Ethics in Dialing for Dollars – Wall Street all over again!

October 6, 2010

In the 1987 movie Wall Street, after Bud Fox comes back from his first meeting with Gordon Gekko his manager at the brokerage firm says:

Where you been the last 3 hours,
	Fox? I wouldn't be sitting around
	chin wagging if I were you...
	plenty of names in that phone book
	to cold call...

I suppose once you have a little age on you, you have an opportunity to see things from a different perspective.  As a “former” CPA I lived through the trying economic times of the Carter Administration and know what it was like to have mortgage rates at 16% and higher.  It was during those times that it became strange – as a matter of fact – that cold calling for investments that frankly made no sense seemed to be at their peak.  I recall the awareness that unsolicited investment calls were a second cousin to an outright scam as the caller clearly didn’t do his/her due diligence related to the investment they were hocking.

Personally I have no problem with folks who make a living soliciting customers; however, when the solicitation is blatantly focused on money from your pocket into theirs without due consideration to the investor and whether they are qualified to invest in what is being offered – strikes me as unethical and fraudulent.

So – where does this all come from?

For many who read this blog – you know I have been following closely the case in Houston, TX of Daniel Frishberg, Al Kaleta and David Wallace.  It would be hard for a reasonable person – presented with the facts – to believe that these three stooges did anything but hock an investment concept to folks who were unqualified and ended up being scammed.  But, today, unrelated to BizRadio and Daniel Frishberg, I got a call that reminded me of the old “Wall Street” movie days.  The call went something like this.

Hi.  Is this Chuck Gallagher?

Yes…how can I help you?

Chuck … I’m calling to talk with you about our oil and gas investment limited partnerships.  We’ve only have a few units left and, considering the tremendous, return and tax benefits, I wanted to enroll you before this opportunity closed.

Thanks for the call but I’m not interested.

Chuck … considering your enrollment in the last quarter of this year will provide you a direct tax write off of $45,000 and we’ll guarantee a return of $250,000 on the investment – you can’t lose.

Interrupting…I stated:  I’m not interested and hung up.

Here are some facts:

  1. I did not know the person soliciting my business
  2. He (the caller) had not done any due diligence on me – thereby knowing my investment strategy or needs
  3. The caller was offering something that, by its nature, I would have no interest in
  4. The caller was clearly “dialing for dollars” hoping that one of those “plenty of names in that phone book to cold call” would be interested in his offer

What happened today with the call I received has happened in many ways – some a bit different in approach – to others and most of the time, the investor looses!

Outside of the legal implications, do you think that unsolicited cold calling with the express purpose of seeking investors is ethical?

I’d like to know your thoughts and as always – YOUR COMMENTS ARE WELCOME!


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.

HISTORY:

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.

WHERE ARE WE TODAY?

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.


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.

COMMENTS ARE WELCOME:

Read the rest of this entry »


The Ethics of Change – A Letter To President Elect Barack Obama

November 5, 2008

Today – the day after the election – we, as Americans, have seen yet another historic moment in a life that has seen many. Those of us with some age have seen the end of wars and the beginning of others; we have seen space travel and a man on the moon; we have seen technology change everything about our daily lives; and we have seen a man rise up and break barriers that once were thought to be iron clad. Mr. President Elect – your election may be historic for African-Americans, but, more important, it is historic for all Americans as we see through you a change of attitude and focus – we see hope in your eyes.

With the above said, Mr. President Elect, I must caution, in the midst of celebration, that we not lose sight ofbarack-obama-smiling what got you there and what your task at hand is. President Elect Obama – we must restore a sense of ethics to this great nation and make choices – tough choices at times – based on sound ethical and moral principles that have guided us for so long.

I, of all people, have no right to lecture you on ethics or change – after all, you are our new President elect. But, like you, I know a thing or two about adversity and obstacles. As a former convicted felon (not something I am proud of) now professional speaker, I have risen above my poor choices from the past and become a voice for CHOICE and ETHICS. Regardless of the choices made, we can moving forward make better choices that will bring about positive results.

You said, “it’s been a long time coming, but tonight, because of what we did on this date in this election at this defining moment change has come to America.” Your statement is true…we have turned for too long away from choices that empower people to achieve greatness and focused on what’s wrong and how we exercise our muscle to the detriment of others.

You, Mr. President Elect, are aware of the challenges ahead. Your words reveal it, “For even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.” You know, as do we all, that the only way to succeed is to do so by making choices founded on the ethical foundation of our forefathers as they founded this great Nation.

I speak on ethics today, founded on the lessons I learned from not living an ethical life. Perhaps, as a Nation, we have not made the best choices – or even ethical choices. The challenges ahead are significant and you, yes you – Mr. President Elect – will be tempted beyond belief, after all you are the most powerful man in the world. Don’t lose your sense of ethics, sir. Remember your promise! “But I will always be honest with you about the challenges we face. I will listen to you, especially when we disagree. And, above all, I will ask you to join in the work of remaking this nation, the only way it’s been done in America for 221 years — block by block, brick by brick, calloused hand by calloused hand.”

Regardless of who authored these next comments you delivered – and delivered well – they form a promise of an ethical foundation for your Presidency.

“So let us summon a new spirit of patriotism, of responsibility, where each of us resolves to pitch in and work harder and look after not only ourselves but each other.

Let us remember that, if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers.

In this country, we rise or fall as one nation, as one people. Let’s resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long.”

Mr. President Elect – we need that foundation that you have stated so well – a foundation of hope and promise and belief that as American’s we can be proud of who we are and what we stand for – that we can be proud to call ourselves American’s here and around the world. You have given us that hope and for that we say – Thank you!

Regardless of political belief, I think we are witnessing the dawn of an new age for America. We will succeed or fail based on the choices we make moving forward. If our choices are based on fear, ego and power, we may find that we will be no better than we have been and perhaps even worse. Those choices and not based on sound ethical principles. On the other hand, if we make choices that foster freedom, opportunity and a spirit of selfless cooperation we might see the dawn of the “Age of Aquarius.”

Let me end with your words…

“America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves — if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?

This is our chance to answer that call. This is our moment.”

Read the rest of this entry »


Business Ethics Training – “The Office” – What Not To Do!

October 20, 2008

Business ethics training!  Across the nation I can hear people saying, “Yea, those people on Wall Street and in Washington need a good dose of that.”  Or, more than likely, in many companies, I hear a big “yawn.”

People, especially now, are sensitive to the need for ethical action.  However, ethical belief and action does not generally mean a commitment to teaching ethics.  In fact, in a national survey, most companies (there are notable exceptions) do very little to teach and promote ethics.  So often, as a business ethics speaker, I hear people recite the statement, “There is no such thing as business ethics, only ethical people.”   Well, that statement is all fine and good, but the reality is – businesses do have a culture and if ethics are not a core value, then unethical behavior is likely.

So what’s this “what not to do” stuff?  Simple answer…but first you need to watch this episode of “The Office” on NBC.  A link is provided.

The Office – Business Ethics

So here’s the skinny:

(1) They have a Business Ethics seminar because “there’s been some misconduct at corporate.”  All too often I find that the business ethics speaker/trainer is called because there is already a problem.  Not that fixing a problem isn’t a good thing to do, but wouldn’t it be better to avoid the problem in the first place.

(2) As soon as the “seminar” started, there was doubt that the company had a true commitment to ethical behavior.  If you were to truly ask the rank and file of your company if they would keep a highly productive but unethical sales person, what do you think they would say?  Their answer might give you a clue as to whether there is a culture of ethics (or right choices) within your company.

(3) How exciting – they first review the survey results.  Now, honestly, how often do you feel that company employees truly express their feelings or opinions on a company survey.  More times than not when I am consulting with a company I find that employees distrust the company and are more apt to tell then (the company) what they think they want to hear.

(4) The training centers around office supplies, excessive breaks, and other issues that do not, in my opinion, get to the heart of an ethics culture.  Banks making loans to people who could ill afford to make the payments is unethical – the heck with the paperclips.

Now…from here I move away from the show – although quite amusing.

When you look up the word “ethics” the following is the first definition:  the discipline dealing with what is good and bad and with moral duty and obligation.  All too often ethics training deals with the “good and bad” and ignors the larger question of moral duty and obligation.  Developing an ethical culture is centered around creating a moral duty and obligation – taking actions that are in line with that duty.

EXAMPLE:  The other day I heard a well known economist say that the actions taken over the past seven years were logical and appropriate.  I could not disagree more.  It was unethical for financial institutions to loan money to people when there had reason to believe that they may not be able to repay the debt.  These financial institutions ignored their “moral duty and obligation” in the name of short-term quarterly profits.  For a time they were rewarded by Wall Street…but as we have seen – all of that value has diminished.  The lack of an ethical foundation in their business decisions provide short-term gain and huge long term loss.  They made choices that lacked fundamental ethics.

I guess in the end…you need to determine if the definition fits your company.  If you need something better than what the folks in “The Office” elected…give me a call.

Otherwise in the words of “The Office” – “What’s right, what is wrong, who’s to say in the end…because it is unknowable!”


AIG’s Financial Crisis – Forget Business Ethics – We Need More Money!

October 8, 2008

$700 Billion for the banking bailout – $85 Billion for AIG (a private company) – these amounts are only a drop in the bucket of what it will truly cost before this financial fiasco is complete in the history books.  The sad thing is – in order to clean up the mess, the goverment will have to “borrow” money to correct – OVERBORROWING!

Now AIG says it needs more – almost $38 billion more!  Talking about missing a projection.  And the biggest question of all, where will it end?

Read the following according to CNN:

The New York Federal Reserve is lending up to $37.8 billion to American International Group to give the troubled insurer access to much-needed cash.

In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back.

The new program, announced Wednesday, is on top of the $85 billion the federal government agreed to lend to AIG last month to prevent the global company from collapsing. AIG said last Friday it had drawn down $61 billion.

To be sure none of us want to see a financial collaspe, but $38 billion on top of $85 billion – the question seems to be where will it end?  And what seems amazing is the magnitude of which the federal goverment is being the backbone of private “for profit” financial institutions.  Frankly put, if the issue were just you or I “Joe Citizen” and we were about to go under – we’d drown.  So why on the back of the taxpayers is the federal goverment backing institutions that have apparently thrown ethics to the wind when making financial desisions?

As a business ethics speaker, I am told daily that my phone should be ringing off the hook – “apparently Washington and Wall Street need your help.”  I can’t disagree with the sentiment, but they needed the help before they made poor business choices that have a clear unethical smell to them.

In a Forbes Article the following was stated:

AIG’s problems stemmed primarily from its insurance of mortgage-backed securities and other risky debt.

On Tuesday former top executives at AIG testified before the House Oversight Committee blaming everything but themselves for the company’s problems and subsequent bailout that cost taxpayers billions of dollars. (See “‘Wasn’t Us’ Former AIG Execs Say)

“Wasn’t us” my ass.  Sorry for the language, but if you’re an exec with a firm like AIG the buck stops with you.  Any person who runs a company has the power to make decisions that “should” be in the best interest of the shareholders.  With an equity decline of 95.4% – YES THAT IS 95.4% – who else to blame but the execs who set the course for the company.  Sure the market has changed, but it changed because “unethically” corporate executives have placed short term quarterly profits above common business sense.

My sense is – it will be a long cold financial winter that may practically last several seasons, if not years.  Your comments are always welcome!


Mortgage Fraud Crisis and House Stealing – How Widespread is the Criminal Activity?

March 31, 2008

Over the past several months I have written a number of blog articles about the consequences of what appears to be rampant mortgage fraud – especially in the subprime lending arena.

A wonderful article was written a week or so ago by Robert Schmidt, writer for Bloomberg.com. The article appears in full here. In the article Schmidt writes:

The U.S. Justice Department is conducting a broad review of the subprime lending crisis to see if there is a “larger criminal story” to the mortgage meltdown, Attorney General Michael Mukasey said.

Mukasey said the agency hasn’t decided if the turmoil merits a response similar to the Bush administration’s corporate fraud crackdown that began in 2002 after the collapse of Enron Corp. Still, he told reporters in Washington today, the department’s criminal division is now weighing how to address the issue.

“We’re considering information that’s coming in and possible legal theories,” Mukasey said. “People are looking at the law to see to what and to whom it might apply.”

The FBI, the Justice Department’s investigative arm, announced earlier this year it was investigating 14 corporations for possible accounting fraud related to the mortgage rout; the number now is almost 20. The collapse in the credit markets has forced people from their homes, shaken Wall Street and become a major issue in Congress and the presidential campaign.

In the White Collar Crime Blog the question has been asked if Mukasey will appoint a Mortgage Fraud Task Force much like the Corporate Fraud Task Force that was set up after the Enron – Worldcom – scandals? According to a report from the New York Times, “LAST month, almost 225,000 properties in the United States were in some stage of foreclosure, up nearly 60 percent from the period a year earlier, according to RealtyTrac, an online foreclosure research firm and marketplace.”

As a white collar crime and business ethics speaker, I have seen a dramatic up tick in the number of requests for information about this form of white collar crime. It seems that every week there is a new form of fraud revealed.

On March 25, 2008 the FBI issued an interesting article on one of the latest scams: HOUSE STEALING. The report reads as follows:

What do you get when you combine two popular rackets these days—identity theft and mortgage fraud? A totally new kind of crime: house stealing.

Here’s how it generally works:

… The con artists start by picking out a house to steal—say, YOURS.

… Next, they assume your identity—getting a hold of your name and personal information (easy enough to do off the Internet) and using that to create fake IDs, social security cards, etc.

… Then, they go to an office supply store and purchase forms that transfer property.

… After forging your signature and using the fake IDs, they file these deeds with the proper authorities, and lo and behold, your house is now THEIRS.

There are some variations on this theme…

… Con artists look for a vacant house—say, a vacation home or rental property—and do a little research to find out who owns it. Then, they steal the owner’s identity, go through the same process of transferring the deed, put the empty house on the market, and pocket the profits.

… Or, the fraudsters steal a house a family is still living in…find a buyer (someone, say, who is satisfied with a few online photos)…and sell the house without the family even knowing. In fact, the rightful owners continue right on paying the mortgage for a house they no longer own.

It can get even more complicated than this, as we learned in a recent case out of Los Angeles that we investigated with the IRS. Last year, a real estate business owner in southeast Los Angeles pled guilty to leading a scam that defrauded more than 100 homeowners and lenders out of some $12 million. She promised to help struggling homeowners pay their mortgages by refinancing their loans. Instead, she and her partners in crime used stolen identities or “straw buyers” (people who are paid for the illegal use of their personal information) to purchase these homes. They then pocketed the money they borrowed but never made any mortgage payments. In the process, the true owners lost the title to their homes and the banks were out the money they had loaned to fake buyers.

So how can prevent your house from getting stolen? Not easily, we’re sorry to say. The best you can do at this point is to stay vigilant. A few suggestions:

If you receive a payment book or information from a mortgage company that’s not yours, whether your name is on the envelope or not, don’t just throw it away. Open it, figure out what it says, and follow up with the company that sent it.

From time to time, it’s also a good idea to check all information pertaining to your house through your county’s deeds office. If you see any paperwork you don’t recognize or any signature that is not yours, look into it.

House-stealing is not too common at this point, but we’re keeping an eye out for any major cases or developing trends. Please contact us or your local police if you think you’ve been victimized.

house_stealing032408.jpg

If you think you’ve been a victim of mortgage fraud, feel free to comment and keep in mind report in appropriate activity to law enforcement.