Digging Deeper, Part 1

By Enid Hilton Brown, CFE


financial-self-destruction.jpg We begin a new series of book and documentary commentaries for anti-fraud professionals. Enid Hilton Brown, CFE, a licensed investigator and regular at ACFE Southeast Michigan Area Chapter meetings since 1998, has three decades of experience in corporate management, government service and investigative digging. We welcome contributions from other investigative diggers.

Following the money

We embark on this series of commentaries on books and movies that provide insight on issues facing fraud examiners, beginning with the the most obvious – money and financial systems. This diverse collection sets directions for further digging into how fraud has permeated so many aspects of our economy.

Over the summer, I immersed myself in the economically destructive schemes of clever financial leaders and charismatic ideologues and panderers. They showed me how systemic financial infrastructures can encourage, nurture and obfuscate fraud from small operations to international organizations. With the passage of Dodd-Frank and other attempts to overhaul the regulatory environment, fraud has hit center stage with the media, politicians and others around the globe. For fraud examiners, many of the books may seem like nonfiction thrillers. I found them gripping.

The economic soap opera in "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown" enthralled me. The authors, Simon Johnson (MIT professor and former IMF chief economist) and James Kwak (a student at Yale Law School with an entrepreneurial background), demystify financial systems and incorporate anecdotes illustrating peer pressure, hubris and attempts to avoid the taboos of addressing "too big to fail." For example, the iconic vision of 13 bankers testifying before the U.S. Congress was riveting, almost surreal with palpable arrogance. More revelations surfaced about the way bank regulatory agencies actually operated. Some banks had the option of choosing the U.S. agency it wanted to regulate its transactions. This created a competitive atmosphere, so agencies actually advertised their non-enforcement records as watchdogs - a big advantage to bank executives and fraudsters. The regulators were essentially paid to keep bank executives happy. Those who have tired to report bank fraud may have felt like they'd taken bites of mushrooms in the surreal world of Alice in Wonderland.   


ACFE Fraud Conference keynote speaker Harry Markopolos, CFE, knows the feeling! He's the author of "No One Would Listen: A True Financial Thriller," which follows Markopolos and his team of "quants" — analytical, mathematical minds that breathe in numeric data and see flags waving — as they investigate Bernie Madoff's Ponzi empire. Markopolos' quest makes for great drama, but more important are his thoughts on whistleblowers' difficulties in persuading others to take them seriously. The SEC's complicity and the culture that creates such conditions in enforcement or regulatory agencies are still ringing alarms. Markopolos alludes to many other frauds – in the millions and billions – that haven't surfaced.

"Freefall: America, Free Markets and the Sinking of the World Economy," by Nobel Prize recipient and Keynesian economist Joseph E. Stiglitz, is a blunt title. The book describes how machinations, such as business models that are too complicated to untangle, offer opportunities with Enron-like pathologies. Not only can their success be deceptive, but when they fail, the convoluted webs may be too difficult to effectively untangle. Stiglitz backtracks to the Reaganomic zeal for deregulation as a turning point that fed the growth of perverse incentives for what actually became the antithesis of "free" markets … and great material for a documentary film.

The one-hour, PBS Frontline program, "The Warning," by producer Michael Kirk, features Brooksley Born, a brilliant attorney and the former head of the obscure Commodity Futures Trading Commission, who had tried and failed to get effective regulatory oversight of the secretive, multi-trillion-dollar derivatives market. She had predicted dire consequences, so, of course, she became "the problem" herself. Former SEC Chairman Arthur Levitt tells in the program how she was described to him as "irascible, difficult, stubborn, unreasonable" and clearly someone to avoid — if not neutralize. In the video, Born is quoted as saying that Larry Summers (a former Treasury Secretary and economics advisor to three presidents) had called her to say, "You're going to cause the worst financial crisis since the end of World War II." The intimidation was ratcheted up with claims that 13 banker were there listening! Bullying didn't stop the free fall. Could the eventual resulting reform really be just a Band-Aid — like other pretenses of contrition? See the program.

Which leads me to a "trashy airport-type book" with sex, drugs and Wall Street! This is perfect for a quick flight. Try this hustler's book or wait for the upcoming movie starring Leonardo DiCaprio! (Seriously.) "The Wolf of Wall Street" by former patron of the Bureau of Prisons, Jordan Belfort, continues bankers' ego subplots. Belfort fancies himself as the new Frank Abagnale. (Yet Belfort's reinvented self is reminiscent of another speaker at our Southeast Michigan Area Chapter meeting who marketed himself to fraud investigators after his prison stint, and before his current prison sentence.) Jordan Belfort was indicted in 1998 for securities fraud and money laundering. His "highly successful" Stratton Oakmont brokerage securities firm (that caused investor loss of approximately $200 million) is fictionalized in the movie "Boiler Room." His "charismatic sales training" is showcased on his website. For an introductory price of only $3,995 you, too, can benefit from his proven techniques, mentoring and coaching. Caveat emptor.

The follow-the-money theme continues. Next time: an assortment of books looking at money flow into washing machines and other modern innovations.

Enid Hilton Brown, CFE, is a licensed investigator with a focus on complex organizations, research and system patterns.

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