UNETHICAL CHOICES & CONSEQUENCES

BBC News reports dated 12 & 13 March have profiled modus-operandi of two renowned swindlers Bernard Madoff (1990 – 2009), US Financier and Ivar Kreuger (1880-1932), Swedish Businessman. Both have been clubbed together because of striking similarities in their operation and impact; ‘genius application of mind for fraud, enraged investors, phantom profits, weak auditing, and a clamour for tighter regulatory control’.

Blatant violation of laws for nearly two decades by Bernard Madoff, while enjoying enviable social status (former chairman of the Nasdaq stock market and a Wall Street figure for more than 40 years) highlights the oft-repeated statement that human beings never learn from history. Both Ivar & Bernard, though separated by more than 60 years, seem like comrade in arms in defrauding hard earned money of innocent investors.

Instances of greed for money in the corporate sector have been surfacing with alarming regularity. Flashback since 1980s brings to mind collapse of corporate giants like Bank of Credit and Commerce International (BCCI) built around a web of deceit and fraud followed by Enron, WorldCom, Xerox, Tyco, Bearing Bank, Anderson Brothers, Satyam Computers to name major ones.

World economy has nose-dived in 2008 due to the financial mismanagement of Lehman Brothers and a few more conglomerates. Despite speculations it is anyone’s guess as to when the economy would recover. Suffering has been heaped on innocents; ironically their only fault lay in reposing trust on scoundrels, whose survival depends on public money, masquerading as competent Captains of industry & Government Regulatory Agencies comprising supposedly committed public servants.

Evidently, humanity is paying a huge price globally due to unethical choices of high & mighty. Worst hit are those who have been retrenched and suffering from job insecurity. Cascading effect of it on the poor is bound to cause more social disturbances.

Excerpts of the two reports:

MADOFF ADMITS $50BN FRAUD SCHEME

BBC NEWS 12 MARCH 2009

My Comments in Italics

1. Disgraced US financier Bernard Madoff has been jailed after pleading guilty to all 11 charges surrounding an estimated $50bn (£35bn) fraud. The 70-year-old defrauded thousands of investors in a fraud he admitted had been running since the early 1990s. “I cannot adequately express how sorry I am for what I have done,” Madoff told the court (what a meaningless confession). He said that when he started the fraud, he had hoped it would only be for a limited time.

2. Madoff is said to have run a Ponzi scheme, whereby early investors were paid off with the money of new clients. He pleaded guilty to money laundering, making false statements, perjury, making a false filing to the US financial watchdog and theft from an employee benefit plan.

3. Greatest con artist probably in the history of the world. He could receive up to 150 years when he is sentenced in June.

4. Evil incarnate. A number of Madoff’s victims attended the hearing. Speaking outside the courtroom, Cynthia Friedman told the BBC Madoff was “evil incarnate”. She and her husband lost $3m with Madoff. “He has no remorse. He’s a horrible man,” she said. “He stole from charities; he’s just an awful man.”

5. Many of his victims told the court they opposed his guilty plea, because they wanted the case to go to full jury trial so they could find out exactly what he had done with the money. Yet most clapped when he was handcuffed.

6. What is a Ponzi Scheme? A fraudulent investment scheme paying investors from money paid in by other investors rather than real profits. Named after Charles Ponzi who notoriously used the technique in the United States in the 1920s‘

7. A Genius. One of Madoff”s victims, Burt Ross, a former mayor of New Jersey town Fort Lee, told the BBC he did not expect to recover a single cent of the $5m he invested.

8. Despite widespread press coverage of famous names and a wealthy elite, Mr Raymond, of law firm Broad and Cassel, said many were normal working people, including a retired couple from Atlanta. “He’s 82, she’s 78, and they are both looking for work because they have lost everything,” he said. Mr Raymond said another victim was a plumber who earned no more than $60,000 a year (how can a human being be so insensitively cruel.)

IVAR KREUGER 1920 – 1932:

THE ORIGINAL BERNARD MADOFF?

BBC NEWS 13 MAR 09

1. Swedish business genius and swindler Ivar Kreuger, had the fantastic idea of turning his family’s matchmaking industry, based in provincial Sweden, into the leading provider of loans to the shattered economies of post-war nations during the 1920s. He raised cash through a number of share and bond issues in the US, and then loaned the money to national governments in exchange for matchmaking monopolies in those countries.

2. Like Madoff he promised fantastic rates of returns to investors, as high as 25%, but the loans he provided to countries such as Germany were returning only 6% to him. Money was shuffled between dozens of subsidiaries to provide the illusion of profits, while Kreuger speculated with other people’s cash in an attempt to fill the interest rate gap. But the stock market crash of 1929 delivered a mortal blow to his speculations, and the whole house of cards came crashing down in 1932.

3. Over the period of seven years from 1922 to 1929, as share-buying and investment mania hit the US, things went well, but then disaster struck. “In October 1929 he made his massive $125m loan to Germany, just days before the stock market crash of Black Monday and Black Tuesday, and it was about that time that his troubles really began,” says Professor Partnoy. But, ironically, in 1929 at the height of the great stock market crash, confidence in his firms grew even more, as they continued to return large dividend payments, even though Kreuger’s ability to generate speculative returns was being squeezed.

4. Kreuger’s “great aversion to divulging information, especially if accurate, had kept even his most intimate acquaintances ignorant of the greatest fraud in history”.

5. Meanwhile, Kreuger’s financial methods were becoming increasingly devious. He had always sailed close to the edge of legitimacy; keeping liabilities “off balance sheet”, establishing a network of more than 200 firms that bamboozled his auditors and bankers, and inventing non-voting shares.

6. He then began Enron-style financial engineering, reporting profits when there were none, and paying his generous dividends by attracting new investment or plundering existing ones.

7. Meanwhile, Kreuger was seen as a business titan of the times, with his firms seemingly triumphing during the crash. President Herbert Hoover regularly sought his advice about the problems affecting the global economy. He was hailed on the cover of Time magazine, and was seen as a hero in countries such as France, which he had bailed out with a huge loan.

8. In March 1932 Kreuger shot himself in a hotel room in Paris, just before a meeting with bankers, at which he would have faced some extremely tricky questioning. At the time of his death his Swedish bankers estimated he was third-richest man in the world. The recriminations began once the extent of his deception became known and investors were hit by what was known as the “Kreuger Crash”.

9. Regulators were lambasted by Congress for their light-touch approach, and in the fallout a raft of new laws and regulatory bodies were created, including the Securities and Exchange Commission.

10. “A generation of people have forgotten Ivar”, says Professor Partnoy. “But if they look back they can see he was arguably the Madoff of his day. It is going to take years to get to the bottom of the Madoff case, as it did with Ivar’s empire too.”

Lessons.

A typical response could be ‘Oh! Things have degenerated beyond redemption. What can I do as an ordinary citizen? Given an opportunity may be I’ll do the same because what matters in life today are money, power & status’.

The all important question is do I need to become a part of the problem or can I be different? Fact is that either of the two choices have consequences affecting one’s own life! Kreugar committed suicide and Madoff, 72 years old, is heading for 150 years in prison.

It would be interesting to know from Madoff as to his feelings for the old couple, who having lost investment of 3m dollars, are now looking for job to survive!

Ineffective governance due to unethical attitude of functionaries at all levels be it the State/Corporate sectors or Audit Firms is, perhaps, the root cause of such blatant frauds. How to identify and induct ethical functionaries for effective governance is the challenging issue?

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