The 60 Minutes story touched on two names that have been lately in the news:  Bernard Lawrence Madoff and Harry M. Markopolos.  Let me first provide some background on these individuals and provide facts on what they allegedly have done.

I will cover a very well known term that describes what Mr. Madoff allegedly did.  Finally I would like to reflect on what this means to Naive Americans like you and me and what could be done.

Bernard Lawrence “Bernie” Madoff (born April 29, 1938 in New York City) is a Jewish American businessman and former chairman of the NASDAQ stock exchange charged with perpetrating what may be the largest investor fraud ever committed by a single person. He founded the Wall Street Company Bernard L. Madoff Investment Securities LLC in 1960 and served as its chairman until his arrest on December 11, 2008.  Madoff said that his Company had liabilities of approximately $50 billion US Dollars.  Mr. Madoff was running the world’s largest unregistered hedge fund.  Banks from all over the world have announced that they have potentially lost billions in dollars as a result.  Madoff’s Company was one of the top market maker businesses on Wall Street.  Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his Company with their endowments.

Harry M. Markopolos (born October 22, 1956 in Erie, Pennsylvania) is a former securities industry executive turned independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise.  Mr. Markopolos tipped off the SEC repeatedly starting in 1999 (the US economic melt down occurred in late 2008), when he argued that it was not legally possible for Madoff to deliver the returns he was claiming (steady 12% year after year).

A term associated with the alleged crime committed by Bernie Madoff is:  ”Ponzi scheme”.  A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit.  The term “Ponzi scheme” is used primarily in the US; in other parts of the world it is called a pyramid scheme.  The Ponzi scheme usually offers abnormally high (in this case about 12%) short-term returns in order to entice new investors.  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 scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903.  Ponzi did not invent the scheme, but his operation took in so much money that it was the first to become known throughout the United States.

Now that we are acquainted with the players and the term, how should Naive Americans react to the alleged actions from Mr. Madoff?

Harry Markopolos figured out that Mr. Madoff was doing something illegal in about five minutes.  Mr. Markopolos then spent about four hours working on mathematical models to prove that the hedge fund ran by Mr. Madoff was a scam.  We Naive Americans need to think about this.  About 65 Billion US Dollars lost and a single individual in a few hours able to prove what was going on.  Why did the SEC, Wall Street executives and the US government did nothing?

The SEC (that is our government) according to Harry Markopolos is staffed with lawyers that know nothing about financing.  They could probably easily spot a form or document improperly composed or filled (similar to what a computer program could do at a much reduced cost), but apparently the SEC staff is not trained or is incapable to detect financial crimes.  Perhaps the SEC needs to revise their staffing needs.

So what about Wall Street executives?  The answer from Harry Markopolos was simple.  When you [Wall Street executives] live in a glass house, you do not throw stones.  Our financial system public and private is corrupt to the core.  Most (one should never generalize) people in financial positions making from hundreds of thousands of to Millions of Dollars a year are not going to upset the status quo.  If there are no police officers to enforce speed limits, we will speed on all and any types of roads, if we could retrieve money from our accounts over our current balance we would, if we would have the opportunity to cheat on our spouses and not get caught, we would, etc, etc, etc.  Suddenly what Bernard Madoff allegedly did to many Naive Americans does not seem so bad.

According to records the list of people and organizations that Mr. Madoff allegedly ripped covers about 162 full pages.  At about 66 names per page it adds up to about 10,000 people and / or organizations.  The greed and lack of morals and ethics of, at the time, very well respected and influential person, affected 10,000 people and organizations.  If you take the entirety of unscrupulous Wall Street executives and higher management, you can easily come to the conclusion that what is going on with the US economy is the result of such individuals.

Naive Americans should contact politicians and demand that legislation be enacted to protect us from Mr. Madoff and people like him.  Sounds like a good idea, but Mr. Markopolos went a step further and did it many years ago in front of the SEC and nothing happened.

Mr. Madoff was so sure of his scam, connections and power that he publicly told investors on several occasions (you can see one of them on-line by visiting the 60 Minutes web site) that it was impossible for a financial institution to violate SEC rules and go undetected.  The public (he meant Naive Americans) does not understand such a simple fact.  The aftermath is that nothing of that was or is true.  Bernard Madoff stole 65 billion US dollars with little consequence.

So what should Naive Americans do about Wall Street?  I would say nothing directly.  What we can do is put extreme pressure on politicians to pass new legislation to put check and balances in our financial system to avoid what some greedy people did and will do over and over again.  Stiffer penalties should be made mandatory for people convicted of financial crimes.  The fathers of our nation did not trust each other.  They wrote into our constitution checks and balances to avoid some family or group of people to rule the United States of America like a monarchy.  At the time, that was their main concern.  With time the main concern has shifted to greed.  Naive Americans in general want to make money but do not wish to work for it.  This is not a problem specific to Wall Street.  This is a problem spread through our entire society.

Please press your local and federal representatives to pass legislation to induce CHANGE and most important make sure we CHANGE our personal ways.

In the real life example I am about to describe, the company in question had in place a phone system.  The system included a main switchboard installed in the reception area and matching phones distributed all through the office.  A set of landlines came into the office.  The lines would be used and automatically routed as needed until all lines were in use.  At that point, the system would inform additional callers that all lines were busy offering the caller to leave a message for the person being called.  All in all a nice and simple phone system.

A receptionist would man the switchboard logging all received calls.  Initially it was done using stationary forms, but with time, all the caller information was entered into a Customer Relationship Management (CRM) system.  This provided a reference on who was calling, allowed to screen callers, and eliminated the need for the people receiving calls to collect information about the caller.  As a side benefit, customers through time would develop a relationship with the receptionist, which helped improve the bottom line.

The business managed its electronic mail by an in-house Microsoft Exchange Server system part of a small business package purchased form Microsoft.  Minimum overhead was required to manage it by a development engineer.  The company received and sent e-mail almost instantly.  On average, about once a year, an issue with the Internet connection would cause a temporary shortage.  The company never experienced an issue with Exchange Server.

All was well until the new partners decided to outsource the receptionist job to an answering service and move the e-mail for the company to a service provider.  The reasons for the changes were quite interesting and perhaps somewhat amusing.

In order to save the close to minimum wage salary of the receptionist, an answering service would provide customer coverage around the clock.  The company in question is based in Central Time Zone, quite convenient for callers in the East and West coasts.  Customer knew when to call during regular business hours.  Keep in mind that if a new customer would call off hours, the best that the answering service could do is take a message and possibly forward the phone.  One of the advantages discussed by the new partners was that the answering service could receive calls 24 x 7.  The company had never sold a 24 x 7 service support contract.  With time it was found that the answering service itself did not offer such service.  It was just in their expansion plans.  The answering service was somewhat less expensive than having a receptionist in the front desk.  On the other hand, they could not ask the answering service to help you preparing some packets to be sent to customers or help with visitors at the site.

The company kept the same number of phone lines.  The lines were hardwired to each phone.  These direct lines would be forwarded to the answering service as needed.  Programming the phones and making the changes was not done for free.  As changes occurred in the company, some offices did not have a phone line.  Employees had to use their cell phones, which could not be easily transferred or conferenced in with the landlines.

Most customers did not like the answering service.  Obviously they could not answer any questions regarding the company or products.  It was obvious to customers that calls were not being answered properly.  In many occasions the caller would be told that the person they were calling was not available when that was not the case.  Overall, the answering service proved it was not working a couple months after the switch.  So why was this done and kept?  Will get to that in a few paragraphs.

There were also changes made to the e-mail system.  The issues were as bad or worse than the ones with the phone system.  Several times during the day one would send a message or set of messages and they would sit in the outbox for hours or days.  One of the approaches that would work some times was to restart Outlook.  Very often messages would be received out of sequence.  Sometimes a message would come in the following day.  Keep in mind that the company had Microsoft Exchange Server and outsourcing e-mail had a monetary cost associated with it.  Issues with the capacity of mailboxes were common.  So why was this done and kept?

It was obvious that quality with the new approaches was not present.  Costs were at least the same if not higher.  The new reason given by the new partners was that procedures and processes were needed to grow the company.  What was previously in place would not scale.  Not sure what the logic behind such claims was.  When questioned, a new idea gradually evolved.  By eliminating anyone that could potentially access the phone and e-mail systems, the company would be protected.  The partners mentioned some obscure case in which an insider leaked some information before an acquisition and the Securities and Exchange Commission (SEC) (www.sec.gov) came after the Chief Executive Officer (CEO).  By this time owners and employees were wearing high boots (catch my drift).

All the changes occurred because the new partners did not want any record of what they were doing or what they were not doing for the company.  They did not want the original owners to find out who was calling and for what reason.  With time, the original owners found out that the office-building manager was instructed by the new CEO not to discuss business issues with the original owners.  The same held true for the company that managed health insurance for the business (talk about mutual trust).

This is another example of events and schemes to be aware of in order to protect the small business from questionable actions from partners and investors.  The best way is to get things in writing up front and retain and if needed regain full control if the partners or invertors do not deliver on their promises within some reasonable time frame.  It is not easy for Naive Americans to start and manage successful small businesses.  Do not let empty promises guide your decisions.