Madoff’s Ponzi investment fraud: a social capital analysis

Author:Paul Manning
Position:Faculty of Business and Management, The University of Chester, Chester, UK

Purpose The social network analysis of criminal networks at both the ego and socio-centric level is well established. This purpose of this study is to expand this literature with a social capital analysis of a criminal network. The focus of the analysis will be the recent egregious investment fraud of Bernard L. Madoff Investment Securities (BLMIS). Design/methodology/approac... (see full summary)

Mados Ponzi investment fraud:
a social capital analysis
Paul Manning
Faculty of Business and Management, The University of Chester, Chester, UK
Purpose The social network analysis of criminalnetworks at both the ego and socio-centric level is well
established. Thispurpose of this study is to expand this literature with a social capitalanalysis of a criminal
network. The focus of the analysis will be the recent egregious investment fraud of Bernard L. Madoff
InvestmentSecurities (BLMIS).
Design/methodology/approach This research involves a case study of the BLMIS nancial fraud.
The article usesa social capital theoreticallens, with archival sources taken fromthe court records of Madoff
v. NY to include victimimpact statements and the defendants Plea Allocution.
Findings Financial crime literature can be expanded with a social capital analysis which facilitates a
socio-economicanalysis of ego-centric criminal networks.
Research limitations/implications Each nancial crime is of its time; however,there are recurring
socio-economic network characteristics that could be applied to develop an understanding of criminal
Practical implications Any understanding of nancial crime, including contemporary instances of
criminalinnovation, such as cyber-crime, can be enhancedwith a social capital analysis of criminal networks.
Originality/value A social capital analysis of nancial crime draws attention to human factorsin
criminalnetworks that are integral to this form of crime.
Keywords Ponzi scheme, Social Capital, Afnity fraud, Madoff
Paper type Case study
On June 29, 2009, at the sentencing trial, Ira Lee Sorkin, speaking for all of Madoffs
attorneys, acknowledged that their client was a deeply awed individual(Sentencing
Transcript dated June 29, 2009.p. 31). Sorkin continued by pleading for leniency, arguing
that his client had turned himself in, and made a full confession that expressed regret:
Madoff had also agreed to fully cooperate with the recovery of investments, though the
judge noted that he failed to be fully cooperative(Lee, 2009, pp. 45-46). The defense attorney
further stressed that they had based their request for a 12-year sentence on the average
length of sentencing for previous acts of severe fraud (Lee, 2009, pp. 32-33). As Sorkin
elaborated, a sentence of 12 years for the 71 years old Madoff could be just short of a life
sentence, with the slim prospect of his client living out his nal years impoverished and
aloneand would signal that justice would not be swayed by mob vengeance. Judge
Denny Chinn, however, remained unimpressedand specically dismissed the notion of life
expectancy analysis, preferring to hand down, in his words, a symbolic verdict[1]of
150 years or 1,800 months for the $65bn investmentfraud[2]: Madoff would be 221 before he
could be consideredfor release on November 14,2139.
It is not easy to elicit sympathy for Madoff, but the sentence was indubitably severe for
someone who had pleaded guilty andclaimed sole responsibility for the crimes[3]. One can
further question the sentencing judges assertion that by any monetary measure the fraud
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 320-336
© Emerald Publishing Limited
DOI 10.1108/JFC-06-2017-0057
The current issue and full text archive of this journal is available on Emerald Insight at:
was unprecedented, as after adjustments for ination, Ivar Kruegers inter-war and John
Laws eighteenth-century frauds were on the same scale. A converse view is that the scale
and operating strategy of Madoffs fraud would be familiar to any white-collar
criminologist,or nancial historian,as the economist J. K. Galbraith has noted:
The man who is admired for the ingenuity of his larceny is almost always rediscovering some
earlier form of fraud. The basic forms are all known, have all been practiced. The manners of
capitalism improve. The morals may not (Galbraith, 1979, p. 75).
From this perspective, Madoff started out with a commonplace afnity fraud[4], and
subsequently grewit into investment fund fraud open to anyone gullible enough to invest[5].
Madoff was also following a familiar rob Peter to pay Paul bubble[6],latertermed Ponzi
scheme[7] to lurein his investors.
The commonplace nature of the Bernie Lionel Madoff Securities (BLMIS) fraud did
prevent the case from achieving a level of infamy not witnessedin recent times[8]. In short,
this investment fraud attained a symbolism in excess of being just another example of a
gifted con man swindling the afuent out of their investments; rather, Madoff came to
personifying the discredited valuesthat led to the nancial crash of 2007: to some critics, he
became responsible for the crash (Hurt, 2009, p. 961). Thus, the investment fraud, with its
scale and reach, length of operation and also deft playing of the media by the victims,or
survivors as they termed themselves (Lewis, 2012, pp. 47-73), quickly established wider
symbolism and signicance.The extensive public interest in the case[9] indicatedthat while
being a typical investment fraud, there was also something remarkable about Madoff and
his investors/victims.
To meet the wider interest in the case a number of mainly descriptive accounts of
theinvestment fraud have been published, (Arvedluund, 2009; and Markopolos, 2010). This
developing literature includesa sub-genre written from a social network perspective (Baker
and Faulkner, 2004;Nash, Bouchardand Malm, 2013). These structural analyses of criminal
networks draw attention to the importance of constructing and maintaining socially
embedded networks to provide proximity between criminal and victim. Socialnetworks are
therefore vital for facilitating fraud as they create proximity. In the syntax of conmen
(condence men), social networksallowed ropersto identify the investors (the marks)to
be roped in, told the tale, and then eeced(Lewis,2012,p.14).
These structural analyses are also analogous with well-established theories from
criminology, which consider the personality traits and social activities of white-collar
crime[10], to analyze the dis-utilities associated with their criminal networks[11]. There is,
however, a limitation of these structural approaches in that they under-report the human
and qualitative qualities of personal interaction and social groups, as the social capital
theorist Robert Putnam has discussed:Knowledge needs a social context to be meaningful
(2000, pp. 170-180).
Accordingly, the extant social network (sometimes called structural) analyses of the
BLMIS investment fraud need to be expanded with an examination of the social context of
Madoff and BLMISs networks. This article will therefore expand the social network/
structural perspective to analyze the qualitative social context of the frauds embedded
network interaction, that is, to focus on the network interactions that are dependent on the
persistence of human contact(Cohenand Prusak, 2001, pp. 179-180).
The social capital concept encompasses the structural social network analysis (SNA)
favored by criminologists, who have studied the exploitative and deleterious effects of
socially embedded networks and transactions (Baker and Faulkner, 2004;Nash et al, 2013).
These analyses have already comprehensively reviewed the social network characteristics
Mados Ponzi

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