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Posts Tagged ‘madoff’

The Ability to Hide

Tuesday, October 19th, 2010

Alvin Toffler, author of Future Shock and The Third Wave just released a paper titled, 40 for the next 40, A sampling of the drivers of change that will shape our world between now and 2050. As expected from a futuristic thinker, Toffler provides a plethora of ideas to think about and ruminate on.

There is one idea that Toffler points out that relates to the phenomenon I refer to as Silent Problems (problems that are being avoided, neglected, going unnoticed or are being intentionally silenced) in my book Without Warning. This idea is:

It will be impossible for organizations to hide improper actions:

Rapidly growing amounts of information, and the proliferation of professional/consumer grade tools for analysis and interpretation, mean previously empowered individuals will now be able to see what organizations are doing, and promote that information to others.

 

Consumer opinion of corporate responsibility practices will influence product/service selection and brand switching.

 

This obviously doesn’t imply that mankind, nor organizations won’t try to hide improper actions. After all, there will always be a Madoff, a Petters, an Enron and others out there preying on the innocent. For some, it is simply their human nature and their predisposition. And this is not to suggest that even with vast computing power; governments will become smarter, thereby becoming more effective in their vigilance in preventing such wrongdoings. It does suggest that a cat and mouse game where wrongdoers will find it necessary to weave an increasingly complex web of deception in an attempt to stay one step ahead of the Feds will continue into infinity. Which by itself; is a knowledge network of sorts.

 

In the end, the empowerment of data changes everything. Yet man must take such data and make decisions, and implement actions. Which makes me ponder, will data overwhelm our ability to make decisions and implement actions?

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Underestimating a Silent Problem

Tuesday, June 22nd, 2010

Risk. Exposure. Liability. These are words that should be at the forefront of every conversation when a silent problem is identified ( a problem that has been avoided, neglected, gone unnoticed, or been intentionally silenced). The reason being, too often we underestimate the real impact a silent problem can have on an organization, and its share price. For instance, we need look no further than Bear Stearns, Lehman Brothers, Madoff, Toyota, and now BP. In each of these and 100s of other of instances, while the crisis on the surface appeared under control, in reality things were totally out of control. Such can be the impact of a silent problem.

 In a recent Reuters article titled Wall Street Said Buy, Buy, Buy BP Stock As Gulf Crisis Unfolded illustrates how analysts often underestimate the financial impact of disasters that eminate from silent problems. The story states:

As early word of BP’s Deepwater Horizon blowout began spreading, investors panicked. After closing above $60 before the April 20 disaster, the energy giant’s shares plunged almost 20 percent in New York, to below $50, in just two weeks.

It is not hard to understand why. Even then, the out-of-control oil spill in the midst of rich fishing grounds and nearby resort beaches raised the specter of horrific damages and untold potential liabilities.

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP (BP.N: Quote, Profile, Research, Stock Buzz) (BP.L: Quote, Profile, Research, Stock Buzz) shares continued to drop, most were screaming the same message: buy, baby, buy.

Credit Suisse, which had a “buy” rating on the stock at the time, did not even mention the accident in an April 28 report. The firm upgraded earnings estimates after BP reported strong quarterly results the day before.

A day later, with BP’s shares then down 11 percent, Citigroup’s Mark Fletcher weighed in. He argued that the decline was “disproportionate to the likely costs to the company, even assuming damages can be claimed.” In the same report, he estimated BP’s total share of the cleanup at just $450 million — today, conservative guesses put the figure at $10 billion to $20 billion.

Around that time, Morgan Stanley was among the chorus citing the strong rebound of Exxon (XOM.N: Quote, Profile, Research, Stock Buzz) shares after the 1989 Valdez tanker spill in Prince William Sound, Alaska, as a reason to be bullish. “We think the sell-off presents an attractive buying opportunity for investors with medium-term investment horizons,” the firm wrote.

All told, 27 of 34 analysts tracked by Thomson Reuters rated the stock “buy” or “outperform” as recently as May 11. The other seven rated the shares “hold.” There was not a single rating of “sell” or “underperform” among those tracked.

The BP crisis is horriffic. It’s impact will be felt for years, and probably decades. And when we look at the evidence, it was a problem being intentionally silenced, and no one screamed Wolf!

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Stanford & Madoff - SEC Treated Them Equally

Monday, April 19th, 2010

The SEC just came out with their report regarding Allen Stanford’s Ponzi Scheme. And guess what, it mirrors that of Bernard Madoff’s encounters with the SEC. In each case, the SEC acted like blundering idiots.  It makes one wonder if the SEC didn’t order their investigative license from an online diploma university for the price of $14.95. Because what has surfaced over the past couple of years reveals, the SEC has been incompetent on some of these matters!

As reported by the Wall Street Journal, The report (The SEC releashed a report on Friday) lays out a series of missteps by the SEC ignoring red flags being raised by the examiners in its Fort Worth office, who were “aware since 1997 that [Stanford] was likely operating a Ponzi scheme.” In four separate instances in 1997, 1998, 2002 and 2004, examiners concluded that Stanford’s businesses were either a Ponzi scheme “or a similar fraudulent scheme.” “The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion,” the report said.

In my entry, Blinded By A Dim Light earlier this year regarding Bernard Madoff, I state, How long does it take to catch a Ponzi scheme operator? Well, according to the report released yesterday titled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” 16 years!!! And that’s 16years from from the date the first red flags were raised about Bernard Madoff.  During those 16 years, the SEC opened five inquiries, and hundreds of red flags were raised.

The truth around stories like Madoff, Stanford and others scare me. And they should scare you too. They reveal that broad swaths of government are likely totally incompetent. Rules and regulations don’t matter. The leadership of these institutions are suspect. And most important, we, the American citizens and the US Economy is taking a hit due to these lapses. Ponzi schemes will always exist, how and when we shut them down determines the true cost of them. Here, we have failed. Madoff and Stanford were allowed to exist for years after the first signs of Ponzi started to surface.

Yes, these were silent problems that resulted into Without Warning events of immense magnitude.

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Blinded by a Dim Light

Thursday, September 3rd, 2009

How long does it take to catch a Ponzi scheme operator? Well, according to the report released yesterday titled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” 16 years!!! And that’s 16years from from the date the first red flags were raised about Bernard Madoff.  During those 16 years, the SEC opened five inquiries, and hundreds of red flags were raised.

Okay - I’m Mad!!! I just read the report. It is possibly the most troubling report I’ve ever read. In fact, it reads like a novel, but then, there’s a difference. Fiction has to make sense, the truth often doesn’t. Here are but a few of the SEC blunders captured from the report.

One of the few points that was made in a conference call between the offices was a comment by a senior-level Washington D.C. examiner reminding the junior NERO examiners that Madoff”was a very well-connected, powerful, person,” which one of the NERO examiners interpreted to raise a concern for them about pushing Madoff too hard without having substantial evidence.

In September 2005, NERO prepared a closing report for the examination that relied almost entirely on information verbally provided by Madoff to the examiners for resolution of numerous “red flags.” One of the two primary examiners on the NERO examination team was later promoted based on his work on the Madoff examination.

 The OIG investigation also found the Enforcement staff was skeptical about Markopolos’ complaint because Madoff did not fit the “profile” of a Ponzi scheme operator, with the branch chief on the Madoff investigation noting that there was “an inherent bias towards [the] sort of people who are seen as reputable members of society.”

As the investigation progressed; in December 2005, Markopolos approached the Enforcement staff to provide them additional contacts and information. However, the branch chief assigned to the Madoff Enforcement investigation took an instant dislike to Markopolos and declined to even pick up the “several inch thick file folder on Madoff’ that Markopolos offered. One of the Enforcement staff described the relationship between Markopolos and the Branch Chief as “adversarial.”

During an interview with the OIG, Madoff stated that he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over … and it never happened.” Madoff further said that when Enforcement did not follow up with DTC, he “was astonished.”

When Madoffs Ponzi scheme finally collapsed in 2008, an SEC Enforcement attorney testified that it took only “a few days” and “a phone call … to DTC” to confirm that Madoff had not placed any trades with his investors’ funds.

Now here is the damning part, and excuse me for be self-serving on this part. In my book Without Warning I present a list of “7 Yellow Flag” symptoms that a silent problem might exist. For instance, here are two of the seven yellow flags.

  1. When the risk of making a decision for employees inside the organization is considered to be greater than the benefit of making one. Symptom: Slow and indecisive decision making.
  2. When information that should be readily available is difficult to access, appears incomplete or doesn’t make sense. Symptom: Information is delayed or incomplete, and parts often held in secrecy.

Actually when I examined the report and the list of seven symptoms, all seven yellow flag symptoms applied to the Madoff case. This is telling on several points. For instance, if silent problems aren’t caught and resolved early, they will morph and become more toxic over time - in this instance, $65+ Billion toxic. Secondly, it’s imperative that businesses and public agencies (like the SEC) become knowledgeable about silent problems, how to identify them, and how to act on them. Lastly, the book Without Warning should become required reading.

The Madoff Ponzi Scheme is a story about what can happen if the warning signs of silent problems aren’t heeded. If you don’t, it’s amazing how dim a light can be, to be blinded by it.

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Google Insight

Wednesday, July 1st, 2009

In my presentation, Without Warning, I present the problem, silent problem and without warning trifecta. I discuss how a codependency exists between problems and silent problems. I illustrate how problems that are uncomfortable want to naturally gravitate toward becoming silent. And once they’ve become silent, over time they naturally want to gravitate back towards being visible (If more people understood this dynamic, they’d be less inclinded to pursue the silent problem option). Its as if a bozo switch exists that says to us, “If I can avoid disclosing this problem, I’ll be able to figure a way out.” It’s a seductive safety valve that rarely works, yet is often deployed. The challenge is, the silent problem morphs over time, growing more complicated and tenacious to the point where it wants to be visible. And when this occurs, a without warning event occurs.

What does this have to do with Google. As you likely know, Google as a company is admired and feared. It’s transformed businesses and made others irrelevant. It has helped change the world, and much of the world has adapted to it. So when Eric Schmidt, the CEO of Google speaks, people tend to listen. Jeff Jarvis, author of “What Would Google Do” recently attended Aspen Ideas Festival where Eric Schmidt spoke and Jarvis wrote about it over at his blog, BuzzMachine. Here was my Silent Problem moment.  Schmidt states;

I learned awhile ago that the right way to run human systems is transparency. Problems came from information hiding.

 Information hiding is one of the cornerstones for silent problems and a catalyst for Without Warning Events. Information hiding can and does occur at every level of the organization, from the individual, the group, the division and all the way up to the organization itself. It’s a dangerous path filled with short term gains, yet long term consequences. Just look at the daily news. Individuals as varied as Madoff to South Carolina’s Mark Sanford perfectly illustrate this point. It speaks volumes about the individual and their integrity. But take a moment and see how this actually manifests itself.

Problem > Silent Problem > Without Warning Event

Sanford had a problem - infidelity. He somehow believed he could keep it all silent(maybe there was some comfort that having an affair in a different country could be held in secrecy). And when it was exposed without warning, it ruins his career and potentially his aspirations for higher office.

I’ve seen this over and over again. That is, the problem, silent problem, without warning trifecta. It’s a losing combination where careers are lost and opportunities squandered. Spread the word, and of course if you want to learn more - go to the book, Without Warning.

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Silent Problems Review - June 29

Monday, June 29th, 2009

Since publishing the book Without Warning earlier this year, the interest in Silent Problems has grown. As a means to capture some of the more significant issues on the horizon, I’ll be compiling a list weekly pointing out a few of the silent problems entering the marketplace (note: One of the blogs I follow is threestarleadership by Wally Bock and this is a concept that Wally utilizes with great effectiveness. Thanks Wally for this idea). I encourage you to take notice, and watch how these problems unfold. But more importantly, prepare so they don’t become Without Warning Events. So for the week of June 29, here they are.

China Bank Risk - from the WSJ:  Chinese banks have lent freely to state-owned enterprises and local governments, partly on expectations that the central government will ultimately underwrite the risk…  Some lenders have let credit standards slip for stimulus loans even though such loans could bear some risks in the long term, the paper said. Most of the lending goes to railroad, highway and airport building projects that eventually are handed over to local governments to manage, and it’s the local authorities — not central government — that will guarantee loan repayments, it said. Banks often lack accurate and full information about local governments and their financial viability, increasing their credit risks, it said. Lenders’ asset quality undoubtedly will suffer if local governments later find themselves in financial trouble, it said.

My Take: China is a growing nation with economic might. Unfortunately, many of its processes and procedures are generally inadequate and untested. Little slip-ups will have an increasing impact on the global economy.

A Slow Burning Fuse - from The Economist: The Econimist is a great publication, and this week’s edition is no different. A special report on the world’s agining population is included. It’s a fascinating read with many charts that begin to show how big this problem is becoming.

My Take: Increasing life spans coupled with declining birth rates is a problem of immense magnitude. It’s impact is being felt by every segment of the population and will have a greater impact going into the future.

Organic Farmers Feel The Pressure - TwinCities.com: A year ago I wrote an article for an agribusiness publication about how organic farming would be one of the fallouts from the economic crisis. This quote begins to show how consumer spending habits can change. Sales in the U.S. of organic foods sold mostly at supermarkets are expected to drop 1.1 percent to $5.07 billion this year, according to the Chicago-based research firm Mintel. Whil the drop is small, it is the first in an industry that has seen annual growth of 12 percent to 23 percent.

My Take: The economic crisis has changed the buying habits of large segments of the population. Areas like “organic farming” which were considered recession proof are not immune, and will continue to feel the impact.

Social Media Amongst Fortune 100 CEOs: from estrategy.com: We researched the Fortune 100 CEOs in the US to see how many were using social media services like Twitter, LinkedIn, Facebook and Wikipedia. The results are shocking - not one CEO has a blog and only 13 have LinkedIn profiles. We found the top CEOs to be disconnected from the rest of the world. If they want to connect with their target audience and raise their company’s visibility, they need to change how they interact online.

My Take: Social media is coming of age, and impacting everything tied to sales and marketing. CEOs are more visible and vulnerable than ever.

Madoff Sentenced, from Bloomberg: Bernard Madoff was sentenced to 150 years in prison for masterminding the largest Ponzi scheme in history. Madoff appeared in court today before U.S. District Judge Denny Chin for the first time since his March 12 guilty plea for an epic swindle that may have reached $65 billion. “I don’t ask for any forgiveness,” Madoff, 71, told Chin. He said he deceived his brothers, his two sons and his wife. The courtroom burst into applause as Chin imposed the sentence, which is about six times longer than those meted out to the chief executives of WorldCom Inc. and Enron Corp.

My Take: Bernard Madoff had a problem that he intentionally silenced for over a decade. The wealth he gained access to and the lives he destroyed was huge. Unfortunately, it was a text book case about Silent Problems and how they can turn into Without Warning Events.

That’s it for Week One, and thanks for visiting. And of course if you have a silent problem story you’d like to share, feel free to drop me a line.

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Blinded By The Fees

Saturday, April 4th, 2009

From Bloomberg “They were blinded by the fees they were earning” in placing their own clients’ money with Madoff, Galvin said of Fairfield Greenwich. The firm ignored “any fact that would have burst their lucrative bubble,” he said in the complaint.

The Madoff Securities ponzi scheme is classic.  It utilized deceipt, avoidance and a fair amount of dancing around the issues to avoid getting caught.  And to reinforce the desired outcome, he used money, in the form of fees, to keep awkward inquisitions at bay. 

Last week, I wrote here about how some of Wall Street’s sharpest analysts were silenced by their employers.  A growing number of analysts who were either critical of the financial sector or were early raisers of red flags in the mortgage market are getting the cold shoulder from their employers, which has led to the analysts being forced out or silenced. Highly regarded mortgage analyst Laurie Goodman, who when she worked at UBS was one of the first researchers to sound the alarm about the dangers of the subprime market, is said to have drawn the ire of UBS brass as her clarion calls crimped the bank’s ability to sell billions in bonds backed by subprime loans.

Likewise, there is an interesting discussion over at the Harvard Business Blog titled, “Are Business Schools to Blame?”  I make the case that Silent Problems are a core problem relative to mortgage crisis, financial meltdown… I wrote:

Interesting, yet terrifying discussion. Predicting how humans will react under a given set of circumstances is difficult to simulate, even more difficult to predict. I believe that each of us has a Bozo switch inside us that given the right incentives, following the right leaders, and society encouraging us along the way, can be extremely distructive. Barbara Kellerman illustrates these points perfectly in her book, Followership. My second point ties back to a theme I discuss at length in my book, Without Warning, which relates to silent problems. Organizations will never be perfect organisms. They will always have silent problems on the sidelines being avoided or neglected. I propose how to dislodge these silent problems out into the open for people to see and deal with. I firmly believe that every MBA class must address the silent problem theme, because its the good apples inside the organization that must be held responsible for disclosing the bad apples that are present. This is the watchdog we need and must embrace.

The “Silence” theme transcends each of these scenarios.  Silence is not “golden” but rather its toxic. Organizations must break the Silence theme - period.

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