Professor soltes, good morning. Good morning. Its a pleasure to have this opportunity to speak to you about your book, why they do it. Let me start with asking you, how is it that you came upon deciding to write a book about the perspectives and backgrounds and thinking of white clar criminals . Im a financial economist by training. This book began when i was a graduate student working on large Empirical Data sets, up at 3 00 in the morning and came across a show called msnbc lockup, the kind of thing that you watch at 3 00 in the morning. And on the show, they had a crew go into various prisons and they were interviewing convicted fellons, mostly for murder, assault, rape. I started to think about the kinds of people that i wonder and think about, the people who are the industries and finance of what we saw on the color of fortune, the commencements, donating generously and wondering what happened to these guys . The people that many people respected. They were convicted for offenses. Then they disappear. And so this project began as really a personal interest, that i saw the headlines. This is 2008. Still very much in the headlines. And that evening, out of personal curiosity, this isnt a scholarly project at all at this point, what a lot of people had in the back of their minds reading the wall street journal and New York Times stories, i thought maybe if i could do what they were doing on the show a little bit, i could spend time talking to them and see a different perspective. So give us a kind of a sampling or list of who it is you spoke to. Over the course of the last seven years, roughly 50 people, most of which were convicted criminally, and in a couple of cases that have been overturned. The executives from enron, the former ceo of tyco, people convicted of ponzi schemes, madoff, largest ponzi scheme in recent history. How did you approach them . And more importantly, why do you think they agreed to talk to you . Thats a great question as an attorney asking that. So i approached them with a i think a as an educator. Im someone that teaches this material to my students at Harvard Business school. And this is not something that a student would ever sanction. Ever think they would face. I wanted to see, how did some of these individuals, some of which are alums of the school of which i teach at, what happened along the way. So write a short letter. I would like to better understand your perspective. Could we spend some time together. So that first night when i sent those first ten questions out, i received a number of responses. Some people actually someone from global head of sales from Computer AssociatesSteven Richards described some of the challenges he faced. Others like sam wasosky say come visit me. I started taking them up on this offer. What started as maybe a half an hour here, a letter there, an email, federal prison email, back and forth through a special system, began something that became more apparent to me that it was interesting. Actually quite humbling speaking to some of these quite extraordinary and intelligent individuals that face consequential sanctions, to hair their perspective. As to why they spoke with me, i think one thing that im quite privileged in being an academic at hbi is that i can commit to spend as much time as i really needed to to try to understand their perspectives. Im not going to try to write something or teach something in my class at the end of the week, the journalists might have a deadline, i could spend weeks, months, and some people spent years trying to understand how they see the world. Because thats the ultimate goal of the project. Also, i think many of them simply just missed their business world. And i teach finance. We can talk about the financial crisis. We can talk about whats going on in other firms. Much of our conversation was not about their case. Much of the revealing aspects of my conversation was talking about Everything Else, what was going on in the wall street journal. I would send them books i was reading and assigning in class and hearing what they had to say versus my colleagues and students which oftentimes is fascinating. Did you talk to Family Members, victims, others that were sort of around these individuals and the crimes that were committed . I did. Much more of my focus was on the individual. But in a number of instances, theyre Family Members. And many of the cases im actually on much of the correspondence that is sent among the family. I think its very easy, and i think i approach this like many people externally, when you see this extraordinary crime that causes such devastation to say someones going to get a year in prison, or two years in prison, that doesnt seem very much. To see what that does to a family, what to kids, its really quite extraordinary. And i think humbling. Even if the sanction is, quote, short. Thats seen from their perspective of their family. But also seeing now that people started to get out of prison, i spent time, how people are finding Different Things to do. And in some cases flourishing in different ways. And other people are stuck, having these sanctions on them, for something they can never overcome. And victims, especially cases like madoff. Some people were just really truly devastated by his actions. And part of my goal of speaking to victims is actually to go back to someone like Bernie Madoff and say, i just had this conversation, can you help me try to understand why this doesnt seem to be resonating with you . Thats where i think i learned something about their personalities. How some cases didnt seem to settle in, that there was really people on the other side that lost everything. And i guess i would ask the question of whether or not you thought they were truthful with you, although perhaps the way you describe it, you werent necessarily in the business of trying to determine what the truth was and confronting them with it, is that right . The broader goal, ill say there are subjective views of the world. I wanted to be able to put myself in their shoes, and see how they viewed the world. Now, their own cases, and i think any prosecutor knows, the defense knows that peoples memories, even if theyre trying to be truthful, theyre involved in change, particularly in their cases. Even the best Case Scenario they were trying to be truthful, its hard to remember all the details. But on top of this, most of them are convicted fellons. So to rely on truthfulness would be naive on my part. This is why i did try to rely on much more of the information going around at the time. We have a lot of email. In some cases they would show me that. In one case, for enron, they werent worrying the night after they signed the papers. They were actually going out and celebrating and described how they went out with their spouses. That piece of information is more powerful, not something that was widely reported, or if you know what people are doing after, you can kind of back up probably what they were thinking a little bit better, or their immediate reaction. Thats what i was trying to do is piece it together. In a different way. But ultimately subjective. The suggestion by some of them was, i didnt run to my defense lawyer that night. I went out and had a party. So, therefore, i wasnt really intentionally doing anything wrong. I dont want to say intentionally. But they werent worrying about what they were doing. Which i think is Something Different. We all do things that are wrong, and this is kind of one of the things in the book. We all speed. Driving a car. We know thats wrong, but we still do it. But if we know that somethings actually harmful, is going to create some kind of significant harm or devastation, we generally have a much deeper pause before going ahead. I argued many cases this is what prevents us from considering a different option in the first place. I think in many cases, they know they were pushing something aggressively, which is wrong. But it could lead to a slap on the wrist. This wouldnt lead to the consequence that is we see described in this book that would really offend and otherwise a privileged life in a lot of cases. Let me ask you, what is the what do you think is the difference, if there is one, between the white collar criminal on the one hand and those who commit other types of crimes, be they physical crimes, like burglary, or drug crimes, or assault . Is there a fundamental difference between the profile of the perpetrator . I think it links to the profile of the perpetrator and the crime itself. The thing thats different with white collar offenses you dont have to get close to the victim. The victims themselves are distant, oftentimes amorphous. Its difficult to identify the actual name of the individuals that we can say its more broadly, more systematic. Creates a harm to the Financial System as a whole. More anonymous persons on the other side of the trade. Anonymous persons on the other side of the trade, thats true. They exist. No doubt. This is not to say it doesnt exist. But you cant pick them out. And actually see their picture. In other cases, even when there are, you can say identifiable victims, the timing in which theyre actually going to be identified actually offsets. Think of a ponzi scheme. At the time youre actually harming the individuals by investing in some nonexistent investment scheme, like Bernie Madoff, people were clambering to give him more money. They were trying to give him more leadership positions in industry. He could come home and actually most of the day look pretty good. Its only when its revealed later that all this starts to unwind and it becomes so clear that there were actually people being harmed rather than so this is why i always find it interesting that i could spend, and i did spend hundreds of hours with individuals in a room, i never once worried about one of these guys if i turned around, going into my back pocket and stealing 20 out of my wallet. About you many of these individuals through, you know, funds that i owned, retirement account, actually have actually taken far more than 20 from me. The question is, well, why do i never need to worry about them stealing 20 from my wallet but many of them without very much remorse steal a couple hundred from my account . And i think thats the fundamental difference in terms of these crimes. That you can actually do some devastating things and not have that gut feeling of actually doing something harmful. Even a reasonably socialized person. As opposed to putting a knife at somebodys throat and demanding a wallet. I think it takes a different kind of person, or a different kind of desperation or circumstances. You also point out in the book, in addition to the anonymity of the victim, and the sort of longer period of time it takes for the victim to be revealed, its the act itself, i think you in the book talk about how the crimes are often create committed by the click of a mouse or erasing and putting in a new number on a balance sheet. Is the nature of the act also something that distinguishes the white collar criminal from others . Thats a great point. I mean, you can actually create extraordinary devastation. Theres one case in which someone actually uses the white font feature in excel and is able to make changes that would cause hundreds of millions of dollars in a loss for the firm. And thats pretty nice, it takes three seconds. It doesnt feel all that harmful at the time. I mean, its really the click of a mouse or signing the paper. One of the people that was prosecuted after the passages, steven garfunkel, a former cfo. He described how he was ultimately prosecuted for signing a significant amount of false collateral. In that he was actually comfortable, not comfortable but didnt feel that bad about signing many, many documents attesting to a false letter of collateral. It didnt seem that big of a lie. Youre signing a sheet of pape. So what . It was only once he actually was actually confronted by someone, actually it was a banker who didnt think the numbers made a lot of sense and confronted him, these numbers dont line up, that he was forced to lie to someone facetoface, that was at that point, its a lie, it doesnt make sense and thats when everything so the most subtle distinction of lying on pape are is very easy. Lying to someone to their face is harder and we can keep escalating from there. So does the fact that does this give you some insight potentially into how one might better deter White Collar Crime knowing how it is different from other types of crime, does that then give you any insight or did you reach any conclusion about how best to prevent it . This is the big challenging question. I mean, the one thing that did initially surprised me but then over time became something i came to expect is that most of these people, even when theyre doing something pretty egregious, the kind of thing that is going to land you in prison. This isnt any gray this isnt if we hire great lawyers were getting out of this thing, this thing is once detected you go away for a period of time, still found ways to see that they werent going to go to prison. Even if you do something really wrong that you never see that outcome happening, it suggests that maybe a different regulatory approach, a way we need to think about that. If this isnt a deliberate cost and benefit calculation. Because if its a cost benefit calculation, theres two ways to increase the cost, increase the probability of being caught or we increase the sentence once caught. And i think the historical approach that weve taken over the last several decades has been lets increase the cost associated with being once youre caught. So rather than a potential sentence of one year, it goes from three years or five years or in some cases theres several that argue that the sentences look potentially too long when we compare them to serious personal yes, there was one cite in your book that, you know, about a 12 million fraud that impacts shareholders in the 1980s was punishable by approximately 3 years in prison whereas by the early 2000s that had increased four fold to 15 to 16 years in prison for the same offense. Obviously a drastic increase in penalties and sanctions and fines, but your point seems to be that may not have much of an impact on deterring White Collar Crime. I think if it was many of these people and were talking about the most privileged people here, so it is a specific type of individual. But whether you go to prison for six months or go to prison for three years, that idea is not resonating in most of these cases. You still think thats for someone else. Its those guys that go to prison, not me. How about the fact of prison as opposed to the length of the term . This goes the other way and this goes to a much broader set of norms. If this stuff is wrong, its going to have really serious sanctions associated with it, which could be, you know, very heavily financial penalties but could be prison. But thats something that people normalize if that this is what happens to people that do this kind of thing. If that was in peoples minds, i think that would change. But thats not a cost benefit calculation anymore. That strikes me that becomes part of our norms and culture and what actually is appropriate and not appropriate. You need resources, too. In order to detect more cases, especially some of the more difficult cases, you need the amount of resources to police, which is challenging because this is, obviously, a political consideration of how much resources do investigators have . What about if white collar criminals you find dont really make that cost benefit analysis, then do you or in your book do you have any suggestions on how it is that this crime can be better deterred . So i go back to the individual at the end, which is my view and this is my view of human nature is that the people in here are not predisposed or have any inclination to actually want to do something criminal. These are the things that happen because of the settings theyre exposed to, the norms, the cultures in the firm and the pressure that they face. I think of a standpoint, for example, a Business School student. Theres not one Business School student when theyre about to leave a prestigious Business School is my goal is to go out and become a titan in the industry, become wealthy, improve the industry, speak at a commencement, donate to a lot of wonderful organizations then maybe at the end of my career, i might engage in some fraud or insider trading. No one thinks like that. But what we find is cases of people doing exactly that. Roger cooper is a prime example of this. Tell us about roger cooper. The most extraordinary careers, one of the most well respected firms in the world. Potentially ceo. Yes, managing director. Became the lead person of one of the most celebrated firms or his culture and what it means, then you look soon after his retirement, hes on the board of a number of prestigious firms, Goldman Sachs, one of them, and at one point 23 seconds after a Goldman SachsBoard Meeting, hes calling a well known Billionaire Hedge Fund and divulging confidential information. I mean, this is against everything that he did in his life to become successful. I mean, you dont become the head of mckenzie by not being thoughtful, reflective, intelligence and protecting client confidences. Let me stop you right there for a moment because i was going to say the cynic, but maybe not limited to cynics, might suggest that exactly the kind of approach and conduct that gets you ahead in the business world. Its not a place necessarily where ethic and morality prevail but those persons that operate in the gray area and maybe even cross the gray area that get ahead. What he did was an extension of how he operated at mckenzie. It could be. Its impossible to fully rule that out. But the cases of raja gupta and the partner at mckenzie is one of the most cherished values at a place like mckenzie is client confidentiali confidentiality. This is place that you dont talk in the elevator about your clients. You dont tell your spouse, you go to st. Louis but you dont tell your spouse which firm. Its remarkable to be in that culture and teach it, lead it and do it successfully around client confidentiality and ill say not respect that and still succeed. At least how i look at both of these cases, gupta and kumar. They were exposed they were successful when they were in the confines of mckenzie culture. Strong culture reinforcing the norms that we protect client confidences. Thats what we do. But thats an artificial norm or intuition. Thats not something we were born with and evolutionarily designed to protect. Something we learn to do. If youre exposed to a different type of culture, that of a corrupt hedge fund manager, youre going to develop that kind of culture. And so when they start interacting with people that differ from that, which one may argue, as youre saying, perhaps in some cases this could have occurred earlier, but what we know unambiguously in both cases when these individuals were spending time with someone that very much acted differently, they adopted that different type of culture, that much grayer, that much more aggressive, i mean, and ultimately undermined something that thats a little disturbing because it suggests that culture and even morality is perhaps more temporary than we would like to believe. That once youre out from under the environment that encourages and fosters moral behavior and good conduct that you become susceptible to crossing the line. I agree. Exactly. I think thats the challenge. We generally spend a lot of time, there are aisles and aisles of books, Business Schools in some cases, about moral character, values, moral compass. And thats nice to think about, to believe that if we had this set of moral values sitting here today, this is how it will be going out in any situation. But ill say the psychological evidence pushes very heavily back on that saying that the situations far dominate the individual person. But we can see a lot of these incidents where you spend hours in a Business Class taking ethics or a couple weeks at a corporate training program. Thats going to be dominated by about 40 hours in the classroom. Thats the equivalent if you go to a major bank, thats your first three or four days on a job. Presumably whatever culture youve been exposed with by day five at that financial institution, it will dominate whatever experience you might have had in a classroom or training exercise. And thats the culture that youre going to adopt. And i think we tend to ascribe morality as being this value thats above or greater than culture, i see it driven largely by cultural norms in a lot of these instances, in that people aspire and in most cases people do aspire to do well, but when facing tremendous pressure and the wrong incentives, we see people doing things that are different. In the recent wells fargo case thats been obviously in the news, we had that case where wells fargo actually had an effective culture in that they had several thousand people doing exactly what the firm incentivized, but simultaneously one of the challenges that the firm faced was that led to people to do things that were clearly going to lead to a whole host of regulatory challenges. So then the question is, where it really becomes, you could say tone from the top, although thats a little too catchphrase. Right. But what is the culture thats actually being set within a firm . Because thats whats going to motivate peoples incentives and ultimately or their ethics. So i guess to the fundamental question of why they do it, and you kind of have a very interest ing portion of the book where you survey the theories of why white collar criminals do what they do going back to the 1800s, including someone very curiously the view that prevailed at some point in time that suggested you could actually tell who was going to be a white collar criminal by the way they looked, physical appearance, a high forehead and a pointed nose might suggest you would be embezzling. Can you tell us a little bit about that theory . Of course. This interview was taking place in 1939, i would not be the person that would be here. It would actually be a colleague from harvard, earnest houghton who was the head of our anthropology department. He talked about why crime occurs. And how he came about this, hes a physical anthropologist, so the shape and the size of bodies. What he did is he did one of the most complete studies of criminal still even by todays standards. A laboratory of students go out and get so,000 convicted felons in prison around the country and took a couple hundred measurements, the length of the earlobe, the angle of the nose, the breadth of eyelashes. A couple hundred. This was still the prevailing view over the 150 years before that, that something about the individuals body is related to their propensity. And he thought, well, the trick is i just need to do this more carefully with more rigor. We need to get a lot of careful, detailed empirical measurements. And harvard publishes his book describing criminality. He actually has one kind of wonderful plate in the book showing what a white collar offender looks like, the forgers and fraudsters sample. And he gives the six or seven characteristics and if the person looks like this, they are going to be the white collar offenders. It would actually be this would be had this actually turned out to be true, this would have actually been wonderful for most regulators. We could dispense with all the complexities here. Dpaekt right. And surf through a database of photos. But turned out that died out as a theory. Very much, i mean, in part because he was a leading proponent of actually eugenics. And people started to see how this was correlated with some of those arguments. It turned out they lacked ultimately scientific rigor. Faulty correlations. But this theory hasnt totally gone away in that theres actually a criminologist from the university of pennsylvania, adrian grain, who has actually done very interesting work which started hes a neurocriminologist. He looks at its not the persons face or body shape thats causing, but its their mind. We just need to go deeper inside the body. So hes done some really fascinating work mostly looking at violent offenders, looking at people that engage in spousal abuse or murder, have some type of different brain makeup that seems to make them have a higher propensity associated with committing these offenses. Hes done one recent paper with one of the colleagues at wharton where they brought in a number of low level white collar offenders and started very preliminarily, they acknowledge, maybe see differences in brain structure associated with people who are more likely, as they try to put it, to engage in white collar offenses. They have a higher capacity almost for almost intelligence, which is pretty humbling conclusion. But it shows this theory is just around, just in a different way. Ill say a more careful way. I mean, ultimately the arguments around whether its a physical cause i mean, theres psychopathy, theres explanations, but ill say many of the people i spent time with, the difference between them and an executive coming to my class thats a prominent ceo or cfo now, if i were to not have their cvs, i could flip around their cvs and i dont think most people would be able to tell the difference. Theyre cordial, intelligent, everything youd expect a corporate leader to be. So the idea that theres a ill say a physical cause to white collar criminality. Right. Is the sole explanation. It can contribute but is probably not the answer. So what is the bottom line conclusion of your book . Youve identified culture as one cause. It is also situational, just the set of circumstances come together and create a perfect storm that makes someone who otherwise wouldnt cross the line to do so . What conclusion did you ultimately reach . So how i came to think about White Collar Crime wasnt so much a failure of managerial reasoning, you can actually what looks like reasoning to us is oftentimes not genuine reasoning. Its justifying something we previously thought. We think were going back and forth but we have wonderful psychological evidence that thats what we really thought. It actually comes down to our intuition. I see much of this failure is a failure of managerial intuition rather than reasoning. s a slig different tack or approach to address these failures. By that you mean managers manage o lot on intuition and gut intingt and they just dont give a lot of thought to those situations when what their instinct is telling them is to do something that they should know better than to do. Exactly. They dont have that initial gut instinct telling them kind of screaming out that this is going to be very harmful or devastating. I think going back to the speeding example. We all know its wrong, but youre speeding, you dont really feel like youre your gut doesnt bubble up and say youre doing anything really heinous and terrible although there could be really serious consequences, the propensity of hurting someone actually goes up. But that doesnt strike us in our gut. As doing physical harm. What we need to do is think of White Collar Crimes in some cases kind of like speeding where you might know youre doing something wrong but youre able to rationalize, other people are doing it, or ill say in some instances youre not even thinking about until someone brings it up to you, until your spouse is next to you and, eugene, slow down. Youre going too fast. If you see an accident or you see a police car, you might slow down because all of a sudden youre reminded. Right. And those reminders often lacked. How i think of it is a lot of these situations, we can think of them as ethical dilemmas or doing the right versus the wrong thing. These are very easy to solve if we were to sit down with a sheet of paper and look at them. You dont need an elaborate discussion to figure out should you call someone after a Board Meeting within 20 seconds and divulge confidential information. Thats not really a difficult ethical dilemma, but why do we see people, in many cases, really quite brilliant people falling prey to these we could say simple failures . And this is where the training is very different than the real world. In training youre given the dilemma. Someone points it out, should you do this or not do this . Its isolated from the hundreds of other decisions you are making. There are people in the room that might think differently than you. Although theres a lot of corporate governance, ideas, a lot of that in some cases checking a box that from a regulatory perspective, but its not really independent in terms of thought and opinion. Right. And wont generally push back on a ceo when its a privileged position. You have a story about Mark Whitaker from Archer Daniels midland and what it is that ultimately convinced him that the conduct that he was engaged in was improper. I mean, he was a rising star. He was, by the way, the focus of the movie the insider. With matt damon. Probably one of the most high profile people to play someone who was convicted of a White Collar Crime. He was a rising star at adm and in the course when he was promoted to a more senior division, they basically finally brought him under the rope, tell him this is how business is really done. Global price fixing on a number of these Chemical Products that are used, very, very important food industry, where you go to your people with the the japanese, people in europe and they sit around and literally figure out how they should set the prices. This is plainly illegal. They also, as i read, wrote down false names in their expense report so there would be no evidence with who they met with. Tracking it down. You could say they put a fair amount of effort. This wasnt someone that came up one day. Pretty clear to Mark Whitaker that he knew what he was doing was wrong. Should have been. There was some hint that this was probably some apprehension when but again this is one of the most successful firms in the country thats been doing it, this is what the senior people tell you this is what were doing. If you want to stay in that position of privilege, you feel like you adapt to what that team is telling you. But where it unwinds is one night where he goes home and is talking to his wife ginger and just describing what hes doing. And his wife reacts with just shock. That this isnt who you are, mark. This doesnt represent what you should be doing. And you know this is wrong. And it really took someone to almost quite physically shake him, someone that he respected and trusted but someone that also said completely outside this business and wasnt, ill say, contaminated in many ways by these different norms and intuitions that were being created within adm. And at that point he became a whistlebl whistleblower, actually one of the most senior in history. And then started secretly taping many of these reports. Whats maybe tragic but also says something in this case so he becomes a whistleblower for the government. At the point hes actually a whistleblower he did something, you could argue, even more shocking. He actually starts essentially embezzling. He doesnt talk to his wife this time about this so he keeps doing it. If youre a government informant, while youre an informant doing a crime, youve increased your propensity of being caught by some high degree. Ultimately ends up going to prison for actually not the offense his wife helped him, you could say, take the best route of he had at the time. He ended up going to prison for doing Something Else stupid. So this suggests that perhaps one route to decreasing the level of crimes to populate companies and corporations with persons who are outside the culture but who are there and present during decisionmaking so they can offer, you know, a voice thats maybe untainted by the group think that may occur in some companies. Ive heard of this happening in some companies. Do you think thats a viable solution . Companies can actually endeavor to do that in a genuine way. Theres a tremendous opportunity there. I mean, the challenge is that so much of this comes down to compliance and things that we need to do to follow rules. So what many firms do when were trying to avoid or responding to some kind of regulatory problem, we institute more rules and bring in more compliance people to make more rules. You see more rules and what do you do . It just requires a little bit more thought to how to keep doing what i used to do before now stay within the bounds of the rule, which is really a perverse outcome you see in a lot of these cases where what youd much rather have is people come in and sit back and say, is this actually what youre supposed to be doing . Does this actually represent why you went to this firm and reflects what youre trying to do in this industry . But that requires a very different approach. I mean, one area where ive spent time is talking the role that attorneys play. I actually believe that in a lot of firms attorneys, they play the role of cocounsel, but counsels generally referred to in the legal conduct where youre giving legal advice about whats appropriate or not appropriate when it comes to laws and regulations. But at laeast i can say from speaking to many senior managers theyre actually looking to that attorney because thats someone that operates an outside counsel is operating outside and is able to see that culture potentially differently. The challenge that counsel plays in this case is that on one hand youre hired because youre reflecting what the client wants, at the same time potentially what the client wants in that moment is different from what they really leak in their longterm interests. Speaking to colleagues at law school and friends who are attorneys, its something where i actually think outside counsel could play a far greater leadership role and actually knowing that youre not just the person about whether people are following the rules and regulations but sometimes youre the chief ethics officer in some cases. Thats a much more humbling position, i know, and i talked to colleagues of law school. And they shy away when you bring in the word ethics in this context. But i think this is where we have seen managers wanting to offset those obligations to someone else or give them sometimes this is attorneys. It could also be accountants when it comes to Technical Accounting matters. But historically this is not where accountants and attorneys are generally viewed as the people who will jump in the room and actually give a different ethical lens. I mean, look, i think a lot more of that goes on than probably given credit for, that outside Service Providers and advisers to prevent companies and individuals from taking certain action. But a lot of that doesnt show up in the statistics because it never happened. On the other hand, there are circumstances where it appears that the attorneys and the accountants were actually the enablers seemed to be facilitating the wrongdoing conduct and that often does come to light. Asymmetry. A little asymmetry there, yeah. Maybe the solution is you imagine a boardroom or a Management Meeting with all the members of management or the board around a table, just need to have all their spouses and significant others around the perimeter of the room whispering in their ears when the moral compass goes off. That would actually do probably a lot of good in some of these cases. Just a genuinely different view. Ben horowitz, well know venture capitalist. When i came across this, originally mg he was going to write about in his biography. Hes a well known celebrated venture capitalist. When he hired a ceo, the cfo came in and looked a the compensation agreements i see something that were doing mg thats not competitive at other firms. Turns out that most of our competitors, other firms with both their lawyers and accountants, they adjust the option date to make it the most attractive for a senior executives. Bens initial response was this looks great. Obviously, we probably need to do this. This looks like basically a free lunch. Additional compensation with no additional risk. But he realized his intuitions around technical finance and accounting matters might not be perfect. Hes a strategist at heart. Hes an innovative thinker, but hes not a technical finance and accounting guy. He had a routine procedure that he always wanted to go to a counsel, outside counsel just to bring someone that sat outside this little environment that occurred not just within the firm but within Silicon Valley and passed it by him. Friend and attorney comes back. I looked over this a pile of different ways and theres no way that this makes any sense, that this can be legal. I recommend against it. Ben went back to the cfo and said, i know everyone else is doing it. Its true. Many other firms were doing it. But its not for us. Fast forward two years, this becomes part of the big options backdating scandal and the cfo actually one of the people that went to prison for this. And as ben reflects on this, this isnt because he had a better moral compass or better values than other executives in the industry, but simply because he had a better, you could call it, a compliance system of controls, almost like a personal preservation framework. He knew where his weaknesses lie, im not a finance and accounting guy. He knew that getting advice from just the little inner circle might not always be right. So he anticipated this and knows how to design a system that could ber seed before he might have ill say this is a fascinating incident or i think this comes down to humility and selfawareness. He was aware of when he might be compromised and knew how to zoin a system which i actually would give him a lot of credit for. So lets talk about some of the individuals you spoke to, and i guess lets start with Bernie Madoff. So tell us about your interactions with Bernie Madoff and you also in the book identify particular episode that i think one might describe as a little chilling but gave, at least according to the book, i think, a little insight into his character. So Bernie Madoff was someone that ive been corresponding with for years now. Every wednesday night for a couple of years we would speak on the phone. Hundreds of pages of correspondence back and forth over this time. He was a well respected leader in the financial industry. I mean, many innovations when we think of the nasdaq can be acontribute to advances at his firm. But simultaneously Bernie Madoff also started out with this Investment Management business that grew to be one of the largest ponzi schemes in history. So despite the fact that he created one of the largest ponzi schemes, i still see him as someone that was never destined to create this massive failure, but then the question is well what happened . How did this end . So i spent a lot of time talking to him trying to understand how this problem grew and why he could never get out of it. I mean, one of the things i always found humbling when i do think of his case, i think most of us like to believe and probably quite rightly that wed never let something grow like this and become out of control, which is what happened in this case. Eventually stopped trading, theres no underlying business. Its a ponzi scheme in the classic sense that theres no way he could have imagined by the late 90s that he could have ever got out of this. The question though is at what point and this is a question i asked myself, if people around you are putting you on a pedestal, clamoring to give you more money, you go home friday night, you have dinner with your wife, your two kids, then you say, you know what . This is enough. I should call the sec. I should call the doj because this needs to end, i think most of us what we would do is say we know this needs to end. Ill do that next week. Then next week comes and the same repeat. I know this is wrong, it needs to stop. But i dont want to end it right now and watch everything ive done collapse. I think if like that, thats a fairly humbling and difficult question to ask. How many of us would have that character to actually, after that final dinner with our family, decide today were going to end it even though not being forced. Maybe long sentences are deterrent to confession. This is actually thats a very provocative way that had the sentence not but he had his allege sentence, hes effectively sentenced to and he knew this, the second he turned himself in he would never have another meal with his family. Thats right. Thats an interesting way of phrasing it. But i think when it comes to why this happened the first place, how did this start growing and why did he potentially think and this is where Bernie Madoff is different than any other people i spent time with. I mean, unlike the other people which i described as people who engaged in crimes who might have devastated people but they didnt know that, they didnt see those victims. On a database. They were distant. Thats not true for madoff. These were really family, friends, people in the jewish community. How do when you know these people are going to lose money, how do you still say its okay to give me your money to Family Member x . And thats something that makes him these are not the remote victims we spoke about earlier today. You can say actually the extreme opposite. These were some of the most close members he were spending time around. Referring to one of the incidents where im trying to understand his personality and how he views the world. We would normally have our talks wednesday evening prepared. Both of his sons while he was in prison died, one committed suicide on the anniversary of when he turned himself in and the other actually died of cancer. And i was reading actually an obituary where his second son died. It just popped up on reuters. I was reading it. It literally gijust came out. I picked up the phone. It turns out this call is from a federal prison, do you accept this call . I was surprised because i didnt have a call scheduled at this time with anyone. Of course i accepted the call. It was Bernie Madoff. Ultimately this is one of the my stomach just sunk when i heard his voice because im reading the obituary of his son at that exact moment and youre talking to someones father and he said he just heard on the radio and he asked if i could read him the obituary. And this is something where ive been fortunate in my life, i havent had to deliver speak to people that are if that you can say the hardest points in ones life, the loss of a child. So i took you know, my researcher hat is off. Im just another person. I read the obituary to him. Im at a loss of what to say after. Im so sorry. If theres anything i can do. Maybe he wants me to pass a note along to someone or a message. I dont know. Im at a loss. What do you say to someone in this situation . Right. He says im fine, im fine. Then theres a pause. Then he says, can we go back and actually talk about the Interest Rates that we were talking about last wednesday . And for the next 11 minutes we talk about interest, swiss interest rate. Ill say he was talking about swiss Interest Rates. And when i still think about this and it comes back, its kind of this haunting. I go back and i went home and my wife saw me i think pale and this was the most disconcerting conversation, one of the few ive had in my life, that i dont think this was the first reaction was maybe he was in shock and you talk about Something Different because right. I dont think it was that. The following wednesday when we speak, we go back to talking Interest Rates. This was an issue and i think for four minutes he was focused on it and it was sad and devastating, but then you can xarlmentalize that and then you switch. And its as easy as being able to switch. And this is something where his psychological makeup is just different. Most of us dont have that capacity to compartmentalize which i think is what helped facilitate that he could see his world operating in these different buckets and knew how to compartmentalize them so when he was soliciting money from someone, all ha was perhaps for him just a solicitation, but the consequences and the r ramifications and all that would flow from that was not something that entered his mind at that time . Right. And something which ive never and i dont he can differentiate these two things. In most cases he would be telling people, i cant take your money right now. And in part, on one hand you can say he looks back, i told people to not give me more money. Strictly speaking, that seems to have been true in a lot of instances. Its actually that marketing pitch which is something we can teach in a Business School, telling people to not give me your money actually makes them want to give it to you more. You cant separate whether thats good nature or thats a great marketing pitch. I generally believe it was probably a great marketing pitch and in the back of his mind he could rationalize i told them not to give me their money. If they give me their money, thats their fault now. Which is a pretty sinister rationization. Blaming the victim. Or im deceiving them but ive given them its the classic where you get the 8,000line contract when youre about to click on something online and the firm can say well on line 6,223, we told you that can happen so its not our fault that you clicked on the okay. Where thats not a reasonable way to that doesnt make it not deceptive. Right. Are there you have so many interesting stories in the book about individual individual white collar criminals. Are there others that stick out in your mind . I know, for example, Allen Stanford who took a very different view and blamed everyone including the u. S. Government for his wrongdoing and claimed that there was no wrongdoing at all. That was one of noes, ill say, extreme that this was not any fault of my own. This was purely and i mean goes at length and the book if anything is short of the pamg i could give, as the fault of the u. S. Government. What interests about his case is his is one of the few that you could say a financial institutions, ill put that in quotes, was shut down prior to its failure. Which on one hand which is the goal of law enforcement. You want to stop it before more victims are created. The ironic part is most of the time in the financial industry things collapse, things go bankrupt, fraud is known and then receivership kicks in and other things. You could argue the best Case Scenario is to stop it before the thing collapses and anything loses anything. Whats ironic is he actually looks at that well there are other firms that could have failed if they didnt have government bailouts or whatnot. I didnt take a government bailout and they put me in receivership. So he kind of uses the, you could say the logic that because i didnt fail, it must be legitimate as a way of i think providing some comfort that this was not his fault, that this was someone else. Its a dhalging question. I think if theres a 99. 9 chance that the firm is going to fail, you could say it makes a lot of sense for it to be taken over. If you say its a 1 chance that you might be shuttering a legit my business, receivership and other documents they put together suggests this is close to the 99 side. He sees this as more of the 1 side. The allegation as i recall were that there were misrepresentations about what he was doing with the money. Its hard to argue that he would have succeeded if the government had not stepped in. If you look at the management i did spend time trying to say i mean had his to the extent his business was legitimate, he should be one of the greatest investors. Warren buffett should be calling him for advice if you look at the rate of return he could generate. I provide one example. One ecuadorian ipo that produced a great 30 or something return. To generate the returns that he did over decades, there should have been hundreds and hundreds of deals. It should look like Berkshire Hathaway and warren buffett. Right. It doesnt. The cfo at the firm, an old College Buddy of his, i mean, the cfo was into some pretty nasty things. He essentially stole the money in a trust when his wife died that was meant for his kids. And then ultimately to the extent you look at all the other major executives of this firm, ultimately they turned in either government witnesses or whistleblowers at the very end that none of them knew what the business actually was. You could actually see the internal emails going back where we dont ask questions, we just sell the stuff. That makes it that much harder to think that there was actually a legitimate business that he only knew about and no one else can find. So he has a hes very liable to appeal but the receivership continues to document more and more evidence suggests that there were no real investments. There was no like madoff, you can say there were investments but buying a golf course or some land for a couple hundred million and then moving around and marking it up to 3 billion, thats not the investment generating of legitimate return. Anyone else stick out in your mind . I recall the story of mark dryer and his impersonating an attorney, i believe. Extraordinary, extraordinary. I mean, this is harvard and yale trained attorney, smart, probably ill say one of the most reflective and just generally i can see him as an academic, just in terms of his depth. Selfaware . Thats whats interesting. Selfaware now when he has the time to step back and think about his actions. Not at the time. This the case where he wanted to build this world class law firm and didnt have the money to do that. And ends up creating a false on behalf of his billionaire client. And whats pretty amazing, i think on both sides. Both that he was able to create a first were talking tens of millions of dollars, that he was able to literally create documentation. I mean he didnt have a finance background. He was able to create all the financials from scratch and then some very significant well respected hedge funds and purchasing these notes. After the first one worked, he thought the firm might start taking off. But as he said the business, the cost kept going up faster than the revenues. Issued another note and another note to the point where it just becomes crazy. He ends up finally someone wasnt willing to take the note just signed an electronic signature by email. Someone wanted an actual person there representing the note. So he ends up impersonating someone. It gets to the level of absurdity which he walks into a Conference Room pretending to be an attorney for a pension fund in front of a hedge fund and someone, as i recall, actually knows this pension fund and doesnt recognize mr. Dryer as an employee. And he tries doing i just need to walk out of the rom and call someone. He hops out where he had his private jet waiting at the airport i believe it was in toronto. He could have taken off, but this shows how delusional someone can become. The lack of selfawareness when youre in a situation. You can say that the quote, smart thing would have been to divert that jet to some country with a pile of money that was not going to extradite him. There are several people in the book that did exactly that. But he actually still thought he could get out of it, he could explain his way out of it at this point in time which shows how crazy you can get in these situations. Let me ask you one other question which is, again, coming back to this notion of whats the effective deterrent and how do we minimize or reduce the level of White Collar Crime. You point to sort of these concepts of a little bit like public shaming or in the Orthodox Jewish community theres sort of individuals who are kind of shunned by the community and the whole community is involved in that process. Can you describe that and perhaps is there a way that we can embrace that concept at least to try and prevent or deter White Collar Crime on a broader scale . Thats a great an idea thats different about how i think what currently happens is that many times we see these prominent executives facing significant cases of wrongdoing and they dont people back up as needed politically, so to speak, but theyre not genuinely shunned. So in the Orthodox Jewish community when someone engages in something thats against the Rabbinical Court and a sanction is placed upon them, theyre not able to take leadership positions at temple. But even more than that. People in the community are told not to only not socialize with this person but not to visit their place of business. In some sense this form of shaming is so deep its hurting the earn about on every dimension, not because theyre going to be thrown necessarily in prison. This is being dealt with internally within a community. Theyre facing prison, theyre facing fines. Theyre losing their home. But what we find in a lot of cases in the Business Community when this happens is you dont see that same sense of outrage occurring within the peers. The people that theyre around and theyre seeking respect from. We see it from people, elizabeth warren, when senator warren hauls someone in front and talks about them, we see this in protests with occupy wall street. So we see public and regulatory outrage in some ways but we dont always see it from the Business Community. If anything, in some cases we see the letters of support where people say, yeah, this was wrong here but Everything Else this person did is so extraordinary. And its pretty remarkable. One thing that is humbling, seeing individuals when theyre being sentenced is actually seeing the people that are supporting them, which on one hand makes a lot of sense. I mean, these people know them under different context. But at the same time you would expect if youre in this position of privilege where youre the head of a major firm made hundreds of million of dollars presumably youve actually done a lot of good stuff in that process. If you havent figured out a way to donate some money and youre worth a couple hundred million doors, youre not a great person. Which is very different than a person, you could say, that doesnt have that privilege is being sentenced, you dont get to have the letters of support attesting to how you donate all this money, how youre able to spend, how you change these communiti communities. And so the question is i wonder do we need to have a little bit more of that outrage coming from the people in which theyre wanting the approval most from . But thats a culture again, thats a cultural shift. Now, this goes back when it does come to regulators, the standpoint that if other people see themselves in that same boat facing those same kinds of sanctions, this creates a challenging question. You dont want to then you want to come support and say its in the that bad, youre kind of protecting yourself, but at the same time thats not the job of the leader. You should be able to call out mistakes when theyre made. I think this is one of the challenges for leaders is we see executives at firms admitting mistakes but thats generally always about four steps later. Right. Where i think in many cases i like to believe that people would be both shareholders, the public and regulators, would actually be much more, say, accommodating when mistakes happen. They happen in major firms. To say anything other would be kind of extreme. Where we can admit those mistakes up front and very clearly saying what were doing to change those. Its a degree