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Madoff Just the Start of Post-Bubble Scandals

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The US$50-billion fraud, allegedly perpetrated by New York's Bernie Madoff, is a predictable outcome following the collapse of a speculative bubble. Enron's Ken Lay and other high-flyers like Bernie Ebbers of World.com were exposed following the tech bubble.

For white collar crime watchers and authors like myself, this is de rigueur. Bubbles attract crooks aplenty in addition to the usual amateurs who think they're brilliant even though they have been merely swept along in an updraft.

And big bubbles attract bigger crooks. Last year, it began with US$8 billion in rogue trading frauds at Societe Generale followed by the export of sub-prime debt to the world disguised as good credits and now this. Madoff is the biggest in history and more will come. Today the head of India's IT giant, Satyam Computers, also listed on the NYSE, admitted to cooking the books big time.

I have written three books on white collar crime which I consider the dark, and inevitable, side of business. My travels and experiences have led me to conclude that crooks fall into one of three categories:

Delusionals
These can be amateurs or egotistical crazies who cannot face reality it arrives so they cover up bad results in the hopes events will skate them, and their companies, on side. Lay and Ebbers fall into this category. They established and ran solid businesses then swept trouble under the floor. Enron deployed off-balance sheet shenanigans to falsify stock market results and Ebbers also cooked the books as the bubbles that made them hugely rich began deflating.
I would also place Conrad Black into this category. He was a man who treated his public company like his own domain and helped himself to cash belonging to his fellow shareholders.

Career or serial sociopaths
These are the guys who charted a crooked course from the beginning. They are con men whose greed and depravity know few bounds. They gravitate to bubbles, from real estate to telemarketing to stock promotions and hedge funds, in order to swindle for fun and profit.
They are flexible and move to where the action is. For instance, I interviewed a convicted swindler who operated mining scams on the notorious, and now defunct, Vancouver Stock Exchange for years after he renamed and redirected his mining shell companies into high tech start-ups to cash in on that bubble. He then issued scads of questionable press releases about inventions, gadgets and contracts with buyers. I asked him how he defined high tech and he responded "anything with a plug."

Desperates
These are people who turn to white collar crime because they have substance abuse problems, gambling problems or are being blackmailed by violent people.

Madoff is a mystery

The case of alleged swindler Bernie Madoff is puzzling. He was a pillar of society and befriended many of the bigshots, charities, non-profits, bankers and religious people whose money he squandered. He was a pillar of society, something that's unusual in the world of crookery.

So, if convicted, Madoff may turn out to be a Delusional - a guy who started off with good intentions, then lost a fortune and decided that, rather than face the music, to keep the money flowing in under false pretenses in the hope that he would score big-time and everyone would win.

On the other hand Madoff may have set out to do this. After all, this US$50 billion disappeared over many years as an elaborate and detailed hoax involving trading and financial records was perpetuated. Like the salting of assays by Bre-X's late geologist.

What characterizes the serial fraudster, however, is a bullet-proof exit strategy. In Bre-X's case it was an alleged suicide by the geologist and, along with that questionable event, a trail gone cold. British newspaper magnate Robert Maxwell also allegedly leaped to his death from the back of his yacht just before it was discovered that he looted pension funds.

Others merely flee the country, change their identities, fingerprints and facial features.
But Bernie Madoff remains in his luxury New York City apartment, under house arrest. His lawyers are cooperating with authorities and he is pledging to remain in the states. His associates are under siege too. One committed suicide (Rene-Thierry Magon de la Villehuchet, a French aristocrat and professional investor who lost US$1.4 billion of his and his clients' money.) Another (Sonja Kohn of the Bank Medici in Vienna which blew US$2.1 billion of client money) is in hiding due to fears that the Russian tough guys who lost their shirts will wreak revenge on her and a third has had his assets tied up in lieu of lawsuits, fines or both.

Whatever the truth, Bernie Madoff's spectacular demise is not the last one that will surface out as a result of the financial system's meltdown. Many more will be made public or are being covered up as we speak.

If this turns out to be an all-out fraud from the get-go, then no laws, regulators, journalists or intermediaries could have averted it. This bubble was the greatest in history and Madoff swam among the biggest beneficiaries who, like bubble victims everywhere, never questioned their own judgment or rightful entitlement to uninterrupted gains.

Diane Francis blogs on Financial Post daily