(By Victor Hartman)More than 25 years ago, I was sitting in an FBI Academy classroom soon to become a newly minted FBI Agent. I heard a presentation on the legendary but notorious Charles Ponzi. I thought to myself, how stupid for someone to get caught up in such a “transparent” scheme and certainly this is the kind of history that doesn’t get repeated. Over the next 25 years as an FBI Agent specializing in white-collar crime, it was much to my surprise to find these schemes are very common. Inherent in its structure and operation lie the seeds of its own destruction: Every Ponzi scheme eventually collapses, leaving many victims out of large sums of money and its perpetrators with lengthy prison sentences. Two interesting and related questions arise from the aftermath of a Ponzi scheme.
• What motivates someone to do this? and,
• Why would anyone participate?

Ponzi schemes have these general characteristics:
• The Ponzi operator is charismatic and/or has apparent credentials;
• the rate of return is significantly above market rates,
• the investment is described as no or low risk, and
• the investment concept is either hard to understand or not disclosed.

Why would anyone start a Ponzi scheme? Ponzi schemes get started in one of two basic ways and depends on whether the operator was an accidental fraudster or a predatory fraudster. In my experience, the accidental fraudster often starts the scheme with the intent of raising funds for a legitimate investment or business. Then two things occur. One, the charisma of the operator overtakes him. He learns his sales pitch is so convincing, that he can easily raise millions of dollars. Two, the underlying business concept is flawed:  He now has to continue paying out hefty returns.  To pay out the promised high returns, more money is required, as the scheme is all about using recent investors as the bait to satisfy the early investors whose money has been exhausted (a 25% return allows the investor’s money to last no more than four years).  Now, the operator is faced with a difficult choice: admit failure to his captive audience, or continue to raise funds with no ability to produce a legitimate profit. If the operator chooses to continue with what is now a Ponzi Scheme, everyone’s fate is now sealed – – the Ponzi scheme will grow until the supply of new investors is exhausted. The resulting collapse is a horror story for everyone involved.

The second and less common motivation is that of a predatory fraudster. This individual’s intent is to steal every investor’s money right from the beginning. By definition, when this is their mens rea, many of these individuals may be considered psychopaths (As the APA puts it, they suffer from “anti-social personality disorder”). They are simply lying, cheating, and stealing for the purpose to taking another’s wealth for their own. This makes some logical sense because bad guys will plan and do bad things; what is perplexing is understanding why they keep occurring and in particular why do they keep finding victims.  Occasionally, accidental fraudsters running Ponzi schemes abscond or simply “disappear,” only to come back later in a different persona, possibly as a predator.

Let’s now look at the victim’s psychology: How do so many individuals get taken in by this scheme? How do educated people, often financially savvy professionals, become victims of a Ponzi scheme? I have interviewed many victims of these schemes. What is most amazing is that to the bitter end, victims continue to believe in the scheme and will defend the Ponzi operator. They will blame law enforcement for shutting down the scheme by seizing whatever remaining funds were left. They continue to expect not only their deposited investment, but the accrued rate of return. There are two reasons for this. One, the Ponzi operator is very charismatic and convincing. Two, the victims’ collective judgment is clouded by the promised high rate of return, appearing to be confirmed in the early years.  What’s not recognized is the difference between a legitimate, profit-making enterprise providing a return ON capital versus the Ponzi scheme involving a return OF capital.

One thing to remember when making investments or advising others, if an investment is characterized as “risk free” and the promised rate of return is higher than the return on either gilt-edged certificate of deposit and/ or a U.S. treasury bill, it’s a Ponzi scheme.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

(By Jack Bigelow and Joe Koletar) A Wall Street Journal article by Maria Armental describes “The Curious Case of an ‘Oxford’ Man,” in which Steven Wessel is described by a U.S. Attorney as “…much less an investment banker than a serial liar.” According to the article, Wessel conducted a classic Ponzi operation. Investors were persuaded by assertions of spectacular returns to invest money that was used to provide spectacular returns to earlier investors. This April, Wessel told an investor he’d be getting back $249,000 for his $200,000 investment, when at the time, Wessel’s bank account had about four dollars in it!
The book, A.B.C.s of Behavioral Forensics (Wiley, 2013) examines the motivations of fraudsters—motivations that go much deeper than greed itself. The Armental article gives us some hints. Wessel is described as “a burly man with a hearty laugh,” given to boasting about his investment banking practice. He’s described as making assertions about Oxford degrees, and employment by former presidents Ronald Reagan and George H.W. Bush (none of which appears to be true). He set up a charity to help military families, chairing prestigious events to bring in funds for it. Amazingly, he succeeded—for a while—in obtaining investment moneys even though he had served time for bank fraud eight years ago! Why did he do it? And what could have motivated the more recent “investors” to unwittingly participate in this scheme?
Regular blog contributor Joe Koletar’s reaction: “This is a typical scam. A little BS goes a long way. All the charity stuff is just cover. The victims could have found out all about this guy by doing a public records data search. I have a friend who’s been doing this for 20 years. He can do a nationwide data search and turn it around in 24 hours for $200. Scams take two parties—the bad guy and a gullible victim”
Which underscores again the questions: “Why do the bad guys do Ponzi schemes and similar scams and why do the victims allow themselves to be so gullible, even to the point of not even researching backgrounds?” Two follow-on posts by Vic Hartman and Daven Morrison will tackle these questions.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

(By Jack Bigelow) I was scanning my emailed Washington Post Headlines when an article by Drew Harwell grabbed my attention. It was titled, “Tarnished by the Enron scandal, can this brand be saved?” Whoa! Having been a part of Andersen for more than 27 years, I knew that this was Big News. And it was: It told about a west coast tax firm, WTAS, formed by a group of former Andersen partners, which had become an “international tax giant” and was now changing its name to AndersenTax. The article described the change as a high-profile bet on this question: “Just how toxic can an international brand become – and still be saved?”

Toxic? Well, maybe. But thousands of alumni like me will tell you that the toxicity was neither the brand nor the “crop” of us comprising this formerly esteemed organization. The downfall of Andersen was to me the result of a perfect storm of factors that in the aggregate, began to converge three weeks after my retirement and doomed the organization. It was like watching an elegant vessel that I had helped to construct go to the bottom of the sea with many of my friends aboard.

Andersen was never accused of fraud in the Enron case. It was indicted and convicted (a conviction later overturned by the U.S. Supreme Court) of obstructing justice by destroying documents as the Enron investigation was starting. The book, A.B.C.s of Behavioral Forensics (Wiley, 2013), examines fraud cases from the viewpoint of what motivates individuals (bad apples), organizations (bad bushels) or cultures (bad crops) to commit or abet fraud. I’d like to apply the “crop” factor to the non-fraudulent downfall of Andersen. Andersen was a culture as much as it was an organization.

How can we tell when a good crop might be beginning to turn bad? For me, it was when it appeared that the luster of some of Andersen’s fundamental values was beginning to move to other values. Every professional firm struggles with tensions between its role as a public servant and its role as a business. When I started, the Andersen value structure emphasized its responsibility to the investing public. The business side was downplayed, inside and outside. (The term, “Marketing” was banned from the Andersen lexicon.) By the mid-1990s, I could see that the emphasis had switched to our performance as a business. (Andersen now had an official Marketing function.) Whether this change was justified by a competitive environment is a separate issue. But it was a change that I noticed and I found it troubling.
As I see it, this very fundamental shift in the value structure rippled down through the organization in many ways that contributed to the perfect storm. A book would be required for a complete analysis; here are just a few examples:

• To reduce costs, Andersen reduced the infrastructure in the primary office serving Enron—some of those released were those who routinely saw to the destruction of documents no longer needed. Now, old documents piled up and became a source of panic when the investigation started. (Note this, those of you who see infrastructure costs as overhead expense, rather than an investment to keep your organization out of trouble.)
• Rainmakers reigned and success (including promotion within the management structure) was measured by profitability more than the oft-proclaimed value of stewardship.
• Quality review controls were—according to some reports at the time—disregarded in the case of Enron, a highly prized client generating lots of extra billable work.
• Those expressing concern about these changes were viewed as being out of sync with the times. Others, I am sure, remained silent but concerned.
• The motto, “Think Straight-Talk Straight” morphed into “Helping our clients succeed.”
• Major partner meetings began to take on the appearance of rallies, (in one instance, a key leader walked on stage, leading a tiger to the tune of “Eye of the Tiger”).
I believe numerous outside factors were also at work in the perfect storm downfall of Andersen. One example: Enron leadership was very chummy with the White House at the time, and I suspect that the federal government’s zeal in prosecuting Andersen was not incoincidental with that relationship.
If I were to summarize the values shift that I saw, it would be a change from asking, in any situation, “What is the right way to do this?” to asking, “What’s the most cost-effective way to do this?” Indeed, the first approach is what attracted me to Andersen in the first place.
So, what happened with the crop? I suggest that the Andersen crop was still an excellent crop, but the values driving the standards of that crop did change. Standards influence behaviors and all the rippling changes from the heavy emphasis on business success ultimately tarnished the brand. Can the brand be restored? The partners of WTAS believe that the bloom can come back and reseed the once-pristine Andersen reputation. I, and, I am sure, many of my former Andersen family members certainly hope so.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

(By Jack Bigelow) Colleagues Daven Morrison and Joe Koletar have kicked off a discussion of lessons learned from the Richard Nixon resignation of 40 years ago (see their posts below).  Daven describes the behavior of deception (behavior exercised in spades throughout the sordid Watergate coverup leading to the President’s resignation as impeachment and trial were looming ).  Joe dives into some of the behavioral forensics in this case, noting that we all practice deception of one kind or another.

Which raises the question of when does deception descend into outright fraud?  And why do we allow ourselves to make choices that drive seemingly innocent deceptions (a la make-up, special effects, etc.) to illegal activities leading to criminal prosecution, potential impeachment, prison, fines, and the downfall of an administration?

My own musings suggest that fraud as we usually see it is a form of deception with the objective of illegal financial gain.  But not all gains are financial.  In the case of Nixon, the deception of covering up a crime committed was also a form of fraud.  In this case, the potential (and temporary) gain was the preservation of political power through re-election.  Post- election, the gain was preservation of political power and prestige through keeping the crime hidden from public view.  Power and prestige were both lost when the facts came out.  The whole Watergate episode is an example of deception run amok to the point of criminal behavior.

My conclusion then, up for discussion, is that deception crosses “the thin line” into fraud (for financial, power, prestigious, and other gains) at the instant that the behavior breaks the law.

But the question remains:  Why do people give themselves permission to allow that morphing to take place?  Some answers can be extracted from the book, A.B.C.s of Behavioral Forensics (Wiley, 2013). I invite my colleagues, the authors of that book, to offer their thoughts.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at BringingFreudtoFraud.com.

(By Joe Koletar) My friend and colleague, Daven Morrison, recently posted a piece on deception (see below) and why it is quite common human behavior, to one degree or another.

We see deception in many areas of our lives. A child may “make up” an imaginary friend they can talk to and play with. Little girls may treat a doll as if it were their child. It is cute and correctly perceived as a normal part of “growing up.” 

Later in life women, and increasingly men, may use “make up” in an adult fashion. Women apply make up to enhance or change their appearance. I once dated a professional model who, by adjusting her hair and make-up, could look like two different people in the space of twenty-four hours. Hollywood can use make up and other devices to make an actor look younger, older, or achieve the physical characteristics of a monster. 

But, like many things, make up can go too far. Human Resources professionals routinely report that about thirty percent of resumes contain material misstatements – covering up gaps in employment, falsifying credentials, over-stating job achievements, or misstating reasons for leaving a prior employment. And employers are often complicit in dealing with these issues, when discovered. They may allow an employee to resign “for personal reasons,” because stating the truth would be “too messy.” 

Is it any wonder then that some people in the business world may overstate financial performance? We know all too well that it happens with some frequency, but the issue is why does it happen? Is it a form of arrested psychological development, or is it a calculated strategy that “it worked before; it can work again?”

In the case of Nixon, I’ve read reports that he served as a Navy officer in the Pacific.  When off-duty aboard a ship, there is little to do, except smoke, drink coffee, or gamble.  Nixon was an excellent poker player and came home after the war with about $7,000 in cash, a huge amount in 1945.  His specialty at poker was…….bluffing.  A form of classic deception.  And when Watergate hit, he tried his specialty one time too often. 

Such considerations have, to date, been little addressed in the financial literature. Those dealing with or interested in such behavior might benefit by better-informing themselves of the mental processes that may at work. For those experienced in the field an all-too-common scenario is encountered time and again. We pay immediate attention to failure and spend significant time and effort to determine its causes. At the same time, we rarely spend one-tenth as much effort looking at what caused apparent “success.” We learn about it when it is too late – think of Enron, et al. 

Does this mean the watchdogs – the accountants and regulators – are corrupt? No. In the vast majority of instances they are not. They just fell into the all-too-human trap of not looking closely enough behind the “make up.”

(By Daven Morrison) As the world turned and watched the World Cup, it was witness to an unpleasant and ugly foul: the biting of Giorgio Chellini of the Italian national team by Luis Suarez of Uruguay. Although the deed wasn’t seen by the referee (an important aspect of fraud to which we will return later) the players knew and the repercussions after the game were justifiably swift and severe.

Why?
The reason for the severe penalty to Suarez and his team (they lost the next game likely because of his absence) was because he was a repeat offender. As the Chicago Tribune noted:

This isn’t the first time Suarez has been accused of biting a player during a match. Suarez has been disciplined two previous times for biting opponents. He was banned seven games in 2010 after a biting incident while he was playing for Netherlands club team Ajax. Another biting incident landed him a 10-game suspension last year with Liverpool in the English Premier League.

What is the tie to fraud?
Predatory fraudsters are not novices. They have honed their craft like a magician and have come to know very well when the “referee”, i.e. the auditors, the regulators, the internal controls, are looking at their work. They, like Suarez, have settled into a pattern of behavior which the legal community calls “recidivism.”

Recidivism refers to the overall likelihood to be a repeat offender. In general, there’s an important distinction between psychiatry and the law. In the law, when making a judgment in court on a repeat offender, the previous offenses are not admissible. This is at the heart of justice, each case must stand on its own. In psychiatry, however, past behavior is prologue. If someone was a troubled child who frequently broke the law and had run-ins with the police, than it is more likely they will be seen as anti-social as adults. In fact, it is part of the definition of an Anti-Social Personality Disorder.

This professional divide between the law and mental health can put the managers in a bind. The law tells them to judge each case, but behavioral science tells them to beware the person who has broken the law in the past.

Why did Suarez bite?
Biting is a very primitive and hostile act towards another. Generally, it resolves itself in pre-school, but when a person uses biting it is because they are incapable of coping. Suarez bit with the intention to have Chellini respond and in order to provoke him. In the video, one can see that he’s over-reacting to Chellini’s response in order to draw a foul and earn a penalty kick. As we noted earlier, the referee didn’t witness the bite. Suarez was quite skillful: He recognized the context, a penalty box where a reaction would lead to a penalty kick, as well as the location of the referee and his ability to see him initiate the conflict. The referee was watching the play around the soccer ball.

Predatory fraudsters also learn this skill. They know when the watchers are watching and they know how an audit works. They can bide their time, shuffle accounts, and clean up their trail, all the while knowingly deceiving the financial oversight process.

What is the take home message?
In the end it didn’t work, but in the next few minutes, the Italians did concede a goal on a corner kick. It will be up to others to determine if it was because of the bite.
We recommend managers have a low threshold as the tendency to repeat is a strong one. The lesson from Suarez is the leopard does not change his spots and the sabre-toothed predator doesn’t change his bite.

(By Daven Morrison) In the 1960s in my hometown of Chicago, protestors chanted “the whole world is watching”. They brought attention to the fact that what had been done by the police relatively invisibly was now exposed to not only the local Chicago news but the entire world. What had been previously dismissed and hidden was now exposed. What had been covered up was no accessible for all to see.

Last week, the World Cup began with a defeat of Croatia by the host country Brazil. It was not their best game, yet Brazil won handily 3-1. It was what the world expected and did not surprise anyone. Unfortunately, this might not be the whole story. On television, the commentators felt passionately that two calls hurt the Croatians, one leading to a penalty kick, another calling back an easy goal. This would have made the final score 2-1 in favor of the Croatians. For this to happen would have to include the collaboration of the referee and his team of officials. It would likely mean others were also involved. Is that possible?
Is what we see real?
Unfortunately it is quite possible and has happened. In a recent long form article in the New York Times, investigations uncovered how easy it was to not only swap out referees who were paid off, but also to influence the teams that lost to be silent about it. In an opening match, with relatively superficial investigative techniques and fairly easily “turned” informants, it was discovered that a large part of the power behind the illegally fixed matches came from wealthy individuals. And in several situations these were not one person but rather they were coordinated by Asian betting syndicates.

The syndicates are able to move easily through this world because many nations are very poor and willing to look the other way for financial reward. This is also true of the referees, the ones who are expected to enforce the rules objectively and consistently. And to do so with both teams.

Yet worst of all, was the intimidation of those regulating the game. Overseers of the referees were clearly able to stave off some fixed matches, but in the end the powerful forces behind the money were most problematic. Although there is no evidence that the regulators were victims of bribes, it was clear that that they were influenced by blackmail – many felt for their personal safety or that of their families. Behind it all was the dark shadow of FIFA which investigated late, stalled some investigations and shut others down.
So what, it’s only a game!
For those of us who investigate the human dynamics of fraud, there are several important factors playing out on a world stage currently that remind us of the perennial challenges of halting fraud:

• When we are excited about an event we can miss cues that tip us off to fraud.
• Large amounts of money can be leveraged to corrupt many in a system in small amounts to the big picture, but large to the individuals.
• Money can mean more than greed for those who are desperate; it can mean affording the basics of health care or living (food, shelter).
• When police are hired by the criminals and the regulators are intimidated, all bets are off. Literally. Or they should be.

(By Vic Hartman)
After a 25-year career with the Federal Bureau of Investigation (FBI) I have only recently returned to the private sector. As a private citizen with considerable public sector experience, I have read the previous posts on mortgage fraud with great interest, and accordingly, want to advance the discussion with some observations.

As was previously suggested, the decision to invest the limited investigative resources of the FBI is the result of various factors to include Congressionally controlled priorities implemented through funding restrictions, executive branch preferences, local United States Attorney’s priorities, and the American public’s demands through individuals and represented groups. As a further backdrop, then FBI Director Robert Mueller developed 10 priorities shortly after the events of 9/11 that continue until this day. The number one priority of the FBI is to protect the United States from terrorist attacks. The number eight priority is combatting white-collar crime which includes mortgage fraud.

But what meets the eye in terms of these stated priorities can be misleading. A priority generally means the FBI needs to recruit agents for specific subject matters, train the agents, and then place those agents in investigative positions associated with that priority. Further, the threats of a higher priority must take precedence and be addressed before dedicating resources to a lower priority. Despite terrorism being a higher priority than mortgage fraud, this never translated into mortgage fraud not being addressed. The reason is that in my opinion, the FBI has adequate resources to address both, and the United States has been blessed with not suffering a major terrorist attack since 9/11.

The previous posts noted that the FBI is easing its investigations of mortgage fraud as indicated in a report by the Justice Department’s Inspector General. In addition to the previous posts, I would add two additional reasons for the lowering of mortgage fraud within the FBI’s White-Collar Crime Program.

The first reason for lowering resources dedicated to mortgage fraud is this crime is occurring with dramatically less frequency (i.e., trending down). As required by federal regulations, banks must report all suspicions of mortgage fraud on Financial Crimes Enforcement Network (FinCEN) Form 111 titled Suspicious Activity Report (SAR). The results of this regulatory SAR filing process provides the FBI and bank regulators with amazingly accurate trending data for mortgage fraud. Unlike almost every other federal crime, SARs provide very timely information about the prevalence of mortgage fraud. In August 2013, FinCEN reported its latest data from 2012 as well as restating its previous trending analysis. See http://www.fincen.gov/news_room/nr/pdf/20130820.pdf.

The chart below is taken from this FinCEN report and very vividly shows a significant peak in mortgage fraud during the 2006-2007 timeframe:

As this spike was occurring, the FBI began rushing significant resources to this crime problem including the formation of regional task forces to combat the issue. In recent years, however, the FBI has moved some of these resources to higher priority matters.

This chart only depicts the filings of SARs by banks. Remember that a SAR means a bank found something suspicious. This often occurs when a mortgagor defaults and the underlying application and underwriting are found to be flawed upon subsequent review. The U.S. is currently in an escalating real estate market. Suspicious activity associated with mortgages is not coming to banks’ attention because default rates are down significantly. Although SAR reporting is down significantly, one cannot automatically assume mortgage fraud is down. This brings me to the second point.

Prosecutors play a major role in deciding the amount of resources the FBI dedicates to a crime problem. If a prosecutor will not take a case investigated by the FBI, it would be a waste of investigative resources for the FBI to continue to investigate that type of crime. Although not a legal impediment, a prosecutor will generally not prosecute a financial crime unless there is a loss to a victim. For example, say a borrower misstates her income on a loan application by saying she earned $250,000 a year when in fact she only earned $75,000 when applying for a $500,000 home loan. This borrower will eventually default on the loan due to the inability to pay. However, the bank is unlikely to suffer a loss because the home likely appreciated in value due to current market conditions. This brings me back to the prosecutor. A prosecutor will not be excited about bringing this case to trial for lack of jury appeal. Accordingly, this is another reason for the FBI lessening its focus on mortgage fraud.

I do think a big caution flag needs to go up here. The U.S. is well into another cycle of rising real estate values. If history tells us anything, we know there will be a down market (whatever goes up has a tendency to come down). You cannot tell if a swimmer is naked until the tide goes out. This will eventually occur, and the question will undoubtedly be asked again, “Why wasn’t the FBI investigating mortgage fraud?”

Mortgage Fraud: Now on the FBI’s Less-Wanted List: Posting IV and Conclusion

(By Joe Koletar and Daven Morrison) (See three previous posts for more on this subject.) We suspect that many factors drove the FBI’s decision to reduce the priority of mortgage fraud investigations; we are exploring five of those possible factors in this series of posts. The fifth factor is that white collar crime such as mortgage fraud is largely a diffused problem. From the FBI’s viewpoint, dealing with a major drug cartel or national organized crime family can be daunting in itself. They are big targets requiring substantial effort, but at least they are single targets. Mortgage fraud tends to occur in many small pockets. Three or four people here or there run it, but there is no national or international organization behind them. That makes the targeting more difficult. Investigations must be built piece-by-piece in almost every area of the United States.

Given these realities, what could go through the mind of a person scheming to commit mortgage fraud? Obviously, the fraudster would feel like the proverbial pig in mud: absolutely delighted! What’s more fun for someone set out to break the rules when they know no one is watching? Or even if they are spotted, they will likely never commit a crime that will rise to the level to be prosecuted. The preventive function of our criminal justice system thus becomes blunted. The issue for our society is that while the perpetrators might “get away” with it, others will indeed be adversely impacted by this “ethic.” Realtors, bankers, and guess who else: The property-buying public! How many families have either lost their homes due to the frauds committed without their knowledge? How many families are relegated to continuing rental arrangements due to the challenges of obtaining mortgages as a result? The economic damages are not as dramatic as the results of physical violence and terrorism, but they are significant.

And what of those mortgage applicants seduced into dishonest gaming of the system? One of us (Morrison) worked with an organization immersed in this marketplace on the eve of the mortgage fraud crisis. This organization was ethical by all accounts and was appalled and alarmed by the methods used to recruit and push applicants into mortgages they could not afford using forms they didn’t understand.

And that brings us to the next question: How big might a bad crop become? Our book, A.B.C.’s of Behavioral Forensics (Wiley, 2013), characterizes fraud perpetrators and enablers as singular (“bad apples”), groups or organizations (“bad bushels”) and bad populations (“bad crops”). What do you think? How big was the bad crop that brought the U.S. financial system to its knees? And given the scope of the impact, what are your thoughts about the FBI’s downgrading mortgage fraud as an investigative priority? The perpetrators of these crimes may be small operators and harder to target, but the aggregate financial impact of their fraudulent tactics is immense in our economy. That is why we question the prudence of the FBI’s downgrading, even though we may understand it.

What was going on with these mortgages? Or more importantly, what was happening between these people? That is the kind of question we address in our book. One nice set of tactics was compiled by Grazioli et.al and referred to in the book. They include masking, dazzling, decoying, repackaging, mimicking, and double-play. Check our book to see them explained. It’s likely that a combination or even all of these tactics are used by mortgage fraud perpetrators. No oversight was requested because everyone (except the home owner) was getting rich. And any post-crime investigation became limited due to resource constraints, shifting priorities, laws needing updating, and the challenges of finding targets warranting the costs of investigation. Meanwhile, the CDO market was like a gluttonous beast requiring more and more mortgage sales to sustain itself. Their quality, as it were, really didn’t matter. In that environment, a tube of toothpaste could practically serve as a mortgage on the market.

What’s the likelihood that it is happening today—or will happen tomorrow? And what will the FBI’s priorities be at that point?