Lessons Learned From the Bernie Madoff Fraud - How Madoff Conned his Palm Beach Socialites

Lessons Learned From the Bernie Madoff Fraud

FEBRUARY 07, 2009 –
As we learn more about the Bernie Madoff criminal enterprise, two important aspects of his business stand out:

1. He used sleazy marketing techniques based on "scarcity" to manipulate his customers:

"Often, Madoff’s lieutenants would make potential investors cool their heels, according to people familiar with the operation. Supplicants were told they didn’t have enough money or that Madoff’s fund was closed. That only augmented his appeal.

Invitations Needed

'He knew how to play on scarcity,” says Robert Cialdini, a professor of psychology at Arizona State University and author of a book on the subject of influence. “Madoff communicated the exclusivity of membership in his club. You had to be invited in. If you weren’t, you would lose the returns. That overwhelmed any caution people might normally have felt.'”

http://www.bloomberg.com/apps/news?pid=20601109&sid=au4Y7Cudw2Xo&refer=home

2. His business was controlled by family members. The only people outside of the family who were hired were inexperienced youngsters who didn't know anything about finance. This allowed his family to commit fraud without being questioned. Those few employees who did question business practices were bullied to stay quiet or were fired:

"So, in our quest to find out how someone could elude regulators and keep a multibillion-dollar Ponzi scheme rolling, we now consider the work environment at Madoff Investment Securities. To sum it up in a few words: boneheads and bullies.

A couple of people close to Madoff's market-making and investment firms told me the firm was rife with intimidation and inexperience and those factors may have been a part of the reason why regulators didn't catch on to the alleged $50 billion Ponzi scheme.

These people say the Madoff family, many who held senior positions with the firm, hired inexperienced employees, from accountants to bookkeepers to clerks. That inexperience kept many of those employees from having a full understanding of the business.

OK, that's an understatement.

When those employees did question how things were done at the firm they were treated as if they were outright "idiots," according to one former employee who worked at the firm in 2007. Family members wielded total power. As one person familiar with the firm put it, if the Madoffs said so it had to be done, regardless of how many hoops, jumps and cartwheels were involved."

http://www.marketwatch.com/news/story/evasion-has-two-new-faces/story.aspx?guid=%7B2C31D5D2%2DB36C%2D4FD3%2DB26C%2DCF73CA8DB36B%7D

Lessons to be learned?: Do not do business with companies that engage in sleazy marketing practices based on phony scarcity (e.g., "private" invitations that expire in 24 hours) and which are controlled by family members.