Bernie Madoff, Sir Allen Stanford and so many other Ponzi perpetrators have masterfully duped thousands of people — including the fabulously wealthy and regulators, who you might expect to be a little more discriminating than the rest of us. I have not met, much less treated, Madoff or Stanford, or any of the other individuals who are currently alleged to have conducted some of the largest Ponzi schemes and investor frauds in our nation's history. But I do have a professional opinion about what made them do it, and how they managed to keep the web of lies from coming undone for so long.
Typically, fraudsters of this magnitude begin with legitimate businesses. A variety of elements must converge for that legitimate business to become a fraud. When these ingredients are present, an opportunist with intelligence and a weak moral code will take advantage of it.
Knowing how to beat the system: If someone is very intelligent and has inside knowledge of how the regulatory system works — and how people get caught — this knowledge can enable them to stay under the radar for a long time.
Investment Strategy: Many of these individuals initially develop a proprietary investment strategy with which they fall in love. It may become an obsession for them, rooted in greed and the need to prove to others that they are the best. If it fails, they may be unable to admit to that failure, and turn to fraud to cover it up.
Elite Networks and Relationships: People like Madoff play off the trust and respect created by the initial success of their investment strategy. But once they begin committing fraud, they need to be socially adept, calculating, and manipulative to get additional well-placed people to invest. Madoff, for example, created an aura of exclusivity around his fund by refusing to allow some people in.
Narcissistic and Sociopathic Traits: These tendencies allow people to feel entitled to all that the world has to offer and believe that they are invulnerable — above the rules and consequences. At the core of their psychology is a sense of inferiority or a void that must be fed through external successes and the relationships that serve to validate them.
Denial and Rationalizations: Some fraudsters may tell themselves that they aren't hurting anyone with their investment schemes, because these schemes allow investors to make money and “feel wealthy and secure” as long as the scheme is operating. It is usually not until the individual gets caught that these defenses weaken, allowing them to understand how they have impacted others.
Addiction: Like a gambler who decides to double down during a losing streak, individuals like Madoff and Stanford start to chase their losses, while forgetting what's at stake. Every day is a battle to keep their scheme alive and they tend to get a rush or high from surviving another crisis or day. These men sought out risk and appeared to be addicted to being right and to the highs associated with overcoming each setback.
These six elements have allowed many individuals to successfully bilk billions of dollars out of some very intelligent people worldwide. They fiercely fed their schemes with the money of innocent victims in order to protect their schemes against a collapse. They were hyper vigilant to all that could go wrong internally. They fed off of fear and uncertainty by guaranteeing returns and security. It took a perfect storm that included an unprecedented market crisis to cause enough investor redemptions to blow their cover. One thing I remind my clients is that nothing worth anything comes easily in life. You've heard it before: If it sounds too good to be true, it probably is. We as a society will recover from this, but hopefully we will also learn to be wary of outsized promises and the charming confidence men who make them.
Dr Alden Cass
is a New York City-based clinical psychologist and performance coach for Wall Street advisors, traders and bankers. For more info visit competitive-streak.com.