme should’ve persisted for as long as it did. But after more than 40 years of its existence, no one wanted to rock the boat. In essence, Madoff’s reputation protected him.

Anti-fraud professionals should leave all assumptions at the door. Never assume that those before you have done their due diligence. This is how a rickety, hodge-podge scheme like Madoff’s persists through decades, causing catastrophically huge losses.

Lesson No. 3: When it comes to fraud, real people experience real suffering

The hardest parts to listen to in “Ponzi Supernova” were the victim stories. The Madoff scheme crossed international borders and affected people all over the world. Not only were there huge feeder funds in the U.S., like Fairfield, but there were smaller funds in Latin America, Austria, Spain, Ireland, Japan and more. None of these entities did their due diligence and thousands of investors suffered the consequences.

To give you an idea of the scope of this scheme, the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse analyzed 2,410 cases of occupational fraud around the world that caused a total loss of $6.3 billion. That’s not even a tenth of how much money investors lost in the Madoff scheme. The collapse of this scheme sent far-reaching ripples into every part of the financial world.

Take Manuel Gallego, for example, who lives in Chile. His family arrived in Chile in 1939 and became successful in the fishing industry. Later, they branched out to forestry and real estate sectors. Go back a few years, and the family decided to invest a couple hundred thousand dollars, “not in anything risky, something safe.” They decided to go with Banco Santander, a private Spanish bank with prestige in Latin America. The account executive at Banco Santander told his family, “Oh, we’re Banco Santander. We’re the biggest in Europe. We have branches all over the world. We’re regulated by the SEC in the United States. We’re a safe bet.” All these things were meant to reassure Gallego and his family. So in 2006, they bought several instruments, one of which was a fund called Optimal. Unfortunately, Optimal fed money to Madoff.

Gallego called his account executive in 2008 after the news of Madoff’s scheme came out hoping his money was safe, but the bank couldn’t give him definite answers. He did some digging and quickly realized that although he had hundreds of thousands of dollars invested through Madoff, he was a small fish in a big sea. “Banco Santander’s Optimal fund had funneled $3 billion to Madoff,” says Fishman.

There were thousands of investors, but sadly, many of them weren’t like Gallego. According to a lawyer at Labaton Sucharow, who represented Gallego and many other Optimal investors, there were some investors who “had saved $50,000 after working 20 years in Argentina, and here comes Banco Santander to offer them what was supposed to be a safe investment.” The lawyer says, “At no time throughout this whole process [did] anybody [do] the right thing.”

Anti-fraud professionals have an incredible chance to help people and prevent this type of pain. As I listened through each episode, I wondered: What if the Madoff scheme had been stopped 10 years earlier? What about 20? Or 30? What if it had been caught at the very beginning? How much heartache, devastation and financial ruin could’ve been avoided? People not only lost their livelihoods, some lost their lives. Madoff’s eldest son Mark killed himself on the second anniversary of the date his father confessed to him, and Madoff’s youngest son Andrew died of cancer at the age of 48. In one of the recordings, Madoff reveals to Fishman that he feels responsible for both untimely deaths. There were other cases of suicide related to this scheme after its collapse.

It might be easy to look at this case and think, “It’s an outlier. Nothing like that could ever happen again.” It might be even easier to think, “I would never ignore those red flags,” or “I don’t care what someone’s reputation is. That wouldn’t influence me.” But the truth often is murkier than we anticipate.

When it comes to fraud, there are no easy answers. Fraud fighters are constantly questioning — both internally and externally — gathering data, analyzing assessments and challenging biases. I plan on taking these lessons forward and applying them to my own life. I also plan to surround myself with a community of like-minded individuals who’ll help hold me accountable and serve as resources when I encounter similar tricky situations.

What about you? Have you listened to the series on Audible? What lessons did you glean from Fishman’s investigation? Share in the comments!

Or if you’re part of the ACFE community, we have a thread dedicated to this topic. Join the discussion and share your thoughts!

Courtney Howell is the ACFE’s community manager. She can be reached at: chowell@ACFE.com.





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