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How Forensic Methodology & Psychology Uncovered Bernie Madoff's Ponzi Scheme

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May 3rd, 2012

It’s not news to anyone that Bernie Madoff’s last name was fitting: his Ponzie scheme made off with billions and billions of dollars from some fairly visible celebrities. But with such high profile clients and huge sums, how did he keep it under wrap and far from the peering eyes of forensic investigators for as long as he did? Questionable accounting and silver-tongued psychology were his principal strategies and will now be taught by forensic psychology colleges around the country. They were the cause for success, and ultimately, the cause of his downfall.

The Madoff scheme may have been the most daring, and is certainly the largest Ponzi scheme ever seen by the financial world. Madoff claims that his illegal trading began in 1992, though there is evidence to support the scheme’s origin in the seventies. Basically, Madoff had a number of high profile clients who invested large sums. He refused most investors, sticking mostly with wealthy New York Jewish executives, who trusted him implicitly by reference and religion.

In fact, by the mid-nineties, Madoff had out and out stopped investing, and used charity investments to keep authorities off his trail. The steps leading up to the discovery of the Ponzie scheme were strictly psychological: as the economy got worse, and worse, and worse, those who had invested in Madoff Securities wanted to pull their investments and hold onto their cash. Though Madoff had been able to sustain his scheme by pulling small funds when necessary, which earned him trust within the communities of the rich, he couldn’t keep up with the demand. And so, the scheme came toppling down. He was caught in 2008 when he could no longer keep up with the demand from clients to cash out, and his sons discovered the tricky bookkeeping. They turned him into the authorities.

Monica Ackerman, a clinical psychologist, reached the conclusion that Bernie Madoff had sociopathic tendencies, though those might not have manifested themselves completely in the absence of the proper environment. He certainly lacked compassion for others, by anyone’s standards. How else could he have justified the fraud of $64.8 billion? However, since his son’s suicide in December 2010, Madoff had said on the record that he regrets what he had done, and that his Ponzi scheme was not initially intended to be so. Rather, it was an accident that snowballed, first into a problem, and then into a lawsuit.

But the bulk of the effort in uncovering Madoff’s frauds was in forensic accounting. Imagine your average number cruncher, but with a CSI-edge. Or Fox Mulder, if he paid attention to your bank account instead of the paranormal.  Forensic accountants unravel financial records to determine where money has gone, where it should have gone, and what that means for the company. The field has been around since the days of Al Capone, but today, with the age of the computer, it’s easier than ever to hide money in offshore accounts, cooked spreadsheets, and a dozen other shady pieces of silicon.

In the aftermath of the Ponzi scheme at Bernard L. Madoff Securities, a team of forensic accountants have set to work tracking down the $50 billion dollars that allegedly disappeared in Madoff’s “accident.” Professor of accounting at Louisiana State University, Larry Crumbley, stated, "They will be looking for records, fake invoices, cooked books, red flags, anything that doesn't make sense. They will just be following the computer and paper trail, rather than the DNA."

In fact, the lessons learned from Madoff’s schemes have wide reaching advantages for other companies. The new attention paid to forensic accounting has made investors aware of their options for vetting companies before trusting them with their money. The opportunities for fraud are weaker now that the consequences have been made more clear.

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