The Heroes of Financial Fraud

The scale of Bernie Madoff's crimes has largely eclipsed the more interesting scam that broke around the same time:  the antics of Mark Dreier, who bilked institutional investors for millions with faked securities.  What we know about Madoff suggests that he may have become an almost accidental crook, like many of the accounting fraudsters of yesteryear:  take big losses, cook the books to cover them until he could "catch up", and when you realize you're too far behind, simply ride the fraud as long as you can.

But Dreier is more like the classic con man of legend, stage and screen:  an amoral, audacious rapscallion who pulls off a massive fraud mostly because  no one can believe anyone would do anything so crazy:

According to prosecutors, for more than four years Dreier sold hundreds of millions of dollars' worth of bogus debt obligations to nearly 40 investment funds run by 13 of the nation's most sophisticated asset managers, including the likes of Fortress Investment Group, Elliott Associates, and hedge funds later acquired by Perella Weinberg Partners and Blackstone Group. Throughout its existence the scheme could have collapsed at any instant, if just one of dozens of duped hedge fund officials had ever run into real estate developer Sheldon Solow - the head of the duped company supposedly issuing most of the notes - at a cocktail party.

As Dreier dug himself ever deeper into criminality and debt, he resorted to ever more desperate measures to postpone the day of reckoning. He and his accomplices talked their way past receptionists of companies they weren't affiliated with; plopped themselves down in empty conference rooms; and then hosted meetings at which they pretended to be people they weren't. The scam succeeded for as long as it did because none of his victims could conceive that anyone of Dreier's stature would act with such monumental recklessness, selfishness, and self-destructiveness.

Almost as an afterthought, Dreier is alleged to have filched about $40 million from his clients' escrow accounts - including $10 million that he stole after his arrest before authorities could get a receiver appointed to seize control of his law firm and ambulance it into bankruptcy. To the 260 innocent attorneys who toiled for him at Dreier LLP's tony offices in Manhattan, Albany, N.Y., Los Angeles, Pittsburgh, Santa Monica, and Stamford, Conn., Dreier bequeathed unpaid salary checks, unreimbursed expenses, lapsed malpractice and health insurance policies, potential civil liability, and untold damage to reputations. An attorney's stock in trade is sound judgment and wise counsel. "To have hitched one's star to a thief," as a lawyer for one of Dreier's former partners puts it, is a stain that won't easily wash out. Most of Dreier's betrayed former colleagues did not return calls or e-mails, and all but one of those who did asked not to be identified.

I can kind of understand what Madoff did, if it is indeed true that he initially thought his fraud was just a temporary thing.  Not condone it, nor really picture myself deciding that it was better to falsify the books than to 'fess up to clients.  But understand it.  The instinct to CYA is a normal human emotion.  But there's no instinctive drive to run crazy scams faking bonds.

Even more, I don't understand people committing these kinds of crimes where they are virtually certain to get caught.  Madoff probably didn't start out knowing that the house of cards would eventually have to come tumbling down--presumably, at least some embezzlers actually have succeeded in dipping into the till and then replacing their takings afterward.  By the time he did know, it was too late to get out.  But Dreier is like Michael Bellesiles, or that guy at Bell Labs who faked potentially Nobel Prizewinning research.  What's the point of enjoying your fifteen minutes of fame at the price of utter, certain ruin?

It is, as the Fortune writer points out, fascinating.  Except unlike the cases of Bellesiles or Bell Labs, this fellow cost people a lot more than time and anxiety.  How did he look himself in the mirror in the morning?  At the end of the Fortune piece, that's still a mystery to me.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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