Episode 102 ... Eugene Soltes (86:41)

His book, Why They Do It: Inside the Mind of the White-Collar Criminal
[Is Soltes another spelling of Soltys? (a Polish Jewish name)]
Professor at Harvard Business School .. finance, accounting, eight years on faculty
Had aspirations to be a trader
Econ undergrad, Masters in statistics
Worked at UBS, exotic options
Got a PhD, Great Financial Crisis hit, went into academics
MSNBC show called "Lockup" inspired him
Wanted to hear from white collar criminals, not violent criminals
Wrote to former Enron and Tyco executives in jail
Wanted to understand their perspective
Steven Richards, Global Head of Sales of Computer Associates, wrote thoughtful letter in reply
"Subtle fraud" ... backdating contracts to prior quarter, eight CA execs went to prison
Understanding the psychology of fraud
90%+ of people he wrote to, responded
"the challenging part of their lives" .. he means being imprisoned, Soltes big on euphemisms
Spent a lot of time with Bernie Madoff, mastermind of largest Ponzi scheme in history
Bernie came from nothing and built an innovative brokerage firm
Madoff former Nasdaq chairman, highly respected and admired, SEC frequently called him for advice
Madoff one of the first to purchase order flow
Allen Stanford was $5BB fraud, big but a fraction of Bernie's
Madoff knew many of his victims ... all close within the Jewish community
Madoff rationalization for the Ponzi scheme, kept doubling down on a "capital violation" -- what a nut
$50BB+ in money under management at Bernie's fund, over a decade of no activity, just Ponzi payouts
Said he was earning 8-12%, any redemption he met with fund inflows
Very few redemptions because the stated returns were so amazing
People begged Madoff to get into the fund
2008 the jig was up, redemptions exceeded inflows
Any sophisticated investor could instantly see it was a fraud, the returns were completely unrealistic
A lot of people looked the other way, wanted to participate in fraud not realizing it was a Ponzi
All his false positions were in tiny, illiquid markets ... just made no sense given his size, obviously ridiculous to anyone who spent ten seconds with the numbers
Can buy Madoff bogus statements on eBay now
Bernie just made a "series of mistakes," a charming guy, very smart and clever
Regulators overlooked all the red flags
Feeder funds aggregated small investors' money, sent to Bernie
Suing investors who took money out of the fund to pay people whose money was left in the fund
2006 SEC deposed him about front-running his brokerage business orders; he wasn't doing this
Was so inconceivable he was a fraud (highly respected), regulators didn't look hard enough at him
Bernie and sons decided to alert regulators in the end
First impression of Bernie: cordial, whip smart, great memory
Bernie is "distantly aware" of what he did wrong
Madoff unusually calm in prison, taking it in stride [because he's a sociopath]
Michael Rand, chief accounting officer, at Beazer Homes
Housing boom, housing bust
Cookie Jar Accounting ... not over-reporting earnings, but under-reporting earnings, "over-reserving"
Unusual case where Rand was *under-reporting* earnings during housing boom
Five years in prison for under-reporting earnings
Managing the Street's expectations
Shop around for estimates that work best for you
Pension assumptions also all over the map, underfund pensions to maintain earnings
Insider trading -- using confidential information to make trades
Capital One employees correlated their credit card database with company sales, e.g., Chipotle sales boom, made trades based on their analysis, caught and went to jail
Two credit card companies do sell their aggregated data to hedge funds
Satellite data of store parking lots, car counts -- valuable data
Private helicopters fly over oil reserve fields to make estimates -- valuable data
Expensive data sources give these insights ... info legitimately acquired
Challenge to identify victims of insider trading
McKinsey exec Rajat Gupta tipped another Raj info he learned at Goldman Sachs board meeting
Received "friendship" from Raj, "fuzzy" benefit, no money, still convicted
Perpetrators very distant from victims so they don't feel bad about it
Prison is nasty ... dirty, cold, and loud ... rich guys still suffer that
Every white collar criminal he interviewed in prison was not remorseful, only troubled by missing family events
Nav Singh Sarao, flashing and spoofing very common
Tom Hayes, LIBOR scandal ... individuals as scapegoats for institutional problems
www.eugenesoltes.com
Twitter: @eugenesoltes