1. In the St Thomas Aquinian view of the moral foundations of contracts, there are 3 virtues: (1) promise-keeping, (2) commutative justice and (3) liberality. A contract may be said to be good morally if it satisfies at least one of these criteria. In a previous note, I had defined these virtues. I'd like to argue that fraudsters are simply those who can't keep promises. Now, there is a lot of research on "how and why people lie" but the main points of this note are on "How to detect fraudsters?" and "What to do after detection?"
2. Fraudsters are easily detected by simply checking their references. Madoff, the $60 billion fraudster who got a 150 year jail sentence lied convincingly all the way up to the day he confessed. I heard that Judge Denny Cheng, who handed out the sentence was swayed by evidence showing Madoff's hardened heart. On the day before publicly confessing, a widow with a handicapped daughter told Madoff that she was giving him all her money and that this was all they had to support herself and her daughter. Madoff put his arm around the lady and whispered, "Don't worry. I'll take care of you and your daughter." He took her money and the next day announced to the world he was broke. I researched Madoff (and created a 50-page anti-fraud checklist based on a complaint against Madoff's main feeder fund called Fairfield --this could be useful to investors and fund managers and I have parked it in my computer) and found that one of the reasons he was able to dupe people is because the duped never bothered to check his references! In Europe, he would name 6 US banks and in the US, he would name 6 European banks. The duped never bothered to check. The bankers who did check never did business with Madoff. In today's world, you should be very careful about physical gold, gold funds and hi-return sovereign bond funds. Anyone selling you these are very dangerous, indeed!
3. What to do with a fraudster after you've detected one? This depends on you. Remember a fraudster is a bit charming, so in the majority of meetings, you will end up paying. Remember nothing is for free and that deals that "have no risk" or offer an abnormal rate of return, or something for which you don't need to pay the full price either or both in terms of time or money, are simply "junk." One of the insanely funny things I learned while trading as an investment banker is that I couldn't trust my "boss" or his "boss" to tell me the truth about anything that affected my personal welfare. I learned to take statements such as "believe me" from my superiors to be the strongest sell signals! I recently experienced a very similar incidence of this sort of funny behaviour at a university. And when I use to employ people, I found they would dip their hands in the cookie jar. In governance theory, we call this the agency problem. The classic agency solution is to offer employees a stock option scheme! Laughable, no? Will a stock option scheme eradicate dishonesty, lies, cheating and stealing? I don't think so.
4. Best is to be vigilant. In Aikido, if someone had broken the code of conduct, eg, broken a promise to a Sensei, stolen from the dojo, lied in public etc., the punishment was quite amazing. The punishment wasn't a stripping of one's rank or being thrown out of the dojo or even a demotion. The gravest punishment was to be called before the senior teachers and for the teachers to "laugh." No fraudster wants to be laughed at. It means he or she cannot be taken seriously. Next time you come across a fraudster, try laughing. It usually is disconcerting enough to spill the beans.
No comments:
Post a Comment