The Anatomy of a Ponzi Scheme – Commentary by Fraud Prevention Expert Chuck Gallagher

February 2, 2010

“I have an inside track on a great investment.  You’ll get better than a 12% per year return.  But, there are only a limited number of folks that I can get in on this offering.  You interested?

STEP ONE – make a promise that seems ‘special’ or ‘better’ than what anyone else can get on their investment funds!

“Wow…this is great.  I just got our statement in the mail and you know that investment I made in that private fund that Joe recommended…well its done better than he projected.  The market has been down, but this has returned over 16% thus far.  Man…I’m glad we got in on this deal!”

STEP TWO – Create an illusion that the investment is real.  This is done with fake statements (Bernie Madoff has had co-workers indicted for their role in creating fake documents).  Gordon Grigg is now in jail for his Ponzi scheme when he made a simple mistake on one of his fake statements.  He reversed the names and instead of calling them Fannie Mae and Freddy Mac he stated Fannie Mac and Freddy Mae…oops.

“Hey Frank…I know you told me the other day how badly your portfolio has been.  Well, I got connected with one of my friends on a private placement investment and, well, I was hesitant at first, but it’s been going great guns.  We’re up over 16% this year and I have a guarantee of 12%.  I didn’t say anything at first, but I thought that you might want to connect with this guy.  He’s really got it together.  Who knows, if you put some money with him…you might be able to dig yourself out of the hole a bit quicker.  Want me to call him and see if he could take you on?”

STEP THREE – Grow the fraud using trust.  First you trusted the person who hooked you into the fraud, and now you’re using that same blind trust to lead others to the slaughter.  Ouch…it will be painful both emotionally and financially on the back side.


Charles Ponzi arrive in Boston on November 15, 1903, aboard the S.S. Vancouver. By his own account, Ponzi had $2.50 in his pocket, having gambled away the rest of his life savings during the voyage. “I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me,” he later told The New York Times. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter, but was fired for shortchanging the customers and theft.

NOTE: There was a pattern of theft and unethical behavior, but the consequence of his actions were not significant enough for Ponzi to change his ways.

Imprisoned for forgery, Ponzi spent three years in the prison St. Vincent-de-Paul near Montreal. Rather than inform his mother of this development, he posted her a letter stating that he had found a job as a “special assistant” to a prison warden.   After his release in 1911 he decided to return to the United States, but got involved in a scheme to smuggle Italian illegal immigrants across the border. He was caught and spent two years in Atlanta Prison, where he met inmate Charles W. Morse, a wealthy Wall Street businessman and speculator, where he learned of greater opportunities than simple petty theft.

Ponzi seized on, what he said was an opportunity, to use postal coupons (I guess today we’d call them stamps), to make money.  IRCs (the postal coupons referred to) were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit.  Here’s where Ponzi dreamed up his opportunity for fraud.

Ponzi went to several of his friends in Boston and promised that he would double their investment in 90 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250.

NOTE: The scheme always involves a promise of something that the average bloke just can’t get.  So when someone – especially someone you trust tells you that they have a fail safe investment that offers great returns…be prepared to be scammed.

Soon afterward, Ponzi started his own company, the “Old Colony Foreign Exchange Company,” to promote the scheme. He set up shop in a building on School Street. Word spread, and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi’s total take was US$5,000, (approximately US$54,000 in 2008 dollars). By March, he had made $30,000 ($328,000 in 2008 terms). A frenzy was building, and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging yet others to invest. By May 1920, he had made $420,000 ($4.59 million in 2008 terms).

NOTE: The illusion was in full force.  Just as soon as folks began to see the promised returns happening (just as promised) they began to believe that what they were seeing was real.  Bernie Madoff, Gordon Grigg, and many many more in just 2009 did exactly the same thing.  They promised something and delivered…creating the illusion that all was just as portrayed.  What investors didn’t know was that the returns they were seeing came from other peoples investments.

By July 1920, Ponzi had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.

NOTE: Another psychological part of most Ponzi schemes is that once there is an element of trust, greed sets in and investors (wanting more and more) do not take their profits, but rather leave them for yet bigger and bigger profits.  In effect, victims would rather gamble with their funds than protect their assets.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. In fact, new money was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits.

NOTE: It seems odd, but the obvious somehow becomes clouded in the quest for more money.  In the Madoff scam…people now looking back could have seen that what he was doing couldn’t work…yet, Madoff survived three SEC investigations with flying colors.  It seems that it is human nature to want to believe that what is not real somehow is real.

Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts with air conditioning and a heated swimming pool, and he maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner.

NOTE:  Most Ponzi schemers use the funds (for the most part) for an illusory lifestyle.   That’s part of the illusion that causes people to trust the schemer.  Madoff, Grigg, Stanford (although he’s not yet been found guilty) Huffman and others all have become part of the illusion that promotes trust so that more people will invest (oops…become scammed).

Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture which he could not afford to pay for, sued Ponzi to cash in on the gold rush. The lawsuit was unsuccessful, but it did start people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. There was a run on the Securities Exchange Company, as some investors decided to pull out. Ponzi paid them and the run stopped. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi’s good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to give him their money.

NOTE: At the height of the schemes most fraudsters find that their false promise supported by an illusion and reinforced with trust (many times of well known and influential individuals) drives ever more folks to be sucked into the PIT. (PROMISE, ILLUSION AND TRUST).  Likewise, at its height that is generally when the pendulum is preparing to swing in – well lets say – a more truthful direction.  In other words the house of cards is soon to collapse.

On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi’s money machine. The Post contacted Clarence Barron, the financial analyst who published the Barron’s financial paper, to examine Ponzi’s scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company. Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad.

The stories caused a panic run on the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, this attracted the attention of Daniel Gallagher (no relation by the way – although that would be quite a coincidence), the United States Attorney for the District of Massachusetts. Gallagher commissioned Edwin Pride to audit the Securities Exchange Company’s books—an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors’ names.

The denouement for Ponzi began in late July, when McMasters found several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul. He went to his former employer, the Post, with this information. The paper offered him $5,000 for his story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. The article claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, McMasters wrote, Ponzi was as much as $4.5 million in the red. The story touched off a massive run, and Ponzi paid off in one day. He then sped up plans to build a massive conglomerate that would engage in banking and import-export operations.

On August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal 13 years earlier—including his forgery conviction and his role at Zarossi’s scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. Although the commissioner did not know it, this move foiled Ponzi’s last-ditch plan to “borrow” funds from the bank vaults after all other efforts to obtain funds failed.

With reports that he was due to be arrested any day, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but after the Post released the results of the audit, the bail bondsman withdrew the bail due to concerns he might be a flight risk.

The news brought down five other banks in addition to Hanover Trust. His investors were practically wiped out, receiving less than 30 cents on the dollar. The Post won a Pulitzer Prize in 1921 for its exposure of Ponzi’s fraud.


Same place we were when old Charles created what we now call the “Ponzi scheme.”  Robbing Peter to Pay Paul is the name of this game and unfortunately it existed before Charles Ponzi (he just got the notoriety for it) and continues to this day…and unfortunately will continue.

People get victimized, in a sense, by their own greed – although many don’t wish to admit that.  But, reality is – the investor (victim) wants a better return than he/she can get elsewhere (they fall victim to a false promise).  The illusion that the fraudster creates lures the investor victim into believing that what seemingly can’t be real – in fact is.  And, most fraudsters prey first on those closest to them – their friends, family and close acquaintances people that trust them.

The fraudster typically uses need, opportunity and rationalization to effect their crime while the victim falls into the PIT – or stated this way, they fall victim to a PROMISE supported by an ILLUSION which has a foundation in TRUST.

Sujata Sachdeva, Koss Corporation Vice President of Finance Arrested for Embezzlement and Fired!

December 31, 2009

As the year and decade draw to a close the news of unethical activity just keeps on coming.  And…as a business ethics speaker who studies ethics and ethical trends, I don’t see any end to these type of reports.  Whether we have a robust economy or an economic crisis, it seems that the personal motivation for money (or what it represents) outweighs the simple ethical choices that should be made daily.

According to a report in the New York Times, “the Koss Corporation, a maker of headphones and equipment, said it fired its vice president of finance after she was accused of embezzling more than $20 million from the company for a multiyear shopping spree of expensive clothes, jewelry and other personal items.”

Sujata Sachdeva, vice president of finance at Koss since 1992, was charged with wire fraud, said Assistant U.S. Attorney Matthew Jacobs, prosecutor in the case. She appeared in federal courtand was released on an unsecured bond, Jacobs said.

The maker of stereo headphones said in a brief statement that the request to halt trading followed its discovery of “unauthorized transactions” and fired Sachdeva following the discovery of unauthorized financial transactions.  Sachdeva served as the company’s Principal Accounting Officer. Also, two members of the company’s accounting staff who served under Sachdeva were placed on unpaid administrative leave.

The firm said its board has appointed a special committee of independent directors to internally investigate the transactions and determine their effect, if any, on Koss’ financial statements.  Preliminary estimates indicate that the amount of unauthorized transactions since fiscal year 2006 through the present may exceed $20 million.

According to a Forbes report – Sachdeva’s income was slightly in excess of $170,000 per year.


Whenever there is such a high profile ethics breech and fraud the question that is often asked is why?  What would cause someone, who otherwise knows better, to do such a thing?  Much as I hate to admit it…that question was asked of me many years ago when my fraud scheme came to light.  And like Sachdeva…I, too, lived an illusory life style.

According to published reports, Sachdeva reportedly used much of the money to purchase luxury items, and was ballsy enough to often leave her price-tagged clothes casually strewn about her office. When confronted by authorities, Sachdeva confessed, saying she covered up her two years of embezzlement by falsifying company financial statements.  Ouch…  I can speak from experience, the comfort that she might have enjoyed from her high flying lifestyle bring no lasting joy when facing the reality of prison – a place she is most certainly headed.


1.  For those close to the situation, is it possible that Sujata Sachdeva suffered from Oniomania. (Oniomania is the technical term for the compulsive desire to shop, more commonly referred to as compulsive shopping, compulsive buying, shopping addiction or shopaholism.)

2.  Do you believe that others were involved in the fraudulent cover up associated with Sachdeva’s scheme?


Credit Crisis – Subprime Mortgage Collapse – New York Times Article Shows That Choices Made Ten Years Ago Haunt Us Today! Comments by Mortgage Fraud Speaker Chuck Gallagher

February 24, 2009

Every day there is more news about the sagging economy.  Banks being considered for nationalization.  Companies contracting and downsizing.  Workers being laid off.  It’s hard to find the bright spots as there seems to be no light at the end of the tunnel.

But – every choice has a consequence – and the consequences we are living in today had a beginning with choices that were once made in good faith.  The more I research the more I find that is isn’t the banks who are totally at fault or greedy wall street tycoons.  Rather, the problem started with government pressure or direction.  Encouragement by our own federal government, coupled with shareholder profit pressure, created the momentum that has now turned into disaster.  new-york-times-building-sign

The following is an article written by Steven A. Holmes for the New York Times on September 30, 1999. (copyright New York Times 1999)  A portion of the article is reprinted here:

In a move that could help home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is not generally not good enough to qualify for conventional loans.  Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nations biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stockholders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called supprime borrowers.  These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s Chairman and Chief Executive Officer.  “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been regulated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy.  But at least one study indicates that at least 18 percent of the loans in the subprime market went to black borrowers, compared to 5 percent of loans in the conventional market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose difficulties during flush economic times.  But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute.  “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The whole article can be seen here.

Almost ten years ago, writer, Steven A. Holmes reported on what was the infancy of what would bring the US to its economic knees some ten years later.  The clarity of his comments are a haunting reminder simple reality checks and what many would now say is common sense business.


  • Politicians wanted the purse strings loosened so that more people could get what they wanted  – even though they couldn’t afford it.  Hum that seems to me to be bad economics but good politics.  Get more people what they want so they will vote for you.  After all, with term limits, most folks won’t be in power when the crisis hits.
  • Shareholders – of Fannie Mae – push for higher and higher returns.  Gordon Gecko – “Greed is good” – yea right!  I have been a Sr. VP in a public company and know what that shareholder pressure is like.  But here’s a reality check:  the tide comes in and the tide goes out.  It is unrealistic to assume that there will always be growth.  If companies were run for the long haul, then some of the dumb decisions that are made would be avoided.  It is terribly frustrating to see what kind of decisions are made just to make the earnings work for the current quarter.
  • Banks and investment firms wanted Fannie Mae’s expansion – why?  Obvious – another line of profitable business (at least for the short term).  I wonder today if those who were so quick to jump on the bandwagon would have done so – if they knew then what they know now.

Were the choices made then ethical?  As a business ethics speaker, I’m interested in your opinions.


Robert Allen Stanford – Stanford International Bank and Stanford Capital Management – Fraud In the News! What Motivates Fraud?

February 22, 2009

It seems that the flood gates are open with no hope of shutting – at least any time soon – with investigations and indictments of fraud!  Madoff, Dryer, Grigg and now Stanford.  Every where you turn there is another fraud or investment scam being reported.  I’ve seen a lot over the years as a business ethics and fraud prevention speaker, but this is a profound season for fraud discovery.  So the question – what motivates fraud?  robert-allen-stanford

To address a question like that you need to look at the scope and magitude of the frauds being reported.  And, make no mistake in this economic climate this is the tip of the iceberg.  As I write this, no doubt, there are frauds taking place that will be discovered in years to come.  Not a great comfort.  And, in this environment, the time is ripe for people to be scammed or victimized.

Before, however, look at the motivation, let’s examine what Stanford is being accused of.  According to the Dallas Business Journal:

A Houston-based broker-dealer and investment advisory firm with an office in Dallas has been charged in an $8 billion investment scheme that centers around a CD program and involves false promises to investors.

The Securities and Exchange Commission out of its Fort Worth Regional office alleges in a lawsuit filed in Dallas that Robert Allen Stanford through three of his companies — Antiguan-based Stanford International Bank, Houston-based Stanford Group Co. and Stanford Capital Management — were involved in orchestrating a fraudulent investor scenario where the parties made false promises to investors and fabricated return data on investments, the SEC stated.

“As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors.”

Rose Romero, regional director of the SEC’s Fort Worth office, called the scheme “a fraud of shocking magnitude that has spread its tentacles throughout the world.”

This was originally reported on February 17, 2009.  Since that time there has been a massive ripple effect related to Stanford’s SEC investigation. Investors have found that their assets have been frozen as Stanford’s assets were frozen to protect investors.  This fraud expands far beyond the boundaries of the US.

The Jamaica Observer states: His is a household name in the tiny Eastern Caribbean island of Antigua & Barbuda.

Likewise, the New York Times reports: Having seized control of Robert Allen Stanford’s two banks in recent days, Antiguan government officials are now pledging to work closely with American regulators to investigate their banking system, long suspected by federal officials of being a center for laundering money from around the region.

Now…as the Stanford saga unfolds so does the mystery.  Keep in mind, fraud – to be successful – has to be based on illusion.  And, as we have seen, the grander the illusion the more plausible the fraud – Bernie Madoff – master illusionist.  So in Stanford’s case the illusion is mystified by a story of an “undisclosed island.”

Again, the New York Times reported on February 20, 2009 – In an October 2008 article, Mr. Stanford told Forbes that he was planning to build an elite resort on what the magazine described as an “undisclosed island in the Caribbean.” At the time, Mr. Stanford said that he was working with 17 architectural and engineering firms to build 30 mansions for a development to be called the Islands Club.

Scheduled to open in 2011, it would have featured the largest private aviation complex in the world, Forbes said, with enough room to park 100 private jets as well as a jumbo marina with enough dock space for 30 massive yachts. The super-exclusive resort would require members to shell out a $50 million deposit, which would be refunded if they left the development. That was on top of the $15 million annual membership fee.

The foundation of a scam is based on three components:  Promises – something that people want and most can’t get; Illusion – the grand scheme that allows people to believe in something unseen as truth; and Trust – the belief that all is right, that somehow the government is overseeing the illusion and that if others do it – well then so should I.


That’s a good question and one that is not easy to answer.  However, one thing is true – a fraud usually has three distinct components: (1) Need; (2) Opportunity; and (3) Rationalization.  While I am not qualified to speak at this time as to each of these critical components, I can safely say that his NEED was driven by emotion (likely first) and (direct need perhaps second).

Note the following reported by  With a net worth north of $2 billion, he owns glitzy homes in and around Miami, the Virgin Islands and Antigua, and in them he has entertained powerful American politicians from both sides of the aisle.

He has an estranged wife, a girlfriend, former girlfriends and at least six children by four women. The monthly tab to support them all runs upward of $200,000, according to court records.

He loves to flash cash and to flaunt the toys that immense wealth can bring, be it yachts, private jets and helicopters, his own professional cricket team or a string of top-shelf pro golfers whom he pays to wear his logo.

An outstanding article appeared in the Wall Street Journal – a link to that article is here.

The flamboyant life style required money to fund the illusion, but more than that the emotional need to be larger than life is likely the key trigger to what and why this whole fraud began.


The story will no doubt unravel.  So consider the following:

  1. If you were an investor who was defrauded, consider making contact with me as I am doing research into how the fraud was carried out.  Your comments might help others avoid your plight.
  2. What do you think should be Stanford’s consequence for the massive fraud he’s accused of?
  3. If you did invest – did it cross your mind that the returns (far better than what the market provided) might be – well – shady?


The Mind of Madoff (Part 1) – What Would Motivate Such A Crime? Comments by Fraud Prevention Expert Chuck Gallagher

January 29, 2009

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.

bernie-madoffThe 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.


Read the rest of this entry »

Wesley Snipes – NOT GUILTY of Felony Charges! Guilty of 3 Misdemeanor Not Filing Charges

February 1, 2008

At 4:05 p.m. Friday, actor Wesley Snipes was convicted on three misdemeanor counts of failing to file his federal taxes but found not guilty of two felony and three other misdemeanor charges.



As I’ve said in numerous blogs, Wesley drank the koolaid and the jury must have seen that as well. He wasn’t by his choices a – convicted felon. However, the convictions carry a maximum sentence of three years in prison.


Snipes was charged with six misdemeanor counts of willfully failing to file federal income tax returns. He was found guilty only on three of those counts.

Kahn, who continued to sit out the trial in the Marion County Jail, and Rosile both were convicted on the more serious felony charges.

Snipes was waited in the courtroom after the verdict was read by Senior U.S. District Judge William Terrell Hodges. One of his lawyers went to finalize up a new bail bond for him. Hodges reduced Snipes’ bail from $1 million to $250,000.

Considering that Kahn was convicted of more serious charges…it appears that Kahn may be out of business in helping unsuspecting avoid their tax liabilities.


Wesley Snipes Faces Taxing Trial With IRS – Round One Begins

January 14, 2008


Screen actor Wesley Snipes is the target of the IRS and this time the Blade Runner might find that escaping the long arms of the IRS isn’t so easy. Been there, done that, and spent time in Federal prison for tax evasion – so I know first hand what Mr. Snipes is up against.  YouTube

Wesley Snipes has been indicted on federal criminal charges for his role in a bizarre tax avoidance scheme that allegedly included him seeking $12 million in fraudulent refunds and failing to file six years of tax returns. In an eight-count indictment unsealed today, Snipes and two others are charged with knowingly attempting to defraud the government by claiming that his substantial income was somehow immune to taxation. According to the indictment, Snipes, 44, conspired with Eddie Ray Kahn and former certified public accountant Douglas Rosile in the tax scam. Kahn is the founder of a Florida company (now known as Guiding Light of God Ministries) that, investigators allege, “promoted and sold fraudulent tax schemes” to clients like Snipes. Kahn has claimed that U.S. citizens could only be taxed on income earned from certain foreign-based activities (and not on money made in this country). This claim–known as the “861 argument” for the section of the tax code to which it refers–has been flatly rejected by the Internal Revenue Service. As part of the alleged Snipes scheme, the actor filed amended tax returns seeking $12 million in refunds on taxes he paid in 1996 and 1997. Details of the Snipes tax gambit first surfaced in 2002, when the Department of Justice sought a restraining order against Rosile. As an exhibit to that filing, investigators included a copy of Snipes’s amended 1997 tax return, which Rosile prepared. That document, which you can review here, sought a $7.3 million refund of previously paid taxes (Snipes earned $19.2 million in 1997). The amended return contended that the star’s income was “not from a taxable source” and contained a slightly tweaked affirmation next to the form’s signature line. The return was supposedly filed “Under no penalties of perjury.”

Substantive issues are at play in this case and we can assume it will be watched closely. The White Collar Crime Blog did a nice report on this very subject today. A summary of what they have listed as issues follows:

Some of the initial issues likely to arise:

  • Jury – Snipes has questioned whether the City of Ocala can provide him with a fair trial. For the government, there can be the dislike for the IRS. Picking a neutral jury may be tough for both sides.
  • Celebrity – How will the jury react to the celebrity? What would Martha Stewart say here? Being a celebrity can both hurt or help. Jurors can be elated to have met the star and been that close to the actor. On the other hand will they hold him to a higher standard?
  • Finger-pointing – Will the three co-defendants be finger-pointing and will the government just need to sit back and wait for the trial to end.
  • The Charges – The Indictment has an odd array of charges including two outside the typical tax realm – charges from title 18. Conspiracy charges are usually relatively easy ones for the government as the agreement does not have to be written and can be a mere nod of a head. Equally detrimental for Snipes is that there are 6 counts of 26 U.S.C. 7203, a failure to file tax returns. If the government can show that these tax returns were not filed, that’s a lot of years for the defense to overcome.
  • Knowledge is Crucial in Tax Cases – The statute requires that Snipes have acted “willfully.” In Cheek v. United States, 498 U.S. 192 (1991) the Supreme Court held that the standard for willfulness is the “voluntary, intentional, violation of a known legal duty.” This can be a tough standard for the government, especially when there is no showing of a desire to obtain a monetary gain.

What will be the outcome? I predict – prison. I don’t like to be a pessimist, but there is a powerful saying: “Pigs get fat and hog get eaten!” Snipes is just “hogish” when it comes to taxes.

According to a New York Times report, From 1999 to 2004, the actor Wesley Snipes earned $38 million appearing in more than half a dozen movies. The taxes he paid in the same period? Zero.

J. J. MacNab, a Maryland insurance analyst who tracks people who deny they owe taxes and has testified before Congress about the movement, said that an acquittal of Mr. Snipes would be a severe setback for the I.R.S.

“He will get more press and attention than any other victory by the tax deniers, and the growth in new members will be exponential,” she said.

Mr. Snipes, 45, is charged with two felonies: conspiracy to defraud the government and filing a false claim for a $7 million refund (a claim for the year 1997, before he stopped paying taxes). He is also charged with failing to file tax returns for the six years starting in 1999. Prosecutors say they intend to show that Mr. Snipes moved tens of millions of untaxed dollars offshore and gave the government three worthless checks totaling $14 million to cover some taxes.

In court papers and interviews, Mr. Snipes says that he is not guilty and that he acted on the advice of two tax professionals. They are being tried alongside him and are promoters of the 861 position and other tax theories.

One is Douglas Rosile, who was stripped of his accounting license in 1997. The other is Eddie Kahn, who has served prison time for tax crimes. Both are under federal court order to stop promoting tax evasion, including the 861 position.

The lawyer representing Mr. Snipes at trial is Robert Bernhoft of Milwaukee, who has been barred by court order since 1999 from selling a program under which he said people could legally stop paying income taxes.

Now, I don’t know about you, but I just don’t see that as a winning hand. I think the cards are stacked against Mr. Snipes and his own choices – most importantly the tax advisers he has elected to associate with may well be his downfall.

I wish him the best!

Your comments are welcome!