Bernie Madoff’s Message To MBAs

David Weber has seen it all. The former chief investigator for the Securities and Exchange Commission, Weber has investigated misconduct ranging from cattle fraud to trade secret theft to Chinese military spying over a two decade career in public service. Over that time, he has learned one enduring truth.

“Fraud is only limited by the ingenuity of the perpetrator,” he tells Poets&Quants in an interview. “It is only limited by the capacity to engage in creative thinking.”

Perhaps the most imaginative hustler in recent memory is Bernie Madoff. During the 2008 financial meltdown, Madoff became the face of fraud, orchestrating a Ponzi scheme that bilked investors out of nearly $20 billion. Currently serving a 150-year prison sentence in North Carolina’s Butner Prison Camp, Madoff may seem more like a cautionary tale than a sage at this point. In Weber’s executive and online fraud detection classes, he brings a rogue’s voice to the table. In essence, he is a guide to what can go wrong, pointing out where individuals and organizations are vulnerable and what can be done to stop the perpetrators.

Sound like a replay of Catch Me If You Can, where Leonardo DiCaprio’s Frank Abagnale helps the FBI catch swindlers after paying his penance? Not exactly. Instead, Madoff operates in the shadows, reviewing course materials and answering student questions via email far away. One contribution: He evaluated Weber’s online course syllabus in advance, posting suggestions on what he felt was truly valuable to MBAs.

“He was very focused on the culture as a whole and the lack of understanding in both the accounting and legal professions in particular,” Weber shares.

FRAUD: THE TOPIC THAT DARE NOT SPEAK ITS NAME

Madoff may be the star attraction in Weber’s fraud courses. But once students roll in, it is Weber’s boundless enthusiasm and thought-provoking questions and experiences that leave a lasting impression. The University of Maryland’s Smith School of Business is known for embracing practitioners like Weber. In his courses, students apply real world tools, used by regulators and senior executives alike, to prevent Enron-like chicanery from engulfing their organizations.

While Weber notes that business schools often highlight how to boost revenue and productivity, he argues that intricacies like reporting structures and internal controls are also key parts of MBA education. “Before they get out of the program, students need to understand their personal role in the corporate governance ecosystem,” he notes. This is particularly true for executive MBAs, who may already be part of the chain of governance. “By having a course focused on understanding the roles and responsibilities of each member of the chain,” Weber points out, “MBAs get to pause and think about how each might be designed to perform better when they return to their employers, as well as where problems might occur in their real world jobs.”

His courses, however, begin with students engaging in what seems a heretical exercise: They are asked to think like criminals. “We close our eyes and we think, ‘OK, each of you in this program is an executive or an up-and-coming person within the organization. Ask yourself: How could you do it if you wanted to? How could we circumvent internal controls and what is the worst thing that you could do in your organization?’ Then, ask yourself, ‘what do we need to do to fix it to prevent this from happening?’”

PARTNERSHIP BETWEEN WEBER AND MADOFF STARTED WITH A SIMPLE EMAIL

Bernie Madoff could’ve easily have been checked when he led his namesake investment securities firm. Like most Wall Street operations, he was audited — though his selection of a two-person firm should’ve raised red flags among investors. He was inspected and examined by the SEC five times. Of course, he pitched his knowledge of the securities market to financially-savvy banks, public accounting firms, and individual investors who could’ve easily dug deeper. Alas, there were always whispers in Upper East Side gatherings and Wall Street corridors that Madoff’s numbers couldn’t possibly add up. Still, Madoff was well-liked and well-connected, even once serving as the non-executive chairman of NASDAQ. It was unimaginable that he could be something other than what he appeared to be.

Yet, it was this very failure of imagination that fueled Madoff’s ongoing deception. No one dared ask the hard questions or verify his assertions. That even included the SEC, observes Weber, who cites Ronald Reagan’s classic “Trust, but verify” axiom in relation to Madoff. “They would come and do an inspection. Bernie would be the first to tell you that he had a lot of anxiety and stress because he felt at any moment that he would get arrested and thrown in jail. He would constantly be surprised because nothing would happen. They would never do the DVs (Direct Verifications) that would have caught him a lot earlier.”

Ironically, Weber had directed all investigations at the SEC’s Office of Inspector General, and first reported misconduct in the SEC’s investigation of Madoff. Despite being on opposite sides of the law, Weber and Madoff have developed a sort of kinship. “We have a lot in common, strange as that might sound,” Weber admits. “We share religion. We grew up in the same neighborhood. I’m around the same age as his boys when they were alive.”