Bernard Madoff may be alone in the sheer magnitude of his alleged $50 billion fraud uncovered Thursday, but he wasn't alone in devising and becoming cornered in an irreversible Ponzi scheme. Norman Hsu and Lou Pearlman were charged for multimillion-dollar Ponzi schemes just within the last year.
Barry Minkow, a former Ponzi scam artist, and psychologists for the Wall Street elite offer very different motives behind why people dig themselves so deep into fraud for so long. But all agree the path to high-stakes Ponzi schemes has less to do with money than emotions.
"We want to sleep at night too," said Minkow, who served seven years in federal prison for his multimillion-dollar Ponzi scheme, but now investigates corporate fraud through the Fraud Discovery Institute, Inc., which he co-founded in San Diego.
For five years during the 1980s, Minkow ran a Ponzi scheme behind the ZZZ Best Co. Inc., once thought to be worth $300 million. He appeared on "The Oprah Winfrey Show," made headlines as a young entrepreneur and, according to his online biography, amassed more than $20 million in loans from banks with no real profitable business.
"We all have a cure," he explained. "The irony of white collar crime is we believe that we're one good week in trading away and we'll get enough to pay it all back."
Ponzi schemes pay existing investors with the money from new investors rather than the profits from a legitimate company. As long as new investors buy in, the old investors will see a "profit," but eventually the pyramid becomes too large and the scheme collapses.
"We're not going to give up in it -- you got to buy time until the cure," said Minkow.
Before the cure, Minkow said he's found that most high-profile Ponzi scam artists work through trust.
"Perpetrators of crime rely on imputed credibility," said Minkow. "Once you've got that then people look at subjective criteria, not objective criteria to do business."
So rather than looking at the profitability of the company or its practices, Minkow said people will go with the credibility from word of mouth, reputation, prominence or glamour.
Building Up a Ponzi Scheme
Minkow said he gained credibility through media appearances.
"Madoff was able to succeed because of his past position as chairman of NASDAQ," he said.
Minkow has found a similarity between Ponzi scam artists when their lies start to unravel, too. Rather than a change of heart, Minkow said there's usually the "unknown variable" that exposes the crime.
"We all get caught because of the unknown variable. It's the thing that brings us down," said Minkow. "For me, it was an investigative reporter. For Madoff, it was an economy that's so bad people began asking for redemptions."
Ironically, Minkow said the end of a Ponzi scheme can be the most psychologically therapeutic.
"The first good night sleep I got was in prison," said Minkow. "Because it was over, I didn't have to lie anymore."
Stephen C. Josephson, a psychologist who treats many Wall Street clients in Manhattan, said he has seen similar greed and deceit in the financial world.
"There's been an association between money and self-esteem, that they'll do anything to keep it," said Josephson, who is also a clinical associate professor at Cornell Weill Medical College and at Columbia University in Manhattan.
"I think he [Madoff] is a textbook, but extreme, example; there are others like him out there," said Josephson.
Josephson said in case of an extreme Ponzi scheme scam artist, there are certain behaviors that fall into psychological "themes."
"From my perspective ... in my field we have a lot of labels that try to help us understand and study human behavior," said Josephson. "Although people don't fit neatly on the boxes, Madoff has certain themes."
Josephson said those "themes" include narcissism, which breeds a grandiose sense of self, greed and a lack of remorse.
"I would imagine that he's probably quite narcissistic," he said.
"Everybody has a personality, but when you take it to an extreme then you have a personality disorder," said Josephson.
Disturbing Thoughts at The Top
Among scam artists of Madoff's scale, Josephson said he can see "themes" of behavior of antisocial personalities.
"You have this other thing called antisocial personality disorder," he said. "These are people who break the law. Typically they lack remorse."
However, for all the "themes," Josephson said he has seen a cultural shift since practicing therapy in 1978 that also contributed to all the recent crimes.
"There are definitely people with money who deal with it in a generous way," he said. "It's not money that's the problem, it's values."
Josephson said he's noticed that across the board, both poor and rich, his clients have put more and more emphasis on money than on community values or even a sense of self. He said this culture has only rewarded and enabled people at the upper echelons to put money first.
"Money has become equated [with] power," he said. "Look, if you have a large sum of money, and even if you obtained it in an unethical way, you'll be welcome in the homes of politicians, in clubs, at events."
In Washington, D.C., Douglas LaBier has been a business psychologist and psychotherapist for senior executives in corporations for decades.
Like Josephson, LaBier sees the heads of these Ponzi schemes as extreme examples of a cultural problem.
"It's a continuum and more extreme at the executive end," said LaBier, who is president of Center for Adult Development in Washington.
"You're in that stratosphere and everything you stand for is your career," said LaBier. "If your identity is so wrapped up in your career, when that starts to unravel, there's no grounding and you're in quicksand."
LaBier said he's seen a "careerist" culture blossom in past decades that connected a person's value to their job. While everyone may become party to it, the more success one has, the more danger they are in to only identify with that success, and protect it with questionable actions.
"It's for any individual. He [Madoff] is not in a vacuum. He's reflecting a larger culture," said LaBier. "It took the form of money because that's the arena he's in. ... but the personal collapse, the sense of who you are, gets destroyed."
But Minkow said he does't buy the identity connection. When asked if he had to reassess his identity after his fall, Minkow responded quite simply: "No."