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Lessons According to Saint Bernard: The Madoff Case Laid Bare
Even if Bernard Madoff does manage to complete his 150-year sentence, due to exceptional family genes and a nutritious prison diet, he’s already earned his place in history. And that’s not just because he’s laid down the ground rules for becoming a bold and brazen con man. Rather, it’s due to key lessons he’s taught us about weaknesses in the regulatory system that were just waiting to be exploited. Those same shortcomings exist in businesses too, big and small, around the globe. The message is, if you think something might be awry in your firm get onto the appropriate professionals without delay. Make sure they’re experienced and able to handle state-of-the-art forensic investigation because that’s what you’ll need.
The full 477-page report of the US Securities and Exchange Commission’s inspector-general, recently released, makes for heavy reading. It’s scathing, and one thing leaps out from its meticulous detail: the number of opportunities to catch Madoff that were missed, and why.
Even when the SEC’s own officers remained extremely worried about his integrity, the Commission’s enforcement division closed down its investigation into Madoff’s business, claiming it was a “fishing expedition”. That was less than a year before Madoff confessed to running one of history’s biggest ever Ponzi schemes. The inspector-general concluded that the breakdown on the SEC’s part was not the result of the “misconduct of a particular individual or individuals, and found no inappropriate influence from senior-level officials”. At least that’s comforting. What isn’t, is his conclusion that the Commission failed systematically during its inquiry into Madoff’s 17-year long scheme, missing the significance of eight separate complaints. Each of these offered an opportunity to expose the fraud.
Why nothing was uncovered was because SEC investigators were too inexperienced, did not concentrate sufficiently on crucial dimensions of the case and were too narrowly focused. Poor communications and turf battles inside the Commission were also a major problem, precluding a “big picture” approach. Indeed, various divisions of the SEC were frequently going off in different directions. This actually played into Madoff’s hands because he was able to tell one examination team that the information it sought had already been provided by him to another. He simply rolled on to recruit more investors. As the inspector-general highlights, Madoff “proactively informed potential investors that the SEC had examined his operations” and given him a clean bill of health.
As ever in these cases, there were good officers around who could sniff out reality in behind the lies, but no one wanted to listen to them. Instead, teams of sleuths roamed around, independently following false trails.
The report examines minutely the Commission’s actions as far back as 1992, when it looked into the operations of a pair of Florida accountants who were channelling funds to Madoff. The result was action being taken against the accountants but not against the culprit himself. A public statement that the SEC made at the time – to the effect that there was nothing to indicate fraud – actually influenced investors to trust their money with Madoff.
Saint Bernard’s lesson is that if you suspect anything underhand going on in your business – especially if it’s a large, multi-divisional operation – contact a team of professionals straight away. If they’re independent and experienced, they’ll be able to X-Ray your company in a short space of time and tell you what you need to know. Computer forensics is nowadays a prime skill used in carrying out such investigations. Whatever the experts find, they’ll be able to help you keep monitoring your affairs into the future.
McKinsey Partner’s Arrest Spotlights White-Collar Crime : : Intellisec Articles says:
[...] case involving a hedge fund. And, of course, another win still fresh in everyone’s memory is the Bernard Madoff [...]
November 2nd, 2009 at 1:15 pm