Wednesday, February 29, 2012

Ubiquitous Computing - Big Brother's All-Seeing Eye

Ubiquitous Computing - Big Brother's All-Seeing Eye

by oldthinkernews,
July 31st 2008

31 July 2008
from YouTube Website

An "Everyware" world, as Adam Greenfield calls it, is a world in which computers are embedded and merged seamlessly everywhere in the environment.

Radio Frequency Identification (RFID) tags communicate their position and other information constantly in a vast network.

Everyday objects become "searchable" as if they were part of the interconnected world wide web. In this interconnected internet of things, scientific management and surveillance of people and the environment we inhabit becomes possible, and marketers' ultimate dreams come true.

Ubiquitous Computing - Big Brother's All-Seeing Eye

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Google Tracked iPhones, Bypassing Apple Browser Privacy Settings

Google Tracked iPhones, Bypassing Apple Browser Privacy Settings | Feb 17th 2012

Google Inc. and other advertising companies have been bypassing the privacy settings of millions of people using Apple Inc.'s Web browser on their iPhones and computers—tracking the Web-browsing habits of people who intended for that kind of monitoring to be blocked.

The companies used special computer code that tricks Apple's Safari Web-browsing software into letting them monitor many users. Safari, the most widely used browser on mobile devices, is designed to block such tracking by default.

Google disabled its code after being contacted by The Wall Street Journal.

The Google code was spotted by Stanford researcher Jonathan Mayer and independently ...


Google Inc. and other advertising companies have been bypassing the privacy settings of millions of people using Apple Inc.'s Web browser on their iPhones and computers—tracking the Web-browsing habits of people who intended for that kind of monitoring to be blocked.

The companies used special computer code that tricks Apple's Safari Web-browsing software into letting them monitor many users. Safari, the most widely used browser on mobile devices, is designed to block such tracking by default.

Google disabled its code after being contacted by The Wall Street Journal.

The Google code was spotted by Stanford researcher Jonathan Mayer and independently ...

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Google's Cookie Trick in Safari Stirs Debate - NYTimes

Google’s Cookie Trick in Safari Stirs Debate

by Brian X. Chen,
February 17th 2012

Researchers have discovered that Google deliberately bypassed the privacy settings in Safari, the Web browser on the iPhone and other Apple devices, so it could customize Web ads. The crux of the story, as reported by The Wall Street Journal in an article that is stirring much discussion online: By exploiting a loophole in the Safari browser, Google was able to install “cookies” that could let it track browsing activity.

Cookies are small files that Web sites can place on a hard drive or mobile device to do things like identify returning visitors. By default, Apple’s Safari browser blocks cookies from sites that a user has not actually visited — typically advertising networks that want to be able to follow people across multiple sites. Other browsers are not typically set up that way.

Google’s loophole involved tricking the Safari browser into allowing it to install cookies to serve ads with a tie-in to its Google Plus social network — adding a +1 button to ads for users to click if they approved of them. Because of another quirk in Safari, this opened the door for additional Google cookies to be installed, potentially allowing wider tracking of users, according to the article.

Google says that The Journal mischaracterized what it was doing. The search company said that it used “known Safari functionality” to provide features for people who were signed into Google services. Enabling the installation of additional cookies was unintentional, it said, so the company has started removing these cookies from Safari browsers.

“We didn’t anticipate that this would happen,” said Rachel Whetstone, senior vice president of communications and public policy for Google, in a statement. “It’s important to stress that, just as on other browsers, these advertising cookies do not collect personal information.”

The news has drawn mixed reactions around the Web.

John Battelle, who has written a book about Google and is chief executive of Federated Media, a Web advertising company that The New York Times Company is an investor in, said in a blog post that he was skeptical about whether Google was truly violating people’s privacy. He said that allowing installation of cookies was standard practice in the Internet industry and “the backbone of the entire Web advertising ecosystem,” so even though Apple’s browser blocks them by default, it’s debatable whether Google’s installation of cookies is an invasion of privacy. And he said Apple might be preventing this activity for its own competitive purposes:

Why do you think Apple has made it impossible for advertising-driven companies like Google to execute what are industry standard practices on the open Web (dropping cookies and tracking behavior so as to provide relevant services and advertising)? Do you think it’s because Apple cares deeply about your privacy? Really? Or perhaps it’s because Apple considers anyone using iOS, even if they’re browsing the Web, as “Apple’s customer,” and wants to throttle potential competitors, insuring that it’s impossible to access to “Apple’s” audiences using iOS in any sophisticated fashion?

The advocacy group Consumer Watchdog has asked the Federal Trade Commission to investigate whether Google violated a previous agreement with the agency, which required Google to be up front about privacy matters. It says Google manipulated Safari users into believing they could permanently opt out of targeted advertising, when in reality they couldn’t.

Google falsely told Safari users that they could control the collection of data by ensuring that third-party cookies were blocked, when in fact Google was circumventing the preference and setting tracking cookies.

Microsoft took this opportunity to criticize Google and promote its Web browser, Internet Explorer, saying: “If you find this type of behavior alarming and want to protect your confidential information and privacy while you’re online, there are alternatives for you. Windows Internet Explorer is the browser that respects your privacy.”

Federal lawmakers, too, want answers. Congressmen Edward J. Markey, Democrat of Massachusetts; Joe Barton, Republican of Texas; and Cliff Sterns, Republican of Florida, sent a letter to the F.T.C. on the issue.

“Google’s practices could have a wide sweeping impact because Safari is a major Web browser used by millions of Americans,” they said in their letter. “As members of the Congressional Bi-Partisan Privacy Caucus, we are interested in any actions the F.T.C. has taken or plans to take to investigate whether Google has violated the terms of its consent agreement.”

The Electronic Frontier Foundation said this incident could serve as a wake-up call for Google.

It’s time for Google to acknowledge that it can do a better job of respecting the privacy of Web users. One way that Google can prove itself as a good actor in the online privacy debate is by providing meaningful ways for users to limit what data Google collects about them.

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Apple Loophole Gives Developers Access to Photos - NYTimes

Apple Loophole Gives Developers Access to Photos

February 28th 2012

8:19 p.m. | Updated

SAN FRANCISCO — The private photos on your phone may not be as private as you think.

Developers of applications for Apple’s mobile devices, along with Apple itself, came under scrutiny this month after reports that some apps were taking people’s address book information without their knowledge.

As it turns out, address books are not the only things up for grabs. Photos are also vulnerable. After a user allows an application on an iPhone, iPad or iPod Touch to have access to location information, the app can copy the user’s entire photo library, without any further notification or warning, according to app developers.

It is unclear whether any apps in Apple’s App Store are illicitly copying user photos. Although Apple’s rules do not specifically forbid photo copying, Apple says it screens all apps submitted to the store, a process that should catch nefarious behavior on the part of developers. But copying address book data was against Apple’s rules, and the company approved many popular apps that collected that information.

Apple did not respond to a request for comment.

The first time an application wants to use location data, for mapping or any other purpose, Apple’s devices ask the user for permission, noting in a pop-up message that approval “allows access to location information in photos and videos.” When the devices save photo and video files, they typically include the coordinates of the place they were taken — creating another potential risk.

“Conceivably, an app with access to location data could put together a history of where the user has been based on photo location,” said David E. Chen, co-founder of Curio, a company that develops apps for iOS, Apple’s mobile operating system. “The location history, as well as your photos and videos, could be uploaded to a server. Once the data is off of the iOS device, Apple has virtually no ability to monitor or limit its use.”

On Apple devices, full access to the photo library was first permitted in 2010 when Apple released the fourth version of iOS. The change was intended to make photo apps more efficient. Google declined to comment on how its Android operating system for mobile devices handles this issue.

“It’s very strange, because Apple is asking for location permission, but really what it is doing is accessing your entire photo library,” said John Casasanta, owner of the successful iPhone app development studio Tap Tap Tap, which created the Camera+ app. “The message the user is being presented with is very, very unclear.”

The New York Times asked a developer, who asked not to be named because he worked for a popular app maker and did not want to involve his employer, to create a test application that collected photos and location information from an iPhone. When the test app, PhotoSpy, was opened, it asked for access to location data. Once this was granted, it began siphoning photos and their location data to a remote server. (The app was not submitted to the App Store.)

The knowledge that this capability exists is not new, developers say, but it was assumed that Apple would ensure that apps that inappropriately exploited it did not make it into the App Store. Based on recent revelations, phone owners cannot be sure.

“Apple has a tremendous responsibility as the gatekeeper to the App Store and the apps people put on their phone to police the apps,” said David Jacobs, a fellow at the Electronic Privacy Information Center. “Apple and app makers should be making sure people understand what they are consenting to. It is pretty obvious that they aren’t doing a good enough job of that.”

“We’ve seen celebrities and famous people have pictures leaked and disclosed in the past. There’s every reason to think that if you make that easier to do, you’ll see much more of it,” Mr. Jacobs said. Not just celebrities are at risk, he added. “A lot of sites are trying to obtain images from everyday people and politicians to post online.”

As the Apple Store has grown to include more than 600,000 apps, and with Apple facing pressure from Google and Android, some worry that the company is becoming less vigilant about monitoring app developers, exposing users to unnecessary risks and shoddy apps.

This month, Apple allowed a fake 99-cent Pokémon app into the App Store. Even though it offered only a series of Pokémon images, it became one of the most popular paid apps before it was removed by Apple.

Brian X. Chen contributed reporting.

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New York Sues BofA and Merrill for Pension Losses - NYTimes

New York Sues BofA and Merrill for Pension Losses

July 22nd 2010

The State of New York is suing Bank of America and its Merrill Lynch securities firm over the companies’ merger and Merrill’s subprime mortgage exposure, hoping to recover more money on its own than by joining existing class-action litigation, Reuters reports.

The state comptroller, Thomas P. DiNapoli, filed two lawsuits on Thursday in Federal District Court in Manhattan to recover losses suffered by the $132.5 billion New York State Common Retirement Fund, which he oversees.

More from Reuters:

Defendants include Bank of America’s former chief executive, Kenneth D. Lewis, and former chief financial officer, Joe Price, as well as Merrill’s former chief executive, Stanley O’Neal.

Mr. DiNapoli filed the lawsuits after choosing to “opt out” of 2007 shareholder litigation against Merrill and 2009 litigation against Bank of America, the largest bank by assets in the United States.

“Our attorneys believe this gives us a chance to get a better recovery,” perhaps reaching “tens of millions of dollars,” a spokesman for the comptroller, Robert Whalen, said in an interview.

The Common Fund owned 3.06 million Bank of America shares and 4.83 million Merrill shares, court records show.

Bill Halldin, a spokesman for Bank of America, declined to comment.

One complaint accuses Bank of America of misleading shareholders about Merrill’s losses as it prepared to buy the Wall Street firm in late 2008. The other accuses Merrill of misleading shareholders about its risk management and exposures to mortgage securities and collateralized debt obligations.

“These companies thought they could get away with profiting at the expense of New York’s pensioners and taxpayers through fraudulent activities and misleading public disclosures,” Mr. DiNapoli said in a statement. “They were mistaken.”

Bank of America agreed to buy Merrill on Sept. 15, 2008. Merrill lost $15.8 billion in the fourth quarter of that year, even as it paid out $3.6 billion of bonuses. The merger was completed on Jan. 1, 2009.

In February, Judge Jed Rakoff in Federal District Court in Manhattan accepted Bank of America’s $150 million settlement of civil charges by the Securities and Exchange Commission that it misled shareholders about the merger, an accord the judge called “half-baked justice at best.”

Attorney General Andrew M. Cuomo of New York has separately filed civil fraud charges against Bank of America, Mr. Lewis and Mr. Price.

Mr. DiNapoli is running for election as comptroller in November. Mr. Cuomo is running for governor. Both are Democrats.

Go to Article from Reuters via The New York Times »
Go to Press Release from Comptroller Thomas P. DiNapoli »

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Bank of America Faces a $50 Billion Shareholder Lawsuit - NYTimes

Bank of America Faces a $50 Billion Shareholder Lawsuit

September 27th 2011

Bank of America’s potential liability for bad mortgages — in the tens of billions of dollars — is well known. But Bank of America is haunted by other demons from the financial crisis, the most significant one being a lawsuit arising from its troubled Merrill Lynch acquisition.

This lawsuit, brought by Bank of America shareholders, claims that Bank of America and its executives, including its former chief executive, Kenneth D. Lewis, failed to disclose what would be a $15.31 billion loss at Merrill in the days before and after the acquisition. The plaintiffs contend that this staggering loss was hidden to ensure that Bank of America shareholders did not vote against the transaction.

Bank of America disclosed this loss after Merrill was acquired. At the same time, Bank of America also disclosed a $20 billion bailout by the government. The bank’s stock fell by more than 60 percent in a two-week period, a market value loss of more than $50 billion.

This episode also spawned a lawsuit from the Securities and Exchange Commission that Bank of America, Mr. Lewis and Joseph Price, the former chief financial officer, settled for $150 million. Judge Jed S. Rakoff of the Federal District Court in Manhattan approved the deal but complained that it didn’t sufficiently penalize the individuals involved. The amount was paid by Bank of America with no liability for Mr. Lewis or Mr. Price. Judge Rakoff called the settlement “half-baked justice at best.”

Judge Rakoff may see his wish for greater penalties granted. The New York attorney general’s office has a lawsuit on the matter.

More significantly, a lawsuit seeking about $50 billion was brought by some of the largest class-action law firms and is quietly advancing in the Federal District Court in Manhattan.

The plaintiffs contend that Bank of America engaged in a deliberate effort to deceive the bank’s shareholders.

According to the plaintiffs, who include the Ohio Public Employees Retirement System and a Netherlands pension plan that is the second-largest in Europe, Bank of America’s senior management, including Mr. Lewis and Mr. Price, began to learn of large losses at Merrill Lynch in early November 2008, months before the deal closed.

Mr. Price met with the bank’s general counsel, Timothy J. Mayopoulos, to discuss whether to disclose the loss — at the time about $5 billion — to Bank of America shareholders. Mr. Mayopoulos testified to the New York attorney general’s office that while his initial reaction was that disclosure was warranted, he decided against it. Merrill had been losing $2.1 billion to $9.8 billion a quarter during the financial crisis, and so this loss would be expected by Merrill and Bank of America shareholders.

Plaintiffs in the private action and the New York attorney general’s complaint claim that after this meeting, Mr. Price and other senior executives at Bank of America sought to keep this loss quiet and that Mr. Price in particular misled Mr. Mayopoulos.

Mr. Mayopoulos has testified that on Dec. 3, 2008, Mr. Price told him that the estimated loss would be $7 billion.

Mr. Mayopoulos concluded again that no disclosure was necessary. Plaintiffs contend that Mr. Price misled Mr. Mayopoulos as the forecasted loss at this time had now grown to more than $10 billion.

The Bank of America vote occurred on Dec. 5 without its shareholders knowing about this gigantic looming Merrill loss, which was now about $11 billion.

Mr. Mayopoulos has testified he was surprised at this higher number when he learned of it at a Dec. 9 board meeting. Mr. Mayopoulos sought to meet with Mr. Price about the new loss. The next day, Mr. Mayopoulos was fired and escorted out of the building.

The Merrill acquisition was completed on Jan. 1, 2009.

Two weeks later, Bank of America disclosed for the first time that Merrill had suffered an after-tax net loss of $15.31 billion.

Bank of America has argued in its defense that the exact amount of the loss was uncertain during this time. Moreover, this disclosure was not necessary because Merrill’s losses were within the range of previous losses and included a good will write-off of about $2 billion that was previously disclosed. The total loss was not material.

But if it is true that Mr. Price, with Mr. Lewis’s assent, kept this information from Mr. Mayopoulos in order to avoid disclosure, this is a prima facie case of securities fraud. Would Bank of America shareholders have voted to approve this transaction? If the answer is no, then it is hard to see this as anything other than material information.

Plaintiffs in this private case have the additional benefit that this claim is related to a shareholder vote. It is easier to prove securities fraud related to a shareholder vote than more typical securities fraud claims like accounting fraud. Shareholder vote claims do not require that the plaintiffs prove that the person committing securities fraud did so with awareness that the statement was wrong or otherwise recklessly made. You only need to show that the person should have acted with care.

This case is not only easier to establish, but the potential damages could also be enormous. Damages in a claim like this are calculated by looking at the amount lost as a result of the securities fraud. A court will most likely calculate this by referencing the amount that Bank of America stock dropped after the loss was announced; this is as much as $50 billion. It is a plaintiff’s lawyer’s dream.

Bank of America is facing a huge liability from this claim. It is also facing even more liability for those who bought and sold stock during this period up until Jan. 15. In a ruling on July 29, the judge in this case allowed these claims to proceed against Bank of America, Mr. Price and Mr. Lewis. The judge had already ruled that the disclosure claim related to the proxy vote could proceed.

This case is on a relatively fast track, with an October 2012 trial date.

Given the $50 billion claim looming over it, Bank of America will most likely try to settle this litigation. The settlement value appears to be in the billions. Firing your main witness — Mr. Mayopoulos — and escorting him out the door no doubt only increases the cost.

The case shows how regulators’ actions can be supplemented by private actions. And if the plaintiffs win, this case may be the exceedingly rare event of directors and officers, particularly Mr. Lewis and Mr. Price, actually having to pay money personally to settle a securities fraud claim. If so, the two men would join the relatively few executives from the financial crisis who have been personally penalized.

Whatever the outcome of this case, it appears that Bank of America shareholders were sacrificed in December 2008 so that the Merrill deal could be completed. The bill may now be coming due for Bank of America.

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Merrill Lynch Fined $1 Million for Bonus Clawbacks - NYTimes

Merrill Lynch Fined $1 Million for Bonus Clawbacks

January 25th 2012

The big bonuses doled out at Merrill Lynch during the height of the financial crisis have once again reared their ugly head.

Merrill Lynch agreed on Wednesday to pay regulators $1 million to settle accusations that it thwarted rules for clawing back the compensation. The bonuses were tied to the firm’s merger with Bank of America, which came in early 2009.

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, sanctioned the firm for requiring former highly paid brokers to settle disputes over “retention bonuses” in New York State court. Under the authority’s rules, brokerage firms are supposed to allow employees access to arbitration panels, rather than state courts, which are less-friendly turf for employees.

“Merrill Lynch specifically designed this bonus program to bypass the authority’s rule requiring firms to arbitrate disputes with employees, and purposefully filed expedited collection actions in New York state courts and denied those registered representatives a forum to assert counterclaims,” Brad Bennett, the authority’s enforcement chief, said in a statement.

Bonuses awarded at Merrill Lynch ahead of the Bank of America deal have been the subject of much regulatory scrutiny. In 2010, Bank of America paid the Securities and Exchange Commission $150 million to settle accusations that it hid the bonuses from shareholders before the deal closed.

But in the latest case, the former Merrill brokers make for unlikely victims.

Merrill awarded $2.8 billion in bonuses, set up as loans that would come due if an employee departed, to more than 5,000 “high-producing” brokers to keep them happy during the tumult of the Bank of America takeover, according to the Financial Industry Regulatory Authority. Soon after, several brokers fled the firm, while stiffing Merrill for the cash owed under the loan.

“It’s important to remember that legal action only occurs when a former employee doesn’t repay their loan as they had agreed to do,” a Merrill Lynch spokesman, Bill Haldin, said in the statement. “Given that well over 90 percent of financial advisers who participated in the program are still with us, repayment problems haven’t been a widespread issue.”

Merrill Lynch filed nearly 100 cases against their former brokers in New York State court, a breach of the authority’s rules. New York State court, Finra noted, “greatly limits the ability of defendants to assert counterclaims in such actions.”

Merrill Lynch neither admitted nor denied the charges, but consented to Finra’s enforcement action and fine.

The Financial Industry Regulatory Authority also accused Merrill Lynch of drafting the bonus program in a way that obscured that the bonuses came from the firm. Instead, Merrill Lynch structured it to seem that the bonuses stemmed from “MLIFI,” an affiliate not under the authority’s jurisdiction.

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Merrill Lynch & Company Inc. News - The New York Times

Merrill Lynch & Company Inc. | Feb 27th 2012

Updated Sept. 15, 2009

Merrill Lynch was founded in 1914 and heralded the idea that everyone, not just the rich, should invest in the financial markets. That stance made Merrill not only one of the pillars of Wall Street, but a reputation as the stockbroker for Main Street as well. It survived wars and the Great Depression, but succumbed as an independent company to the mortgage meltdown that began in mid-2007. On Sept. 14, 2008, Merrill announced that it had agreed to be purchased by Bank of America, rather than run the risk of being pulled under by turmoil surrounding the industry, as Bear Stearns and Lehman Brothers had been.

Merrill's logo -- a bull -- had long symbolized the fundamental optimism of Wall Street, and its leaders had often been viewed as spokesman for the entire industry.

In recent years, Merrill had grown to be really two companies. One was a thriving wealth-management company with $1.4 trillion of assets managed by 16,000 brokers plus a 49 percent interest in BlackRock, a fast-growing asset management operation.

The other part was a fixed-income or bond-trading operation that invested heavily in relatively high-risk, high-return securities backed by subprime home mortgages. These securities lost value as housing prices fell and the number of foreclosures grew. In late October 2007, the company posted a write-down of $8.4 billion to recognize the decline in value of these securities.

Shortly thereafter, E. Stanley O'Neal was removed as chief executive as a result of the losses and an unauthorized merger proposal. On Nov. 14, John A. Thain, the chief executive of the New York Stock Exchange and a former president of Goldman Sachs, was named as Mr. O'Neal's successor.

Mr. Thain moved quickly to push more of the worst investment out the door, writing off billions while moving to raise more capital. In July 2008 he sold $31 billion of securities for pennies on the dollar, asserting that Merrill needed to get the housing crisis behind it.

Mr. Thain's actions were the most drastic of any of the chiefs of the major Wall Street banks, and as late as Sept. 10 he reassured worried employees that the firm's capital levels were sound. But as Lehman Brothers started to swirl downward toward bankruptcy -- a prospect that held the risk of pulling other firms down with it -- Mr. Thain became convinced that a far more drastic action was needed.

When Treasury Secretary Henry M. Paulson Jr. called top bankers together on Friday, Sept. 12, for weekend-long talks on saving Lehman, Mr. Thain began discussions with the chief of Bank of America, Kenneth D. Lewis. By Sunday, they were ready with an announcement that rattled some on Wall Street even more than the news of Lehman's bankruptcy: the end of Merrill as an independent firm.

Bank of America offered $50.3 billion in stock, or $29 a share, for the 94-year-old company. The merger combined Bank of America's banking and lending strength with Merrill Lynch's wealth-management expertise. Mr. Lewis called Merrill's 17,000 financial advisers "the crown jewel of the company."

Bank of America's shareholders signed off on the acquisition in early December, only to discover that gaping losses at Merrill would force the bank to seek assistance from the government for a second time, getting an emergency infusion of $20 billion in capital. Some investors sued, claiming that Mr. Lewis failed to fully disclose the risks of the deal.

In April 2009, as the deal continued to draw heavy criticism, shareholders voted to strip Mr. Lewis of his title as chairman. For his part, Mr. Lewis told a Congressional panel that he had considered pulling out of the Merrill deal but that regulators had pressured him to complete it.

Meanwhile, $3.6 billion in bonuses were paid in late 2008 to some of those Merrill employees just before the merger was completed. Shareholders and taxpayers were outraged when they learned of the bonus payments since Bank of America was the recipient of so much federal bailout money.

The Securities and Exchange Commission filed suit and Bank of America agreed on Aug. 3, 2009 to pay $33 million to settle claims, without admitting or denying the accusations, that it had misled its shareholders about the bonuses.

On Aug. 10, the judge in the case, Jed S. Rakoff, refused to approve the deal, questioning whether the $33 million agreement was adequate. He said too many questions remained unanswered, including who knew what and when about the controversial payouts.

On Sept. 14, Judge Rakoff overturned the settlement. His ruling directed both the S.E.C. and the bank to prepare for a possible trial that would begin no later than Feb. 1, 2010. He wrote that the settlement "does not comport with the most elementary notions of justice and morality." 

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Brokers Plead Not Guilty in Eavesdropping Case - New York Times

Brokers Plead Not Guilty in Eavesdropping Case

March 25th 2006

Three former stockbrokers from Merrill Lynch and Lehman Brothers Holdings and four former and current executives at the online brokerage firm A. B. Watley Group pleaded not guilty yesterday to charges involving a suspected scheme to let day traders eavesdrop on confidential conversations.

The seven charged, who are free on bond, were arraigned before Judge I. Leo Glasser in Federal District Court in Brooklyn on securities fraud, conspiracy and other charges. They are accused of participating in what prosecutors described as a "front-running scheme" in which Watley traders improperly obtained inside information about large orders to buy or sell stock ahead of institutional customers.

The charges stem from an indictment announced on Tuesday by federal prosecutors in Brooklyn that added charges and defendants to a previous indictment issued in August 2005; that indictment named two stockbrokers at Merrill Lynch and a stockbroker at Lehman Brothers. The earlier indictment accused the brokers of accepting thousands of dollars from the day traders for the chance to eavesdrop on firm intercoms, called squawk boxes, and obtain confidential information.

The seven defendants each entered pleas of not guilty to the new charges. Judge Glasser scheduled the next court hearing in the case for June 29.

The new indictment charges that Watley day traders used the illegal information to generate more than $800,000 in profit from trading shares of Citigroup, Home Depot and Pfizer from January 2002 to February 2004.

On Tuesday, the Securities and Exchange Commission filed charges against four Watley managers and six former day traders at the firm.

Those who entered not guilty pleas to the latest charges were Kenneth E. Mahaffy Jr., 50, a Merrill Lynch stockbroker; Timothy J. O'Connell, 41, a Merrill broker; David G. Ghysels Jr., 48, a Lehman broker; Robert F. Malin, 41, Watley's vice chairman; Linus Nwaigwe, 49, the firm's director of compliance; Michael Picone, 50, former chief operating officer; and Keevin H. Leonard, 45, Watley's former supervisor of proprietary trading.

All declined to comment as did their lawyers.

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S.E.C. Faces Fresh Scrutiny Over Trading Inquiry at Lehman - NYTimes

S.E.C. Faces Fresh Scrutiny Over Trading Inquiry at Lehman

February 22nd 2009

The Securities and Exchange Commission, under fire for failing to heed warnings about the Ponzi scheme that was apparently run by Bernard L. Madoff and lasted for decades, is now under scrutiny for its handling of insider-trading accusations involving former executives at Lehman Brothers.

In a letter sent to the commission last Thursday, Charles E. Grassley, the Iowa Republican who is the ranking member of the Senate Finance Committee, asked Mary L. Schapiro, the chairwoman of the S.E.C., whether it had followed up on allegations that were brought to its attention last spring involving a unit at Lehman Brothers. Employees in the unit, known as the Product Management Group, appear to have tipped off clients and traders about the content of the firm’s research reports before they were released, a former Lehman analyst said.

The letter does not disclose who might have received the tips, if they were made.

The insider trading allegations, and more than 4,000 e-mail messages relating to them, were presented to Linda Thomsen, the former director of enforcement at the S.E.C. last April by Ted Parmigiani, a former analyst at Lehman who followed the semiconductor industry. According to Mr. Grassley’s letter, Mr. Parmigiani spoke with high-level enforcement officials several times both on the phone and in person. An in-person meeting on April 30, 2008, lasted for six hours, the letter said.

Mr. Parmigiani, who was dismissed by the firm in June 2005 for what it said were performance issues, declined to comment. John Nester, a spokesman for the S.E.C., said he would not discuss whether Ms. Schapiro had responded to Mr. Grassley’s letter or the allegations made by the former analyst. But he said in a statement: “We certainly share the senator’s interest in vigorous enforcement against illegal insider trading.”

Mr. Grassley noted in his letter that his staff had examined the materials given to S.E.C. enforcement lawyers by Mr. Parmigiani and that “there are many documents that raise suspicions of insider trading.” The e-mail messages and other documents appeared to provide “ample detail to assist in launching an investigation,” Mr. Grassley wrote.

But the matter appears to have gone nowhere within the S.E.C, the senator contends. “It is unclear whether the S.E.C. has issued a formal order authorizing the enforcement staff to subpoena records and take sworn testimony,” Mr. Grassley wrote. “In light of the S.E.C.’s failure to follow up on repeated warnings about the Madoff Ponzi scheme, I must inquire as to whether these allegations are being acted upon.”

Mr. Grassley has asked that the S.E.C. brief him privately by the end of this week on any actions it has taken to investigate the analyst’s allegations.

According to the letter, the documents provided by Mr. Parmigiani indicate that officials in Lehman’s Product Management Group routinely received research reports before they were made public. The case also raises questions of whether the content or gist of the reports was disseminated to select traders in advance.

When they are published, Wall Street research reports often cause a stock or sector to rise or fall. The Lehman group was in charge of coordinating and broadcasting calls that disclosed new research reports and changes in coverage or analysts’ opinions.

Tipping off traders to nonpublic information is illegal. And regulatory rules governing securities firms forbid employees who are not directly involved in the compilation of research reports, other than legal or compliance officials, to review them before publication.

One example cited by Mr. Grassley in his letter involved a company called Amkor Technology, a semiconductor concern followed by Mr. Parmigiani. A series of e-mail messages from June 2005 indicated that in the hours after he submitted a bullish report on Amkor to the Product Management Group, but before the report was made public, the company’s stock began actively trading and rose 12 percent.

A second case mentioned in the letter involved an e-mail message from a sales executive indicating that he had advance knowledge of a change in another analyst’s rating on a separate company. The sales executive advised Mr. Parmigiani in the message dated March 2005 that he could not attend a meeting because of a “big ratings change looming.” Later that day, Lehman downgraded Commodity Chemicals, a supplier and exporter of basic chemicals.

The e-mail, Mr. Grassley wrote, seems to demonstrate that this particular executive may have illegally obtained prior knowledge of the Commodity Chemicals downgrade and had acted upon it.

Ms. Thomsen, who received Mr. Parmigiani’s materials and discussed their content with him, left the S.E.C. this month after being criticized for failing to pursue enforcement cases and tips assiduously. Robert Khuzami, a former federal prosecutor in Manhattan, was appointed to succeed her as director of enforcement last week. Lehman Brothers filed for bankruptcy in mid-September, a victim of the credit crisis.

Mr. Grassley has been frustrated by the S.E.C.’s response to insider trading allegations before. In 2006, investigators for Mr. Grassley aggressively pursued accusations made by Gary Aguirre, a former staff lawyer at the S.E.C., that his superiors had thwarted his attempts to investigate possible insider trading at Pequot Capital Management, a major hedge fund, and then fired him when he complained.

The S.E.C.’s investigation into Pequot was closed in 2006 without any actions taken. But a 108-page report issued by the Senate Finance and Judiciary Committees in 2007 found that agency officials had bungled the Pequot investigation by delaying it, by disclosing case information to lawyers for those under scrutiny in the case and other missteps.

The office of the inspector general at the agency also investigated Mr. Aguirre’s allegations. In a report issued last year, it concluded that enforcement officials involved in the matter “conducted themselves in a manner that raised serious questions about the impartiality and fairness of the insider trading investigation.”

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S.E.C. Choice Is Sued Over a Merger of Regulators - NYTimes

S.E.C. Choice Is Sued Over a Merger of Regulators

January 11th 2009

WASHINGTON — Mary L. Schapiro, who appears this week at a confirmation hearing on her selection to head the Securities and Exchange Commission, has been accused in two lawsuits of making misleading statements to quickly complete a merger of regulatory organizations after which she received a 57 percent raise in her pay.

The merger involved the regulatory units of the New York Stock Exchange and the NASD two years ago. Ms. Schapiro was then head of the NASD, and she spent months traveling the country to persuade its 5,100 members to support it. The merger created a new self-regulatory organization, the Financial Industry Regulatory Authority, or Finra, where Ms. Schapiro is the chief executive. The Securities and Exchange Commission relies on Finra to police Wall Street.

Among the misstatements that she is accused of making is that the Internal Revenue Service had prohibited the NASD from paying each member more than $35,000 as part of the merger deal. Although an NASD proxy statement issued while the deal was pending said that the I.R.S. would not permit the organization to give more compensation to members, the I.R.S. did not actually issue a ruling on the matter until March 2007, long after the deal closed and three months after the members voted to approve it.

Lawyers representing Ms. Schapiro, Finra and other senior executives have fought vigorously to keep the I.R.S. ruling — and court references to details of that ruling — under seal. Last January, a federal judge in New York denied a request by The New York Times to unseal the ruling and other documents in the case.

Ms. Schapiro’s lawyer has denied the lawsuits’ allegations and, in a recent interview said that the second suit, filed shortly after her selection, is an opportunistic effort to pressure the defendants to settle. The first, dismissed by a federal district judge in New York, is on appeal.

At the S.E.C., Ms. Schapiro would be leading a government regulator that has been battered by setbacks, including its failure to uncover the apparent long-running fraud at Bernard L. Madoff Investment Securities. A recent report by the S.E.C.’s inspector general said the agency had failed to adequately police the markets and regulate Wall Street’s largest investment banks. Congressional critics have said the S.E.C.’s shortcomings contributed to the financial crisis.

The strongest proponents of the merger that created Finra were the more than 200 firms that were members of both the NASD and the New York Stock Exchange. The merger significantly lowered their regulatory expenses, but many of the smaller members were concerned about what benefits they might receive from it.

In an effort to get enough votes from the smaller firms, NASD offered each member $35,000, for a total of about $178 million, and a smaller commitment to reduce future assessments.

Executives said that amount was derived from a calculation of efficiencies from merging the organizations. NASD listed its total outstanding equity in an annual report of more than $1.6 billion. NASD officials, including Ms. Schapiro, said then that the organization could not make a greater payment because the I.R.S. had opposed it because the NASD is nonprofit.

The lawsuits challenge that assertion, saying that evidence that remains sealed undermines the NASD’s description of the I.R.S. ruling. Also sealed is an independent fairness opinion on the merger by the investment bank Houlihan Lokey Howard and Zukin Financial Advisors.

“Our cases raise questions about the transparency, truthfulness and candor of the NASD and its leadership in a major financial transaction with its own members,” said Jonathan W. Cuneo, the lead lawyer in both cases for the member firms. “It’s certainly ironic that the case involves the NASD, which is charged with policing those values in others.”

Defense lawyers said in court papers and an interview that no material misrepresentations were made. They assert that the top executives of the organization, as regulators, are entitled to absolute immunity from lawsuits. They say that the members of the NASD were not entitled to greater compensation because they do not have the same rights as shareholders of a corporation.

“These lawsuits are meritless, and the second suit is just a dressed-up version of the first one that was rejected by a federal judge,” said F. Joseph Warin, a lawyer representing Finra and Ms. Schapiro. “The lawyers are the same, and the arguments are virtually identical. The second suit was filed days after Ms. Schapiro was nominated to become chairman of the S.E.C. It looks to me like a desperate effort to leverage Mary’s nomination to squeeze money out of Finra before her confirmation vote — a last-second Hail Mary pass.”

Mr. Cuneo said that the second lawsuit was in the works long before the announcement of Ms. Schapiro’s appointment and that its filing had nothing to do with her selection.

Herb Perone, a spokesman at Finra, said that following the customary practice of presidential appointees, Ms. Schapiro would not comment about the case while her confirmation proceedings were pending. The Senate banking committee is to consider her appointment on Thursday.

Lawyers involved in the proceeding say they have not been asked about the lawsuits by either the Obama transition team or the Senate banking committee.

An official at the Obama transition said that the lawsuit had been examined during the vetting process and that Ms. Schapiro would not have been selected if it were seen as a problem.

Kate Szostak, a spokeswoman for the Senate banking committee, said it would study Ms. Schapiro’s record as a regulator, including Finra’s supervision of the Madoff firm and her role in the merger of the NASD and the New York Stock Exchange. Ms. Schapiro has extensive regulatory experience. She served for six years as a commissioner at the S.E.C. before becoming chairwoman of the Commodity Futures Trading Commission in 1994. She arrived at the NASD in 1996 to lead its regulatory arm.

Both suits were filed as class actions on behalf of most members of Finra. The first was filed by Standard Investment Chartered. Federal District Judge Shirley Wohl Kram of New York dismissed that suit a year later without addressing the underlying allegations. The dismissal has been appealed to the United States Court of Appeals for the Second Circuit, in New York.

A second lawsuit by Benchmark Financial Services, was filed three weeks ago in federal district court in New York. Benchmark was founded by Edward A. H. Siedle, a former lawyer at the S.E.C. who investigates pension fraud and other financial abuses. Mr. Siedle has done legal and investigative work for plaintiffs that have sued companies, and he sued the NASD in 2002 after it blocked him from publishing a book about disciplinary proceedings against member firms.

“This case is about a corporate transaction effectuated by deception,” the complaint in the latest case said. “The officer defendants stood to gain substantially by the transaction, in terms of enormously higher compensation and benefits, vastly elevated prestige and powers resulting from the virtual monopoly regulatory authority created by the transaction, and the higher degree of control over the board of the consolidated entity.”

After the merger, Ms. Schapiro’s total compensation rose to more than $3.1 million, from almost $2 million. The pay package, while not outsize by Wall Street standards, is large for a nonprofit organization. Mr. Perone, the Finra spokesman, said the raise was the result of Ms. Schapiro’s promotion to a higher job. He said her predecessor had received about $6 million in compensation. Other top executives at the new entity received pay increases of around 20 percent after the merger.

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Regulators in Madoff Inquiry Defend Actions - NYTimes

Regulators in Madoff Inquiry Defend Actions

January 27th 2009

WASHINGTON (Reuters) — Top federal regulators defended their oversight of securities markets on Tuesday and said they had investigated Bernard L. Madoff’s brokerage firm in the past but found no evidence of a vast fraud.

The Securities and Exchange Commission is being heavily criticized for not thoroughly following up on tips from one of Mr. Madoff’s competitors and missing red flags like Mr. Madoff’s ability to generate steady returns in all types of market environments.

The industry-financed Financial Industry Regulatory Authority (Finra) has also been tainted by the Madoff scandal, as its main mission is to supervise nearly 5,000 brokerages.

At a Congressional hearing, the S.E.C.’s head of enforcement, Linda Thomsen, said the agency started an investigation of Mr. Madoff’s business in 2006 but closed it early in 2008 without recommending enforcement action.

Ms. Thomsen also said that the S.E.C. filed two enforcement actions in 1992 that involved Mr. Madoff’s broker-dealer firm, but that neither Mr. Madoff nor his firm was named as a defendant in either case.

Lori Richards, the S.E.C.’s director of compliance, inspections and examinations, said the S.E.C. did examine Mr. Madoff’s broker-dealer operation — most recently in 2004 and 2005 — but found no fraud.

The S.E.C. did not examine Mr. Madoff’s advisory operations although the firm registered as an investment adviser in September 2006, Ms. Richards told the Senate Banking Committee in prepared testimony.

The banking committee pressed top enforcement officials on how and why they failed to uncover Mr. Madoff’s alleged $50 billion fraud.

“The fact that the regulators were put on notice through direct tips, press articles and industry chatter raises serious questions about the state of our regulatory system,” said the panel’s top Republican, Richard C. Shelby of Alabama.

The Senate Banking Committee chairman, Christopher J. Dodd, said the Madoff fraud was a regulatory failure of historic proportions. “But what’s more disturbing about it is that it went undetected until the perpetrator himself confessed,” said Mr. Dodd, a Connecticut Democrat.

Finra’s interim chief executive, Stephen Luparello, said the watchdog conducted regular examinations of Mr. Madoff’s broker-dealer operations during the last 20 years.

Finra received and investigated 19 complaints against Mr. Madoff’s broker-dealer, but the complaints generally related to trade execution quality and did not relate to the investment advisory issues where fraud was alleged, the watchdog has said.

Mr. Luparello said the watchdog never received any complaints charging a Ponzi scheme, nor did the S.E.C. share tips or concerns with Finra.

The top securities regulators suggested ways to improve their oversight, including more coordination between the S.E.C. and Finra, third-party custody of customer assets and aligning broker-dealer rules with investment adviser regulations.

Regulators also suggested that auditors for broker-dealers needed more oversight.

Mr. Dodd expressed disbelief that the S.E.C. did not zero in on the fact that Mr. Madoff’s auditor was a tiny, little-known auditor. “Isn’t it often a preliminary question to ask, who is your auditor?” said Mr. Dodd.

Ms. Thomsen said consideration needed to be given to imposing requirements about an auditor’s qualifications.

Other experts have said broker-dealer auditors should be required to register with the audit supervisor, the Public Company Accounting Oversight Board.

Ms. Thomsen of the S.E.C. said resources for the agency had not kept pace with the growth in the securities industry and said the agency simply did not have the resources to fully investigate every tip.

Ms. Richards, the S.E.C.’s top compliance official, said the agency was considering the frequency of its examination of investment advisers and was determining if advisers should disclose more risk-related information, like the identity of their auditors and their performance returns.

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2 Banks to Send Madoff Trustee $535 Million - NYTimes

2 Banks to Send Madoff Trustee $535 Million

January 29th 2009

The Bank of New York Mellon Corporation and JPMorgan Chase & Company have agreed to transfer about $535 million to the trustee liquidating the brokerage of Bernard L. Madoff, the man accused of engineering a global Ponzi scheme, according to court documents filed Thursday.

In the filings in United States Bankruptcy Court in New York, the trustee and the banks asked a judge to approve the transfers at a hearing on Feb. 4.

The move is part of the trustee’s effort under the Securities Investor Protection Act to gather assets to be returned to defrauded investors.

Bank of New York Mellon would send a wire transfer of about $301.4 million, and JP Morgan Chase would send about $233.5 million to the court-appointed trustee by Feb. 6, the documents said. The accounts are held by Mr. Madoff’s brokerage company.

A New York lawyer, Irving H. Picard, is the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities, which collapsed after Mr. Madoff was arrested and charged last month with securities fraud.

Mr. Madoff, a former chairman of the Nasdaq stock market, is under house arrest and 24-hour surveillance in his luxury Manhattan apartment as criminal and civil authorities investigate his global operations, which are said to have lost $50 billion.

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The Talented Mr. Madoff - NYTimes

The Talented Mr. Madoff

January 24th 2009

TO some, Bernard L. Madoff was an affable, charismatic man who moved comfortably among power brokers on Wall Street and in Washington, a winning financier who had all the toys: the penthouse apartment in Manhattan, the shares in two private jets, the yacht moored off the French Riviera.

Although hardly a household name, he secured a longstanding role as an elder statesman on Wall Street, allowing him to land on important boards and commissions where his opinions helped shape securities regulations. Along the way, he snared a coveted spot as the chairman of a major stock exchange, Nasdaq.

And his employees say he treated them like family.

There was, of course, another side to Mr. Madoff, who is 70. Reclusive, at times standoffish and aloof, this Bernie rarely rubbed elbows in Manhattan’s cocktail circuit or at Palm Beach balls. This Bernie was quiet, controlled and closely attuned to his image, down to the most minute details.

He was, for instance, an avid collector of vintage watches and took time each morning to match his wedding ring — he owned at least two — to the platinum or gold watch band he was wearing that day.

Per his directives, the décor in his firm’s New York and London offices was stark. Black, white and gray — or “icily cold modern,” as one frequent visitor to the New York operation described it.

Despite nurturing a familial atmosphere in his offices, he installed two cameras on the small trading floor of the firm’s London operations so he could monitor the unit remotely from New York.

This Bernie also ran a money management business on the side for decades that he kept hidden far from colleagues, competitors and regulators.

While he managed billions of dollars for individuals and foundations, he shunned one-on-one meetings with most of his investors, wrapping himself in an Oz-like aura, making him even more desirable to those seeking access.

So who was the real Bernie Madoff? And what could have driven him to choreograph a $50 billion Ponzi scheme, to which he is said to have confessed?

An easy answer is that Mr. Madoff was a charlatan of epic proportions, a greedy manipulator so hungry to accumulate wealth that he did not care whom he hurt to get what he wanted.

But some analysts say that a more complex and layered observation of his actions involves linking the world of white-collar finance to the world of serial criminals.

They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators.

“Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims,” says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioral profiles.

Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives.

“People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”

As investigators plow through decades of documents, trying to decipher whether Mr. Madoff was engaged in anything other than an elaborate financial ruse, his friends remain dumbfounded — and feel deeply violated.

“He was a hero to us. The head of Nasdaq. We were proud of everything he had accomplished,” says Diana Goldberg, who once shared the 27-minute train ride with Mr. Madoff from their homes in Laurelton, Queens, to classes at Far Rockaway High School. “Now, the hero has vanished.”

If, in the end, Mr. Madoff is found to have been engaging in fraud for most of his career, then the hero never really existed. Authorities say Mr. Madoff himself has confessed that he was the author of a longstanding and wide-ranging financial charade. His lawyer, Ira Lee Sorkin, declined to comment.

During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business.

“He once mentioned to me that he spent one-third of his time in Washington in the early 1990s, late 1980s,” says a person who has known Mr. Madoff for years but requested not to be identified because he does not want to be drawn into continuing litigation. “He was very involved with regulators. I think they used him as a sounding board and he looked to them like a white knight.”

“He was smart in understanding very early on that the more involved you were with regulators, you could shape regulation,” this individual adds. “But, if we find out that the Ponzi scheme goes back that far, then he was doing something much smarter. If you’re very close with regulators, they’re not going be looking over your shoulders that much. Very smart.”

MR. MADOFF spent his early years in Laurelton, a close-knit, Jewish enclave where he and his friends ate ice cream at the local five-and-ten and attended activities at the community center.

“It was an idyllic place to grow up in,” recalls Vera Gitten, who attended elementary school with him. She remembers him as “very thin,” a good student and extremely outgoing. She recalls a musical skit that he and his best friend wrote, rehearsed and performed for the class when they were in fifth or sixth grade.

“It was a broad company, sort of a ‘Sheik of Araby’ kind of thing where they wore costumes, which were their parents’ bedsheets, that made them look like they were desert sheiks,” Ms. Gitten says. “They would have us rolling.”

None of Mr. Madoff’s former elementary school friends could recall what his parents, Ralph and Sylvia, did for a living. According to Securities and Exchange Commission documents from the 1960s, it appears that his mother had a brokerage firm called Gibraltar Securities registered in her name with an address in Laurelton.

In 1963, the S.E.C. began investigating whether a number of firms, including Ms. Madoff’s, had failed to file financial reports and whether that required revoking their registrations. Early the next year, Ms. Madoff withdrew her registration and the S.E.C. dropped its proceedings against her.

While Mr. Madoff’s friends remember little about his parents, they all clearly recall his childhood sweetheart, and future wife, Ruth Alpern, a pretty, bubbly blonde who was voted “Josie College” by her Far Rockaway High School class.

Mr. Madoff, after graduating from high school in 1956, spent a year at the University of Alabama, where he joined Sigma Alpha Mu, a Jewish fraternity. A year later, he transferred to Hofstra University, where he graduated in 1960 with a degree in political science. He later became a Hofstra trustee, but the university never invested with him.

Mr. Madoff spent the next year at Brooklyn Law School, attending classes in the morning and running his side business — installing and fixing sprinkler systems — in the afternoon and evening, recalled Joseph Kavanau, who attended law school with Mr. Madoff. When Mr. Kavanau married his wife, Jane, who was Mrs. Madoff’s best friend from Queens, Mr. Madoff was the best man.

“Bernie was very industrious,” Mr. Kavanau explains. “He was going to school and working at the same time.”

Mr. Madoff was never interested in practicing law, Mr. Kavanau says. Instead, Mr. Madoff left law school and, using $5,000 saved from being a lifeguard and from his sprinkler business, joined the ranks of Wall Street in the 1960s.

“For many years when we were first married, my wife and I would go to their house or we would all go out to dinner, maybe a couple of nights a month,” said Mr. Kavanau, who says that the first home Mr. Madoff shared with his bride was a modest, one-bedroom apartment in Bayside, Queens.

Over the years, however, the two couples drifted apart. From time to time, Mr. Kavanau said he turned on the television and caught a glimpse of Mr. Madoff — now a successful financier — being interviewed, realizing that he had made his mark on Wall Street.

“The last time I saw him, we had run into him and Ruth on Worth Avenue in Palm Beach,” Mr. Kavanau recalls. “We were definitely aware of how well he was living.”

When asked if he can understand what happened, what may have motivated or prompted Mr. Madoff to eventually take such risks after building up a seemingly successful business, Mr. Kavanau paused.

“There is no way to. I can’t make it add up. It doesn’t make sense,” he says, growing increasingly frustrated. “I cannot take the Bernie I knew and turn him into the Bernie we’re hearing about 24/7. It doesn’t compute.”

WHEN Mr. Madoff arrived on Wall Street in the 1960s, he was an outsider. His small firm, Bernard L. Madoff Investment Securities, got its start by matching buyers of inexpensive “penny stocks” with sellers in the growing over-the-counter market. This hardscrabble market was made up of stocks that were not listed on the tonier New York Stock Exchange or American Stock Exchange.

In the O.T.C. market, it was common practice — and completely legal — for firms like Mr. Madoff’s to try to attract big trades to their shop by offering to pay clients a penny or two for every share they traded. His firm would make money by pocketing the difference in the “spread,” or the gap between the offering and selling price for the stocks.

During the mid-1970s, when changes in the rules allowed his firm and others like it to trade more expensive and more prestigious blue-chip stocks, Mr. Madoff began gaining market share from the Big Board.

“He was a man with a good idea who was also a terrific salesman,” says Charles V. Doherty, the former president of the Midwest Stock Exchange. “He was ahead of everyone.”

While completely legitimate, the practice of paying for trading orders was entirely distasteful to blue bloods on the established exchanges who saw the actions, ultimately, as a threat to their livelihood. Around this time, Mr. Madoff began cultivating key relationships with regulators.

“He was the darling of the regulators, without question. He was doing everything the regulators wanted him to do,” says Nicholas A. Giordano, the former president of the Philadelphia Stock Exchange. “They wanted him to be a fierce competitor to the New York Stock Exchange, and he was doing it.”

Current and former S.E.C. regulators have come under fire, accused of failing to adequately supervise Mr. Madoff and being too cozy with him.

Arthur Levitt Jr., who served as S.E.C. chairman from 1993 to early 2001, has acknowledged that he occasionally turned to Mr. Madoff for advice about how the market functioned. But Mr. Levitt strongly denies that Mr. Madoff had undue influence at the S.E.C. or that the agency’s enforcement staff deferred to him.

Mr. Levitt said that he was unaware that Mr. Madoff even ran an investment management business, and that Mr. Madoff never had special access to him or other S.E.C. officials. He also noted that he and Mr. Madoff opposed one another on several key industry issues.

“The notion that Madoff came to my office many times is a fiction,” Mr. Levitt says. “And the notion that he did my bidding is so fantastic that it defies belief.”

Mr. Madoff’s firm was an early adopter of new trading technologies. And, during the early 1990s, he served three one-year stints as head of the Nasdaq, an electronic exchange that has competed vigorously and won market share from brick-and-mortar exchanges like the Big Board.

Despite this flair for the experimental, Mr. Madoff routinely told his employees to adopt the mantra “KISS,” or “keep it simple, stupid.” He was, after all, a man of precise and controlled habits. He smoked Davidoff cigars and, in London, tailored his suits at Kilgour on Savile Row and bought many of his watches at Somlo Antiques.

Associates and others acquainted with him said his punctilious ways sometimes veered into obsessive-compulsive behavior. His office, for example, always had to be immaculate.

According to a former employee, who requested anonymity because of continuing litigation and because, he said, regulators have told Madoff employees not to speak to the media, Mr. Madoff scouted the office for potential filth. Once, when he spotted an employee eating a pear at his desk in New York, this person said, Mr. Madoff spied some juice dripping onto the gray carpet.

“What do you think you are doing?” this person recalls Mr. Madoff demanding. Eating a pear, the employee replied. Mr. Madoff ripped the soiled carpet tile from the floor, then rushed to a closet to retrieve a similar swatch to replace it.

Julia Fenwick, who was the office manager for Mr. Madoff’s London operation from 2001 until the unit was shuttered in December, said that “everything had to be perfect” and that “you never left paper on your desk — ever.”

Although he visited the London office only a couple of times a year, usually on the way to his vacation home in France, Mr. Madoff still reveled in micromanaging everything there, including the office décor.

The London unit recently finished spending about $700,000 for a refurbishment that recreated the black and gray palette of Mr. Madoff’s New York office and his private jet, Ms. Fenwick says. The result was office furniture made from black ash, black trimming on gray walls, black computers, black mouse pads and even a black refrigerator on the trading floor.

But former employees and friends say Mr. Madoff’s obsession with order and control of his environment never led them to believe that deeper problems were afoot.

“He appeared to believe in family, loyalty and honesty,” said one former Madoff employee, who asked to remain anonymous because of the continuing litigation and investigations. “Never in your wildest imagination would you think he was a fraudster.”

Despite all of the easy money that rolled into Mr. Madoff’s firm for much of its existence, financial pressures began to emerge there during the last several years after Wall Street changed the way securities were priced and as new competition emerged.

In his asset management business, however, Mr. Madoff continued to haul in fresh rounds of money from unsuspecting investors hungry for the predictable and handsome returns he booked year after year, without missing a beat.

Employees who were veterans in the New York and London offices were even allowed to invest with Mr. Madoff, according to people who worked at the firm. Some employees are said to have given Mr. Madoff a large portion of their life savings — all of which now appears to be gone.

Like so many others who invested with him, his employees weren’t lured to his funds simply by a promise of outsize returns. Rather, they say, they sought the security of investing with a man they knew and trusted. The Bernie they thought they knew.

Mr. Madoff’s confidence reminds J. Reid Meloy, a forensic psychologist, of criminals he has studied.

“Typically, people with psychopathic personalities don’t fear getting caught,” explains Dr. Meloy, author of a 1988 textbook, “The Psychopathic Mind.” “They tend to be very narcissistic with a strong sense of entitlement.”

All of which has led some forensic psychologists to see some similarities between him and serial killers like Ted Bundy. They say that whereas Mr. Bundy murdered people, Mr. Madoff murdered wallets, bank accounts and people’s sense of financial trust and security.

Like Mr. Bundy, Mr. Madoff used a sharp mind and an affable demeanor to create a persona that didn’t exist, according to this view, and lulled his victims into a false sense of security. And when publicly accused, he seemed to show no remorse.

Television footage of Mr. Madoff entering his apartment building on East 64th Street at Lexington Avenue after federal authorities charged him with fraud in December doesn’t seem to show a man exhibiting any sorrow or regret. With a battery of reporters asking him whether he felt remorse, he declined to respond and pushed his way into his building. (Thus far, his only public apology has apparently been in letters left in his lobby for fellow tenants who suffered through the media circus outside their building.)

To some extent, analysts of criminal behavior say, defining Mr. Madoff is complicated by the wide variety of possible explanations for his scheme: a desire to accumulate vast wealth, a need to dominate others and a need to prove that he was smarter than everyone else. That was shown, they say, in an ability to dupe investors and regulators for years.

Like the former F.B.I. agent Mr. McCrary, Dr. Meloy cautions that he has not met Mr. Madoff and can’t make a clinical diagnosis. Nevertheless, he says individuals with psychopathic personalities tend to strongly believe that they’re special.

“They believe ‘I’m above the law,’ and they believe they cannot be caught,” Mr. Meloy says. “But the Achilles’ heel of the psychopath is his sense of impunity. That is, eventually, what will bring him down.”

He says it makes complete sense that Mr. Madoff would have courted regulators, even if he ran the risk of exposing his own actions by doing so.

“In a scheme like this, it’s very important to keep those who could threaten you very close to you,” Dr. Meloy explains. “You want to develop them as allies and shape how they go about their business and their attitudes toward you.”

INDEED, if it is shown that Mr. Madoff fooled regulators for decades, that would have been a “heady, intoxicating” experience and would have fueled a sense of entitlement and grandiosity, Mr. McCrary says.

And by reeling in people from the Jewish community, from charities, from public institutions and from prominent and relatively sophisticated investor networks worldwide, Mr. Madoff wreaked havoc on many lives.

That’s why Mr. McCrary says it’s not too far-fetched to compare Mr. Madoff to serial killers.

“With serial killers, they have control over the life or death of people,” Mr. McCrary explains. “They’re playing God. That’s the grandiosity coming through. The sense of being superior. Madoff is getting the same thing. He’s playing financial god, ruining these people and taking their money.”

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Ponerology 101

Ponerology 101 | Feb 15th 2010

by Harrison Koehli


from Sott Website


Lobaczewski and The Origins of Political Ponerology

Beginning immediately after World War II and continuing in the decades after the imposition of Soviet dictatorship on the countries of Eastern Europe, a group of scientists - primarily Polish, Czech, and Hungarian - secretly collaborated on a scientific study of the nature of totalitarianism.

Blocked by the State Security Services from contact with the West, their work remained secret, even while American researchers like Hervey Cleckley and Gustave Gilbert were struggling with the same questions.1

The last known living member of this group, a Polish psychologist and expert on psychopathy named Andrzej Łobaczewski (1921-2007), would eventually name their new science - a synthesis of psychological, psychiatric, sociological, and historical studies - "ponerology", a term he borrowed from the priests of the Benedictine Abbey in the historic Polish village of Tyniec.

Derived from poneros in New Testament Greek, the word suggests an inborn evil with a corrupting influence, a fitting description of psychopathy and its social effects.

Most of what we know about this research comes from precious few sources. Łobaczewski's sole contact with the researchers was through Stefan Szuman (1889 - 1972), a retired professor who passed along anonymous summaries of research between members of the group. The consequences for being discovered doing this type of forbidden research were severe; scientists faced arrest, torture, and even death, so strict conspiracy amongst their little group was essential. They safeguarded themselves and their work by sharing their work anonymously.

This way, if any were arrested and tortured, they could not reveal names and locations of others, a very real threat to their personal safety and the completion of the work.

Łobaczewski only shared the names of two Polish professors of the previous generation who were involved in the early stages of the work,

  • Stefan Błachowski (1889 - 1962)

  • Kazimierz Dąbrowski (1902 - 1980) 2

Błachowski died under suspicious circumstances and Łobaczewski speculates that he was murdered by the State police for his part in the research.

Dąbrowski emigrated and, unwilling to renounce his Polish citizenship in order to work in the United States, took a position at the University of Alberta in Canada, where he was able to have dual citezenship.

A close reading of Dąbrowski's published works in English shows the theoretical roots of what would become ponerology.3

Like Lobaczewski, Dąbrowski considered psychopathy to be,

"the greatest obstacle in development of personality and social groups".4

He warned,

"The general inability to recognize the psychological type of such individuals [i.e. psychopaths] causes immense suffering, mass terror, violent oppression, genocide and the decay of civilization...

As long as the suggestive [i.e. hypnotic, charming, "spellbinding"] power of the psychopaths is not confronted with facts and with moral and practical consequences of his doctrine, entire social groups may succumb to his demagogic appeal".5

In perhaps the first explicit mention of "political psychopathy", he remarked that the extreme of ambition and lust for power and financial gain "is particularly evident in criminal or political psychopathy":6

Methods are developed for spreading dissension between groups (as in the maxim "divide et impera" [divide and rule]). Treason and deceit in politics are given justification and are presented as positive values.

Principles of taking advantage of concrete situations are also developed. Political murder, execution of opponents, concentration camps and genocide are the product of political systems at the level of primary integration [i.e. psychopathy].7

In a passage decades before its time, he observed that less "successful" psychopaths are to be found in prisons, while successful ones are to be found in positions of power (i.e., "among political and military national leaders, labor union bosses, etc.").

He cited two examples of leaders characterized by this "affective retardation", Hitler and Stalin, to whom he referred repeatedly in his books8 and who both showed a,

"lack of empathy, emotional cold­ness, unlimited ruthlessness and craving for power".9

Dąbrowski and Łobaczewski experienced this horror firsthand.

In September 1939, the Nazis invaded Poland using a false-flag operation that has come to be known as the Gleiwitz Incident. This was part of the larger SS project Operation Himmler, the purpose of which was to create the illusion of Polish aggression as the pretext for "retaliation".

In other words, the Germans needed a plausible excuse or cover story to invade the country. Germans dressed as Poles attacked a radio station and broadcast anti-German propaganda in addition to murdering a German-Silesian sympathizer of the Poles, Franciszek Honiok, and placing his body at the scene.10

The Nazis used these operations to justify the invasion, after which they instituted a regime of terror that resulted in the deaths of an estimated six million Poles. As part of a larger goal of destroying all Polish cultural life, schools were closed and professors were arrested, sent to concentration camps, and some murdered. Psychiatry was outlawed.

According to Jason Aronson of Harvard Medical School, the Nazis murdered the majority of practicing psychiatrists.

Only 38 survived out of approximately 400 alive before the invasion.11

During this tumultuous time Łobaczewski worked as a soldier for the Home Army, an underground Polish resistance organization, and his desire to study psychology grew.

The gothic style school that he would later attend, Jagiellonian University, suffered greatly during the war years as part of a general program to exterminate the intellectual elite of the city of Krakow. On November 6, 1939, 144 professors and staff were arrested and sent to concentration camps. They had been told that they were to attend a mandatory lecture on German plans for Polish education. Upon arrival, they were arrested in the lecture hall, along with everyone else present in the building.

Thankfully, due to public protest, the majority was released a few months later and despite the University having been looted and vandalized by the Nazis, survivors of the operation managed to form an underground university in 1942.12

Regular lectures began again in 1945 and it was probably then that Łobaczewski began his studies under professor of psychiatry Edward Brzezicki 13,14 Łobaczewski probably also met Stefan Szuman, a renowned psychologist who taught at Jagiellonian, at this time.

Szuman later acted as Łobaczewski's clearinghouse for secret data and research.

While Jagiellonian and the other Polish universities enjoyed three years of freedom, this quickly ended in 1948 when Poland became a satellite state of the Soviet Union and the Polish United Workers' Party took full control of University life. With the establishment of the Polish Democratic Republic, Poland was placed under the Soviet sphere of influence; medical and psychiatric services were socialized, and clinical psychiatry reduced to strictly Pavlovian concepts.

Thus the "Stalinization" of Polish education and research picked up where Hitler left off. Łobaczewski's class was the last to be taught by the pre-Communism professors, who were considered "ideologically incorrect" by the powers that be. It was only in their last year of schooling that they fully experienced the inhuman "new reality" which was to inspire the course of Łobaczewski's research for the rest of his life.

During the three decades he spent living under the Communist dictatorship, Łobaczewski worked in general and mental hospitals.

The dictatorship provided intensified conditions and opportunities to improve his skills in clinical diagnosis - essential skills for coming to terms with this new social reality. He was also able to give psychotherapy to those who suffered the most under such harsh rule. Early on, as others involved in the secret research observed Lobaczewski's interest in psychopathology and the social psychology of totalitarianism, he became aware that he was not the first to pursue such research and was asked to join their group.

Originally, he only contributed a small part of the research, focusing mostly on psychopathy.

The name of the person responsible for completing the final synthesis was kept secret, but the work never saw the light of day. All of Łobaczewski's contacts became inoperative in the post-Stalin wave of repression in the 1960s and he was left only with the data that had already come into his possession. All the rest was lost forever, whether burned or locked in some secret police archive.

Faced with this hopeless situation, he decided to finish the work on his own. But despite his efforts in secrecy, the political authorities came to suspect that he possessed "dangerous" knowledge that threatened their power. One Austrian scientist with whom Łobaczewski had corresponded turned out to be an agent of the secret police, and Łobaczewski was arrested and tortured three times during this period.

While working on the first draft in 1968, the locals of the village in which he was working warned him of an imminent secret police raid. Łobaczewski had just enough time to burn the work in his central heating furnace before their arrival.15 Years later, in 1977, the Roman correspondent to Radio Free Europe, to whom Łobaczewski had spoken about his work, denounced him to the Polish authorities.16

Given the option of a fourth arrest or "voluntary" exile to the United States, Łobaczewski chose the latter. All his papers, books, and research materials were confiscated and he left the country with nothing.

Upon arrival in New York City, the Polish security apparatus utilized their contacts to block Łobaczewski's access to jobs in his field.

He was terrified to learn that,

"the overt system of suppression I had so recently escaped was just as prevalent, though more covert, in the United States."17

In short, the U.S. was infected with the same sickness and the "freedom" they offered was little more than an illusion.

In the case of scientists living abroad, the Polish secret police's modus operandi was to suggest certain courses of action to American Party members, who then gullibly carried them out, unaware of the real motivations for their actions. Łobaczewski was thus forced to take a job doing manual labor, writing the final draft of his book in the early hours before work.

Having lost most of the statistical data and case studies with his papers, he included only those he could remember and focused primarily on the observations and conclusions based on his and others' decades of study, as well as a study of literature written by sufferers under pathocratic regimes.

Once the book was completed in 1984 and a suitable translation made into English, he was unable to get it published. The psychology editors told him it was "too political", and the political editors told him it was "too psychological".

He enlisted the help of his compatriot, Zbigniew Brzezinski, who had just previously served as President Jimmy Carter's National Security Adviser and who initially praised the book and promised to help get the book published.

Unfortunately, after some time spent corresponding Brzezinski became silent, responding only to the effect that it was a pity it hadn't worked out. In Łobaczewski's words,

"he strangled the matter, treacherously".18

In the end, a small printing of copies for academics was the only result, and these failed to have any significant influence on academics and reviewers.

Suffering from severely poor health, Łobaczewski returned to Poland in 1990, where he published another book and transcribed the manuscript of Political Ponerology - A Science on the Nature of Evil Adjusted for Political Purposes onto his computer.

He eventually sent this copy to the editors of Sott and Red Pill Press, who published the book in 2006. His health once more failing, he died just over a year later, in November of 2007. While other scientists conducted important research into these subjects over the years, Łobaczewski's book remains the most comprehensive and in-depth.

It is truly an underground classic.


  1. Cleckley wrote the classic book on psychopathy The Mask of Sanity and Gilbert wrote The Psychology of Dictatorship based on his analysis of the Nazi Nuremberg war criminals.

  2. It's unclear if Łobaczewski was aware of more but refused to share their names for fear of their well-being.

  3. Unfortunately, like Gilbert's book, Dąbrowski's books are now out-of-print. A DVD containing scans of his work is available here.

  4. Translated by Elizabeth Mika in "Dąbrowski's Views on Authentic Mental Health", in Mendaglio, S. (ed) Dąbrowski's Theory of Positive Disintegration (Scottsdale, AZ: Great Potential Press, 2008), pp. 139 - 53.

  5. Dąbrowski, K. (with Kawczak, A. & Sochanska, J.), The Dynamics of Concepts (London: Gryf, 1973), pp. 40, 47.

  6. Dąbrowski, K. 1996 [1977]. 'Multilevelness of Emotional and Instinctive Functions' (Lublin, Poland: Towarzystwo Naukowe Katolickiego Uniwersytetu Lubelskiego, 1996 [1977]), p. 33.

  7. Ibid, p. 153.

  8. Ibid, p. 21; 'The Dynamics of Concepts', p. 40; Dąbrowski, K. Personality-shaping Through Positive Disintegration (Boston: Little, Brown, 1967), p. 202; Dąbrowski, K. Psychoneurosis Is Not An Illness (London: Gryf, 1972), p. 159.

  9. Dąbrowski, K. (with Kawczak, A. & Piechowski, M. M.) Mental Growth Through Positive Disintegration (London: Gryf, 1970), pp. 29 - 30.

  10. See Wikipedia, "Gleiwitz Incident".

  11. Preface to Dąbrowski, K. Positive Disintegration. (Boston: Little, Brown, 1964), pp. ix - x.

  12. Błachowski taught at one such underground university in Warsaw. See Wikipedia, "Stefan Błachowski".

  13. On the arrest of Jagiellonian staff, see here.

  14. See Jagiellonian University website.

  15. Later, in Bulgaria, he attempted to send a second draft to a contact in the Vatican via a Polish-American tourist, but to his knowledge it was never delivered.

  16. Łobaczewski only learned the identity of his denouncer from the Polish Institute of National Remembrance in 2005. See interview conducted November 19, 2005.

  17. Łobaczewski, A. Political Ponerology: A Science on the Nature of Evil Adjusted for Political Purposes (Grande Prairie, AB: Red Pill Press, 2006), p. 23.

  18. In Memoriam: Andrzej M Łobaczewski

Back to Contents

The Psychopath's Mask of Sanity
17 Mar 2010

M.C. Roessler 2010

A Wall Street Psychopath?
In 1960 Bernie Madoff founded his Wall Street firm, Bernard L. Madoff Investment Securities LLC.

As chairman of its Board of Directors until his arrest in December of 2008, Madoff saw his firm (and himself) rise to prominence on Wall Street, developing the technology that became NASDAQ, the first and largest electronic stock exchange in America, in the process.

A multimillionaire with over $800-million in shared assets with his wife and high school sweetheart, Ruth Alpern, Madoff was well-regarded as a financial mastermind and prolific philanthropist. He exuded an aura of wealth, confidence, and connections, and many trusted him as a pillar of the community.

Sounds like a great guy, huh?

His humanitarian image was supported by his work for various nonprofit groups like the American Jewish Congress and Yeshiva University in New York, the various commissions and boards on which he sat, and the millions he donated to educational, political, cultural, and medical causes.

As his firm's website made clear at the time (it has now been removed):

"Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

It's funny how things change with a little perspective and a pattern emerges only in retrospect.

It wasn't until December of 2008 that the public became aware that this "personal interest" was anything but one of integrity, and that image stopped being taken for reality.

In a discussion with Condé Nast Portfolio Editor in Chief Joanne Lipman, Holocaust survivor, Nobel laureate and Madoff victim Elie Wiesel said:

"I remember that it was a myth that he created around him... that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand... He gave the impression that maybe 100 people belonged to the club. Now we know thousands of them were cheated by him." 1

In what has been described as the largest investor fraud ever committed by single person, Madoff defrauded thousands of investors out of just under $65-billion in an elaborate Ponzi scheme, paying returns to investors from money paid by other investors, not actual profits.

By moving funds in such a way, Madoff created an image of money that rivaled his own as a man of good character. The illusion of consistent, high returns, lured thousands into a deal too good to be true, offered by a man too good to be true. According to the media portrayal of events, Madoff described the investment fund as "one big lie" to his sons, who promptly informed the authorities.

Madoff was arrested the next day and his assets were frozen (as were those of his wife and sons later on).

In the aftermath, Madoff had succeeded in ruining the lives of thousands, driving some victims to suicide. He ended up pleading guilty to eleven counts of fraud, money laundering, and perjury, among others. Although Madoff ran his companies with an iron fist and claimed he was solely responsible for defrauding clients, investigators were unsatisfied that one person alone could hide fraud on such a massive scale for so long.

Subsequent investigations have so far placed six former associates under criminal investigation,2 while multiple lawsuits are underway against Ruth Madoff and her sons.3

So how did he pull it off?

Jerry Reisman, a prominent New York lawyer, described Madoff as,

"utterly charming. He was a master at meeting people and creating this aura. People looked at him as a superhero." 4

Even when he was scrambling to secure funds to keep up his dead-end fraud, associates noticed no signs of stress.

In a 2007 roundtable conversation, viewable on Youtube,5 Madoff makes some telling comments.

Speaking about modern exchange firms, Madoff coolly says,

"By and large, in today's regulatory environment, it's virtually impossible to violate rules. This is something that the public really doesn't understand... It's impossible for a violation to go undetected. Certainly not for a considerable amount of time."

This coming from a man who had been doing just that for years and possibly decades!

No wonder, given his propensity for deceit, that Madoff and his firm were extremely secretive, finding ways of keeping their illegal activities hidden, for example, refusing to provide clients online access to their accounts and ordering employees - against regulations - to delete email after it had been printed on paper, as reported by Lucinda Franks in her piece for The Daily Beast.6

Contrary to his illustrious public persona, in an article by Mark Seal for Vanity Fair,7 various family friends and insiders present an image of Madoff as a cold-hearted control freak who not only exploited strangers, but also those closest to him.

He cultivated ostensibly close friendships with the late Norman F. Levy and philanthropist Carl J. Shapiro while robbing them blind in the process. Madoff spoke of Levy as his "mentor of 40 years" and always deferred to him.

In return, Levy considered Madoff his,

"surrogate son, a member of his family."

Carmen Dell'Orefice, Levy's then-girlfriend, remembers,

"He always did so much for Norman's comfort in the smallest details."

She described Madoff and his wife as quiet and inconspicuous and expressed the cognitive dissonance often experienced by victims of conmen like Madoff when the truth behind the image is finally revealed:

"I am accepting that what I was experiencing was a projection of a person who wasn't there... If I didn't take all the pictures I took all those years, I would say 'Carmen, you're delusional'."

Levy's son Francis said his father believed in Madoff:

"If there's one honorable person," he said, "it's Bernie."

Joseph Kavanu, a former law school peer of Madoff's shared similar disbelief with Julie Creswell and Landon Thomas Jr. in their piece for the New York Times:

"It doesn't make sense... I cannot take the Bernie I knew and turn him into the Bernie we're hearing about 24/7. It doesn't compute."

In reality, there were two Madoffs:

  • the carefully cultivated image of the successful businessman and philanthropist

  • the reality: a ruthless and remorseless criminal who operated behind a mask of sanity, success, and humanitarianism

One source described to Seal how Madoff ruled his two sons through,

"tough love and fear. People were afraid of Bernie. He wielded his influence. They were afraid of his temper."

Madoff also ruled his office with an iron fist, controlling the work environment down to the smallest detail. He was obsessed with order and control.

A family friend related,

"There was a lot of arrogance in that family. Bernie would talk to people who were as rich as he was, but he didn't want to be bothered with the little people."

Another insider said,

"He was imperial, above it all. If he didn't like the conversation, he would just get up and walk away. It was 'I'm Bernie Madoff and you're not.'"

Another said,

"Peter [Madoff's brother] is much more religious, more even-keeled. Bernie is more cocky, arrogant, a showman. Shrewd like a fox."

From the descriptions of those who knew and interacted with him, a picture emerges of Bernie Madoff as arrogant, superficially charming, glib, manipulative, deceitful, emotionally cold, domineering, and heartless, in short, all the hallmarks of a successful psychopath.

Unsurprisingly, journalists and experts alike have suggested exactly that J. Reid Meloy, forensic psychologist and author of The Psychopathic Mind, Florida forensic psychologist Phil Heller, and former FBI agent Gregg McCrary, have all said so in print 8 & 9, and several prominent researchers including Adrian Raine suggested the same at the 2009 conference for the Society for the Scientific Study of Psychopathy in New Orleans.

In what I'll show over the course of this series to be typical psychopathic fashion, Madoff fought his way to the top, wooed the regulators, and built his fortune by conning those he saw as worthless, even screwing over his so-called friends.

However, as Meloy told Creswell and Thomas,

"the Achilles' heel of the psychopath is his sense of impunity. That is, eventually, what will bring him down."

What Is Psychopathy?
Until the publication of Hervey Cleckley's landmark book The Mask of Sanity in 1941 (along with its subsequent editions), there wasn't much agreement on what exactly psychopathy is.

The term had come to describe individuals whose emotional life and social behavior were abnormal, but whose intellectual capacities were undisturbed. In contrast to psychotics whose grip on reality is clearly disturbed, as in paranoid schizophrenia, psychopaths are completely sane. They have a firm grip on reality, can carry on a conversation, and often appear more normal than normal.

But at the same time, while talking to you about the weather or the economy, they may be deciding the best way to con you out of your life savings or perhaps get you to a secluded location where they can rape or murder you.

However, while psychopaths may be intellectually aware that their actions grossly violate the limits of normal human behavior, they lack the emotional engagement with others that normally acts as an inhibitor of anti-social acts, like calculated aggression, intentional intimidation, pathological lying and emotional manipulation.

In the course of his (or her, as probably one in four psychopaths is female) development, the psychopath's inability to feel and thus identify with the emotions of others blocks the development of a "moral sense" that allows normal individuals to care for others and treat them like thinking and feeling beings.

Psychopaths just don't care. To them people are things, objects.

When they're no longer useful they can be discarded or destroyed without a second thought.

The jarring disconnect between the absolutely normal (if not more than normal) face with which the psychopath greets the world, and the utterly unfathomable irrationality and inhumanity of his actions has led to their being called "wolves in sheep's clothing" and "snakes in suits".

Cleckley coined the phrase "mask of sanity" to illustrate the disparity between the image of normality and the psychopath's essential abnormality.

While the label has come to be almost strictly associated with serial killers, rapists and arch-villains, Cleckley was quick to point out that the vast majority of psychopaths are not violent, and,

"only a small proportion of typical psychopaths are likely to be found in penal institutions, since the typical patient... is not likely to commit major crimes that result in long prison terms."10

Their actions are antisocial in that they violate the almost universally agreed upon "rules" of social behavior.

Of course, this often takes the form of crime, but many psychopaths operate successfully within the boundaries of the law, wreaking havoc interpersonally or monetarily.

After years of frequently encountering psychopaths in clinical practice and witnessing the immense suffering they inflict upon those who happen to fall within their sphere of influence, Cleckley identified several universal traits.

On the one hand psychopaths are superficially charming and of good intelligence. They lack any delusions or other signs of irrational thinking and are free of nervousness and anxiety. In other words, they present an image of good "mental health" that can disarm even the most experienced judge of human character. However, a close analysis of their life history and interactions with others reveals some striking deficits beneath the mask.

Psychopaths are also notoriously insincere, liberally inserting lies and innuendo into their talkative stream that usually go unnoticed. They are usually impulsive, acting on whims, and seeming to live entirely in the present, unhindered by concerns for past failures and future consequences.

As such they often show remarkably poor judgment and an inability to learn from punishments or the threat of future ones (psychopathic criminals have the highest recidivism rates). They are unreliable, often moving from job to job and city to city, finding new victims and living parasitically off of others' kindness and naiveté. They also have a pathological sense of entitlement. The center of their own universe, they are incapable of love, lack any sense of remorse or shame, and show a general poverty of any deep emotional life.

This is the core feature, shared equally by all psychopaths: the inability to feel empathy.

While Cleckley did much to bring light on the issue, in the preface to the fifth and final edition of his book he described "an almost universal conspiracy of evasion" of the topic of psychopathy among North American researchers and clinicians.

While institutions exist to deal with illness and crime, when it comes to psychopathy,

"no measure is taken at all... nothing exists specifically designed to meet a major and obvious pathologic situation."11

Psychopathy arguably accounts for a grossly disproportionate amount of damage to society.

Cleckley was convinced that the first step to deal with this immense problem was to "focus general interest" and "promote awareness of its tremendous importance."12

Thankfully, significant contributions have been made in recent years towards such a goal by writers like Robert Hare and Paul Babiak, clinicians Martha Stout and Sandra Brown, and popular media portrayals such as the documentaries, The Corporation and I, Psychopath.

Unfortunately, even with these efforts, public knowledge about psychopathy still falls far short of ideal, the "conspiracy of evasion" persists, and the problem rages on. For a disorder affecting more people than schizophrenia,13 and causing exponentially more harm to society, the fact that psychopathy is not a generally understood concept is alarming.

Robert D. Hare, Professor Emeritus of psychology at the University of British Columbia, wrote a book in 1970 summarizing the research available at the time. Since then, he has been at the forefront of psychopathy research, developing the first valid measure of criminal psychopathy, the Psychopathy Checklist (PCL-R), and writing two bestsellers on the subject: Without Conscience in 1993 and Snakes in Suits (co-authored with Paul Babiak) in 2006.

Working with criminal populations, Hare further refined Cleckley's list of psychopathic traits for the PCL-R, settling on twenty characteristics of a prototypical psychopath.

Whereas Cleckley described his psychopathic patients as "carr[ying] disaster lightly in each hand" and "not deeply vicious",14 Hare's Without Conscience presents a much more malevolent look into the mind of the criminal psychopath.

As he puts it:

"Psychopaths have what it takes to defraud and bilk others: They are fast-talking, charming, self-assured, at ease in social situations, cool under pressure, unfazed by the possibility of being found out, and totally ruthless... Psychopaths are generally well satisfied with themselves and with their inner landscape, bleak as it may seem to outside observers."15

They see empathy, remorse, and a sense of responsibility - all the qualities usually considered as the epitome of goodness and humanity - as signs of weakness to be exploited; laws and social rules as inconvenient restrictions on their freedom; and antisocial behavior as deliberate "nonconformity", a refusal to "program" by society's artificial standards.

Love, kindness, guilt, and altruism strike the psychopath as comical and childish naiveties for "bleeding hearts", and psychopathic serial murderer Ted Bundy even called guilt,

"an illusion... a kind of social-control mechanism."16

While they may convincingly profess to love in the most romantic and meaningful verbosity to their partners, these displays are soon replaced with domination and exploitation, as Sandra Brown shows in her 2009 book Women Who Love Psychopaths.

Psychopaths see normal life as dull and boring, a dog-eat-dog world in which potential enemies (i.e. you and me) are to be manipulated, and aggression used as a tool to establish their superiority and take what is rightfully theirs - to satisfy their grandiose sense of entitlement.

Naturally, in a universe of one, Hare observes,

"Obligations and commitments mean nothing to psychopaths... They do not honor formal or implied commitments to people, organizations, or principles."17

They may very well ask,

"What's so bad about being articulate, self-confident, living a fast-paced life on the edge and in the now, and looking out for number one?"

And in our decaying society, many would not disagree.

But what the psychopath sees as a carefree life of excitement and entitlement usually amounts to little more than the pursuit of immediate moments of pleasure and feelings of power, whether fleeting or more long-lasting.

With Hare's work, the psychopathic "mask" of sanity and normality acquires a sinister and Machiavellian tone. That's because psychopaths are conscious of being different. They see normal people as inferiors - "others" - to be used and discarded when they are no longer needed. But like a predator among its prey, psychopaths must disguise themselves to evade detection. If they made their motives known, others would be horrified.

So, from an early age they learn to fit in by copying normal human reactions and behaviors.

They learn when it is appropriate to cry, show grief, guilt, concern, and love. They learn all the facial expressions, common phrases, and social cues for these emotions they do not feel. And as such, they deceive others with false displays of sadness, grief, guilt, concern, and love, and they manipulate our reactions to get what they want.

That's how a psychopath is able to con you out of money by playing on your sense of pity and compassion.

Normal people, unaware of the differences between psychopaths and themselves, assume that these displays of emotion are evidence of actual emotion, and so the psychopath succeeds in going unnoticed, like a wolf in sheep's clothing.

"[T]he truly talented ones have raised their ability to charm people to that of an art, priding themselves on their ability to present a fictional self to others that is convincing, taken at face value, and difficult to penetrate."18

This "practice" at appearing human is expertly portrayed in Mary Astor's novel The Incredible Charlie Carewe, which Cleckley recommended,

"should be read not only by every psychiatrist but also by every physician" because of its remarkably accurate portrayal of a psychopath.19

This "act" is a matter of survival for a psychopath, lest their "inhumanity" be discovered.

After all, most people do not react positively to a child or adult who potentially can, as Hare put it,

"torture and mutilate [a human being] with about the same sense of concern that we feel when we carve a turkey."20

Psychopaths also keep up their "psychopathic fiction" by being charming conversationalists.

They expertly tell "unlikely but convincing" stories about themselves, easily blending truth with lies. Not only can they lie effortlessly, they are completely unfazed when caught in a lie. They simply rework their story, to the befuddlement of those who know the truth. They may feign remorse, but are equally skilled at rationalizing their behavior, often portraying themselves as the victims (and blaming the real victims).

One female psychopath complained that no one cared about how she felt, having lost both her children. In fact, she was the one who had murdered them. In cases like this, the mask slips ever so slightly, as when the less intelligent psychopath attempts to use emotional concepts he cannot understand.

One inmate told Hare,

"Yeah, sure, I feel remorse [for the crime]."

However, he didn't,

"feel bad inside about it."21

Even their violent outbursts of "rage" are carefully controlled displays.

One relatively self-aware psychopath revealed,

"There are emotions - a whole spectrum of them - that I know only through words, through reading and in my immature imagination. I can imagine I feel these emotions (know, therefore, what they are), but I do not."22

Another, confused when asked how he felt, was asked about the physical sensations of emotion and responded,

"Of course! I'm not a robot. I really get pumped up when I have sex or when I get into a fight."23

Capable of only the most primal body-based feelings, the psychopath has no intense emotions to be in control of; any display of such is an act with the intent to manipulate.

As to the causes of this disturbing disorder, researchers are now confident that, contrary to the once common belief that psychopathy must be caused by childhood trauma, there is a substantial genetic and biological basis for psychopathy.

In his 2007 update on the last twenty years of psychopathy research, Robert Hare comments:

"I might note that the early results from behavioral genetics research are consistent with the evolutionary psychology view that psychopathy is less a result of a neurobiological defect than a heritable, adaptive life-strategy."24

Or, as he put it in Without Conscience:

I think [childhood experiences] play an important role in shaping what nature has provided [i.e. "a profound inability to experience empathy and the complete range of emotions"]. Social factors and parenting practices influence the way the disorder develops and is expressed in behavior.

Thus, an individual with a mix of psychopathic personality traits who grows up in a stable family and has access to positive social and educational resources might become a con artist or white-collar criminal, or perhaps a somewhat shady entrepreneur, politician, or professional.

Another individual, with much the same personality traits but from a deprived and disturbed background, might become a drifter, mercenary, or violent criminal...

One implication of this view for the criminal justice system is that the quality of family life has much less influence on the antisocial behaviors of psychopaths than it does on the behavior of most people.25

In line with this understanding, psychopathy can be detected at an early age.

By the age of 10 or 12, most psychopaths exhibit serious behavioral problems like persistent lying, cheating, theft, fire setting, truancy, class disruption, substance abuse, vandalism, violence, bullying, running away, precocious sexuality, cruelty to animals. One psychopath smiled when he reminisced to Hare about tying puppies to a rail to use their heads for baseball-batting practice.26

However, the exact causes (and possible steps to prevent it in infancy and early childhood) are still unknown.

Children predisposed to psychopathy who do not show obvious signs later in life probably become successful at avoiding detection because of such factors as increased intelligence and abilities to better plan and control their behavior.

While the vast majority of research has been conducted on prison populations, because of the relative ease of research opportunities, the concept of the successful psychopath (whether that means he is not criminal or simply doesn't get caught) is a relatively recent topic of interest for specialists and is not yet clearly defined or publicly understood, just as the term "psychopath" was in the early twentieth century.

It is these psychopaths - the ones who avoid detection - who become successful and ruthless politicians and government insiders, as was the case with Hermann Göring and Lavrentiy Beria (who will be discussed in future columns) and is probably the case with contemporary politicians like,

  • Israeli Prime Minister Benjamin Netanyahu

  • American ex-Vice President Dick Cheney

  • Italian Prime Minister Silvio Berlusconi

These men achieve the heights of power, and they are dangerous.


  1. A transcript of the talk is available here

  2. "Ex-Madoff Operations Director Arrested by FBI", Reuters, February 25, 2010

  3. "Participants in the Madoff investment scandal," Wikipedia, accessed March 17, 2010

  4. Tim Shipman, "Bernard Madoff: how did he get away with it for so long?",, December 20, 2008

  5. YouTube video

  6. Lucinda Franks, "Madoff Employee Breaks Silence", The Daily Beast, March 19, 2009

  7. Mark Seal, "Madoff's World", Vanity Fair, April 2009

  8. Julie Creswell and Landon Thomas Jr., "The Talented Mr. Madoff", New York Times, January 24, 2009

  9. Katy Brace, "Psychologist calls Madoff a psychopath",, January 29, 2009

  10. Cleckley, H. 1988 [1941], The Mask of Sanity (Augusta, Georgia: Emily S. Cleckley)

  11. Ibid, viii

  12. Ibid, ix

  13. Goldner et al. (2002) put the prevalence of schizophrenia at 0.55% of the general population, and while accurate studies of psychopathy in the general population have yet to be done, recently a few limited studies show that the low limit for psychopathy is 0.6% (Coid et al., 2009). Some estimates go many times higher than that figure, factoring in successful psychopaths.

  14. Cleckley, 33

  15. Hare, R. D. 1999 [1995], Without Conscience: The Disturbing World of Psychopaths Among Us (New York: Guilford Press), 121, 195

  16. Ibid, 41

  17. Ibid, 63

  18. Babiak, P. & Hare, R. D. 2006, Snakes In Suits: When Psychopaths Go To Work (New York: ReganBooks), 50

  19. Cleckley, 326

  20. Hare, 45

  21. Ibid, 41

  22. Ibid, 52-3

  23. Ibid, 54

  24. Hare, R. D. 2007, 'Forty Years Aren't Enough: Recollections, Prognostications, and Random Musings,' In Herve, H., and Yuille, J. C. (eds) The Psychopath: Theory, Research, and Practice, pp. 3 - 28 (Lawrence Erlbaum Associates), 14. However, recent studies have shown distinct differences in the brain functioning of psychopaths when compared to normal individuals. See Oakley, B. 2007, Evil Genes: Why Rome Fell, Hitler Rose, Enron Failed, and My Sister Stole My Mother's Boyfriend (Amherst, NY: Prometheus Books).

  25. Hare (1999), 173 - 4

  26. Ibid, 66 - 7

Back to Contents

Snakes in Suits
05 May 2010

Spanish version

The criminal psychopath has been observed and studied for almost a century.

But except for a short mention by Cleckley, the idea of a successful psychopath - ordinary by almost all external standards - has remained shrouded in that pervasive "conspiracy of silence". As this series progresses, it will become clear why this is the case and what exactly are the ramifications of such a dangerous gap in knowledge and awareness.

So far the only in-depth presentation of the problem of successful psychopaths has been Paul Babiak's and Robert Hare's book Snakes in Suits, published in 2006. The book is essential reading, and has the potential to save your life, literally.

The information it contains is universal and can be applied to interactions on any social level.

Babiak, as an industrial and organizational psychologist, encountered his first corporate psychopath in 1992. By studying operators like "Dave" in the corporate environment, Babiak not only brought into focus the methods by which psychopaths infiltrate and ascend the corporate ladder of success, he shattered previous illusions about what was and wasn't possible for psychopaths to accomplish.

Many in the industry thought psychopaths wouldn't be able to succeed in business. They thought that psychopaths' bullying and narcissistic behaviors would be off-putting to potential hirers, and that their abuse and manipulations would inevitably lead to failure within the company. In fact, the so-called "experts" couldn't have been more wrong.

They seemed to have neglected the uncanny ability of psychopaths to present an image of extreme normality, and even excellence, to their victims.

And that is what we are to them: victims, potential "marks", suckers.

Against the prevailing beliefs and hubristic assumptions, Babiak found that psychopaths were readily accepted into the management ranks of prominent companies, and were even experiencing career success.1

Their extreme narcissism was apparently mistaken as a "positive leadership trait", and the murky morality and internal chaos typical of the mergers, acquisitions, and takeover environment seemed perfect for their type. Not only would they do well under the pressure - not having the ability to feel fear or stress - the potential personal rewards were too great to refuse, for the business and the psychopath.

As Babiak put it,

"the lack of specific knowledge about what constitutes psychopathic manipulation and deceit among businesspeople was the corporate con's key to success." 2

Ironically, the very traits sought by corporations and other powerful entities are often the ones that do bring about their inevitable demise (witness the fall of Bernie Madoff, Enron, Nazism).

And they are the traits we have been conditioned to see as ideal. For example, through the "rose-colored glasses" of those who do not know better,

  • conning and manipulative become "persuasive" and "influential"

  • coldhearted behavior and lack of remorse become "action oriented" and the "ability to make hard decisions"

  • fearless and impulsive become "courageous" and "high-energy"

  • lack of emotions becomes "strong" and "controls emotions" 3

In short, when we call a psychopath "persuasive and courageous" we should actually be charging a commission for doing the psychopath's PR for him, because that is all it is.

It's like selling bleach and calling it holy water!

On paper these qualities may look promising, but as coworkers, and especially as bosses, psychopaths are domineering, intimidating, frightening, and dangerous. Quick to take credit for others' work and to hire and fire employees on a whim, they tolerate only praise, are extremely short-sighted, and genuinely lack the insight that makes a good leader.

One psychopath, described by Babiak, was,

"unwilling and perhaps unable to acknowledge that any of her decisions could have any negative consequences for the business."4