After dropping the ball on the Bernie Madoff scandall – the SEC changes its focus on Tips!

July 31, 2011

Sometimes government agencies just don’t get it…they miss the obvious and ignore competent data that’s provided through tips.  Perhaps they aren’t staffed to follow up.  Perhaps they feel that most tips are grudge tips and not credible.  Who knows?  But after the Madoff scandall – the largest Ponzi scheme in US history, the SEC has now changed their focus when it comes to tips.  Below is a well written article that shows the power of tips and it’s impact on busting fraud wide open.

(Sarah N. Lynch and Matthew Goldstein) – For more than three years, U.S. securities regulators investigated allegations of accounting fraud at a small telecom firm called China Voice Holding Corp, but could not make a case.

Then last November, they got an unexpected break. A Texas-based tax consultant doing work for a firm affiliated with China Voice contacted the U.S. Securities and Exchange Commission with information about suspicious money transfers she’d detected.

The call from Dee Dee Stone was quickly routed to a preliminary version of the SEC’s new $21 million “Tips, Complaints and Referrals” or TCR Database, which the agency later fully deployed in March. Within 24 hours, Stone, a former Internal Revenue Service agent, got a call from an SEC attorney spearheading the China Voice inquiry.

Five months later, the SEC on April 29 sued several China Voice executives, claiming they had duped investors out of $8.6 million in a Ponzi scheme. Agency lawyers say without Stone’s help, regulators may not have even discovered the scheme, let alone made a case so soon.

The alleged fraud at China Voice was small in the annals of Wall Street sins. But the SEC’s response to Stone is an indication that after dropping the ball on Bernie Madoff, the nation’s top securities cops are trying to modernize the way they handle tips and complaints about potential wrongdoing.

The TCR Database is the SEC’s most significant response to its well-documented fumbling of early tips about Madoff’s $65 billion fraud. The SEC’s new Office of Market Intelligence, which last summer also forged a first-of-its kind partnership with the Federal Bureau of Investigation, is using the database as a key tool.

The changes are part of an effort by SEC Chairman Mary Schapiro to overcome the agency’s reputation for being a step or two behind the bad guys. It is far too soon for the SEC to declare victory. But some of the agency’s harshest critics notice a change.

Among them is Harry Markopolos, the Boston-based financial analyst and fraud investigator best-known for trying to alert regulators about problems with Madoff’s operation. Markopolos said since the database went into operation, he has submitted three of his own tips. In all three cases, he heard back from an SEC attorney within days, or in one case, a few hours.

“Everything they should have done in the Madoff case they are now doing,” said Markopolos. “They have done a fantastic job of reforming themselves.”

In February 2009, Markopolos told the House Committee on Financial Services that the SEC’s “investigative ineptitude and financial illiteracy” permitted Madoff’s crimes to go on for so long.

PAPER, PENCILS & FAXES

It took the embarrassment of the Madoff scandal to drag the SEC into the 21st century when it comes to tracking tips and complaints.

Tips used to come via phone calls, e-mails, faxes and even handwritten letters into the SEC’s 11 regional offices and Washington headquarters. Before the Madoff case, the SEC’s Los Angeles office might receive a written complaint about a bad broker, for instance, and stuff the letter into a filing cabinet if it was deemed without merit. So, if later on a complaint about the same broker was sent to the SEC’s Chicago office, staff there would have no easy way of knowing about the earlier tip and connecting the dots.

Sometimes, the only way an attorney could find out if someone had looked into a complaint would be to call all the other SEC offices.

“It was a sieve, basically,” says Russ Ryan, a partner in the Washington law office of King & Spalding who spent a decade at the SEC before leaving in 2004. “It probably got better as I went along in my career, but I remember back when I first started there, it was a lot of paper and pencil type stuff.”

Now with the TCR Database, once a tip or complaint is entered into the system, about 2,300 SEC employees can see it and add new information.

“All of the plumbing was brought into one place,” said Thomas Sporkin, a nearly 19-year veteran SEC attorney in Washington, who oversees the agency’s new Market Intelligence Unit and its 41-member team.

The database is emerging alongside a new program by the FBI’s criminal profiling group in Quantico, Va. that is creating a series of behavioral composites to help agents investigate white collar crime.

The more systematic approach by the SEC and FBI comes in response to the growth and complexity of financial crimes in recent years. In the US government’s 2010 fiscal year, the FBI’s economics crime unit reports the bureau had 1,703 active securities and commodities fraud investigations, a 41 percent increase over the number of active investigations in 2008.

Over the past year, the amount of monetary penalties the SEC has imposed on wrongdoers has almost tripled, with high-profile cases against companies such as Goldman Sachs, Citigroup and Morgan Keegan for their roles in the crisis.

Sporkin’s 41-member Market Intelligence Unit last month moved into new offices in Washington that look a little bit like a Wall Street trading floor, where they process more than 100 tips, complaints and referrals that come in each day.

The group’s chief task is to ensure legitimate tips, like the one from Stone about China Voice, get routed to the right attorneys. The triage process begins with analyzing the information provided by tipsters, whistleblowers and self-regulatory organizations on an online questionnaire in the TCR Database portal.(here)

The SEC is also trying to revamp the way it uses the raw data it gathers. Sporkin’s team is working side-by-side with an FBI expert in financial crimes under a deal agreed to last August.

The FBI agent gets to look at all the tips about securities fraud as they come into Sporkin’s team. For the FBI, the partnership offers the promise of faster criminal investigations. For the SEC, it’s a chance to learn a trick or two from law enforcement.

Having an FBI agent embedded with the SEC “is really revolutionary,” Sporkin said.

Other regulators are trying to set up their own FBI partnerships, including the Commodity Futures Trading Commission, which regulates the futures and over-the-counter derivatives market. The CFTC, which declined to comment, has also been closely studying the operation of Sporkin’s team.

THE FBI EMBED

Jeffrey Horner, the FBI agent embedded with Sporkin’s group, is an accountant who worked for audit giant PriceWaterhouseCoopers before joining the bureau in 2004.

Horner says he’s not allowed to talk about specifics, but the nearly year-long partnership has led to new leads and bolstered existing FBI files.

“Some of the raw data that comes into the SEC, the (FBI) case agents may not be aware of,” he said. “So plugging them in with the SEC and the information that the SEC has can be very valuable to an ongoing investigation.”

FBI agent Horner is also sitting in on two SEC working groups examining micro-cap fraud and Chinese businesses that have done so-called reverse mergers with small U.S. shell companies. The FBI has opened its own broad investigation into reverse mergers and allegations of accounting irregularities.

Horner also uses the SEC’s tips system to drill into areas of particular interest to the FBI. Right now, for instance, he is on the lookout for tips about high-yield investment scams as well as high-priority areas such as insider-trading and market manipulation.

The real test of the partnership — and the effectiveness of the TCR Database — will lie in the kind of cases the SEC and federal prosecutors file.

An independent analysis of the work of Sporkin’s team could come when SEC Inspector General David Kotz conducts a planned audit of the Market Intelligence Unit’s triage work. Kotz, who issued a scathing report on the SEC’s failures in the Madoff affair, has called the new database an adequate response to ensure tips are “acted upon in a timely and appropriate manner.”

Former SEC lawyers and securities attorneys wonder whether more agents need to be assigned to the SEC-FBI partnership.

“My sense is that there would be so many things going across that person’s desk, I am not sure one person can manage it,” said James Cox, a law professor at the Duke University School of Law.

Officials with the SEC and the FBI don’t rule out an enhanced relationship. They note that before Horner was embedded with the SEC, the two agencies coordinated on major investigations, such as the probe into insider trading by hedge funds.

At the same time, officials say they are sensitive to law enforcement protocols prohibiting prosecutors and the FBI from sharing investigative materials, such as wiretapped conversations, with securities regulators. They say it’s easier for the FBI and SEC to work hand-in-hand before an investigation gets going to avoid any defense allegations of improper collaboration or information-sharing.

REWARDING WHISTLEBLOWERS

Sporkin’s group is a work in progress and the TCR Database has some limits. It can’t yet be cross-checked against other internal databases. The system s not advanced enough to perform more sophisticated analysis or data-mining, such as cross-checks against trading activity, company filings or news feeds.

“It will be several years before we really see whether this new system is a success,” said Bradley J. Bondi, a former SEC attorney who is now a partner with Cadwalader, Wickersham & Taft LLP. “But I think the new system is a step in the right direction.”

It’s a system Sporkin expects will become bigger and better over time, especially now that the SEC in May finalized rules for its own whistleblower program, rewarding individuals who provide the agency with a high-quality tip that leads to a successful enforcement action.

Stone’s tip about the potential Ponzi scheme at China Voice came in November 2010, after she says she grew concerned about the number of complaints she was hearing from investors in China Voice and related partnerships.

On May 31, Stone, testifying before a U.S. judge in Dallas in the China Voice case, said she learned about the new whistleblower rule only after hiring an attorney in advance of her court appearance. Her attorney, Misty Gutierrez, declined to comment; Stone didn’t return telephone calls to her consulting business, Number Crunchers.

Stone told U.S. District Judge Reed O’Connor she started reviewing the bank statements for China Voice and those related companies after hearing the complaints, and quickly concluded, “something was wrong.”

She talked about the money transfers with a friend who also once worked for the IRS and agreed the math didn’t add up. The next day, Stone said she called the SEC.

(Editing by Bill Tarrant)

Copyright 2011 Thomson Reuters.

QUESTION: Do you think that you have information that would help law enforcement in discovering or uncovering fraud?  If so, would you be willing to share that in the form of a tip?  Not asking you to do that here on this blog, but rather discuss why you would or why you wouldn’t.

YOUR COMMENTS ARE WELCOME!


Business Ethics: It is really about more than avoiding prison! Is there a little Bernie Madoff in each of US? A Guest Blog by Corey Richardson

July 24, 2011

A “Man of The Age” financier is surrounded by mystery and adoring members of the moneyed elite hungry for some of his wondrous returns. This paragon of the business class with The Midas Touch accepts only a few choice clients who seem to wither in his presence as they deliver their accumulated wealth into his magical hands – no questions asked. The returns are beyond belief, and for very good reasons. Unbeknownst to all, this wizard of the market is juggling fraudulent accounts to pay for his lavish lifestyle. The only trading is from their hands to his. The ruse comes tumbling down and the entire nation is stunned.

The scoundrel portrayed above is Charles Dickens’ character, Mr. Merdle of Little Dorrit, first published in 1857. Dickens foretold the Madoff scandal verbatim in his quintessential corruption tale, but this iniquitous business leader is an age-old archetype, and we, like Dickens, find it easy to vilify him due to the magnitude of his crimes; No stealing a crust of bread for this villain. At its polar opposite, take the “common criminal,” the savage monster seen today in T.V. cop shows, the local news, and innumerable B-movies. This standard is bloodthirsty, drug- crazed, and has a soul as black as night.

Dickens’ work is also replete with such characters.  The beauty of these caricatures is that we cannot find ourselves in either. They conveniently represent “other.” All the while we can sit comfortably in our living rooms with our sense of moral rage because we do not bilk venerable charitable funds and we do not cook meth in our kitchen. Yet, it can be argued that if we truly strive for a better world, then we need to go well beyond the knee-jerk reactions of these scenarios, and find ourselves in the moral conundrums.

Stricter regulations of the financial sector and more accountability, gun control legislation, sensible criminal sentencing laws, affordable drug rehab, etc., are important factors, but are only part of the solution. Even focusing on improvements to education and social services, which have been shown to be extremely important in crime prevention within certain groups, is still only a small part. To thoroughly understand what drives people as different as Kenneth Lay or a Gov. “Blago,” as well as a gun-totting inner-city kid with a pocket full of dope, we must understand root causes of criminal behavior, thus pointing the way for our next generation of leaders- and evaluate ourselves in our own business affairs.

“What causes criminal activity, and. who are these people who commit crimes against our society, such as … ” taking items from work, “fudging” on taxes, paying for non-business activity with a business account, inflating an insurance claim, switching labels at a store, producing unsafe products, “padding” a bill, or any number of violations of legislated standards for personal gain committed by everyday people.

Due to perception, universally known within psychology as the fundamental attribution error, these crimes are given little thought by those who commit them.   Joe Citizen justifies and minimizes these activities as “bending” the rules. And this is where we see the attribution error in effect: we tend to overestimate the role of personal factors and underestimate the “influence of situations in others, and we overestimate the situational factor and underestimate the personal factor in our own circumstances. It is the age-old “We judge others on their actions, and we judge ourselves on our intent.” Or I’m bending the rules, and he is breaking the law.

This phenomenon is not unique to the middle and upper socioeconomic strata, and equally applies to the poor. A drug dealer feels that his activities, though illegal, are still a legitimate means to earn a livable wage within his community.  The same could be said of any accountant or lawyer who “tweak’s” the system to make a little money. So, getting a television set off the back of a truck in the ghetto looks much like another’s decision to not claim income on a second job. It is all about perspective.

As we address the problem of the business class, we can facilitate the much-needed change in perspective with some cold, hard facts. Business leaders do not need to be as extraordinarily crooked as Madoff to affect a, huge societal burden. Study after-study demonstrates that “white collar” or corporate crimes, as well as middle-class crimes, ranging from tax evasion, insurance fraud, price fixing, inventory “shrinkage” (what a euphemism!), etc., weigh much more heavily than the number one Index crime, conventional property crime. Index crimes are known also as “street crimes.” They are highly visible crimes, easy to categorize and count, and are overwhelmingly committed by the poor. White collar crimes, by contrast, are difficult to detect and rarely prosecuted. Still, the economic yearly cost with respect to property crimes of the corporate America are approximately twenty times greater than conventional property crimes of index offenses, or a difference of $200 billion to $10 billion annually.

Having completed a fully accredited MBA program via a distance-based education format, I need to share that – this accomplishment – was done from an 8′ by II’ prison cell.  I was an inmate and like most “on the inside,” I readily justified my criminal acts, which occurred within my professional life, as did the drug dealer or the burglar.  So, as I approached my Business Ethics coursework, I did it with the secure knowledge that I committed a crime. This perspective, and the belief that my professors would judge my answers too with this in mind, gave me a keen eye in studying ethical queries in business.

I believe that when most students answer questions related to ethical foundations or detail their understanding of their own personal values, they do it from a perspective that they themselves could not possibly commit a crime. Such activities, such as smoking pot in the college dorm or not claiming wages from a summer job paid “under the table,” are simply not considered as crimes, which they are. Again the attribution error: “My (illegal) acts are not illegal, and certainly not unethical.

Everybody does it. It is no big deal.” And so forth. To cultivate a true ethical North in business, we must broaden our perspectives, and when an ethical dilemma arises, we can perceive it as such. No different from operations management or strategic planning. An appreciation of multiple perspectives — proffers a grand wealth of insight that will carry our next generation of leaders.

As a convict, my daily life is a direct result of criminal acts related to my work. In my studies, I can clearly see the untold millions that are affected by one unsafe product, but I can also appreciate how one man can justify criminal acts as a bad business decision, rather than a pathological act for profit with no respect for the law. To open the eyes of CEOs early in their training to the easy comparisons between corporate crime and “street” crimes, as well as offer tangible proof of the enormous societal burden of white-collar crime, would be of immeasurable value. In teaching business ethics, we must go well beyond the bland terms and definitions and the prosaic personal litanies of “What I value in the world.” We must make the coursework truly applicable and create managers and business leaders who intuitively understand how ethics within Corporate America are just as important, if not more so, as profit margins and supply chains.

Clearly, when I understand myself, I can understand Bernie Madoff or Kenneth Lay.  I believe the same could be said of us all. The equation is simple: Unbridled Financial Gain plus Opportunity, then Add the Likelihood of Detection and Fear of Prosecution. Embracing the truth of unlawful acts in our everyday lives, be it business or personal, is much harder to do than to merely vilify in a fanciful Dickensian way the corporate or government leader who betrays our trust, or even the dope dealer of the inner cities. But it will help to create leaders who view all of their work and life through a lens of principled behavior. We must begin to see the situational nature of all criminals acts, and therein lies the beginning of meaningful solutions. It is not enough to alter the number of opportunities to steal or the severity of the requisite penalties, but to go further by changing what stealing looks like by different people, changing the perceptions of illegal gains, and infusing the intrinsic value of ethical behavior.

When we see that all of us have a little of Bernie Madoff in us, only then can we begin to view our world more clearly and begin to make authentically ethical decisions as we lead our companies and organizations. We may even make significant changes in our personal lives.

Business Ethics: It is really is about more than avoiding prison.

Corey Richardson Biography:

Corey John Richardson is a former clinician, who holds a Master’s Degree in PA Studies from the University of Nebraska’s College of Medicine (Omaha) and a Bachelor’s Degree in Health Science/PA Certificate from the University of Florida’s College of Health Related Professions (Gainesville). He holds an MBA from Salve Regina University’s Graduate Business School (Newport, RI) and has completed doctoral health science coursework with a focus on prison healthcare at Spalding University (Louisville, KY). Mr. Richardson’s work has been incorporated into criminology courses at the University of Cincinnati and has been included in CURE’s congressional file on correctional healthcare in support of HR 3710. He has performed medico-legal consulting and has legal experience assisting prisoners in various civil and criminal actions. As a pro se litigant, he won a precedent-setting case on appeal against the Kentucky DOC and its Abuse of Power (published at Richardson v. Rees, 283 S.W. 3d, 257). He has also worked as a facilitator in numerous psychotherapeutic and rehabilitative programs.

Mr. Richardson has written widely about prison issues and sobriety for publications such as Spotlight on Recovery, Cell Door Magazine (the official publication of the National Death Row Assistance Network), T’he Kentuckiana News, Perspectives (the official journal of the Association for Humanistic Psychology), The Grapevine (Alcoholics Anonymous’ international publication), The Long Term View: A journal of informed opinion (Massachusetts School of Law at Andover), OUTlooks (Canada’s GLBT magazine), and others. Several of his essays have been published in the book Voices Through The Wall and he won 1st Prize in the Ford Foundation’s 2OO9 national writing competition Think Outside the Cell, published in Love lives here, too. (2010)

Mr. Richardson maintains his writing at coreyrichardson.blogspot.com and may be reached at coreyjohnrichardson@gmail.com. In 2001, he was convicted of crimes related to practicing medicine without a license and served 122 months in the Kentucky Department of Corrections; his supervising physician was given a probated sentence. Mr. Richardson has 13 years of continuous sobriety on July 14, 2011.

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Christmas in Prison – Inmates remembered or forgotten? Second Chances book Excerpt by Chuck Gallagher

December 15, 2010

Today I shipped a copy of my new book SECOND CHANCES to an inmate in prison.  Seems that someone cared enough about this man to want to send him a Christmas present – the gift of potential – the gift of how to turn Adversity into Opportunity – the gift of how to change your life.

As I packaged the book for shipment, it caused me to reflect on my first (and thank God only) Christmas in prison.  It’s been 15 years now and yet I can vividly remember that time and the strong emotions I was feeling as Christmas approached.  All to often we can get caught up in the wrongs that folks have done (and, yes I was a wrong-doer) and we lose track of the tragedy that all face when dealing with the consequences of the choices we make.  Here in 2010 Bernie Madoff’s son Mark is just another example of the pain and brokenness that all who are associated with bad choices experience.

For those who cling to self-righteous judgment, allow me this moment to share my experience – to give my readers a brief glimpse or view into the inside of prison at Christmas…

SECOND CHANCES book excerpt:

On Christmas morning, my first and, as I thought, hopefully my last in prison, I lay in my bed feeling an aching in my chest. The pain was not from a physical ailment. Rather, the pain was an emotional ache that hurt to the very core of my soul, perhaps more deeply than any physical pain I ever experienced before. Although Christmas was my favorite time of year, this year it was the most painful time, and I was not alone in those thoughts. By this time, Buck and I had developed a close bond. Even he found Christmas morning difficult, and he had seen six of them come and go before I got there. I couldn’t imagine what that was like.

Five hundred men in this prison facility and on Christmas day, most of them would shed a tear. Being in prison doesn’t make anyone immune from pain and loss. On days like today, it magnifies the pain and loss. Just like them, as I lay motionless in my top bunk bed, I found myself thinking with tears streaming down my face. I cannot, to this day, say why the thought came to mind, but it made a powerful impression. It seemed that this “learning laboratory” had the tendency to teach at a rapid rate. At least, it did for me.

I recalled one evening, sometime back in the mid-eighties, standing in the checkout line at the grocery store I frequented in my former hometown. At that time, I was in my mid to late twenties and had a budding career. Now, I must admit, I thought that was an odd thing to recall on Christmas morning in prison, but this is what came to mind.  Looking back, there was clearly a reason.  The memory was crystal clear. I had walked into the store quickly to buy some steak and shrimp, having told my wife I would pick up some on my way home. We were to grill out that night, and I knew it would save her a trip. Little did I know that something so simple would provide such a profound lesson. Frankly, I had forgotten the experience until that day─Christmas morning in 1995.  As I entered the checkout line, the clerk, a female around my age, spoke to me.

“Chuck Gallagher. You’re Chuck Gallagher.”

“Yes.” Somewhat startled, I responded tentatively, realizing I had no idea who this person was and how she knew me. Here I was, standing in my suit, having just finished a workday at the office, and now I was being identified by a stranger at the grocery store.

“I’m Suzie,” she said, as if I should know her. I did catch her name as it was on the badge she wore on her grocery store smock. Even though she knew me, for the life of me, I had no clue who she was. Not only did I not know her name, but her face was also unfamiliar. While I tried not to show my unfamiliarity, my face must have given it away.

“We went to high school together,” she exclaimed, as if that should somehow jog my memory. “I read about you often in the paper. You seem to be doing so well.” Noticing my wedding ring, she then asked, “Do you have any children?”

“Yes, one,” I replied, smiling at her as I acknowledged her obvious warmth. I was just trying to be nice and carry on conversation, even though inside I just wanted to check out and move on. Then I asked what, in retrospect, was a dangerous question, “Do you?”

Little did I know that those simple two words would change the course of this unexpected visit.  With my question she responded, “Yes, three.” And with that, she stopped the process, even though we were in the express lane. She reached under the counter, removed her pocketbook, and proceeded to take out her wallet, wherein she had two pictures each for three children─and that was just the beginning.

Standing there, I could tell that the people in line were perturbed at her for the lengthy explanation and at me for even asking. Frankly, I wasn’t excited either. I didn’t remember her and I was just being nice. In reality, I just wanted to get out the door and get home. As she began to wind down, I knew not to ask any further questions.

“It’s so good to see you,” she said as she handed me the receipt for my purchases. “Maybe we’ll see each other again sometime.” I smiled and quickly walked away.

As I walked to the Mercedes I was then driving, I gloried in self-righteous thoughts. How important I was. She had read about me in the paper. I was ‘somebody.’ All of this time away from high school and the highest rung of the ladder she had aspired to was a check-out chick at the local grocery store. That thought was judgmental, ugly, and turned out to be profound.

Yet, on that Christmas day, 1995, as I lay on my top bunk, my thoughts drifted back to that incident. I couldn’t even remember her name, yet, in my mind’s eye, I vividly saw her with her family on this Christmas day.  No doubt she and her husband shared joy as their children squealed with delight over the meager gifts Santa left. Most of the time you can’t get kids out of bed, but on Christmas morning they won’t stay in bed. The joy and love you feel as a parent, seeing those tiny little eyes light up as they experience Christmas, is hard to describe. That feeling is one I ached to have there in prison on Christmas morning.  I imagined seeing her as she prepared their Christmas meal.  As their energy began to wane, she would hold her children in her arms and tell them that she loved them. As I lay there, I imagined her gently stroking their heads as they struggled to keep their eyes open, fearing they might miss something. Gently, they would fall asleep in her arms.

All those thoughts passed as I noticed the wetness of the pillow against my cheeks. She was home with her little ones. She was more of a “somebody” than I had ever dreamed of being. She was there, and I was in prison.

As the thought passed, I knew there were still choices to make. I could wallow in self-pity, or make a choice that would brighten my day and perhaps the day of others. A part of me longed to continue feeling sorry for myself, but I chose to move past it. With that, I got up and stood in the phone line. Most of the time there wasn’t a line for the pay phone, but today, Christmas day, there was a long one. So I waited.

I waited my turn in order to make a three-minute collect call to my children.  Hearing their voices on the phone, I choked back my emotion and with the most cheer I could muster I said, “Rob – Alex, Merry Christmas boys – this is Dad.”

15 years later my sons are grown men, yet I never forget the loss I felt the Christmas of 1995.  Christmas is not about the gifts, the carols, the outer trappings that merchants wish to lure you in with.  Rather, Christmas is about sharing the deep and abiding love of God that is indwelling in each of us with others.  So where ever you are, what ever you do, make sure to take some time to reflect on who is important in your life and how you can bring love and light to them – even if it’s in the darkest of prisons.


Bernie Madoff and Mark Madoff’s suicide – the Reality of Prison! Choices and Consequences

December 13, 2010

Doing presentations on business ethics and fraud prevention, every presentation I begin starts with the statement – “Every choice has a consequence!”  No where is this more painfully obvious then the very public unfolding of the consequences begun many years ago by Bernie Madoff.

Two years to the day – the day Bernie Madoff admitted creating the largest Ponzi scheme in US history, his son, Mark Madoff, committed suicide.  Apparently the pressure of all that was taking place (as the Madoff saga is far from over) was far too much for Mark to bear.

Some might ask, well how would you know?  The answer is simple…I’ve been there.  Having created a Ponzi scheme (not something I am proud of, but it is a fact that I openly share), I know about the emotional pressures that come with the consequences of choices I made.  The magnitude of my crime is dwarfed by that of Bernie Madoff.  Yet, pressure is pressure and likely it is all relative.

I candidly feel for Mark Madoff – knowing that his “dark night of the soul” had to be very light less in order for him to elect to end his life.  Beyond that, the pain that Bernie Madoff must feel is, too, enormous.  Even as I write this I can almost hear readers shaming me for having some compassion for Bernie.  But, honestly, I do.  The pain a father must feel knowing that his actions contributed to a depth of depression that contributed to his son taking his life is great.  I cannot honestly imagine that pain.

According to Ira Sorkin, Bernie Madoff’s attorney, Madoff will not attend the funeral of his son, Mark, out of consideration for his daughter-in-law and grandchildren.

Housed in a medium security prison for the rest of his life, Bernie Madoff has had his life reduced to working for around 12 cents per hour and wearing simple prison clothing day in and day out.  His brilliance will not be remembered.  Rather he has become the butt of jokes – “Charles Ponzi created the scheme, but Bernie Madoff with all the money!”  What a sad legacy.

As I said…I know the feelings of loss, inadequacy, hurt and what I and others have described as a “dark night of the soul.”  My new book describes my experience well.  Perhaps this excerpt will give some insight into that feeling that comes from facing a consequence that seems so great that ending a life is the only option – at least at the time.

SECOND CHANCES – excerpt:

At 7:11 p.m. that evening, I grabbed the Yellow Pages and began calling clinics─anyone who I thought might help me. Frankly, I don’t recall what I was looking up. I do remember that there were no listings under “suicide”─in fact, that wasn’t a category. So I looked up physicians, psychologists, psychiatrists, anything that started with a “P”. Honestly, I don’t remember who I did call─a proctologist, as far as I knew. The only thing that flooded my mind was I needed help.

“You’ve reached the office of Drs . . . Our office hours are from 8:30 a.m. to 5:00 p.m. Our office is closed. But if you’ll leave your name and number, we’ll be happy to call you first thing in the morning. Have a nice day!” Somehow, when you’re thinking of ending your life, “have a nice day” just doesn’t seem appropriate. And unfortunately, that’s the message I got over and over.

Calling became an obsession. It was the one thing I could do, one action that I felt in life I had some control over. “Just one more dial,” I would say to myself as I pressed the buttons on the phone, listening to the ring, hoping for an answer.

“Dr. Benson’s office.” That was the second time that day I was stunned. After getting recording after recording, I was somewhat unprepared for the possibility that someone would answer. Yet someone did.

“I need to talk with someone. I’m from out of town,” I somehow stammered.

“Actually, our office is closed. I was just walking out the door and thought this was my wife. Give us a call in the morni . . . ”  Before he could finish his sentence, I blurted, “I’m thinking of committing suicide!”

Silence─then the voice said, “Let’s talk.”

For the life of me, I can’t recall what was said between us as I lay on that lonely hotel bed. We could have talked for two minutes, twenty minutes, or two hours. I just don’t remember. What I do recall is that this total stranger, a man who I had never met, took the time to help me see past the grand illusion I had created and uncover the real me inside.

That night was the darkest night of my soul. That call that I shared didn’t make it better. It didn’t eliminate the consequences. It didn’t remove the pain. Rather, it gave me hope, hope that if I could make poor choices that would, most certainly, bring painful consequences, I also possessed the power to make positive choices with positive results.

His comment to me still resounds in my heart today. He said, “You have made a terrible mistake, but YOU are not a mistake! The choices you make moving forward will define your life forever and provide the foundation for your children’s lives. Think carefully as you make this choice!”

When he said to me, “YOU are not a mistake,” it hit me─while the past cannot be changed, the life we are given and the choices we make moving forward are the only things that count. I felt a burden lifted. I could not change the past; all I could do was face the consequences.  It was within my power to make good choices, now and in the future, that would produce a fruitful outcome. That was my destiny!

For information on how to obtain a copy of SECOND CHANCES – visit www.secondchancesbook.com or Amazon.com


We’ll call it a Family Affair – Richard Alan Cohen pleads guilty to Ponzi scheme fraud!

May 9, 2010

Bernie Madoff – West Coast Style!  What’s different – this father and son team are both facing serious time in prison.  Bernie got 150 years.  Seems the Cohen’s are looking at over 300 years.  Choices and consequences – but why the proliferation of Ponzi schemes?

Richard Alan Cohen, 61, a Sherman Oaks man pleaded guilty today to 26 felony counts related to a long-running scam that offered investments in, among other things, caffeinated mints and took approximately $39 million from 1,000 victims across the United States.

Richard Cohen’s son, Daniel Cohen, 34, of Calabasas, pleaded guilty on April 22 to 20 felony counts related to the scheme that utilized a number of sham companies, including one called Euromints.

Both Cohens face hundreds of years in federal prison when they are sentenced in the fall.

In the mid-1990s, the Cohens formed several companies – including Eurobrand, LLC, doing business as Euromints; Samuel & Cohen Media, LLC; Mintech International, Inc.; and Rig Leasing, Inc. – that they used to solicit investors with claims that the businesses were successful and generated large profits. Potential investors were solicited in several ways, including by a team of salespeople who worked in a “boiler room” in Calabasas. In addition to making claims that the businesses were viable and successful, salespeople often told potential investors that the companies were on the verge of “going public” or were going to be taken over by larger companies. Salespeople commonly told potential investors that they could buy company stock from a widowed investor who was willing to sell her investment at a discounted price.

In reality, the Cohen companies were not successful, the stock certificates issued by the companies were worthless, and a substantial portion of the money received from victim-investors was skimmed by the Cohens to fund their lavish lifestyles, which included luxury automobiles and Daniel Cohen’s “palatial” home in Calabasas.

As part of the scheme, the Cohens were involved in related fraudulent activity, which included Richard Cohen’s efforts to avoid paying restitution to victims who lost money when his commodities investment company, Madison Financial, was shut down by the Commodities Futures Trading Commission. Richard Cohen withheld information from the CFTC through a number of ways, including having his son pay rent on his $8,500-a-month Bel Air residence and using an American Express Black card in his son’s name to conceal hundreds of thousands of dollars in income that had been misappropriated from investors.

Both Richard and Daniel Cohen pleaded guilty to conspiracy, 11 counts of mail fraud, two counts of causing victims to travel in relation to a fraud, and conspiracy to evade tax laws. Richard Cohen additionally pleaded guilty to two counts of money laundering, three counts of making false statements to the CFTC, two counts of filing false tax returns and three counts of tax evasion. Additionally, Daniel Cohen pleaded guilty to five counts of money laundering.

Richard Cohen is scheduled to be sentenced by Judge Wu on October 7, at which time he faces a statutory maximum sentence of 306 years in federal prison. Richard Cohen today agreed to surrender to begin serving his sentence on May 28.

Daniel Cohen is scheduled to be sentenced on September 23, at which time he faces a statutory maximum sentence of 290 years in prison. Daniel Cohen has been in custody since July 2009.

A third defendant involved in the Cohens’ scheme – Joshua Hoffman, 40, of Malibu – was sentenced in March to 5½ years in prison after pleading guilty in this case, as well as pleading guilty in another fraud case that defrauded various companies and organizations that thought they were purchasing advertising in magazines (see: http://www.justice.gov/usao/cac/pressroom/pr2010/049.html).

If you were a victim of these men…I’d like to know through your comments – how did you get connected with this long running expansive fraud.

YOUR COMMENTS ARE WELCOME!


Club Fed huh? Bernie Madoff reported beaten in Prison

March 22, 2010

It’s not unusual to hear.  From time to time when I speak to groups – whether it’s financial services, oil and gas, or manufacturing I hear the back of the room comment (most of the time under their breath), “You were sent to ‘club fed'”.  I must admit I do have a twinge of resentment when I hear that remark.  It is “fed”, but it ain’t no “club.”

Unfortunately, Bernie Madoff is find that the hard way.   The Wall Street Journal reports (full report seen here), that Bernie Madoff was attacked while an inmate in prison.

Mr. Madoff was treated for a broken nose, fractured ribs and cuts to his head and face, according to a felon currently at Butner serving time on drug charges who was familiar with his condition at the time. The details of the injuries couldn’t be independently verified.

Another inmate who recently was released from Butner after serving time for drug charges and a third person who isn’t an inmate and is familiar with Mr. Madoff’s situation both confirmed the assault.

The former inmate said the dispute centered on money the assailant thought he was owed by Mr. Madoff.

Fellow prisoners say Mr. Madoff, who is Inmate No. 61727-054 at Butner, has garnered some respect from inmates because of the breadth of his Ponzi scheme. The fraud caused about $20 billion in net losses by thousands of investors.

Since Mr. Madoff’s arrest in December 2008, five other individuals have been charged in connection with the fraud. Two have pleaded guilty; the other three have either maintained their innocence or declined to comment. Prosecutors have said there were more alleged co-conspirators in the scheme who worked at the Madoff investment firm.

Separately, prosecutors from the U.S. attorney’s office in Manhattan are building tax-fraud cases against Mr. Madoff’s brother and two sons, all of whom worked at Mr. Madoff’s investment firm, people familiar with the matter have said. Those men have said they had no knowledge of fraud.

Every choice has a consequence!

YOUR COMMENTS ARE WELCOME


Prison Inmate Presentation – Looking into Eyes seeking Hope! Comments by business ethics and fraud prevention expert Chuck Gallagher

March 22, 2010

February 23, 2010.  As I walked up to the main area where visitors are received at the prison, it occurred to me that some 15 years ago I was in prison.  What a reality check!

Now, for the first time, I was returning – just this time it was in a different role.  Fifteen years ago, I was an inmate and almost to the day fifteen years ago, I was taking my first steps out of prison to speak to students at a local school about choices and consequences – about what choices I made that got me into prison.  On this day, some fifteen years later, I was speaking to inmates, having successfully navigated surviving and thriving following prison, about choices and consequences – specifically how to succeed in life following incarceration.

And, as I write this I have the sneaking suspicion that some of you – haven’t looked closely enough at my background and will find surprise in my open revelation.  To me this is nothing new.  I haven’t hidden my past.  If you are open about who you are then those who would attack you are denied the ammunition.  But, more important than my past is the fact that I am not defined by it either.  I cannot change the fact that I am a convicted felon, but that label does not define who I am and the value that I bring to my family and society.

But this blog is not about me…rather it’s about what I saw when I looked into the eyes of those prisoners on February 23rd.

WHAT’S NEXT?  I remember asking that question…time after time.  As I took those first 23 steps into federal prison I knew that my life had changed.  This new environment was something I was unfamiliar with – a foreign experience and for sure something I was unprepared for.  I couldn’t go to Barnes and Noble and read “Prison for Dummies.”  Although, I’ve thought of that since 9 out of 100 Americans will be incarcerated at some point in their lives.  (Sad statistic).

Prison is a different world.  The rules are unique and one must adapt to this new society or face problems that most would want to avoid.  It’s not like the movies, at least not in every way.  Likewise, especially minimum security prisons are not “club fed” either…just ask anyone who’s been there.  Life is different and the adaptable survive.

OVER TIME…you become accustom to your new world…the world in which you work each day for 12 cents an hour.  This world knows you as a number, not a person, and all effort is practically made to strip you of your identity.  Bernie Madoff is no more important than John Doe…in fact, celebrity might work against you.

I tried in every way to keep a portion of who I was, but 2 steps forward were met with a push of 5 steps back.  The sooner you accept your number and learn to blend the easier it becomes to survive.  And, if you are cursed with a long sentence, then prison becomes a way of life.  If I’ve ever seen anything that creates an entitlement mentality – prison does.   It’s a bit like being stuck in a boarding school for a long period of time, you eventually think that life is what you are currently experiencing and forget that another “civilized” world exists out there somewhere.

NEARING THE END – But then you begin to see that the end of your sentence is approaching and again you wonder “what next?”  Actually, for most inmates, that end “What’s next” question is the scariest one.  Think about it…for “X” number of months or years this has been your life.  You have not had to be concerned with where you would sleep, what you would eat, how you would get medical care, or where you would work.  All of those questions were conveniently  answered for you.  After all you were the ward of the federal government or state…under their care and direction.  Now, however, you’re facing a new day…a day when those questions have to be answered by YOU!

THE PRESENTATION: As I stood there, facing a group of inmates for the first time since I was released, I knew as I looked into their eyes what they needed.  They needed HOPE!  They needed the reassurance that they could make it on their own, that they were not destined to be a repeat statistic.

REALITY CHECK:

  • Regardless of what they or anyone might say, the choices they made got them there.  The sooner we learn to accept that we are truly the masters of our fate – good or bad, the quicker we learn to apply those “master” skills to empower ourselves to achieve our dreams.
  • Life in prison (while truly a different experience and one that must be adapted to) is not normal and we must not forget that we are responsible for our own well being.  No one is responsible for us – and for some that is a hard lesson.
  • Yes…when you get out you will still be a convicted felon and many people will look down on your for that label.  The question is not what you have been but rather what you elect to be.  As a wise man once said to me, “Son, you’ve made a terrible mistate, but YOU ARE NOT A MISTAKE!  The choices you make today will define your life in the future and the legacy you leave for your two children. MAKE THOSE CHOICES WISELY!”
  • But, Chuck, finding work will be hard.  Yea…that’s right, but they key is to do what other people are unwilling to do.  Have you ever wondered what makes folks born outside of this country so successful?  They see opportunity where others don’t.  So think about the most “unsexy” jobs that most folks don’t want to do and do them.  You can become rich in “garbage!”
  • Last, but certainly not least, believe in yourself.  Every human being, regardless of circumstance, has the power to move in the direction of your dreams.  In fact, there is a song by that title sung by Michael Gott.  I would highly suggest that you look it up on itunes…but it for 99 cents and listen.  What an inspiration!

It was my honor to speak to those inmates and I hope that other opportunities like that present themselves.  While speaking to a paying audience is wonderful, my “pay it forward” is addressing inmates and as I look into their eyes seeking hope – I hope that I fill their hearts with the knowing that they, too, can find joy beyond prison walls.