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Madoff is dead, but his lessons should live on

Madoff is dead, but his lessons should live on
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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. Prominently displayed was an enormous sculpture of a screw — appropriate, as it was for the mastermind of the largest financial fraud in American history. No one ever quite could explain why Madoff had so blatantly mounted this defiant symbol in his office. I was there as an enforcement attorney on the U.S. Securities and Exchange Commission’s team that was meticulously combing through his decades of falsified records. But how exactly did Madoff implement his fraud — and what lessons should we learn today?

Madoff cultivated an aura of exclusivity. He controlled those around him and in turn enlisted them as the evangelists for his fraud. He enticed those outside his ring of fraud with lavish rewards — but treated poorly the staff whom he had lured into the scheme.

Madoff often deployed the velvet rope technique prevalent at nightclubs: Keep a large line waiting outside while the club remains empty. Perversely, he rejected high profile potential investors in order to induce others to invest. Madoff’s scheme lasted as long as it did because he selected his victims carefully. Sophisticated investors were rejected in favor of charities that by their bylaws could not withdraw the principal. Countless foundations such as Steven Spielberg’s foundation were scammed. The New York Mets are still paying the price for their disastrous Madoff investment.

Just as Elizabeth Holmes did with Theranos, Madoff also cultivated elected officials to perpetuate the myth of power and legitimacy. Politicians unwittingly engage in “grip and grins” and those photos end up on the desks of schemers nationwide as evidence 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 pointed to their latest trading systems and gave us a tour of their purportedly model operation. One can only imagine the maniacal nature of the man who would invite the SEC to tour his ongoing crime scene in an effort to intimidate the government from ever asking too many questions.

Did Madoff start out with criminal intent? Perhaps not. But not all frauds begin with an intent to defraud. They often begin with small transgressions such as a falsified bank loan document, or a minor accounting manipulation. This then snowballs as the fraudster stoically keeps up the charade while privately scrambling to cover the losses. And it is the enablers who look the other way who perpetuate the scheme.

Charity is also a preferred weapon of fraudsters because it bolsters their façade of benevolence. After all, if someone donates a million dollars to charity, they must be aboveboard. Charities also enable fraudsters to move in circles and gain the confidence of people who would ordinarily be suspicious of such characters.  

Many investors long suspected that Madoff’s consistently outsized returns were the result of some chicanery. But they believed he was cheating on their behalf, perhaps by 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 sentence of 150 years, and after meeting his demise in a jail cell, Madoff will face the Ultimate Judge, who will render His verdict on this notorious financial predator.

George G. Demos is a partner at DLA Piper LLP and an Adjunct Professor at UC Davis School of Law where he teaches Corporate & White Collar Crime.