Tag Archives: Ponzi Scheme

Now That I Think About It…


When we talk about fraud and how it tends to happen, the classic fraud triangle is most commonly used to help us understand how it all happens. The sides of this triangle represent opportunity, pressure and rationalization. In this triangle there is a person, just a regular old person, like you and me. Fraud can happen to anyone and fraudsters are often regular people who find themselves under pressure, faced with the opportunity to perpetrate a fraud and the ability to rationalize it all.

Sometimes this person may face pressures. Maybe she has a family member who gets sick and now they have to deal with massive bills. Maybe the person has a gambling problem. Maybe he wants to live the jet set life that he sees his friends living. Whatever the reason may be, these people feel under a lot of pressure to get their hands on more money than they are currently earning.

Pressure or not, maybe this person sees an opportunity to defraud. Perhaps he can sign checks, AND, he has custody of the checkbook AND he performs the company’s bank reconciliations. He has all this access and responsibility and no one checking his work. So, now he has access to the money and he can doctor the books to cover up his wrongdoing. However it works out, these people see a weakness that they can take advantage of.

The third leg of this triangle is rationalization. This is where a person tells himself that there is a justification for what he is doing. Maybe she tells herself that she really needs the money to deal with this one emergency and this will happen only once. Maybe she then tells herself that this will happen only once and, to boot, she has been a loyal employee for a while so the company really owes her a little leeway for all that she has done. Maybe she tells herself that once she is out of this spot of trouble, she will pay the company back and it will be like it never happened in the first place. Maybe he tells himself that he is underpaid and that what he is doing is merely taking the money that he is rightly owed for all the hard work and time that he puts into the business. The rationalizations that people use are practically endless.

Earlier this year, I listened to the podcast “Ponzi Supernova”, a podcast about Bernie Madoff’s Ponzi scheme and what has happened since. One thing that was fascinating about this series was the conversations that Steve Fishman, journalist and narrator of the series, had with Bernie Madoff, infamous perpetrator of a massive Ponzi scheme. Bernie talked about his childhood and how affected he was by his father’s financial failures. Bernie tells Steve that, after seeing his father lose a lot of money and what it did to the family, Bernie swore he would never let that happen to him (perhaps one could see this as a pressure looming over his life). In the early 1960’s, Bernie Madoff violated market regulations and his clients’ trust by losing their money on risky deals. Instead of letting them know that this had happened, he lied to his clients, borrowed money from his father-in-law and carried on as though he was a brilliant investor. Speaking with Fishman, Madoff made it sound as though, because he did not want to fail as his father had, he took these steps so that he could continue to, at least, appear to be successful and very talented.

Bernie Madoff spoke with Steve Fishman a couple of years after he was caught (though, in some versions of his story, he claims he quit). Bernie Madoff also spoke with Diana Henriques, who wrote the book The Wizard of Lies, which is now an HBO Film by the same title. Their interactions also occurred a couple of years after Madoff’s fraud was discovered. After he had plead guilty to his crime. Yet, over and over again, Madoff seemed to continue to make excuses for his behavior and try to minimize what he did. Even though, when pleading guilty, he claimed that he acted alone, he has since changed his tune and as co-conspirators have testified against him, he then seems to say, “well, except for that person, I acted alone”. So, it seems that even after being caught, he is only sharing as much of the truth as he needs to and, what I have found to be most interesting, is that he appears to continue to rationalize what he did.

In an ideal world, one would imagine that having a fraud exposed and pleading guilty would bring a fraudster to his senses. When we imagine a person committing fraud as a regular person who has fallen into irregular behavior, the hope is that putting an end to this irregular behavior will bring this person to her senses and get them to admit that what they did was without excuses; that, even though they rationalized their actions when they perpetuated the fraud, they now saw the error of their ways and realized that the rationalizations were all without merit. During the hearing when he plead guilty, Madoff read a prepared statement where he apologized to his victims. However, even that apology came with a “but” attached. “While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost.” Yet, listening to Ponzi Supernova, you learn that some clients would demand an adjustment to their statements when they did not receive the return they had been promised. Madoff has also placed blame on his victims, claiming that they knew, or should have known, what they were getting into, that he had warned them and that they did not lose as much as they claimed. And, I have found that it is not just Madoff who does this. The Association of Certified Fraud Examiners talks to people who were convicted of fraud and, in video after video, the perpetrators found ways to hold others responsible for what they did – and this is after they had been found guilty and served their sentences. For instance, one blamed her supervisor for being too trusting, “I don’t blame them but…” she started her sentence. Another stated, “I asked you for help and you said no”, while yet another said “I won’t get caught again”, not “I won’t do it again because I realize it was wrong.

It may be human to not want to admit full responsibility. Perhaps it is too hard for most of us to admit that we have done terrible things. Who really wants to be a monster, blamed for ruining lives, even when those lives are laid out in front for you? And if we are not harshly judging ourselves, even when caught, then can we really adjust our behaviors to do right and get back on the straight and narrow? I don’t know the answers to this but it is something I think about as I perform my work as a forensic accountant. If a person is not able to strip away rationalization and admit that they were just wrong when they perpetuated their fraud, then what are the chances that it won’t be so difficult to do it again?

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It’s In The Mail

ImageIn one of my previous lives, I worked for a company that, among its various business ventures, owned a mailboxes service. I would pop in occasionally to see how this and other nearby businesses were doing and, on one such visit, I found myself in the middle of an adventure. In the morning, shortly after the store opened, a man walked in and flashed his very impressive-looking badge. He explained that a woman was going to come in later in the day to pick up a package and that he needed to be present when this happened. Unsure what was going on, yet thoroughly impressed by the badge, the store’s staff agreed to let the man set himself up behind the counter, in wait for the woman. In no time, the man had settled himself in a chair, opened up a newspaper and blended into the scenery. A short while later, the store’s phone rang and one of the store’s employees answered a call for the woman they were waiting for. She asked if her package had arrived. Upon hearing that it had, she requested that someone bring it out to her car, as she was waiting outside the store. The employee explained that it was the store’s policy that all customers come in to pick up and sign for their own packages. After a short back and forth, he hung up the phone and a few minutes later a small woman in massive sunglasses walked in. The agent paid her no notice and appeared, instead, to be engrossed in a phone conversation with a friend. The woman signed for her package and turned to leave with it. As she did so, the agent whispered urgently into his phone and, suddenly, the mailboxes store turned into a scene straight out of the movies. Men in dark glasses, holding guns, burst in through the door, our agent behind the counter surged forward and, in no time, the woman was under arrest and her box was in their custody. Before he left, the agent explained that this woman was one of a group of people shipping some drug along the lines of PCP. Suffice to say, we were all pretty speechless and the most amazing thing of all? These guys worked for the US Postal Service. Yes, those folks who will let “Neither snow nor rain nor heat…” keep them from delivering your mail will not let crime hang out in their system either.

The United States Postal Inspection Service, founded by Benjamin Franklin, is the primary law enforcement arm of the US Postal Service and one of the oldest federal law enforcement agencies in the United States. Their goal is to protect against those who  “attack our nation’s postal system and misuse it to defraud, endanger, or otherwise threaten the American public.” You would be amazed how many criminals use the postal service as a conduit for perpetuating their crimes (using services such as UPS and FedEx for crimes that cross state lines is also covered by these laws). When Charles Ponzi was arrested for taking people’s money in a giant fraud that came to be known by his last name, the Ponzi Scheme, he was arrested by the US Postal Inspection Service because he had used the mail system to write to his investors, encouraging them to reinvest their funds.  He was charged with and went to jail for mail fraud.

If a person sends you mail in order to ensnare you in some kind of scam, to make an illegal delivery or to otherwise commit a crime, that is mail fraud. Conversely, if someone has scammed you and you end up sending that person money or some other item of value, that too is also considered mail fraud and that person can be prosecuted for it. Since a lot of mail fraud involves financial schemes, the work of financial forensics experts is quite important in the crime fighting work of the US Postal Inspection Service. If, for example, a person were running a pyramid scheme that involves people mailing in funds to invest in the scheme, a forensic accountant would be needed to track and follow the money trail and build a case against the criminal carrying out the scheme. Also, say you received a solicitation to send money to a fake charity and you sent payment in the mail. A forensic CPA’s skills would go a long way in exposing and putting a stop to the bad deeds of the fake charity.

The US Postal Service provides a very important service. It is well known that stealing mail is a federal crime but few realize just how far the US Postal Service and its law enforcement agents go to maintain the integrity of the postal service. Much trust is placed in those blue boxes and this is because of the work of these agents.

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