30 Jun 2009 |
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BERNARD MADOFF: THE MAN WHO MADE OFF WITH INVESTORS’ BILLIONS. On Monday, 29 June 2009, Bernard Madoff was sentenced to 150 years in prison for securities fraud, investment advisor fraud, mail fraud, wire fraud, money laundering, false statements, perjury, making false filings with the Securities and Exchange Commission (SEC), and theft from employee benefit fraud. The Madoff fraud empire is believed to have squandered over $50 billion of investors’ funds. His meteoric rise and fall is reminiscent of Charles Ponzi’s mail fraud in the 1920s. I will attempt to look at Bernard Madoff from a management perspective. Reports from his victims showed that he played on people’s intelligence by using the instrumentality of credibility to defraud of them of billions of dollars. Credibility is a strong determinant in business dealings. We only want to deal with credible individuals in business and life. In the 1998 movie ‘Enemy of the State’, the corrupt FBI director, a role played by Jon Voight while trying to track down a Georgetown labour lawyer, Robert Dean (Will Smith) said:…you know what I have seen?, I have seen killers walk free because the witness was an alcoholic, I have seen sex offenders that couldn’t be touched because the victim was a call girl. Credibility... is the only currency that means anything on this kind of playing field. Bernard Madoff, the 71 year old conman founded Bernard L. Madoff Investment Securities in 1960. Over the next four decades, he established himself as a prominent member of the influential Jewish community in New York. A major contributor to political parties and community projects, he later served as a non executive chairman of the NASDAQ stock exchange. This former American financier was regarded as the gold standard of Wall Street, a good family man and the last person on Wall Street to be suspected of fraudulent dealings. In fact, his firm accounted for 10 percent of the trades on the New York Stock Exchange (NYSE). Given the nature of his precedence in the financial markets, he was able to con thousands of people to part away with their hard earned dollars. Madoff never promised outlandish returns on investment, just a steady, consistent profit. He was even regarded as a business man that encouraged his clients to invest a little amount with him, check the returns for a while and then invest more. His genuine persuasive mien belied the monster beneath the façade. An interesting twist to the Madoff investment scam was that, most of his investors were not greedy persons looking for a money doubler. They were not looking for spectacular returns, just safe returns. The spread of his tentacles was global. His clientele list included the wealthy American Jewish community, friends, pension schemes and charity funds. From Palm Beach, Florida to California, from London to Luxembourg, the trail of the Madoff scandal leaves a sour taste. In February 2009, Bill Foxton, a retired British soldier who had all his retirement funds in Madoff’s firm killed himself. He swindled both the high and low. Professor Stephen Greenspan, the author of ‘Annals of Gullibility’, a book about how people fall for scams also lost close to $40,000. This is considered inconsequential when compared with billionaire investors such as Steven Speilberg. Norma Hill, a victim called Madoff “an equal opportunity thief”. It is believed Madoff could not have single-handedly orchestrated the fraud given the enormity of the paper work involved. Since he has admitted guilt of all the charges pressed against him, the complicity of his cohorts remains a hazy affair for the FBI to tackle. Getting to the brass tacks, the purpose of this piece is to look at credibility in business. In 2005 while trying to set up a consultancy firm, Leke Alder of Alder Consulting gave me a 12 point agenda on becoming an entrepreneur. A salient point in his advice was that credibility is the most important thing in business. He gave the analogy of an aspiring business man who needs to convince people to do business with him. He has to make a very strong impression before anyone would trade with him. Alder calls this person a ‘credibility deficient entrepreneur’. Alder then juxtaposed this with a well known professional in an industry who has experience and the contacts. If this experienced fellow decides to branch into his line of business, he does not need to impress or convince anyone about his credentials. This category of individuals Alder refers to as ‘credibility enabled entrepreneur’. In my years of reading and studying business and management, I had never come across such a poignant, incisive and succinct advice for budding entrepreneurs. Musing over the Bernard Madoff saga, I realised the major ingredient of his deception was based on his credibility as a Wall Street veteran. It was because of his credibility he could defraud chartered accountants, shrewd business men, astute film makers, the list is endless. He was so entrenched in the system that the Security and Exchange Commission (SEC) did not bother to investigate him when charges of fraud were repeatedly levelled against him by Harry Markopolos, a fund manager. The Madoff episode is a lesson for fund managers and the investing public to carry out due diligence before throwing their money into investments of questionable character. The sad reality is that a lot of fund managers in New York knew something was wrong given the steady returns Madoff promised irrespective of market fluctuations, but they could not blow the whistle given the exalted pedestal Madoff was placed on the Wall Street. It reminds me of the ‘wonder bank’ scandal in Nigeria; my friends advised me to come and invest in what promises to yield 50 percent returns. This was in late 2007, the oil price was steadily rising, the economic recession was in the offing, and retail sales were down in the United Kingdom. Although, my area of specialisation is in management, I was asking my friends where the fund managers were investing the money that guaranteed such ‘incredible’ returns. Could it be the US, Britain or in the drug cartels of Mexico? Anyway, that is another story for another day. Despite the prowling scammers lurking in dark for our money, I believe an in-depth understanding of financial matters and a due diligence on investments would safe guard us from parting with our dough. There are no guaranties that we won’t fall to these scams, but at least we can reduce the probability of doing so.
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