Madoff scam

8/14/2019 Madoff scam

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,Fraud Schemes


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Part 1The Madoff Era:

Ponzi chemes & The New Wave of Fraud


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Red Flags :

xper warn ngs y o er mar e ana ys s e.g. eWorlds Largest Hedge Fund is a Fraudby HarryMarkopolos)

"Bernie Madoff is running the world's largest

unregistered hedge fund... Harry Markopolos nusua us ness pract ces

Reputation of the auditor


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Definition :

A Ponzi scheme is an investment fraud wherein theoperator promises high financial returns or dividends.

Instead of investing victims' funds, the operator pays

"dividends" to initial investors using the principleamounts " nveste " y su sequent nvestors.

Source: fbi.gov


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History :

Ponzi schemes are named for Charles Ponzi, whodeceived thousands of New England residents into.

thought he could take advantage of differences

between U.S. and foreign currencies used to buy andse nternat ona ma coupons. onz to nvestorsthat he could provide a 40-50% return in just 90 dayscom ared to the interest rates for bank savin s

accounts, stocks and bonds.


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How to protect against a Ponzi Scheme:

Be skeptical about investments Be skeptical about reputations

Diversification of investments

Due diligence


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Proliferation of advertisement videos for

business opportunities structured as Ponzischemes (i.e. YouTube.com).

The Better Business Bureau identified nearly

23,000 videos. promo ng cas g ng or g ng c u programs nearly 60 million views

,


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Lessons Learned or Notfrom the Madoff Case

- Scheme based on trust, reputation, fueled by lackof diligence and regulatory failure

What failed

- Common sense, individual diligence ands ep c sm, regu a ory an nves ga ve o yoversight and follow-up

- Fraud wont go away, diligence and attention tored-flags is key


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Technology and Fraud:e ew ave

Many fraud schemes have been the same for centuries butnew technology has provided those seeking to commit fraudwith more tools and options:

Email hoaxes that go out to millions of people

Websites that collect data from unsuspecting victims Greater anonymity

Email and the web can provide a cloak of anonymity for those thatcommit fraud

Increased complexity (or at least apparent complexity) Many people arent technologically savvy, and those that commit


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Accordin to the ACFE Re ort to the Nation on

Occupational Fraud and Abuse for 2008, US businesseswill lose an estimated $994 billion in fraud losses (7% of

Instances of fraud will likely increase during this period of

duress

Companies are facing issues concerning valuation ofassets such as asset-backed securities held as


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urren conom c

Investment Scams


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Current Economic Environment The Fraud Triangle

-

current economic crisis

Pressure / Incentive

Rationalization O ortunit


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2008OccupationalFraudsbyCategory MedianLoss

Fraudulent

Statements $2,000,000

ofF

raud

Corruption $375,000

Type

Asset

Misappropriation$150,000

$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000

Median Loss

Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 959 cases of occupational fraud).


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Ps cholo of Investment Scams 2006 Consumer Fraud Research Group study funded by

the FINRA Investor Education Foundation revealed thefollowing common tactics used by fraudsters as part of theirapproach:

- e an om c es ac c - ang ng e prospec o wea ,enticing you with something you want but can't have. These gas

wells are guaranteed to produce $6,800 a month in income.- The "Source Credibility" Tactic - trying to build credibility by

claiming to be with a reputable firm or to have a specialcredential or experience. Believe me, as a senior vice president

of XYZ Firm, I would never sell an investment that doesn'tproduce.

. .


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Ps cholo of Investment ScamsThe "Social Consensus" Tacticleading you to believethat other savvy investors have already invested. "This ishow ___ got his start. I know it's a lot of money, but I'minand so is my mom and half her churchand it'sworth every dime.

The "Reciprocity" Tacticoffering to do a small favor for

you in return for a big favor. "I'll give you a break on mycommission if you buy nowhalf off.

The "Scarcity" Tacticcreating a false sense of urgency

by claiming limited supply. "There are only two units left,so I'd sign today if I were you.

. .


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Securities Re ulation

Federal Regulation:

Securities Act of 1934

Rule 10b Anti-fraud provisions

Investment Advisor Act of 1940

Investment Company Act of 1940


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Sarbanes-Oxley Act of 2002:

er ca on o ga ons or s an s

New standards for audit committee independence

New protections for corporate whistleblowers

Other criminal enalties: Document destruction

Freezing of assets


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Be cautious of "opportunities" to invest your money in franchises

or investments that re uire ou to brin in subse uent investors

to increase your profit or get back your initial investment. If the offer of an "opportunity" appears too good to be true, it. . ,

legitimate business is rarely conducted in cash on a street

corner. now w o s e promo er e n e ransac on. you ave no

heard of a person or company that you intend to do businesswith, learn more about them. Depending on the amount of money

that you intend to spend, you may want to visit the businesslocation, check with the Better Business Bureau, or consult withyour bank, an attorney, or the police.


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Be cautious of business deals that require you to sign

nondisclosure or non-circumvention a reements desi ned to

prevent the investor from independently verifying thebackground and credentials of people with whom you intend to

Do not invest in anything unless you understand the deal. Con

artists rely on complex transactions and faulty logic to "explain".

As with any investment perform due diligence. Independentlyverify the identity of the people involved, the authenticity of the

deal, and the existence of the security in which you plan toinvest.


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pressures and cause fraud to rise

A little fraud soon becomes larger if left togrow


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42.3%

46.2%Tip

InitialDetectionMethodforMillionDollarSchemes

22.8%

19.4%

20.0%ByAccident

on

16.7%

.

23.3%InternalControls

InternalAudit

T

ypeofDetecti

AllCases$1,000,000+

6.0%

15.8%

3.2%

9.1%

NotifiedbyPolice

ExternalAudit

Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 237 cases of occupational fraudinvolving $1 million or more).

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%PercentofCases


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Characteristics of Fraud (cont.)

Business Approximately 6% of TotalAnnual Revenue

Fraud Costs U. S. Businesses More than

$400 Billion Annually en omm o epor e rau ases


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- -

o omm s rau

10% of any Workforce Would Never TakeAn thin

80% of any Workforce Would Take

Somethin if the Circumstances Were Ri ht

10% of any Workforce Would Take

Source: The Association of Certified Fraud ExaminersSource: The Association of Certified Fraud Examiners


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Motive: Unshareable Need(Usually Financial)

Bad Investments Impatience for the Good Life = High Debt

Drug and/or Alcohol Abuse

Family Debt x ramar a a rs

Need to Meet Productivity Targets


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O ortunit : An O ortunit to Commit Fraud Can BeReal or Perceived. Those Who Think TheyWill Get Caught Rarely Commit Fraud.

Lack of Segregation of Duties (Do More

Lack of Controlled Access to Vendor Master

Lack of Accounts Payable Controls

Fox in Char e of the Hen House

The Out Post Effect


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Rationalization: Most Fraud Offenders Have to Be Ableto Rationalize Their Behavior asSomething Other Than a Crime

Im Only Borrowing the Money Ever one Else is Doin it

The Company Owes Me

Im Underpaid I Didnt get my Bonus Because My Boss

Took Credit for my Work

m ore


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Red Flags:The Keys to Fraud Detection

Time Fraud Affects the Bottom Line Ethics Must Start at the Top and Flow Downward Exposure to Fraud Can Be Limited by Restricting

O ortunities Throu h Effective Internal Controls Fraud is Present Within Every Organization -

Challenge - Identify and Minimize Nearly All Frauds Could be Detected More Quickly if

e ags are no gnore

Madoff scam

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