Professional Documents
Culture Documents
Era,
Fraud Schemes
Part 1
The Madoff Era:
Ponzi Schemes
S & The New Wave off Fraud
The Madoff Case
• Bernard Madoff Professional Career :
– Financial Services, Investment Management
– Former Chairman of NASDAQ Stock Exchange
– Founded Wall Street Firm Bernard L.
L Madoff Investment
Securities (BMIS)
– Philanthropist
The Madoff Case
• Red Flags :
–EExpertt warnings
i b other
by th marketk t analysts
l t ((e.g. The
Th
World’s Largest Hedge Fund is a Fraud by Harry
Markopolos)
– "Bernie Madoff is running the world's largest
unregistered hedge fund...” –Harry Markopolos
– Unusual
U lb
business
i practices
ti
– Reputation of the auditor
Madoff: A Ponzi Scheme
• Definition :
– A Ponzi scheme is an investment fraud wherein the
operator promises high financial returns or dividends
that are not available through traditional investments
investments.
Instead of investing victims' funds, the operator pays
"dividends" to initial investors using the principle
amountst "invested"
"i t d" b by subsequent
b t iinvestors.
t
Source: fbi.gov
Ponzi Schemes
• History :
– Ponzi schemes are named for Charles Ponzi, who
deceived thousands of New England residents into
investing in postage stamps back in the 1920s 1920s. Ponzi
thought he could take advantage of differences
between U.S. and foreign currencies used to buy and
sellll iinternational
t ti l mailil coupons. P
Ponzii ttold
ld iinvestors
t
that he could provide a 40-50% return in just 90 days
comparedp to the interest rates for bank savings g
accounts, stocks and bonds.
Ponzi Schemes
• How to protect against a Ponzi Scheme:
– Be skeptical about investments
– Be skeptical about reputations
– Diversification of investments
– Due diligence
– Avoid “deferred”
deferred payment plans
Ponzi Schemes on the Internet
• Proliferation of advertisement videos for
business opportunities structured as Ponzi
schemes (i.e. YouTube.com).
• The Better Business Bureau identified nearly
23,000 videos.
– promoting
ti "cash
" h gifting"
ifti " or ""gifting
ifti club"
l b" programs
– nearly 60 million views
– fees ranging from $150 to $5$5,000
000
Lessons Learned ((or Not))
from the Madoff Case
• What happened
- Scheme based on trust, reputation, fueled by lack
of diligence and regulatory failure
• What failed
- Common sense, individual diligence and
skepticism,
k ti i regulatory
l t and
d iinvestigative
ti ti b body
d
oversight and follow-up
• What can we learn
- Fraud won’t go away, diligence and attention to
red-flags is key
Technology and Fraud:
Th N
The New WWave
• Many fraud schemes have been the same for centuries but
new technology has provided those seeking to commit fraud
with more tools and options:
– Greater reach to go after more victims
• Email hoaxes that go out to millions of people
• Websites that collect data from unsuspecting victims
– Greater anonymity
• Email and the web can provide a cloak of anonymity for those that
commit fraud
– Increased complexity (or at least apparent complexity)
• Many people aren’t technologically savvy, and those that commit
fraud prey upon this fact
Current Economic Environment
Pressure / Incentive
Rationalization Opportunity
pp y
Current Economic Environment
2008 Occupational Frauds by Category ‐ Median Loss
Fraudulent
Statements $2,000,000
Type of Fraud
Corruption $375,000
Asset
Misappropriation
$150,000
Median Loss
Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 959 cases of occupational fraud).
Psychology
y gy of Investment Scams
• 2006 Consumer Fraud Research Group study funded by
the FINRA Investor Education Foundation revealed the
following common tactics used by fraudsters as part of their
approach:
- The "Phantom Riches" Tactic - dangling the prospect of wealth,
ealth
enticing you with something you want but can't have. “These gas
wells are guaranteed to produce $6,800 a month in income.”
- The "Source Credibility" Tactic - trying to build credibility by
claiming to be with a reputable firm or to have a special
credential or experience. “Believe me, as a senior vice president
of XYZ Firm, I would never sell an investment that doesn't
produce.”
Source: http://www.finra.org/Investors/ProtectYourself/
Psychology
y gy of Investment Scams
•The "Social Consensus" Tactic—leading you to believe
that other savvy investors have already invested. "This is
how ___ got his start. I know it's a lot of money, but I'm
in—and so is my mom and half her church—and it's
worth every dime.”
20.0%
By Accident 22.8%
19.4%
Type of Detection
Internal Audit 18.6%
18 6%
All Cases
23.3% $1,000,000+
Internal Controls 16.7%
9 1%
9.1%
External Audit 15.8%
3.2%
Notified by Police 6.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Percent of Cases
Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 237 cases of occupational fraud
involving $1 million or more).
Characteristics of Fraud (cont.)
• Gambling
• Bad Investments
• Impatience for the Good Life = High Debt
• Drug and/or Alcohol Abuse
• Family Debt
• Extramarital Affairs
• Need to Meet Productivity Targets
Opportunity:
pp y An Opportunity
pp y to Commit Fraud Can Be
Real or Perceived. Those Who Think They
Will Get Caught Rarely Commit Fraud.