Bernard Madoff - What Compelled Him to Commit A Ponzi Scheme?

Following on the heels of other notorious financial fraud perpetrators, Bernard Ebbers, former CEO, WorldCom, Kenneth Lay, former Chairman, Enron Corp, Jeffrey Skilling, former CEO, Enron Corp, Ivan Boesky, a prominent Wall Street arbitrageur, who amassed a fortune based on tips received from corporate insiders, Bernard L. Madoff pled guilty on March 12, 2009 in a New York City federal court to a Ponzi scheme that robbed thousands of investors of their life savings. In November, 2008, Madoff told 4,800 investors their accounts held $64.8 billion, according to court papers filed in New York City federal court.

Ponzi scheme is named after Charles Ponzi,* who duped thousands of New England residents into investing in a postage stamp speculation in the 1920s. Ponzi took advantage of the difference between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi's operation paid returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.

The system can not sustain itself and therefore is destined to collapse because the earnings, if any, are less than the advertised return. Usually, the scheme is interrupted by authorities before it collapses because a scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

Several media reporters have pondered what prompts someone to do such a thing. The answer is both simple and profound.

Boys are indoctrinated and rewarded that to be valued they need to achieve and even be ‘heroes.’ Boys are indoctrinated to feel more comfortable scheming and testing out where the edge of the law is at home and in the community.

In my practice I often hear parents say, “I never set a curfew for my son, because I know the girls’ parents set a curfew and boys are less likely to stay out longer than the girls.” The unspoken message is “Boys don’t need limits.” And for boys, the consequences of unacceptable behavior are less harsh than for girls. Unacceptable behavior in girls often leads to tangible negative consequences—suspension of allowance or privileges, being grounded or required to perform tasks—while the negative consequence for a boy is often merely, ‘a talking to.’ Thus, boys get the message that scheming and flaunting limits is acceptable—or at least, there is little price to pay.

Without limits, appropriate impulse controls do not develop. Children look for limits, and unless they find them, they continue to push, becoming anxious when there seems to be no end to how far they can go. When a parent fails to set limits, the child feels unimportant and unloved. Limits and negative consequences for breaching them, on the other hand, reassure children that they are noticed and that someone cares.

Lack of limits or of enforcement of limits, coupled with the parental and societal message that males in order to be full fledged men need to be ‘heroes’ and achieve success, puts tremendous pressure on men to scheme and push the limits in order to be valued. Those who manipulate to get what they want believe they are duty bound to perform, produce and create bigger and bigger acts of ‘heroism’ to feel valued and powerful, as well as allaying their fears of vulnerability (resulting from lack of impulse control) and the humiliation of failure (the ultimate sign of unworthiness).

Coupled with the lack of consequences for transgressing boundaries boys become adapt at not only scheming, they learn another valuable tool--charisma. Being the man among men or the charming man with women becomes their stock in trade.

Being valued for achievement, success and ‘heroism’ produces arrogance and grandiosity: “I can do no wrong; I am entitled; I can do whatever I want and get away with it.” While this is readily seen with sports heros, it is more subtle and accepted with high powered business people.

Madoff said when he started the fraud in the early 1990s, he felt "compelled" to give institutional investors strong returns despite the weak stock market and national recession. [His need to prove himself by being the hero is what compelled him to start this scheme/fraud.] "When I began the Ponzi scheme I believed it [the weak stock market and national recession] would end shortly and I would be able to extricate myself and my clients from the scheme," he told the court. "However, Madoff, lamented, this proved difficult and ultimately impossible."

In addition, there is a preoccupation with their own gratification in combination with lack of regard for how others feel, propels this behavior. Thus, in a vain attempt to fill themselves up, manipulators need bigger and bigger acts to fill the emptiness inside—not unlike the alcoholic—they become addicted to the chase and headiness of the win. It becomes an insidious downward spiral as they push the limits further and further to create the next emotional high.

A healthy level of self-centeredness, self-involvement, and a feeling of excellence is the natural companion of true accomplishment. Indeed, a certain degree of self-centeredness and self-involvement is considered a prerequisite to success. But the pathological form of self-centeredness and self-involvement compels people to achieve for neurotic reasons often times using illegal schemes to achieve greater rewards than anyone. Madoff now holds that title.

Closely tied to striving for achievement in unhealthy self-absorption is a need to fail. If your self-esteem is so fragile that you are unable to believe praise, you feel guilty and conflicted about success because you don’t believe you deserve it. Such people vacillate between a sense of undeserved success and a feeling of worthlessness.

Whatever these people achieve is viewed as a means to an end—that is, the continual search for love and approval. They often don’t know what their moral standards are. They haven’t experienced consequences as a result of transgressing limits during the critical maturational stages. As adults, they get themselves in trouble as punishment for having gotten something that, deep-down, they do not believe they deserve to have. They are seeking the negative consequences and limit-setting that they wanted/needed as children.

Court papers reveal in the early stage of the scheme, Madoff made investments, but, for the past thirteen years no investments were made. Thus, without making any investments, the scheme was sure to fail. Therefore, creating the emotional payoff Madoff needed to have as punishment for having gotten something that, deep-down he did not believe he deserved to have. He was seeking the limit-setting and negative consequences that he wanted and needed, but, heretofore had not gotten.

Bernard L. Madoff, Bernard Ebbers, Kenneth Lay, Jeffrey Skilling, and Ivan Boesky are men who, on one level, want ‘the ultimate hero’ label, but on another level, they don’t believe they are worthy. Thus, they continually scheme, test and manipulate situations in ways that ensure they will eventually be caught. “As the years went by, I realized that my arrest and this day would inevitably come,” said 70-year-old Madoff, at his plea hearing. “I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients, who gave me their money. I cannot adequately express how sorry I am for what I have done.”

On a conscious level, the only thing they fear is being caught; unconsciously, they want to be caught because they feel out of control. They often profess the greatest respect for the law, and many are lawyers; yet, paradoxically, they push the limits of the law and when caught, their first step is to hire the best lawyer possible to manipulate the law in their favor—thus continuing their grandiose manipulation of the system. Furthermore, lawyers who manipulate the system are the lawyers who created the laws with loop holes and room for interpretation—perpetually continuing a self-serving system. It is only fair, however, to point out that the system works in the favor of justice as well.

What can be done? Parents need to set limits for children both male and female. When the limits are transgressed, enforce negative consequences immediately. As an executive, business owner or manager, hold all employees accountable for the methods they use to achieve a goal. Lines of responsibility and accountability need to be outlined in performance standards and judiciously followed with consequences for non-compliance.

However, be advised, “Negative consequences” for a child does not mean “punitive.” Punitive measures prompts retaliation and damages self-esteem. Verbal berating and hitting/spanking are examples of punitive consequences, as is any consequence out of proportion to the offense. An appropriate negative consequence for missing a curfew, for example, would be taking away the car for the day or evening, or two days/evenings for a second offense. A younger child could be penalized by making him/her stay in his/her room for an evening without TV and other items of amusement. If the child is angry about the consequence, empathize rather than punishing further. Talking with your child regarding how he/she is in control of whether he/she has consequences is highly effective. The child's anger is appropriate, and additional punishment would be punitive. The child's anger is at him/herself, because, she/he knows her/his behavior created the consequence, albeit she/he projects the anger toward the parent.

*Source: U.S. Securities and Exchange Commission http://www.sec.gov/answers/ponzi.htm

Dorothy M. Neddermeyer, PhD, Entrepreneur, personal and professional Life Coach has 30 years of experience. She has consulted to professionals with IBM, AT&T, Exxon, Mobile, Merrill Lynch, First Boston, FedEx, USPS. http://www.drdorothy.net