Evading suspicion through political networking

Sam Bankman-Fried, Elizabeth Holmes and Bernard Madoff. What do they have in common? They apparently used their outsized social influence in their professional networks to illegally expand their bank accounts and prolong their crimes. Fraud fighters can’t also be duped by their wily ways.

Sam Bankman-Fried got by with a little help from his “friends.” Actually, a lot of help. According to The New York Times, his cryptocurrency company, FTX, its executives and its philanthropic division spent hundreds of millions of dollars in “political and charitable contributions, consulting fees, investments in media outlets and even real estate.”

A network of “political action committees, nonprofits and consulting firms funded by FTX or its executives worked to court politicians, regulators and others …” The objective? To make Bankman-Fried the authoritative voice of crypto. (See “Inside Sam Bankman-Fried’s Quest to Win Friends and Influence People,” by Kenneth P. Vogel, Emily Flitter and David Yaffe-Bellany, The New York Times, Nov. 22, 2022.) And for a while, it worked. Bankman-Fried’s high-placed connections vaulted him into the crypto stratosphere.

But now his friends have vanished. FTX has collapsed, Bankman-Fried’s net worth of $26 billion is reduced to zero, and he sits — at press time — in a federal jail in Brooklyn, awaiting trial on defrauding investors in his business, illegally diverting crypto from customers and enriching himself. Prosecutors are saying they’ll use testimony from his “trusted inner circle” of former executives to prove his crimes. (See “Testimony from Sam Bankman-Fried’s trusted inner circle will be used to convict him, prosecutors say,” by Larry Neumeister, AP, U.S. News, Aug. 14, 2023.)

Bankman-Fried, and so many high-profile fraudsters, such as Theranos’ Elizabeth Holmes and Ponzi king Bernie Madoff, reached their pinnacles with savvy political networking. But does that high-flying networking with prominent influentials trigger risks associated with the social psychological concept known as social influence? Does social influence diminish our investigations’ due diligence because of whom we’re scrutinizing?

Ultimately, the consequences of the risks associated with social influence may unnecessarily extend the longevity of fraud schemes because of the enhanced credibility of fraud offenders, which allows them to evade suspicion while committing crimes in plain view. Let’s first analyze another master of social influence.

Bloody deception

Elizabeth Holmes, founder and CEO of Theranos, Inc., was known as a supposed visionary in the health technology field. Yet in January 2022, Holmes was convicted of defrauding investors in the company of hundreds of millions of dollars. Former President and CEO Ramesh Balwani, in a separate trial, was also convicted on charges of fraud that risked patients’ health by misrepresenting the accuracy of Theranos blood analysis technology. Holmes, with the assistance of Balwani, fraudulently raised investment funds totaling more than $700 million.

They deceived investors by making it appear as if Theranos had developed a commercially viable portable blood analyzer, the “miniLab,” that could perform a full range of laboratory tests from a small sample of blood. The U.S. Securities and Exchange Commission (SEC) said Holmes, Balwani and Theranos deceived investors by (1) making false and misleading statements to the media, (2) hosting misleading technology demonstrations, (3) providing false and misleading financial information on Theranos’ financial condition and (4) overstating the extent of Theranos’ relationships with commercial and government entities, namely the U.S. Department of Defense, and its regulatory status with the U.S. Food and Drug Administration. (See SEC vs. Elizabeth Holmes and Theranos, Inc., filed April 14, 2018.)

Years before, The Wall Street Journal and other media outlets raised Holmes’ public profile. By the end of 2014, Forbes declared that Holmes was “the youngest woman to become a self-made billionaire” whose company could, “with a painless prick, … quickly test a drop of blood at a fraction of the price of commercial labs which need more than one vial.” (See “Bloody Amazing,” by Matthew Herper, Forbes, July 20, 2014; SEC vs. Elizabeth Holmes and Theranos, Inc.; and “With Cold Ease: Inside the Fraud Offender Mind,” by Frank Perri, 2022.)

Holmes also befriended well-known public and political figures to invest in Theranos and be members of the company’s board of directors. For example, she appeared with and was interviewed by former President Bill Clinton at his Clinton Global Initiative. And former U.S. Secretary of State Henry Kissinger was a Theranos board member who invested $3 million in the company. [See “President Clinton speaks with Elizabeth Holmes and Jack Ma (2015 CGI Annual Meeting),” Clinton Global Initiative, Sept. 30, 2015 and “How Elizabeth Holmes convinced powerful men like Henry Kissinger, James Mattis, and George Shultz to sit on the board of Theranos,” by Lydia Ramsey Pflanzer, Insider, June 2, 2023.]

Other well-known citizens on the board included former Senator Sam Nunn and former Secretary of Defense William Perry who served under President Clinton. Perry told The New Yorker in 2014 that Holmes “has sometimes been called another Steve Jobs, but I think that is an inadequate comparison. She has a social consciousness that Steve never had. He was a genius; she is one with a big heart.” (See “Blood, Simpler,” by Ken Auletta, The New Yorker, Dec. 8, 2014 and “The Epic Rise and Fall of Elizabeth Holmes,” by David Streitfeld, The New York Times, Jan. 3, 2022.)

Former Secretary of State General James Mattis, during Holmes’ trial, said he thought Theranos’ technology could have game-changing benefits on the battlefield. “I was interested in anything that would improve the care of causalities,” he told jurors. “I was taken by the idea that with one drop of blood and with remote capability you could basically test for a broad array of problems.” (See “Former Theranos board member, investor testifies against Elizabeth Holmes,” by Victor Ordonez, ABC News, Sept. 28, 2021.)

In John Carreyrou’s book, “Bad Blood,” Mattis said Holmes had “one of the most mature and well-honed sense of ethics — personal ethics, managerial ethics, business ethics, [and] medical ethics that I’ve ever heard articulated.” (See “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” by John Carreyrou, 2018 and “The downfall of Theranos, from the journalist who made it happen,” by Jonathan M. Gitlin, ARS Technica, July 15, 2018.) “It was breathtaking what she was doing,” Mattis said during Holmes’ trial. Mattis said she was “sharp, articulate, committed and confident.” (See “Theranos Trial: Former Defense Secretary Mattis Takes Stand; ‘It Was Breathtaking What She Was Doing’,” CBS News Bay Area, Sept. 23, 2021.) Mattis invested $85,000 into Theranos.

Role of social influence

Social influence, a form of persuasion technique, is rooted in social psychology, which attempts to explain what occurs when influential persons affect our emotions, opinions or behaviors and how our behaviors then in the converse influence others including those in groups to which we belong. Individuals in a political network adhere to norms supported by social influence to maintain their reputations and gain social approval from those with whom they interact. (See “Robert B. Cialdini and Jennifer L. Eberhardt On The 7 Principles of Influence,” by Jennifer L. Eberhardt, Association for Psychological Science, Feb. 28, 2022.) Factors that contribute to effective persuasion techniques are: (1) obedience to authority, (2) social validation, (3) similarities with others increasing the probability of being liked and trusted, (4) reciprocation of good will, (5) consistency in honoring commitments and (6) proclaiming scarcity of resources and opportunities. (See “Cialdini’s 6 Principles of Persuasion: A Simple Summary,” World of Work Project.)

Decision-makers, regardless of their pedigrees, often give players in professional networks social privileges they don’t deserve.

We often revere authority figures, whom we perceive to be powerful in their fields, and therefore don’t necessarily challenge their words and actions. Social psychologists observe we have a natural tendency to accept authoritative statements unless we have strong evidence to the contrary. (See “Influence: Science and Practice, 5th edition,” by Robert Cialdini, Pearson, 2008.)

Moreover, social validation may be characterized as a form of endorsement because we follow the lead of others who we think are credible. We take mental shortcuts by relying heavily on those around us for indications on how to think, feel and act, especially when we’re uncertain. We tend to follow the lead of others we trust because social approval is important to us. We often unwisely believe this is reasonable because if so many others are acting and speaking in a certain way, they must be correct.

Bernard Madoff and his devious circles of influence

The perfect example of social influence affecting the decisions of those in informal groups is Bernard Madoff, the U.S. financier who executed one of the largest Ponzi schemes in history. At the time the scheme became public, Madoff was accused of defrauding thousands of investors of $65 billion in at least 17 years, based on the returns he falsely claimed to have achieved. However, in reality Madoff stole about $20 billion, which is the face value of the money his victims initially invested with him. (See “Five things you didn’t know about Bernie Madoff’s epic scam,” by Aaron Smith, CNN Business, April 14, 2021.)

He evaded suspicion, in part, because of his savvy political networking within the SEC. Coupled with his perceived Wall Street reputation, Madoff created a negative synergy that influenced SEC employees, mostly attorneys, to either willfully ignore or downplay fraud-related red flags associated with his behavior.

SEC’s high-level management respected Madoff so much that the agency’s commissioners sought him out for advice and appointed him to its advisory committee on market information. Arthur Levitt, who served as SEC chairman from 1993 to early 2001, acknowledged he occasionally turned to Madoff for advice on how the market functioned but denied that Madoff had undue influence at the SEC or that the agency’s enforcement staff deferred to him. Madoff in an interview said, “I’m very close with the regulators.” [See “Hanging with Bernard Madoff (it wasn’t memorable),” by Justin Fox, TIME, Wall Street & Markets, Dec. 12, 2008.]

Madoff boasted that former SEC Chairperson Mary Schapiro was a “dear friend,” and former SEC Commissioner Elisse Walter was a “terrific lady” whom he knew “pretty well,” which implied he had easy access to these influential people. (See “Bernie Madoff baffled by SEC blunders; compares agency’s bumbling actions to Lt. Colombo,” by Alison Gendar, Daily News, Crime and Public Safety, Oct. 30, 2009.)

Madoff’s social influence and classic affinity fraud

During a 2008 NPR interview, Ronald Cass, former dean emeritus of the Boston University School of Law, discussed the Madoff case, how social validation can serve as an alternative to engaging in due diligence and how many of Madoff’s Jewish victims succumbed to his wiles because they believed they were all in the same affinity group.

“When my wife … and I were going to try to pick somebody to do health insurance for us, we asked the rabbi in our congregation, do you know anybody who does this?” Cass said in the interview. “And he recommended another member of the congregation. We didn’t go out and do due diligence, we didn’t have to. The rabbi said this one’s OK. I think a lot of that is the sort of thing that was happening with the Madoff investments. …

“Bernie Madoff was the chairman of NASDAQ, an advisor to the SEC, he was someone who had within his circle of clients enormously successful people. It was like he came pre-certified. You had every reason to trust the guy. He looked like and sounded like you and your friends,” Cass said. (See “Affinity Fraud Preys on Group’s Trust,” by Linda Wertheimer, NPR, Dec. 24, 2008 and Transcript.)

Fraud behavior red flags

SEC investigators, over many years, caught Madoff in deceptions, evasive behaviors, contradictions and inconsistencies when they questioned him about his business. These were blatant, but ignored, fraud-offending red flags. He often failed to provide the SEC with requested documents, and the agency failed to cross-reference his disclosures to known evidence. The SEC sometimes refused assistance from experts who understood the securities industry and were willing to provide the agency with advice on whether Madoff committed fraud.

For example, when senior SEC staff deposed Madoff in 2006 in Washington, D.C., according to a member of the National Securities Dealers, the SEC staff didn’t understand the basics about securities trading. The SEC rejected the suggestion of Gene DeMaio, vice president and deputy director of the NASD Amex Regulation Division, to postpone Madoff’s testimony so DeMaio could “do a little bit more homework” on Madoff’s operation. (See “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” SEC Office of Investigations, Aug. 31, 2009.)

In 2009, Madoff told then SEC Inspector General David Kotz that he was astonished the SEC never asked the correct questions. He told Kotz that if investigators had checked with the Depository Trust Company it “would’ve been easy for them to see” the Ponzi scheme. “They never even looked at my stock records.” (See “Bernie Madoff baffled by SEC blunders; compares agency’s bumbling actions to Lt. Colombo,” by Alison Gendar, Daily News, Crime and Public Safety, Oct. 30, 2009.)

Quantitative analyst Harry Markopolos, CFE, tried several times — in 2000, 2001, 2005, 2007 and 2008 — to alert the SEC’s Boston and New York’s Northeast Regional Office (NERO) that Madoff’s business was a massive Ponzi scheme. But on Feb. 4, 2009, Markopolos told a U.S. House of Representatives subcommittee that the SEC ignored his multiple warnings and his offer to help.

“Mr. Madoff was one of the most powerful men on Wall Street. He owned a prestigious brokerage firm,” Markopolos told the subcommittee. “He and his brother held numerous top-level positions on the most influential industry association boards. Clearly, the SEC was afraid of Mr. Madoff.” (See “Assessing the Madoff Ponzi Scheme and Regulatory Failures,” hearing before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises of the Committee on Financial Services, Feb. 4, 2009.)

... the revolving door between the private sector and the government undermines the effectiveness of both regulatory agencies and governmental departments ...

When examiners from the Northeast Regional Office (NERO) of the SEC questioned Madoff in 2005, before he was caught, he emphasized his role in the securities industry, dropped names of senior SEC staff and said he was on the shortlist to be the next chairman. (See “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” by U.S. Securities and Exchange Commission, Office of Investigations, pages 32-33, Aug. 31, 2009 and “Madoff ‘astonished’ SEC failed to act after interview,” by Ian Katz, Bloomberg News in the Pittsburgh Post-Gazette, Sept. 3, 2009.)

Madoff would charm SEC investigators but also try to control the direction of investigations through intimidation. (See the U.S. Congressional report, “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.”) And when Madoff pushed back to SEC investigators’ incisive questioning, their bosses often discouraged them from pursuing Madoff. “Madoff … is a very well-connected, powerful person,” a senior-level SEC examiner told junior NERO examiners. One of the NERO examiners interpreted this comment as a warning about pushing Madoff too hard. No doubt, Madoff’s social influence played a role in the SEC’s abject failure to uncover his fraud. (See “Investigation of Failure of the SEC To Uncover Bernard Madoff’s Ponzi Scheme, SEC Office of Investigations.”)

Because of Madoff’s influential position in a wide network, few SEC staffers would want to attract Madoff’s ire and backlash by challenging his evasive and contradictory answers. Madoff said SEC lawyers wouldn’t press too hard because they had ambitions to go into lucrative private practice.

As one SEC staffer stated, if “you work for the enforcement division of the SEC you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.” (See “The SEC and the Madoff Scandal: Three Narratives in Search of a Story,” by Donald C. Langevoort, Michigan State Law Review made available through Georgetown University Law Center, 2009.)

Would SEC staffers risk Madoff blacklisting them from Wall Street for confronting him on his deceptive answers when their supervisors aren’t supportive and those at the top of the SEC don’t seem too concerned about his operations? Empirical studies document the SEC’s inclination to go easy on big Wall Street players in enforcement cases. (See “The SEC and the Madoff Scandal: Three Narratives in Search of a Story.”) The reality is “the revolving door between the private sector and the government undermines the effectiveness of both regulatory agencies and governmental departments, because self-interest interferes with effective oversight and enforcement, including criminal enforcement,” writes attorney Mary Kreiner Ramirez in “The Oxford Handbook of White-Collar Crime.” (See “Oversight and Rule Making as Political Conflict,” by Mary Kreiner Ramirez, Chapter 23 in Part VII, Regulatory Oversight, The Oxford Handbook of White-collar Crime, 2016, edited by Shanna Van Slyke et al.)

Fraud examiners shouldn’t be duped

Decision-makers, regardless of their pedigrees, often give players in professional networks social privileges they don’t deserve. And when those players cross over the boundaries into fraud, their social influences unnecessarily extend the longevity of their fraud schemes because of their false enhanced credibility. We’re still studying how Sam Bankman-Fried attained crypto king status through blatant political acumen. But he joins Elizabeth Holmes and Bernie Madoff and many others who used their inflated social images to evade suspicion while committing huge crimes in plain view.

Further research will help us understand the connection between political networks and how such power centers influence auditors and anti-fraud professionals in the ways they perform their duties. Perhaps whatever impact these social influence dynamics expose can be mitigated so we can prevent and detect such schemes more rapidly.

Frank S. Perri, J.D., CFE, CPA, is an attorney in Illinois. Contact him at frankperri@hotmail.com.