Bernie Madoff Explains Himself

hbswk.hbs.edu/item/bernie-madoff-explains-himself

10/24/2016
One December evening in 2011, while preparing a lesson plan, Harvard Business School professor Eugene Soltes
picked up the phone for his weekly conversation with Bernie Madoff.
Soltes, who was doing an in-depth investigation on white-collar crime, had been interviewing Madoff every
Wednesday evening for several months. Madoff, a renowned stockbroker turned fraudster, conducted the phone
calls from FCI Butner, a medium-security federal correctional institution in North Carolina. At the time, he was
serving the third year of a 150-year prison sentence for orchestrating the biggest Ponzi scheme in history.

Madoff is an extreme case in many ways, but in other ways, he is just someone who fell prey to
biases and the tendency to rationalize

Madoffs phone-time allowance was limited, and he saved much of it for his conversations with Soltes. They
conversed in 15-minute chunks, the maximum amount of uninterrupted call time that the prison would allow.
The professor and the felon shared a genuine, geeky interest in financial economics. Sometimes they discussed the
early days of Madoffs career, which began in 1960. Other times they chatted about new books, academic journal
articles, or recent events in the news. But that evening Soltes led the conversation with a specific question: How
would you explain your actions and misconduct to a group of students?

Interviewed in prison, Bernie Madoff reflects on his crime. ( Click on the sound icon to mute and unmute the
recording.)
Madoffs three-minute response, posted here, is an extemporaneous reflection on accountability. In hindsight, when
I look back, it wasnt as if I couldnt have said no, Madoff says toward the end of a recording punctuated with many
halting instances of uhh and you know.
He doesnt sound remorseful in the recording, but he displays some self-recognition. It wasnt like I was being
blackmailed into doing something, or that I was afraid of getting caught doing it, he continues. I, sort of, you know, I
sort of rationalized that what I was doing was OK, that it wasnt going to hurt anybody.
Soltes now plays the recording for students in his MBA and Executive Education courses. His goal is not to garner a
discussion of Madoffs massive crime, but rather to help students realize something important about themselves. In
short, the recording shows students that knowing the difference between right and wrong is not sufficient to avoid
falling into the behavioral traps people can face when under pressure to succeed.
Answering a single question, Madoff exhibits several all-too-familiar cognitive biases, psychological tendencies that
can lead to irrational behavior. In a three-minute recording, we hear Madoff describe a multitude of common
biases, says Soltes, the Jakurski Family Associate Professor of Business Administration at HBS. Theyre amplified
biases on steroids, in Madoffs case. But theyre biases that we all have, that we all experience.
For example:

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Ambition: In the recording, he describes his ambition, which is something that every single person at
Harvard Business Schooland really every person aspiring to be successful in businesscan relate to,
Soltes says.
Overconfidence: I built my confidence up to a level where Ifelt thatthere was nothing thatI couldnt
attain, Madoff recalls in the recording.
The slippery slope that enables a small transgression to grow into a bigger one: I started to go off
the tracks, and I was able to convince myself that this was, you know, a temporary situation, Madoff says.
Lack of self-control: Iprobablyjust didnt give it enough thought or wasnt frightened enoughto say to
myself, I cant, you know, I cant do this, I cant take the risk, Madoff says.
Rationalization of iffy decisions: The piece thats most humbling in the recording is the realization of
rationalization, Soltes says. He recognizes now that it was all rationalization.
Once students recognize that this is a smart guy, and he didnt need to do what he did, but he still did it anyway,
there is a degree of humility in the classroom, Soltes says. Madoff is an extreme case in many ways, but in other
ways, he is just someone who fell prey to biases and the tendency to rationalize.

The scary link between ambition and infamy

Its especially important for budding entrepreneurs to appreciate the link between Madoffs ambition and his slippery
slope to infamy, says Soltes, whose new book, Why They Do It: Inside the Mind of the White-Collar Criminal,
devotes an entire chapter to Madoff and his Ponzi scheme.
For starters, Soltes wants students to understand that while Madoff possesses an extraordinary lack of empathy for
his victims, he didnt explicitly set out to commit the crime of the century.
Hes respected in prison because it looks like he was the mastermind of this extraordinary plan, says Soltes, who
has amassed hundreds of pages worth of correspondence with Madoff, in addition to hours of recorded phone
conversations. But to say that he sat down and planned a two-decade, multibillion-dollar Ponzi scheme, I think
thats giving him too much credit as an individual financier, or even as a sinister deviant. He couldnt have planned
such a long-running and extraordinarily devastating fraud in advance even if he tried.

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A timeline of Bernie Madoffs career. Credit: Micaela Brody

Soltes reminds students that Madoff was once best known for pioneering the controversial but legal practice of
payment for order flow, in which he would pay brokerage firms a couple of cents per share to send orders through
his firm. This made him popular among investors, who previously had to pay brokers for the service of buying
shares; now Madoff had turned the practice upside down and was paying them to trade.
That innovation diverted trading away from the New York Stock Exchange floor, and by the early 1990s, Madoffs
firm was handling upwards of 10 percent of all NYSE-listed stock trading. Outside his brokerage business though, in
his growing investment management practice, Madoff started to feel greater strain in generating profits.
He began naked shorting to clients. Another controversial but legal practice, this involved short-selling a stock
without first borrowing the security, and then acquiring the security after the sale. But then he started conducting
short sales without putting them on the books, which is illegal. Eventually he stopped trading altogether, once he
realized he couldnt generate the profits he continued to promise his investors. A few steps down the slippery slope
later, he was running a Ponzi scheme.
Its like a comedy of errors, Madoff says in Why They Do It. I allowed myselfand I really have to say allowed,
since no one put a gun to my headto keep taking in more money. I kept on waiting for the environment to change
and of course it never did.It turned into a total fiasco.
Its a mundane series of errors, one leading to another, which grew into something of remarkable proportions,
Soltes says.

Idolizing entrepreneurial law benders

Even as famous white-collar criminals go, Madoff is an outlier, both in the size of his crime and in its longevity. But
its important for students to appreciate the slippery slope of small crimes often becoming bigger ones, Soltes says,
especially in todays entrepreneurial culture, which tends to accept and even glorify bending the law a little.
Within entrepreneurial cultures, theres often a feeling that its OK to ignore or bend some regulation, Soltes says.
Sometimes regulations are legitimately outdated or potentially too restrictive to let innovation flourish. But the
challenge for entrepreneurs is that the line between appropriate and illicit is often quite murky.
Case in point: the ride-hailing company Uber, which is thriving in spite of pushing legal boundariesand fighting its
case in courtin cities all over the world.
In some places Uber is hailed as a brilliant company, and in other places its executives are convicted criminals,
Soltes says. Many well-respected entrepreneurs, from Michael Dell to Steve Jobs, have faced their own allegations
of wrongdoing, but still managed to build remarkable enterprises. At the same time, many white-collar criminals also
break rules in the process of believing they are on the cusp of doing something great. Navigating the fine line of
which regulations might be legitimately broken and which cannot is sometimes difficult. But understanding this
distinction is critical for entrepreneurs who want to operate on the most innovative frontiers of business.
Entrepreneurs who are trying hard to make their mark often need to be aggressive, Soltes continues. This
sometimes leads to successful businesses like Uber or Airbnb, and other times it leads to terrible failures like
Enron.

About the Author

Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.

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