What did Bernie teach us?

Bernie Madoff is an American convicted of fraud and a former stockbroker, investment adviser, and financier. He is the former Non-Executive Chairman of the NASDAQ stock market and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in US history.

Madoff founded the company Bernard L. Madoff Investment Securities LLC in 1960. Many family members worked for him, like his brother Peter, Peter's daughter Shana and his sons, Andrew and Mark. Peter has since been sentenced to ten years in prison and Mark committed suicide two years after his father's arrest.

Digging up the dirt

Investigations into Madoff’s business had been taking place for over ten years by the Securities Exchange Commission (SEC), but no fraud had ever been uncovered. But on 10 December 2008, Madoff's sons told authorities that their father had confessed to them that the wealth management division of his business was a massive Ponzi scheme, and quoted him as describing it as one big lie.

Those charged with recovering the missing money believe the investment operation may never have been legitimate. Actual losses are reported at $17 billion and the amounts missing from fabricated client accounts are reported to be $65 billion.

A recent report in the Wall Street Journal Market Watch, cited evidence that JPMorgan had suspicions about Madoff's operation as early as December 1998, when a bank fund manager warned the investment returns were possibly too good to be true.

For readers wishing to read a real-life financial thriller, pick up ’The Wizard of Lies’ by Diana B. Henriques. She gives a great account of the financial devastation, personal loss, legal battles, suicides and broken families as well as leaving the reader with clear lessons that have been learnt.

Applying sound marketing and sales principles

While the lessons presented are sound, this short article touches on other learnings from this catastrophe. It shows us that Madoff was a sheer marketing genius with a brilliant, yet shrewd, application of sound marketing and sales principles.

His application of marketing’s four P’s and more recent six R’s theories warrant brief comment:

• He developed a product whose scarcity and exclusivity made it sought after. The returns were consistent and above expectations.
• He sold it to the rich through a carefully placed network of exclusive referrers, brokers, feeder funds and investment banks.
• All awareness was created by under the radar, word-of mouth, promotions started at exclusive golf resorts.
• He priced the product differently and inexpensively, forfeiting the trail-fee.

His implementation of new-age principles, exploitation of human nature and use of perception to deceive willing investors, was masterful:

• He donated money to charities and they reciprocated by investing the funds in his scheme.
• His relationships with investors, brokers, bankers and charities were personal and deep. They trusted him totally.
• He dissipated any perceived risk through explanations that suggested a hidden formula that could not be shared publically.
• He earned trust with affinity groups through the reputation he had cultivated over thirty years.
• He fuelled a massive referral network by constant delivery, even in bear markets.
• The realisation of service experienced by customers matched expectations. When people withdrew funds he paid quickly.

The principles are legal

These principles can be applied legally on a national sales strategy level and on an individual sales plan level, supporting a legitimate product of course. People want access to closed funds. They pool with other investors to qualify for minimum entry requirements to gain access. The use of closing techniques can exploit this scarcity and exclusiveity.It’s just knowing how and when to use these tactics that makes the difference.