Bernie Maddoff and International Fraud

Went to a party last night where a group of us discussed the following scams:

1. Bernie Madoff.

2. Mark Dreier. I brought this one up and I have to give Dreier credit for managing to pull off a 300 million dollar scam, yet gain very little recognition for it because Madoff so quickly threw him off the front pages.

3. Lou Pearlman. I brought this one up also because this Vanity Fair article does such a great job explaining it.

4. All of us lawyers then told about the scam cases on which we had worked or are working and we then concluded that blind greed had been a large factor in all of them. Obviously nothing revolutionary in that.

Stan Abrams over at China Hearsay did a post, entitled “In Defense of Due Diligence,” tying Madoff to China and pointing out how due diligence would probably have prevented the whole affair:

So what’s the point? There are a lot of crooks out there, and some of them are even pillars of the community. Why, oh why, would anyone ever do a deal without checking out the other party? Why do anything based on trust? I know the usual excuses, I’ve heard them for the past 10 years with respect to Sino-foreign deals:

1. Due diligence costs are too high.

2. We don’t have enough time to conduct proper due diligence.

3. People I trust vouch for this company.

4. The CEO is a close friend of . . .

5. The company has ties to the Ministry of . . .

You get the idea. None of this is new, and most people have read countless articles over the years on this topic. I am wondering whether the recent goings-on will make some people stop and think before doing something stupid. Perhaps, but I also know that the list of five excuses is compelling, even to the most professional deal-maker out there.

By the way, I shouldn’t keep this post limited to due diligence. All of this goes for other kinds of investigations and audits of licensees, distributors, suppliers, etc. Multinationals that don’t do their homework are asking for trouble, and with all the examples out there of bad practices, there really is no excuse anymore — if something goes wrong, you will be punished.

Stan is, of course, dead-on. I will add one more excuse to the list, one which I have heard twice in the last few months as an explanation for having already lost pot-loads of money: “We had never had any problems before.”

For countless reasons, international deals are ripe for scams and the dispute resolution lawyers at my law firm have worked on a ton of them. Virtually without exception, there were weird things that should have tipped people off as to what was going on, but these things were always ignored. Examples:

1. Why would there be an Atlantic Bank in Australia when Australia it is not on the Atlantic?

2. Why would a company allegedly based in the Marshall Islands have misspelled the country’s name as “Marshal Island” on its letterhead?

3. Why would an allegedly prominent London lawyer share office space with a Blimpies fast food joint?

4. Why would an alleged US Federal Court case pull huge swaths of language straight out of Paul McCartney’s divorce case? It took us a less than ten minute internet search to discover this.

5. Why would a US lawyer call himself a barrister when the US does not have barristers?

6. Why would a large Moscow-based company send all its faxes from a cheap hotel in Busan, Korea? Big surprise, it was not the Moscow company after all.

Be careful out there and have a MERRY CHRISTMAS.