Madoff Ponzi Scheme – Fraud Prevention Expert Chuck Gallagher Comments – Stay Out of the PIT

Splashed all over the media in every form one can imagine is the news of the massive Ponzi scheme that Bernard Madoff was able to perpetrate over the scope of decades.  A staggering $50 billion is being reported and the numbers seem to always rise as first estimates (for some reason) seem to be conservative.  Perhaps it’s just we don’t want to believe it can be that bad!

madoff

From the Wall Street Journal to Bloomberg to Time – all are reporting about what happen and now asking how?  Of course, it is becoming a field day for lawyers (trying to protect their client’s interests) as well as politicians (attempting to fix lax regulatory blame).  And the reporters – well they have questions (as they should).

How could it have happened?  How could we have known?  And, most importantly – how could it have been prevented?

Those are all good questions.  But the best question is – how best to find the answer?

In order to unravel this massive financial and legal mess one needs to understand the components and pattern of fraud in order to prevent it in the future.

Fraud consists of three primary components: (1) Need; (2) Opportunity and (3) Rationalization.  All three must exist for a fraud of this magnitude to take place, live and grow over time.   Without doubt…all three existed with Madoff.  The trouble is we may not know the exact details of “why” for some time to come – if ever.

However, the most important of the three is the OPPORTUNITY SEGMENT.  Without “opportunity” the three legged stool wouldn’t support the weight of the fraud or crime.  That’s where falling into the PIT comes in. Of course, the question is – what is the PIT and what does it stand for?

The OPPORTUNITY segment of the fraud goes like this:  The fraudster (Madoff) makes a PROMISE (P) to an unsuspecting investor, creating an ILLUSION (I) – generally something the investor truly desires – which is supported by TRUST (T) – most of the time something the fraudster already has with the unsuspecting investor.  That is the “PIT” and once one falls in it, it becomes easier for others to join.  In Madoff’s case the PIT had become so large that the slippery slope in was easy and the company impressive.  My guess is that folks wanted in.

O.K. – great, so there’s a PIT.  But the real question is how to avoid the trap?

I must say that there is no shortage of people from all walks of life who are easily, quickly and willing to call Madoff all manner of names and express outrage.  The fact is – getting caught in the PIT is easy and simple.  Avoidiance is unnatural for most. Think about it, most frauds take place with people you know and/or trust.  Trust is the key factor.  So how does one avoid the PIT?

Simple Avoidance Steps:

(1) Understand – especially in a down economy when temptation for financial performance is on the rise – anything this is proposed which seems too good to be true – isn’t.

(2) Know what you’re investing in.  If you don’t understand the investment or it is an area that is foreign (in other words you could easily be manipulated) avoid the investment.

(3) Check out the investment through reliable means.  In other words approach the investment with a healthy skepticism.  Trust no one completely and due your due diligence.

Fraudsters abuse the trust others have in them in order to effect their fraud.  I did and so did Madoff.


For more information about my programs and consulting on business ethics and fraud prevention, contact me at www.chuckgallagher.com or call me at 828.244.1400.  My commitment to my clients: To evaluate and identify areas for fraud and help weed them out.  Fraud can be prevented!

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