The largest Ponzi scheme in history seems to be unfolding before our eyes if what Bernie Madoff has said is true. What some believed was a Wall Street power broker is now a prisoner in his own home. Fifty billion dollars potentially lost with a huge string of investors who found out in late ’08 that the economic crisis was personal – very personal.
The proported manager of billions of dollars for individuals and foundations, Madoff to many was a brilliant investor who produced consistent returns and attracted a star studded client list. After all, who would not want to place their investments with someone who seemed to have the inside track on how to produce results. But with Bernie’s self admitted Ponzi scheme, who is the real Bernie Madoff and more importantly what would motivate such a crime?
According to a New York Times article written by Julie Creswell and Landon Thomas, Jr. the following is stated:
An easy answer is that Mr. Madoff was a charlatan of epic proportions, a greedy manipulator so hungry to accumulate wealth that he did not care whom he hurt to get what he wanted.
But some analysts say that a more complex and layered observation of his actions involves linking the world of white-collar finance to the world of serial criminals.
They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators.
“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 behavioral profiles.
The questions about who the real Bernie Madoff is and what motivated his crime will be the subject of many books and be studies for years.
Psychopath – now that seems a deep reach and a good question. Listed in Scientific America is the following definition or description of psychopathic behavior. I have included several paragraphs so that you can begin to judge for yourself just where the connection may be with Bernie Madoff.
First described systematically by Medical College of Georgia psychiatrist Hervey M. Cleckley in 1941, psychopathy consists of a specific set of personality traits and behaviors. Superficially charming, psychopaths tend to make a good first impression on others and often strike observers as remarkably normal. Yet they are self-centered, dishonest and undependable, and at times they engage in irresponsible behavior for no apparent reason other than the sheer fun of it. Largely devoid of guilt, empathy and love, they have casual and callous interpersonal and romantic relationships. Psychopaths routinely offer excuses for their reckless and often outrageous actions, placing blame on others instead. They rarely learn from their mistakes or benefit from negative feedback, and they have difficulty inhibiting their impulses.
Not surprisingly, psychopaths are overrepresented in prisons; studies indicate that about 25 percent of inmates meet diagnostic criteria for psychopathy. Nevertheless, research also suggests that a sizable number of psychopaths may be walking among us in everyday life. Some investigators have even speculated that “successful psychopaths”—those who attain prominent positions in society—may be overrepresented in certain occupations, such as politics, business and entertainment. Yet the scientific evidence for this intriguing conjecture is preliminary.
Most psychopaths are male, although the reasons for this sex difference are unknown. Psychopathy seems to be present in both Western and non-Western cultures, including those that have had minimal exposure to media portrayals of the condition. In a 1976 study anthropologist Jane M. Murphy, then at Harvard University, found that an isolated group of Yupik-speaking Inuits near the Bering Strait had a term (kunlangeta) they used to describe “a man who … repeatedly lies and cheats and steals things and … takes sexual advantage of many women—someone who does not pay attention to reprimands and who is always being brought to the elders for punishment.” When Murphy asked an Inuit what the group would typically do with a kunlangeta, he replied, “Somebody would have pushed him off the ice when nobody else was looking.”
Is this the description of Bernie Madoff? When he began his career is this Bernie Madoff? Those questions will be the subject of much public debate. Yet, as I read the definition above, I can think of many people I know, including myself, who have – from time to time – exhabited some of those behaviors. In fact another comment from the New York Times article says it so clearly:
“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.”
By all means I am not trying to be funny here, but what Mr. McCrary says is to me the definition of a good salesman. And a good salesman, Bernie Madoff was!
I suspect that his motivation was far more simple than what some are trying to characterize. All of his upbringing would indicate a basically normal childhood with nothing presented that is out of the ordinary. Starting his investment firm in the 1960’s trading penny stocks, Bernie Madoff – I believe – was making a way for himself as honestly as he knew how. I doubt he had any thought or concept that he would create a ponzi scheme to defraud people. I can almost picture that nothing like that was foremost in his mind.
Now some might be asking, well why do you think you know so much about a man you’ve never met? Fair question. The answer, because I’ve been in his shoes. Not proud to say that, but my past will reveal that I, too, effected a ponzi scheme and like Bernie – when the card (from the house of cards was pulled) I, too, revealed my misdeeds and eventually went to prison. They say it takes one to know one – well maybe that fits in this case.
Fraud – at least this kind of fraud – consists of three primary traits: (1) need; (2) opportunity and (3) rationalization. So when looking at the question of “what would have motivated such a crime” the first thing that is important is what was Bernie’s – need. Need in this case is the key to his motivation.
What was his need? Money? I doubt it. Rather, I think that Mr. Madoff’s need was emotional. Reared as a child in a normal jewish home, I have no doubt that Bernie Madoff was a motivated – perhaps driven – individual set out on achieving success. Getting involved in the securities business when he did allowed him to ride the crest of a wave of growth and success that this nation had not seen for decades. And Bernie was at the forefront of dramatic change.
As an example of Bernie Madoff’s business positioning the following was said in the New York Times article:
During the mid-1970s, when changes in the rules allowed his firm and others like it to trade more expensive and more prestigious blue-chip stocks, Mr. Madoff began gaining market share from the Big Board.
“He was a man with a good idea who was also a terrific salesman,” says Charles V. Doherty, the former president of the Midwest Stock Exchange. “He was ahead of everyone.”
So what happened? Imagine…fairly successful guy – gets to move in bigger and more powerful circles – making money for himself and those he is connected with – on the cutting edge of his career growth – likable – and a great salesman. Then the market changes and he experiences what he has not felt in years – losses. Clearly I can’t support the theory with documentation – that will be disclosed in years to come as part of this massive investigation. But, if I were a betting man I would say that Bernie had an emotional problem with revealing that he was not the person he created the illusion he was.
Fraudsters, by nature, create illusions. That statement seems obvious, but to the unsuspecting public is seems a revelation. If a fraudster were to reveal the truth, no one would be defrauded. The illusion is critical and the illusion is hard to break. Once broken the fraudster is revealed as nothing more than a liar and a thief. In 1990 I had to reveal that shadow side of myself to my wife, family, partners and clients and the cost was devastating. In December of 2008 Bernie Madoff – when there was no way to perpetuate his fraud had to do the same.
I suspect that when Bernie’s results began to go south, he was incapable of admitting his weakness to his clients and friends. He created the persona and was going to stick by it. It was then that the ponzi scheme began to unfold. Did he intend to defraud at first? I don’t think so. However, his need to maintain the illusion for his emotional well being kicked into gear the first aspect of the tranformation of Bernie Madoff into fraudster. When “need” was established the house of cards began to be built.
The Times report says the following:
To some extent, analysts of criminal behavior say, defining Mr. Madoff is complicated by the wide variety of possible explanations for his scheme: a desire to accumulate vast wealth, a need to dominate others and a need to prove that he was smarter than everyone else. That was shown, they say, in an ability to dupe investors and regulators for years.
There is no one answer and yet the answer is simple. For whatever the underlying reason, when the “need” is established and firmly in place the fraud will begin.
There will be more about Madoff to come…for now however, know this – in troubled economic times – the “need” becomes heightened and fraud is on the rise. Perhaps it remains undetected, but it will be brought to the light – it always is. Every choice has a consequence. I am living proof of that statement and speak around the world about choices and consequences. Perhaps my comments – heard by just one person – will be sufficient to help them make choices that yield positive results. Bernie’s will leave him in prison for the rest of his life.
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As a business ethics and fraud prevention expert, I have the opportunity to speak to corporations, associations and universities all over the world. If your group would benefit from a powerful presentation on choices and consequences – ethical behavior – feel free to contact me at firstname.lastname@example.org or visit my web site at www.chuckgallagher.com. Fraud prevention services are discussed in a confidential manner and not included as part of my web site for security reasons.