Thursday, 16 April 2015

Too Good to Be True: The Rise and Fall of Bernie Madoff - Erin Arvedlund

Title: Too Good to Be True: The Rise and Fall of Bernie Madoff
Author: Erin Arvedlund
eISBN: 978-1-101-13778-9
Publisher: Portfolio
It may seem odd to review this book when a vast majority within this blog are of a military nature; however, the fundamental reason why I started reviewing books was to provide opportunities to learn from the successes and failures of others and to promote discussion, reflection and learning. The international disaster that was Madoff’s Ponzi scheme provides ample fodder to meet that baseline criteria.

Madoff was convicted in 2009 and sentenced to 150 years in prison for running what was called a ‘Ponzi scheme’ with an estimated value of 60 billion dollars (although exact figures are elusive). A ponzi scheme is when an individual takes money for the purposes of investing and provides  returns on that alleged investment but, in actual fact, never invests the money at all but instead uses new investors to offset the returns for older investors. The scheme collapses when the inflow of capital is not enough to cover the required outflow (especially when investors request a return of their initial capital). It is estimated that Madoff was able to run his scheme for upwards of twenty years or more before it failed in 2008. 

What is of interest to me in this case, is not what Madoff did but how he managed to convince people to disregard all of the warning signs (for indeed there were many) and continue to not only invest but leave their money with him. It is a fascinating study in human psychology that he was able to do this, and from a leadership perspective, a lesson that needs to be reinforced. Madoff was able to get to a point where, regardless of the evidence, people refused to acknowledge that there was a possibility of him being anything but above board. 

How was he able to do this: 

1.      Consistency in moderation: he promised reasonable returns and delivered without fail month after month regardless of the volatility of the market;
2.      He kept a low profile and conducted himself in a conservative manner;
3.      Perceived exclusivity of his clientele;
4.      He developed a very close working relationship with the SEC (Securities Exchange Commission) and ensured his goals were in tandem with theirs as much as possible;
5.      He ensured investors access to their money quickly and without question (usually in 30 days or less);
6.      Made himself very accessible to (certain aspects of) the media;
7.      He maintained an tight air of secrecy around his actual investment processes;
8.      He took advantage of investment traditions within communities (such as the Jewish);
9.      He was very charming and personable (very high EQ – Emotional Quotient) and made people at ease;
10.  He was not pushy or demanding;
11.  He established a number of ‘feeder’ funds that transferred money to his fund exclusively and provided a line of separation between him and the client; and
12.  He maintained a legitimate fund business that acted to distract attention from the ‘personal’ investment fund that he maintained. 

All of these activities (and the list is not exhaustive) were carefully cultivated to guide his investing public and the SEC into a sense of complacency and ease where they would not question his methods, only accept his results. 

People cast aside due diligence and common sense and adopted a herd mentality through: 

1.      A sense of being in a special/exclusive group that people wanted to belong to;
2.      Creating such a track record that it became anathema to question him;
3.      Being lazy and assuming that others had done the due diligence;
4.      Greed;
5.      Intellectual intimidation – not understanding what he was doing and not questioning it; and
6.      His reassuring personality and close relationship with such organizations as the SEC.
It is easy to fall into line with what ‘everyone’ is doing and it takes a great deal of personal courage to go against that tide; however, it is critical to “trust but verify” and to follow the adage of Frederick II of Prussia when he stated to a Major who had shown poor judgement: “I made you an officer to know when not to obey orders”. The book itself is a decent rendition of the events surrounding the Madoff case. It is, after all, a fairly simple story despite the smoke and mirrors. The author tends to reiterate the same information throughout the narrative but it is a reasonable read and an excellent lesson to be learned for all.

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