There is no honor amongst thieves.
We watched “Madoff the Monster of Wall Street” and read books this documentary was based on, through the lens of our respective compliance practices.
We highly recommend you watch this documentary and read these books, as we found them quite entertaining. As a bonus, if you are a compliance officer, a risk manager or an auditor, here are 4 lessons you can take back to the office and use in your everyday work (+ 1 bonus lesson if you want to start a Ponzi scheme).
Lesson number 1: Always be skeptical
If it is too good to be true, it’s neither true, nor good. Don’t let your professional skepticism get dulled by the power of a good story. Learn to recognize FOMO (Fear Of Missing Out), keep calm and go through your due diligence checklist. If you are auditing something or investigating something… don’t treat your subject’s statement as evidence: make sure it is consistent with and corroborated by documentation obtained from a third party. It would have been so simple to catch Madoff (or Wirecard) much earlier this way, it’s ridiculous.
Lesson number 2: Wizardry doesn’t exist, even the financial kind
If someone is making money in a way that does not make sense to you or too people whose professional judgement you trust, don’t let them tell you that it’s too sophisticated. Crooks and fraudsters have always painted themselves as wizards and geniuses, hiding behind the veil of “trade secret” or “intellectual sophistication” when asked to explain their success. Madoff’s ultimate answer when he was questioned about his “split-strike” investment strategy was that it was his “secret sauce”.
Lesson number 3: Diversification remains the simplest way to manage your investment risk
People who lost “everything they owned” with Madoff had “everything they owned” invested in Madoff. As Madoff offered not to charge any fees for his investment management services, he effectively bribed fund managers, who were able to charge their own fees to their investors, and incentivized them against diversification.
Lesson number 4: Don’t feel constrained by your previous conclusions
SEC investigators started by lacking skepticism of Madoff. But after their first examination, they were probably influenced by their own initial conclusion that there was nothing wrong with his activities.
Lesson number 5 (bonus lesson for would-be-Ponzi-schemers)
There is no honor amongst thieves. The documentary (and the book by Jim Campbell), shows really well how Madoff himself was pushed around and pressured by some of his “Bif 4” investors who used him to generate outsized returns and fictitious tax losses. Madoff tried to buy his employees’ loyalty with outsized compensation and bottomless expense accounts. Yet, when grilled by the FBI and prosecutors, these employees ultimately turned against him in exchange for leniency. Friendship is based on honesty. When your business is dishonest at its core, you have no friends.
