Chapter 2:
Portrait of a Fraudster
Con artists come from all walks of life. Some grew up poor, bent on achieving wealth at any cost. Others, like Marc Dreier, came from affluent families and enjoyed every advantage. Bernard Madoff rose from a modest background, but he was already a millionaire by the time he started his Ponzi scheme.
What drives people to jeopardize their reputations and livelihoods? Why do they risk branding as a criminal, and potentially conviction to serve jail time? Surprisingly, money is often not the core motivator behind the crime, although it may have provided the initial attraction. Often the driving force is ego, or a need to feel important.
Regardless of how they start, most fraudsters seek the adulation that comes with prestige and power. They often enjoy the thrill of deceit, knowing they can manipulate and cheat anyone out of anything. Power and recognition fuel their egos, and money is simply the vehicle to get there.
Financial Psychopaths
While circumstances might differ, most Ponzi schemers share some common personality traits. Many are sociopaths or psychopaths. They almost have to be, to carry out their crimes without conscience. How else could they act with the full knowledge of the financial ruin they bring upon their unsuspecting victims? They connive and steal from the elderly or unsophisticated without an ounce of guilt or remorse, and could not care less about the trail of destruction they leave. They are only concerned with their own needs.
Many say they intended to pay the money back. They claim a temporary setback made them “borrow” the money. It is an all-too convenient excuse. When you delve into the details you find that in most cases, they have perpetuated their frauds for years, even decades.
Most fraudsters are so confident they won’t get caught that they often steal from their own family members or friends. Their grandiose sense of self-worth, arrogance and feeling of superiority over others is truly staggering.
The only good thing about their pretentious attitude is that it often results in their downfall. Arrogance blinds them to the flaws in their schemes, and is often why they are eventually exposed.
Of course, not all Ponzi schemers are psychopaths, nor is every psychopath hatching a Ponzi scheme. However, as we study the personalities behind the biggest Ponzi schemes in history, you will notice some striking similarities. Research into the minds of Ponzi schemers has shown a truly astonishing number of them exhibit psychopathic traits.
Dr. Robert D. Hare1, the developer of the Hare Psychology Checklist (PCL-R), includes the following as key characteristics of a psychopath:
This is only a portion of Hare’s PCL-R checklist, but you get the picture. All of the above are perfect traits for a Ponzi schemer. Even qualified clinicians find it difficult to confirm a psychopath diagnosis. Ticking the boxes is not all that is involved in identifying a psychopath. However, it raises a fundamental question. Why would we ever trust our money to people with these characteristics?
Scott Rothstein, disbarred Florida lawyer and perpetrator of a $1.4 billion Ponzi scheme, certainly displayed most of the characteristics. His extravagant purchases included his million-dollar watch collection, exotic cars, and luxury real estate. But he didn’t stop there. His freewheeling spending also included over-the-top contributions to political parties to curry favor, and he also made charitable donations to fuel his need for name recognition and publicity. Even after he was caught red-handed and admitted guilt, he briefly escaped to Morocco. He had secretly squirreled away money there, after having the presence of mind to first confirm the absence of an extradition treaty.
Bernie Madoff showed no remorse after committing the largest Ponzi fraud in history. The former NASDAQ chairman was already a billionaire, so he didn’t need the money. He was fabulously wealthy, moved in exclusive circles, and was so well-regarded that even seasoned hedge fund managers begged to invest their money with him. Madoff also had all the trappings of wealth: a yacht in the French Riviera, a couple of jets at his disposal, and just like Rothstein, an expensive watch collection.
More aloof than Rothstein, Madoff nevertheless ingratiated himself with important people, like Wall Street regulators. Such networking further cultivated his image as a Wall Street elder statesman. Like Rothstein, he had a grandiose sense of ego and superiority, and a complete lack of empathy for his victims. Even after admitting his guilt, he seemed more concerned about his reputation than the lives he had ruined. A fraudster’s view of the world always focuses on the fraudster, not you.
Can Madoff, Rothstein, and other fraudsters be considered psychopaths? Only their psychologists know for sure. Many never started out with the express intention to defraud others. Given the right motivations and circumstances, almost anyone can commit fraud. It has less to do with upbringing, social status, or ambition than you might think. As we have already seen, money is often a secondary factor.
Aside from a fraudster’s psyche, there are some outward signs you can look for. Many con artists are overly concerned about image. They may boast about their connections or need to feel important. Many will donate large sums of other people’s money to charity, for the express purpose of getting a hospital wing or a school named after them.
They often own expensive cars, yachts and homes, or flashy jewelry. Only the best is good enough for them in terms of travel, clothes and the other trappings of wealth. Image is paramount. They want to appear ultra-rich and successful, perhaps as further proof that you should invest with them.
Some like to rub shoulders with elite athletes, celebrities, and politicians. Nevin Shapiro spent millions as a football booster, just so he could hang out with University of Miami basketball players and NBA stars. Once he faced jail time for his Ponzi scheme, he lashed out at the University of Miami sports program and accused athletes of violating the rules by accepting his gifts. If he was going down, he decided to take others with him, even those not connected to his Ponzi scheme. His ego demanded it.
To Catch a Thief
Aside from psychology, people reveal their characters most clearly by their everyday actions. Look at the person behind the investment, and spend a few minutes on a background check. Much of the information below can be found online, in public records or media reports.
While a background check does not indicate whether this person is running a Ponzi scheme, it will reveal plenty about the integrity and character of the person promoting the investment.
Someone exhibiting some or all of the following traits may not have much of a conscience. At best, they are likely dishonest in at least some personal or business dealings. Why assume they will be honest or have integrity in their business dealings with you?
Almost everyone gets speeding tickets from time to time. But people repeatedly ticketed show a blatant disregard for laws and regulations. These types of people often decide the rules apply to other people and not to them. Very often, they do not pay the fines, either. Their sidestepping of rules can apply in other areas too, like securities regulations. Avoid investing with someone who skirts the law.
Anyone engaged in deception of any kind shows tendencies toward self-gratification and an alarming lack of ethics and morals.
Most fraudsters have a prior history of business disputes, litigation, and even prior fraud charges. Several or more former business associates may also refuse to engage in business deals with the person, or even to have contact with them. They may be unwilling to say why, since the fraudster often uses offense as a defense. He may threaten litigation. This sort of thing is not hard to uncover with all the information available online today.
Disciplinary action is usually preceded by repeated warnings. Most people are disciplined only after all else fails.
It is surprising how many people have a history of repeated criminal convictions for fraud, yet they are able to repeat similar or even identical crimes on unsuspecting victims.
The Fraud Triangle
While personality and psychology play a major role in a fraudster’s actions, there are other equally important considerations. Donald R. Cressey was a noted criminologist, sociologist, and penologist, and was widely considered a pioneer in the study of white-collar crime. In the 1950s, he interviewed more than a hundred inmates convicted of embezzlement to understand their behavior and motivations. He identified three common traits, which when present together could lead to fraudulent behavior. This combination is commonly referred to as Cressey’s Fraud Triangle:
Cressey’s fraud triangle related more to embezzling employees, but the principles apply to any situation where the opportunity for fraud is present. With the right access and knowledge, all that is missing is rationalization, or an excuse. Some fraudsters don’t expressly plan to start a Ponzi scheme. After a few bad investments or cash flow problems, they realize they are unable to escape the financial mess they have created. Rather than confess their mistakes, they hide their losses and rationalize their deception by telling themselves they are temporarily borrowing the funds. When things get better, they will repay the money and no one will be the wiser. Of course, repayment never happens, often because it isn’t possible. Once they are no longer able to attract new investor money to pay off earlier investors, they are exposed.
Regardless of how the fraud and deception began, these fraudsters are hardly trustworthy characters. Further, their claims that their scheme started out legitimately might be self-serving. When the scheme is eventually unwound, the fraud inception date becomes critically important, since it determines the division of any remaining funds amongst the victims. Investor returns paid prior to the fraud start date are considered legitimate and belong to the investors receiving them. However, profits received after the fraud starts do not belong to recipients, since they were paid from the funds of earlier investors.
Net winners under the scheme must surrender their so-called “earnings”. Recovered monies are re-apportioned amongst the net winners and net losers. This ensures everyone shares in the loss, since the earnings were not real in the first place. It is similar to confiscating stolen goods from those who purchased them. The stolen items get returned to the rightful owners, and the unwitting buyer is left out of pocket.
Bernard Madoff claimed that his Ponzi scheme started from a legitimate investment fund. That may be, except he has a vested interest in choosing a later start date for the fraud. The later date benefits his earlier investors (who also happened to be family and former friends).
Any claim of a Ponzi being unintentional should be taken with a grain of salt. The difference between a premeditated and an unintentional Ponzi schemer is simply degree of rationalization. Somewhere along the timeline they are all pre-meditated, since they are committed with the express intention of stealing from others.
The Accountant’s Handbook of Fraud and Commercial Crime also summarizes the essential ingredients for a fraud in the GONE theory:
Greed
Opportunity
Need
Expectation (of not being caught)
While greed drives the desire for money and riches, an opportunity must be present. This serves as a trigger for the person to put his wants into action. Most people with a conscience will still not commit fraud, since the risk of exposure, reputational damage, and imprisonment far outweigh any potential reward.
A greater need must drive an individual to crime, whether it be ego, a drug addiction, or a need to cover up previous investment losses. Ego is the overwhelming core need for most Ponzi schemers. Though they need to cover up financial losses, these losses only occur once their schemes are underway. Very few Ponzi schemers are substance abusers, simply because they are too busy doctoring client statements and financial records.
The last barrier to committing fraud—fear of being caught—is removed if the perpetrator believes he can conceal the fraud. Most fraudsters studied in this book restricted financial record access to only themselves or a trusted few. They also kept their offices locked and were much more “hands-on” than typical executives.
Given the right circumstances, anyone can hatch a Ponzi scheme.
1 The Hare Psychopathy Checklist-Revised by Robert D. Hare, 1991. Multi-Health Systems, 908 Niagara Falls Blvd, North Tonawanda, New York, USA, 14120-2060