(By Sri Ramamoorti) In two previous posts, colleague Vic Hartman addresses the $1.365 billion settlement between the federal government and Standard & Poor’s Financial Services LLC (S&P) and the miasma from which it emerged. He presents the tacit and possibly subconscious widespread collusion involved in a situation where all the players he described could dismiss individual and collective risks and focus on their incentives to incur those risks. The problems were systemic, of a scope that Vic suggests could be covered by the term, “Bad Farmer’s Market (a dimension enveloping and including Bad Apple, Bad Bushel, and Bad Crop).”

I want to expand that dimension even more. For ease of understanding the dynamics and interplay, Vic kept it simple. Here are additional complicating components that made a bad Market even worse:

· Congress-passed laws such as the Community Reinvestment Act (CRA), forcing banks to sell sub-prime mortgages to those who could ill-afford them—low income, high-default risk customers;

· Auction Rate Securities, that served to prop up the market (and their later collapse);

· Insurance companies (such as AIG), which “insured” the securities issues through Credit Default Swaps, to be on the hook for a whopping $450 billion in notional value and needing a $182 billion bailout;

· Regulators, including the SEC, that were hamstrung and discouraged by the prevailing mood of de-regulation and rolling back important Great Depression-era laws such as Glass-Steagall to create irreconcilable conflicts of interest;

· Investment banks such as Goldman, Merrill, Lehman, and Bear Stearns, all heavily invested in the subprime mortgages as a significant segment of their portfolios (other major banks were also at this trough);

· Hedge Funds, adding fuel to the fire.

This was a crazy Market indeed, and one that basked in the sunshine. Clearly, the rewards outweighed any risks in the view of these players. As Joe Koletar points out, in some cases it may be ineptitude, but more often it is unethically reward-focused. Here, it seems that the rewards dazzled the whole ecosystem into dismissing the risks as minimal. Citigroup’s Board of Directors was famously ignorant of some of their arcane financial products, such as “CDO-Squared.” CEO Charles Prince captured the moment when he said, “As long as the music is playing, you’ve got to get up and dance!” New Century, Countrywide Financial, Washington Mutual, Bank of America, JP MorganChase, Wells Fargo, they all got up and danced as the Market prospered, ignoring the reality that sometime soon, the music would end. Some may have been “too big to fail,” but that assumption too would be put to the test.

In the end, the risk was mostly unseen but systemic in scope. And it illustrates the need for someone to connect the dots between and among the actions of bad actors in the marketplace. One possibility would be the formation of a “Financial Stability Council” to connect those dots and judge the resulting image.

We do have marketplace referees, such as auditors, raters, and regulators. But how do we keep the public guardians (acting as referees) honest and effective in their role? Two Nobel laureates, George Akerlof and Robert Shiller, wrote, “The public, and the regulators who were supposed to act on their behalf…failed to understand a fact of life that is totally obvious to everyone who has played a serious team sport: There have to be rules and there has to be a referee who enforces them—and a good and conscientious (italics added) referee at that. Otherwise, there will be random cheating….and dangerous and aggressive play, so that many people will get hurt and the game will cease to reward good play.”

S&P was obviously less than “good and conscientious” in its ratings performance as it got up and danced with the other farmhands. I humbly proffer one Freudian insight, with Daven’s expert critique: “If it is those who love us who can hurt us the most, does it not follow that it is those we trust to protect us (such as auditors, raters, regulators, even the police) can hurt us the most when they violate or betray our trust?” And then, when this happens, what do we do about such malignant golden apples?

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) An old African proverb goes, “If you wish to travel quickly, go alone. If you wish to travel far, go together.”

There is much wisdom reflected in two simple sentences.

The challenge of a leader is not so much to have a vision. It is the ability – leadership – to get others to accept and follow that vision.

This is the essential challenge we face today in the realm of compliance. The voice in the wilderness is often a lonely one. The effective voice can lead people, nations, industries, and professions.

Why do some succeed, and some fail?

It is a function of the style of leadership. No two are exactly alike, but those that are successful seem to have one thing in common.

In 1967 I was a young Army Officer, and completed the Infantry Officers’ Basic Course at Ft. Benning, Georgia. One thing was drummed into our heads, over and over, in different ways:

• “Never ask your men to do something you would not do.”

• “An officer only eats after his men have eaten.”

• “An officer only sleeps after his men have slept.”

It is called Leadership By Example.

Although each person has their own style, the principle remains constant.

Words from on high are nothing but words unless they are followed and lived, and that starts at the top. “Enron” is a great example of hollow words. Unfortunately, there are many others.

When we will ever learn the simple truths of the Africans and the U.S. Army?

Being a leader has many benefits – money, power, and prestige. But it also has many demands. Combined, those demands seem to say, “Hold yourself to a higher standard.” Too often that standard seems to fall by the wayside.

Will we ever learn the proverb of the ancient Romans?

“Sic transit gloria mundi.” (“Thus passes the glory of the world.”)

We have guidance before us. It comes through the centuries. From the Africans, Romans, and the U.S. Army.

The guidance is not the issue. It is sound. The issue is when (if) we listen to it.

To quote a lyric from an old anti-war song: “When will they ever learn?”

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) Dr. Sridhar Ramamoorti, a professor of accountancy at Kennesaw State University, and founder of this blog, has been honored by the Michael J. Coles College of Business (Kennesaw State University) for his authorship role in the book, “A.B.C.s of Behavioral Forensics (Wiley, 2013).”
The award, The 2015 Coles College Publication Prize, will be formally announced in the Coles College Research Magazine, to be published later this year, along with summaries of this and other prize-winning published books and articles. Our congratulations to Sri and to fellow authors and bloggers, Dr. Joseph Koletar, CFE, Daven Morrison, MD, and Kelly R. Pope for their fascinating and insightful exposition of the emerging field of behavioral forensics that explores questions such as “why good people do bad things,” what makes fraudsters choose to commit fraud, how to get into the fraudster’s mind and “think like a crook to catch a crook,” conducting an after-the-fact “psychological autopsy,” etc. This blogsite contains numerous added insights such as “the bad farmer’s market” that go beyond A.B.C., viz., the bad apple, bad bushel, and bad crop.

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) The Wall Street Journal carried an article concerning the possible future of employment in an organization (“You Aren’t a Human, You’re a Data Point.” 2/17/15, page B-1).

It appears some top executives want a digital dashboard which will inform them who is at their desk and how happy they are about their work. Some believe this capability, if achieved, will replace something old and creaky: The Human Resources Department. Employees may come to be viewed as mere elements in the supply chain, just like copier paper and light bulbs.

By accessing emails, personal calendars, measuring internal networks, and likely more as development continues, the intent seems to be to boil down the old questions of “..who’s naughty and who’s nice..” to a series of electronic blips. Or, in the the words of one developer of such services, to turn managers into “people geeks,” by quantifying that old and murky idea of “corporate culture.”

Some commentary, based on my two years of Vietnam Era service, and my forty years as a manager and executive in the public and private sectors:

I don’t like being under surveillance. What part of my life is still mine, and what part have I sold to you? Is it spelled out my contract?

Am I “happy” about my work for the reasons you presume? Could it be my kid’s school performance, my spouse’s spending, or the fact my favorite sports team is having a terrible year? I guess you have a right to know these things. Am I correct? (Probably included in my employment contract, yes?)

Temper your joy, managerial “people geeks;” you’re probably going to be next. If they can get rid of actual “people” at one level, why not the level above it? Ask not for whom the bell tolls. (John Donne, a mere human being, once wrote that, believe it or not.) Too bad a computer didn’t dream it up. (P.S.: Do computers “dream,” or is that just a human thing?)

Envision the field of battle. The computer spits out short text: “Advance. Seize objective. Be brave.”

We wouldn’t have needed that tall guy in the funny hat at Gettysburg.

Fair warning: Take leadership, however erratic it may be, out of the system at your own risk. Let your computer convince a young private who makes perhaps $700 a month to follow you through the gates of Hell.

Have a nice day.

(That’s an order.)

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 Sri Ramamoorti) On February 13, 2015, Joe Koletar posted an entry that mentions, “…the fines (relatively insignificant in amount to the offenders), often go unpaid!” The fines levied on the big banks following the Wall Street financial crisis exceed $100 billion, and even for the big banks, these are are significant and material numbers…note that $100 billion, is 10 raised to 11, or 1 followed by 11 zeroes…We really have no idea whether these amounts are being actually collected by the U.S. Department of the Treasury, and what they are doing about it.

But the more important point is the one regarding jail time…why isn’t anyone going to jail? Indeed, if there exists an implicit guarantee that the most egregious sins in banking won’t get you jail time, then that’s an incentive to take the biggest possible risky bets, in the hope that if you get lucky, the windfall gain can easily make you millions, and if the bets go sour, well, there are others who can pay the fines for you (and the organization is a “too big to fail” candidate for a bailout). Economists call this “moral hazard,” but simply put, whenever transparency and accountability are missing, we must expect to see bad actors and bad behavior, “no punishment = increase in crime.” It appears that the unholy alliance of money, power, and politics is leading to “double standards” in our nation when it comes to justice and fairness.

For maximum deterrence, here’s a thought experiment: imagine a world where for people making $100,000 or less, fines of $ 1 million or more are levied for transgressions, and for those making more than $100,000, if proven guilty, a mandatory prison sentence of 5+ years, in addition to any applicable fines constitutes the punishment. I suspect that Wall Street will quickly change its ways in such a scenario…but who is going to “bell the cat?” as the Aesop’s Mice Council fable has the old (wise) mouse asking. Thought experiments, like impossible remedies, are easier proposed than enacted in law and implemented.

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) The February 11, 2015 Wall Street Journal reports what increasingly seems to be old news: “U.S. Seeks Guilty Pleas from 4 Banks in Probe (page C-3).”

The targets this time are Barclays PLC, Citigroup, Inc., J.P.MorganChase, and Royal Bank of Scotland. The article tells us the Justice Department (DOJ) plans to charge anti-trust violations and alleged collusion in foreign currency markets. The article states that DOJ is prepared to try some or all of the banks and put them in the position of having to plead guilty rather than face lengthy and expensive trials.
This trend is accelerating over the past several decades. When it started, the focus of such investigations was to jail people for their misdeeds. Now, in the view of some observers, such cases have taken on the aura of just another business deal. Indeed. The article reports some Wall Street bankers believe that a guilty plea is the most efficient and effective way to deal with such issues. Some almost go so far as to say they expect little negative fallout from such now-common arrangements.
We could well ask, “Where’s the outrage? Where’s the shame?”
Or, adopting an English accent, might we present the impact as casual conversation at The Club?
“I say, old boy, seems your chaps got knocked around a bit by the hounds. You must try the fish today—excellent, absolutely first rate. And how is Margaret?”
This observation may be tongue-in-cheek, but it reflects current reporting from a respected source. And it brings up these thoughts:

Has it really come to this? Are those outside the inner circles of Wall Street and the Justice Department just unimportant bystanders in a game played by the rich and powerful on manicured fields?

Then, as we’ve discussed earlier in this blog, the fines (relatively insignificant in amount to the offenders), often go unpaid!

To each their own, as to opinions on the state of current affairs, but a word to the wise: If you steal $50,000, there’s a chance you might go to jail. But $50 million? Who knows?

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 Vic Hartman) The Department of Justice announced February 3, 2015, a $1.375 billion settlement from the long-standing and venerable ratings agency, Standard & Poor’s Financial Services LLC (S&P). DOJ had charged S&P with civil charges based on laws enacted after the Savings and Loan crisis here in the United States in the late 1980s. S&P was charged with the civil version of mail fraud, wire fraud, and bank fraud.

The government’s case was that S&P misrepresented its rating on Residential Mortgage-Backed Securities (RMBs) and Collateralized Debt Obligations (CDOs). According to the government, S&P under-rated the risk level of the RMBs and CDOs in its desire to grow and maintain profits as they were competing with Moody’s Investors Services and Fitch Ratings. The profit-seeking interest behind this misrepresentation outweighed the interest of the financial institutions and other investors they were in business to serve.
How could this happen? And was it occurring in isolation?

An organization’s culture can lead to many undesirable consequences, including bad governance and, worse, fraud. The authors of “A.B.C.’s of Behavioral Forensics (John Wiley & Sons, 2013)”, draw on their collective experience in psychology, psychiatry, accounting, auditing, and law enforcement to describe the human motivations behind fraud . The authors’ aptly coined term, “ABCs” of fraud, explaining them as bad Apples, bad Bushels, and bad Crops, refer to fraud committed by a single rogue executive, a colluding set of bad apples (with accomplices) called a bad bushel, and when the whole organization or industry is afflicted by a toxic culture, the bad crop. It is an easily-understandable way of describing an extraordinarily complex interplay of fraudulent behaviors at different levels. The ABC theory explains neatly how a single individual, a unit, or the organization itself can become corrupted.

With S&P, the DOJ’s investigation concluded that S&P senior analysts told the company’s leadership that it was inappropriately giving top ratings to financial products they knew were of lesser quality. But the S&P management refused to downgrade the underperforming assets. Why? Because of worries that doing so would hurt S&P’s business! A parallel example: an automobile manufacturer declines or delays an expensive recall and replacement of a defective part. Safety is an issue and the consumer can get hurt, but the company’s bottom line is still intact. The difference in the S&P case is that it violated civil and criminal federal law to knowingly provide a false rating. And, of course, these actions handsomely improved S&P’s bottom line (some estimates say by as much as $400 million).

The authors of “A.B.C.s of Behavioral Forensics” would probably describe the S&P failure as the result of a bad crop. The fraud is committed at the C-suite level, but it would appear that the S&P culture was not unfriendly to this behavior, suggesting that the whole Crop was infected.

This raises the next question—-was it this Crop alone, or did the infection appear in other companies and stakeholders as well? Or, to put it as an extension of the ABC terminology—did we have a bad Farmer’s Market (i.e. the entire mortgage service industry)? Finance folks would call such industry-wide effects as “financial contagion” and while the ABC book did refer to the LIBOR rigging scandal that is still being played out, it did not envisage environmental pressures and spill-over effects to be so extreme as to cause the bad Farmer’s Market scenario.

We’ll plow into that “A-B-C-FM” issue in a following post.

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.

The January 29, 1915 Wall Street Journal describes (p. B1) technology “…That Unmasks Your Hidden Emotions.” The article, by Elizabeth Dwoskin and Evelyn Rusli, introduces software based on the work of Paul Ekman, now 80 years old, who catalogued more than 5,000 facial muscle movements that he believes clue us in about the emotions behind the faces. The software is coded to detect subtle changes in our faces, using those changes to unveil thoughts and feelings that would otherwise stay hidden. Several young companies using this software are cited, including Emotient, Inc, Affectiva, Inc., and Eyeris.
This “I’m gonna detect what you’re feeling and know what you’re thinking” technology has been mostly used for market research, but would seem to have great potential for other uses, privacy concerns aside. Examples in the article: Monitoring truck drivers for sleepiness, gauging classroom attentiveness, an interrogation aid. This blog is focused on people committing fraud. Which leads us to this question: How useful might this software be for detecting committers of fraud by reading their facial expressions?
Daven Morrison, MD: “Silvan Tomkins [researched this] before Ekman, and Ekman at one time would have considered Tomkins his mentor. Some in the security business know about [Ekman-based] training methods used by Israel and the CIA, NSA, and others. Unfortunately, the training is losing credibility. The best argument for why this solution is failing despite being in the industry for more than 20 years is Ekman’s own argument: One cannot tell the difference between [facial expressions showing] fear of ….being caught lying from fear of being punished when….really innocent (i.e. fear of not being believed).” We use this argument in our book (A.B.C.s of Behavioral Forensics, Wiley, 2013) as an argument against the “lie-spotting” promises of people like Pamela Meyer.
“This technology has a ‘god complex.’ It is an unrealistic and limited promise: ‘If I can read others, the whole world will open up for me and I can manipulate people’ For fraud, the point is more nuanced and not so simple. We make this point on our text and I think it fits the way people work: To inoculate against fraud, we have to see our own affects as well as those of others. This is why we talk about a dance of deception orchestrated by emotion. Two people, one manipulating, the other, not. This technology is about manipulating. And it is trying to find the easy way to detect it… A bit of snake oil salesmanship.”
“The affects as described can be a flash, unconscious, and they can be ignored. Both by the received but also by the person who is experiencing the affect. So, although these …companies may believe they are capable (with big numbers) to perceive affects and sell stuff, they may not. In fact, they might be wasting money and time trying to interpret emotions (complex affects) in people they really don’t know or with whom they don’t have a relationship.”
In the end, with both lie-detection and marketing, it is important to remember the first rule of the marketplace: caveat emptor. Let the buyer beware!

Joe Koletar:  What Daven refers to as experiential learning over time most of us call gut instinct. I dealt with a contractor when we were beginning to build our house. I didn’t like the way one of them responded and I dropped him. Turns out I was right.

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.