Madoff is dead, but his lessons should continue
It was the spring of 2009, and I was in Bernie Madoff’s personal office in the “Lipstick Building” on Third Avenue in New York City. A huge screw sculpture was in sight – appropriate, as was the case with the mastermind of the biggest financial fraud in American history. No one has ever really been able to explain why Madoff had so openly mounted this provocative symbol in his office. I was there as a law enforcement attorney on the United States Securities and Exchange Commission team, which meticulously went through its decades of forged documents. But how exactly did Madoff implement his fraud – and what lessons should we learn today?
Madoff has cultivated an aura of exclusivity. He controlled those around him and enlisted them in turn as evangelists for his fraud. He lured those outside his cheating circle with lavish rewards – but treated badly the staff he lured into the scheme.
Madoff has often deployed the velvet rope technique prevalent in nightclubs: keep a big queue outside while the club sits empty. Perversely, he rejected high profile potential investors in order to entice others to invest. Madoff’s plan lasted as long as it did because he selected his victims carefully. Sophisticated investors have been rejected in favor of charities that by their statutes could not withdraw the principal. Countless foundations like the foundation of Steven Spielberg have been ripped off. the New York Mets always pay the price for their disastrous investment in Madoff.
Fair as Elizabeth Holmes did with Theranos, Madoff too elected officials perpetuate the myth of power and legitimacy. Politicians unwittingly engage in “stick and smile” and these photos end up on the desks of schemers across the country as proof of their exalted status.
Madoff even maneuvered himself to become the chairman of NASDAQ. I will never forget in July 2001 when – as an SEC summer intern – I stood in Madoff’s gleaming brokerage offices as he and his sons smugly showed us their latest trading systems and us. showed around their supposedly model operation. One can only imagine the manic nature of the man who would invite the SEC to visit his ongoing crime scene in an effort to intimidate the government never to ask too many questions.
Did Madoff start with criminal intent? Maybe not. But not all fraud begins with an intention to defraud. They often start with small transgressions such as a forged bank loan document or minor accounting manipulation. It snowballs as the fraudster stoically maintains the masquerade while scrambling privately to cover the losses. And it is the facilitators who look away who perpetuate the pattern.
Charity is also a favorite weapon of fraudsters because it reinforces their facade of benevolence. After all, if someone is donating a million dollars to charity, they have to be above the bar. Charities also allow fraudsters to run around in circles and gain the trust of people who would normally be suspicious of such figures.
Many investors have long suspected that Madoff’s consistently outsized returns were the result of some bickering. But they thought he was cheating on their behalf, possibly through insider trading.
If the returns are too good to be true, they are too good to be true.
In 2009, a Federal District judge handed down a 150-year sentence, and after encountering her disappearance in a jail cell, Madoff will face the ultimate judge, who will deliver his verdict on this notorious financial predator.
George G. Demos is a partner at DLA Piper LLP and an assistant professor at UC Davis Law School where he teaches corporate and white collar crime.