$65 Billion Stolen by Madoff? Not Hardly
By Joseph T. Wells, CFE, CPA
Well-meaning victims, courts, the media and the public actually believe that Bernard Madoff, sentenced recently to a record 150 years in prison, stole 65 billion dollars. Not hardly — not even close. What has been lost in the hysteria of the largest fraud in history is that the lion’s share of that money doubtlessly went to investors who did not show up in court to demand Madoff’s maximum punishment. Why would they? They’re laughing all the way to the bank because these investors were paid off early in the Ponzi scheme.
The principle characteristic of a Ponzi is that earlier investors are paid with money from later ones. That is what the notorious Carlo Ponzi did in the 1920s by promising investors that they would double their money in 90 days — an effective interest rate of 360% when banks were paying about two percent on savings accounts. As long as new investors exceed earlier ones, the scheme can continue. But all such scams are pre-destined to fail because of pyramidal mathematics.
Assume six investors put money into a seemingly legitimate (but fraudulent) investment. They become the Ponzi’s best advertisement and will tell their friends who will tell their friends. (Remember: Madoff didn’t advertise; he didn’t have to.) If the scheme grows exponentially ad infinitum, by the eighth iteration the number of investors has exceeded the population of the United States. By the 13th iteration, they exceed the total people of Planet Earth.
Make no mistake: Bernard Madoff did not come forward because of a guilty conscience. With the downturn in the economy, he did the math and realized his swindle could not be sustained. It takes tremendous cash to operate a Ponzi scheme. In most fraud cases, like this one, the actual losses will probably never be known.
Still, Bernard Madoff — with multiple million-dollar mansions, a yacht and all of his other trappings — probably didn’t convert more than a billion dollars of illegal loot to his own purposes. What hasn’t been made clear is that fraud is unique in criminal offenses: It is the only one that requires voluntary assistance from the victim. And the reason most people fall victims to fraud can be described in one word: Ignorance.
There is no amount of punishment that can restore victims of crime. Executing a killer doesn’t bring a victim of murder back to the living; thirty years in prison for a rapist does not restore the lost innocence of his victim. Four decades of my life’s work has been in the anti-fraud field and the study of white-collar crime and punishment. First I was an FBI agent specializing in fraud cases. Now I am chair of the Association of Certified Fraud Examiners. With nearly 50,000 members in 125 countries, we are the world’s largest anti-fraud organization. People who know me are aware that I am not soft on crime.
But today I received an email from someone who wasn’t even a victim of Madoff. Yet he “…prefer(s) the Chinese method of dealing with white-collar criminals. At least they can recoup some money by selling their organs. Harvested organs bring a really good price. 150 years in jail. Madoff got off easy. His wife should be penniless and homeless if we can’t convict her as an accomplice.” That isn’t logic talking; it’s pure rage. This person would deny the constitutional right of due process to someone who has not yet been charged or convicted of a crime. Regrettably, too many others feel the same way.
Prosecutors and politicians often say that harsh punishment sends a message to deter others. However, reams of scientific criminological studies cast serious doubt on this dubious notion, called “general deterrence.” What deters crime — of any kind —is the thought of being caught; if someone has no fear of detection, the potential punishment is moot.
If we got serious about avoiding future Madoffs, we would get him — from prison — to educate others on exactly how he was able to pull off such a massive deception for decades so that we all could learn from this fiendish mastermind. It is impossible to defraud a victim who knows what to look for. After all, Madoff whistleblower Harry Markopolos, a certified fraud examiner, wasn’t fooled. Education is by far the best prevention for fraud.
Joseph T. Wells, CFE, CPA is founder and chairman of the Association of Certified Fraud Examiners. He has published 14 books and nearly two hundred articles on fraud education.
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