Many who followed the news probably have heard of how Bernie Madoff, former NASDAQ Chairman has managed to pull off one the largest (latest) financial fraud in history. How could man and woman of high calibres, and institutions armed with sophisticated tools (his investors) can fall for such a basic fraud, using nothing more than a simple “Ponzi” (or Pak Man Telo, in Malaysia’s case)? The answer lies in a simple word: “GREED”. Human beings are gullible to greed. Greed made human beings to close their eyes to simple logic, and makes them to believe and act, in what they “want to believe in”. And that’s the reason why fraud happens all the time, some in small cases, some bigger; it is everywhere, and will continue to happen, until greed is no longer presence. Since, greed is embedded in human being – then fraud will always be there and will continue to happen. Madoff is one of the many that have pulled it off and get caught, and many more are still ongoing out there, and many more will happen in the future. This is the subject of this article.
First – let us just state a few facts. Frauds are everywhere, and happening every day, it is just a question of whether you realize it or not; and a question of size and complexity. And when comes to size, America and the developed countries are the main champions and the leading areas of how this happen. So let me start it close to home, you and me.
Every day in business, you see some propositions by many people. I claim that even the most innocent and well meant business proposals are mired in fraud. How? It is a simple case of misrepresentations. Over ambitious targets, exaggerated claims, and so on is always there. Nobody is honest. Even the “worst case scenario” presented in truth is the most probable scenario; and the “probable scenario” as claimed could be the best case scenario. Exaggerations and superfluous claims are just a daily routine for everyone. By everyone, I really mean everyone, which includes bankers, professionals, lawyers, and off course the businessman themselves.
Even government practice the acts of fraud! How? They never tell the whole truth. They put people on false hopes and sense of security. For example, recently, top Malaysian government officials said that Malaysia won’t be affected by the Global Economic Crisis. How much more fraudulent that statement can be? If people are going to plan and act based on that remarks, then can they sue and claim back from the government because of that remark?
Then, the only question remains is how serious the frauds are? First of all, the bigger the size of the fraud, the more serious it is. The more people and money involved, which put many people at risks, then the more serious it is. And in this case, the US is probably the biggest and the most serious fraudsters off all. We can see how the fund managers are punting the assets and commodities (such as oil price) until it become the burden and pain for many poor people around the world. Off course by now we know the frauds relating to the mortgage markets is so large that it brings the whole banking system down.
Second – why then not all “fraud” as I have described above violate the laws, and why not all the perpetrators go to prison? This is where things got a bit fuzzy: most fraud, if not all, are on a very thin line between being legal and illegal. Off course, the obvious ones such Ponzi scheme, outright cheating, and so on are against the laws and is clear cut criminal case. But what I would like to argue is that what is going on is so rampant, and what is more worrying is that, most of the frauds are “legal” under the laws, and they are well disguised as good intended actions.
A good example of this is the real estate in Dubai. When I read through the Sale & Purchase Agreement, I was aghast. It falls so thinly within outright cheating by the developers. But everyone was happy and accepts it. It was said that this is the standard agreement in Dubai, and since no one complaint, why should anyone? As the market crashes and surely many people will start to cry foul; will their rights be protected under the law? If not, then should anyone go to jail for fraudulently selling properties based on false pretentions?
Similarly, in case of Malaysia: the Securities Commission (“SC”) is in charge of regulating the securities industry, which includes share markets. Under the name of regulator, they approve listing of companies and other market activities. At the end of the day, you have to go through a rigorous process of getting their approvals and it may take months to do so. After listing is done, then when company’s prices started to fall, and failed to make their promises under the prospectus; what does the SC have to say? Nothing – except that if the company purposely falsify the numbers. Otherwise, if it is due to “market forces”, then it is perfectly legal. If that’s the case, why the SC in the first place act as if they are the one that “condoning” the numbers since they can’t be responsible about it. Might as well take no responsibility from the beginning, because in that case they are part of the perpetrator –since as I claimed earlier, no matter how well intended everyone are, the truth is everyone exaggerates their numbers and forecasts. Therefore the fraud here committed by SC is the sense of security and integrity which are actually not true.
These are examples of the less obvious frauds; but how about the obvious ones, people should have recognize it, or isn’t it? It is quite sad that day by day people still fall for it, even though it should be so obvious case of fraud. Why? Again, people tends to believe and make believe in what they want to believe in, when greed preoccupies their mind. Greed is not the disease of only rich people; it is also the disease of people with little means. The lure of getting millions easily is so great that it overcomes any sense of rationality. Especially if the entry price is so small and the rewards are so great, so why not jump into it. This class of fraud, I would call it the “Nigerian Fraud”, following the normal tricks of letters claiming that you can get your hand on millions if you pay few thousands.
So what should we do?
1. “Occam’s Razor Rule” – the simplest explanation is the truth. When people makes elaborate claims, and it seems more complicated than what your simple mind can comprehend; then the simplest explanation will hold true – that it is not true.
2. “Anything that is too good to be true is definitely not true”. Whenever you see something, and then you say to yourself, this can’t be true. Then better stop there: it is not true. Trouble is people then started to find ways to justify in their mind that is not the case (and off course the fraudsters are prepared with eloquent and elaborate stories to make it so). So it is better off to admit that “I am stupid and dumb” that’s why I can’t see any other logic except to say it is not true.
3. “Name droppings should be seriously doubted”. We should doubt are any claims that this is sanctioned by any names, such as authorities, well known names, etc. For examples, this securities are approved by the SC, or these Bank Guarantees are issued by top name banks in the world; A good example, recently in Hong Kong billions were lost (even by billionaires) when they bought “structured products” called “accumulator” from Lehman Brothers. It has all the names in there: the regulator, the Bank, and so on (this is a case of fraud with “good intentions” – but how about those bogus Bank Guarantees?
4. “In case of numbers: the back of envelope calculations is as good as any complicated analysis”. If you can’t perform the calculations using the “back of the envelope” then probably, you will never be able to do it at all. In another word, if the simple logic cannot hold, then anything else is as good as “humbug” (i.e. bullshit). The worse thing is that the humbug is performed by good named firm and cost a lot of money.
5. “During speculative frenzy; all sort of fraud can and will happen”. When everyone is making money, and a lot of it, then be sure that there are so many frauds going on. You will only know it when the market crashes that you are caught in it. So be careful when things are going too good and too well, there will be many fraudsters present.
6. “Don’t rely on the government or the laws – they can’t protect you from fraud”. The believe that governments are there to protect you and to defend you makes many people fall into the trap. This sense of security is what caused people to lower down their guard, and becomes easy victims. That’s the reason why I said that the Governments are the promoters of fraud themselves, unknowingly.
I can list up with many other anecdotal rules, but I don’t want to bore readers. Hope by now you get some of the ideas.
Now let me close the article by commenting about Madoff, why he is special? He passed almost all the rules that I have mentioned above with flying colors. So you can’t detect him as fraudster. In fact he performs the simplest method of fraud in the most complicated environment and among the most sophisticated people, and he managed to pull it by a very large numbers indeed. And you know what? If the people have performed him the first two tests, he should have failed. But why didn’t they do it? Because they trust him and believe in him blindly – because they are greedy and arrogant. And that’s what makes it unique.
Furthermore, I would like to comment that most frauds are in the US, and they are well disguised in many intelligent forms. Over the last decade we have seen the WorldCom debacle, the Enron debacle, and so on. The question is why the US is such a fertile breeding ground for fraud? Despite that they are the most advance nation of the world? This is where the last rule should by applied:
7. “Greed – is the mother of all fraud”. Therefore, the only and the most useful rule of all are to have self control over greed; and this is the hardest act of all. If you can detect your own greed, then you can detect any fraud. If you are greedy then any fraud will be feasible.
With that rule, I hope all of us can learn the lessons.