Bernie Madoff and Trust Ponzi Schemes

Bernie Madoff’s death causes me to reflect on the most heart-breaking and heart-wrenching consulting engagement of my career—busting a $50 million Ponzi scheme wherein several hundred unsuspecting elderly retirees lost substantial life savings, eventually bringing-down with them the entangled trust company.

A Ponzi scheme--a form of fraud that lures unwary investors into an investment scam and pays profits to earlier investors with funds from more recent investors--was perpetrated against a trust company by one of its institutional clients that was, in turn,?embezzling from its clients and using the Houston-based trust company as its shield. The trust company served as custodian; consequently, it exercised no discretion and blindly executed instructions issued to them by the account’s owner, ultimately causing personal grief and financial pain on the gullible investors that were just trying to earn a little extra income off of their thought-to-be safe “FDIC insured CDs held in custody by a trust company chartered, regulated, supervised and examined by the Department of Banking”.??

In essence, the scammers were trading CDs in a so-called “secondary market” with “guaranteed interest rates at 2% above market” and using the trust company as its “clearing house” while leveraging its trademarked logo.

The trust company’s new owner smelled-a-rat and with the support and consent of the Banking Department engaged my services to root-out the cause of their suspicion. It only took three days to body-slam the scammer’s six-year-old fraud; but, the owner, regulators, legal counsel and board were not convinced that a $25,000 commission on the purchase of a $100,000 CD represented “fraud” but rather an “excessive commission”.

Consequently, as my highly skilled team continued to search for so-called “hard evidence”, I notified the CD customers that they had been defrauded. Although I immediately flew to LA to visit with them to explain our efforts to retrieve their stolen assets, they turned-the-tables by reporting me to everyone from regulators to elected officials to publishers to broadcasters (including Tom Brokaw’s?Fleecing of America—on whose program the trust company was featured) and from local law enforcement to the Secret Service. In fact, the scammed investors had the Ventura County Sheriff’s Department waiting for me at the hotel to arrest me when I arrived for the presentation; but, the officers informed me that they had already done their homework and knew that I was the “good-guy”.

Unfortunately, the Secret Service must not have conducted a similar investigation of my involvement. After having conducted surveillance of my every move for a month (as I later learned), fifteen or so pistol-packing, wind-breaker-wearing Secret Service agents stormed through the front-door of the trust company with a schematic of the office lay-out along with a search warrant threating my arrest, cameras with spotlights recording everything and everybody and attaching pre-printed signs to doors and desks identifying offices and staff—all-in-all, not one of my better days.

Bottom-line, although most retirees did not retrieve much of their investments; the five crooks were convicted and sentenced to five years in federal prison.

Although this Ponzi scheme does not rise to the level of the Madoff scam, it should suggest that a similar event could happen to your trust department or trust company—either perpetrated against your organization as in this situation or, in a more common fashion, one that is initiated from within the organization in the way of embezzlement, fraud, theft and defalcation.

In recalling other such engagements, I would offer these observations:

1.????Fraud is more prevalent among trust organizations than one might imagine

2.????Management would often prefer to ignore past events rather than hold parties accountable

3.????Most fraudulent activities can be prevented by adhering to sound business principles, policies and procedures

4.????Management should not expect or rely on examiners and auditors to identify and prevent fraudulent activities

5.????Trust organizations often unknowingly create an environment that makes them vulnerable to crooks and scams

6.????Discovering irregularities might not be as difficult as one might expect

7.????Rather than dive into minute, detailed records and activities in an effort to discover irregularities or fraudulent activities, step-back and look at the bigger picture; examine processes, procedures and decision-making methodologies that can lend themselves to such problems; as with this occurrence, it could have easily been prevented had management operated?by-the-book?instead of?by-the-seat-of-its-pants

Raymond R. (Bob) Fletcher, CTFA, CISP, CFMP--Institutional Trust Consultant / CEO

See Detailed Commentary on subject Ponzi Scheme on this site: Part I and Part II: Careful...That "Big" Opportunity Just Might Be a Scam, as in, "Ponzi Scheme"

About: FiPar Financial, Inc., San Antonio, Texas

FiPar Financial, Inc., a San Antonio-based business with a national service scope, serves as an institutional trust consulting firm specializing in helping community banks and other financial services organizations optimize trust capabilities by integrating visionary ideas, strategic initiatives and specialized skills.?In other words, "We put 'em together, take 'em apart, turn 'em around, shut 'em down and sell 'em off!"

--Not only can we spell "fiduciary" / We understand what it means-- (sm)

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