Madoff Ponzi Scheme – How Do Folks Get De-Frauded? Comments by White Collar Crime Speaker Chuck Gallagher

December 20, 2008

The headlines are riddled with questions.  How do people get sucked into white collar crimes?  Didn’t they do their do diligence?  The Madoff scandal has more people asking more questions than any white collar crime in recent history and there are more to come.  Amazing, but the answer is often found in the comments made by those who have been directly touched by Madoff’s actions.

In a recent AP story the following was stated:

Signing up companies for office space in Manhattan skyscrapers made Norman F. Levy a very rich man.

In the hotly competitive but tight-knit world of New York commercial real estate, Levy worked across more than seven decades brokering leases in midtown’s towers. When he died in 2005 at 93, he was hailed as an elder statesman of the trade whose zest for the deal was matched by his generosity with both friendship and money.

“Your spirit and love of life have touched and changed all who knew you,” one friend of 40 years wrote in a paid death notice for Levy that ran in The New York Times. “You taught me so much. I’ll cherish our relationship forever.”

The friend was Bernard Madoff.

The real estate broker and the money manager were separated by 26 years, but they and their families had formed a friendship reinforced by shared interests, social circles — and trust.

Levy and Madoff were active in some of the same organizations, like New York’s Yeshiva University. They donated their money to many of the same causes — groups including the Lincoln Center Theater and Gift of Life, a South Florida charity that tries to save Jewish leukemia victims by matching them with bone marrow donors.

In the summer, both families headed to the Hamptons. When Norman F. Levy died, he was staying at his daughter’s house fronting the Atlantic in Montauk, just a few sprawling lots away from the mansion owned by the Madoffs.

For more than 30 years, the Levys also entrusted their personal investments to Madoff. When they chartered the Betty and Norman F. Levy Foundation — which reported assets last year of $244.4 million — as the vehicle for their charitable giving, they again put their trust in their longtime friend.

The story, apparently one of many now starting to surface, talks of connection, friendship and most of all TRUST.

The question – how does one get defrauded is obvious.  One of the key critical factors is “trust.”   In order for a scam or fraud to be effected there are three components that all must come together: (1) need; (2) opportunity and (3) rationalization.  Those are the tools of the fraudster and if any one is missing the fraud doesn’t happen.  But in order to be defrauded you must, as I call it, step into the PIT.   A prior blog post talks about the PIT.  But for a short explanation the PIT means: A Promise (P) which creates and Illusion (I) which is supported by Trust (T).  Trust for the person or organization being scamed is critical.

An outstanding article in the Charlotte stated in the first paragraph:

For sheer toe-curling embarrassment, it may be a while before Wall Street does better than the Bernard Madoff scandal. Here was a rogue who practically telegraphed his unreliability by hiring a tiny, no-name audit firm, by reporting monthly investment results that never fluctuated and by claiming a trading strategy that could not possibly have been implemented given the billions of dollars he managed. And yet, despite these warnings, the rich, the famous and the supposedly sophisticated entrusted their money to Madoff, who defrauded them with the most laughably crude of methods – an old-fashioned Ponzi scam.

Think about what is said up above – how many clues could one recieve before bells of warning would go off?  Reality is – people, especially those who believe that they deserve or should receive better than most, place their desire and “trust” above their intellect.  That’s when the suckering begins.  Unfortunately the devastation that follows is both financial and emotional.

The New York Times stated the following:

He provided little information and demanded a lot of trust.

“You have a lot of wealthy people who made a lot of money on handshakes,” said Mark S. Weiss, a commercial real estate broker at Newmark Knight Frank, where several brokers had invested heavily with Mr. Madoff. There was “something about this person, pedigree and reputation that inspired trust,” he said.

Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans.

“The level of devastation, both financial and on a human level, is astounding,” said Robert J. Ivanhoe, a lawyer who is representing 10 developers and investors who lost $5 million to $50 million each with Mr. Madoff.

As a former white collar fraudster (not something I’m proud of) the reality is the pattern is predictable.  Fraud to the victim is a function of trust and illusion.  Madoff, seemed to be the consumate illusionist and had unparelled trust.  His trust propelled the scheme and now we are at the beginning of finding just how devastating the effects will be.

More to come…

As a business ethics and fraud prevention speaker I routinely working with companies on a confidential basis to evaluate and eliminate fraud.  For more information or for comments related to ponzi schemes – contact me at or 828.244.1400.

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

December 19, 2008

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!


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 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!