Filed under: Fraud Disputes & Litigation
By Pete Miller, CPA|CFE, and Mike Nurse, CPA|CFE|CGMA
Has cheating and fraud always been a part of human history? According to Andrew Beattie in his article “The Pioneers of Financial Fraud,” evidence of fraud stretches all the way back to 300 B.C. when a Greek merchant named Hegestratos orchestrated a loan fraud that ultimately ended in his demise. In modern times, stories of financial fraud and corporate scandals have become ubiquitous in daily news feeds, providing a critical call to action for anyone involved in business.
For National Fraud Awareness week, we are highlighting five of the largest accounting scandals in U.S. history. Each day, we will bring you a short description of a prolific fraud in the hopes that raised awareness will ultimately help us to understand and mitigate fraud risk. In doing so, we can help to ensure ethical and sound business practices, which will benefit society as a whole.
“Look, these banks and these funds had to know there were problems. I wouldn’t give them any facts, like how much volume I was doing. I was not willing to have them come up and do the due diligence that they wanted. I absolutely refused to do it. I said, ‘you don’t like it, take your money out,’ which of course they never did.” – Bernie Madoff
Nothing typifies a Ponzi scheme quite like the Bernie Madoff scandal. A Ponzi scheme, which is named after Italian businessman and con artist Charles Ponzi (1882-1949), essentially involves paying quick returns to the first investors using money invested by later investors. Also known as a Pyramid Scheme, it essentially “robs Peter to pay Paul” until eventually there is not enough cash coming in to pay back investors and the whole thing falls apart
In Bernie Madoff’s case, the investments he solicited were through his Wall Street investment firm called Bernard L. Madoff Investment Securities, LLC. Overall, Madoff tricked investors out of $64.8 billion dollars during the years he was in business. There were thousands of investors, including well-known celebrities Steven Spielberg, Kevin Bacon and Larry King, to name a few.
Madoff was reported to the SEC by his sons, after he admitted his wrongdoings to them. He is now serving time in a medium security correctional facility in North Carolina and is slated for release in 2139. Additionally, he was ordered to pay $170 billion in restitution.
For those victims who have submitted claims, the trustee liquidating Madoff’s firm has been able to recoup roughly 56% of the $17.5 billion in principle as of 2014.
Takeaway: With Ponzi schemes, the tell-tale sign is that it is too good to be true. If you feel like something is too good to be true, it probably is. When the rest of the world is losing 10% or at best breaking even and you are earning 12%, something isn’t right. We often tell our clients that they need to create dashboards to capture operational data and then use that data in analyzing their financial performance. If something funny is going on, the operational data and the financial data will likely not coincide. In this case, the same concept is true; it is just played out in a macro setting. The economy (e.g., financial performance) was performing very poorly, but the Madoff funds were seemingly outperforming the entire market by several multiples (e.g. ,operational performance). This was the equivalent of selling every unit you have in the warehouse and not getting paid for any of it. Unless you are keeping track of the operational data, you may not have any context from which to analyze the financial data.
Co-author Mike Nurse is a manager in the Accounting and Consulting Group at Clark Nuber PS. Reach him at mnurse@clarknuber.com.
© Clark Nuber PS and Focus on Fraud, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.
