Monday, 10 October 2011 03:26

Inside the Mind of a Fraudster: Profiling a Criminal

by Manuel Rodriguez


The overwhelming amount of fraud occurring and uncovered in South Florida, including mortgage, banking, securities, and regulatory fraud demands at least a cursory analysis of the personalities and behavior that typify these fraudsters. Stanford, Rothstein, Freeman, Tolz, etc., are merely the tip of a very large iceberg penetrating South Florida.

I am often asked to explain, or even justify, criminal behavior, not merely for the sake of curiosity, but to prevent being swindled by these schemers. We believe that if we can understand the criminal mind, we can identify their attributes and prevent from getting swindled. Unfortunately, the pathology of crime is far more complex than we dare imagine.

There are two ways of preventing a fraud from occurring. One technique is quantitative, and involves the use of sophisticated due diligence to ferret out the fraud or any inconsistencies in the fraudster’s “stories”. These quantitative techniques take the form of pre-investment financial due diligence, background checks, verification of financial history with third-party sources, current customer verification, etc. These quantitative techniques are typically performed before investments are made and throughout the history of the investment. Unfortunately, very little of these techniques are actually performed, witness the Madoff scandal. Here, very little, if any, investigative due- diligence was ever performed, and even when it was, the SEC summarily dismissed it.

The second technique, the subject of this article, is far more complex and qualitative. It involves understanding and profiling the criminal pathology as a means of detecting potential firestorms later. This subtle technique involves profiling the types of personalities that might be inclined to commit criminal fraud.

What personality type is prevalent or stands out amongst the great fraudsters of our time? The Narcissist. The malignant narcissist, or NPD, is the uncontrolled or dangerous narcissist. Adolph Hitler and Osama Bin Laden are both prime examples of malignant narcissists who subdued entire nations or cults into unspeakable acts of violence and war, and who used their charisma to achieve these ends. Both Hitler and Bin Laden, though, exposed the cultural conformity that must occur within an entire nation or group to allow blind obedience to occur. Fortunately, American individualism means that most Americans are unlikely to become seduced by a lock-step mentality of destructive conformity. At the group level, Americans are fairly well insulated from this behavior.

How does one spot the individual criminal, the one who steals our millions and destroys our finances? What characteristics do all NPD’s share that might become obvious to potential investors or business partners as a qualitative warning? The following list, admittedly imperfect, is fairly comprehensive:

1. A surface presentation that is often captivating, igniting feelings of attraction, admiration or intimidation;

2. A relentless need to manipulate people in order to maintain an endless supply of attention, control, status, money power or recognition;

3. Great sensitivity to criticism, or intolerance of anything perceived as less than a perfect performance;

4. Endlessly entitled to special consideration and attention;

5. Constantly bending the rules for himself although outwardly criticizing others for similar behavior;

6. No real remorse for the effects of his offenses on others and will rationalize deceptive manipulations;

7. Severe sense of entitlement, i.e. unreasonable expectations of especially favorable treatment or automatic compliance with his or her expectation;

8. A pervasive pattern of grandiosity, need for admiration and lack of empathy;

9. Grandiose sense of self-importance (exaggerates achievements and talents;

10. Is preoccupied with fantasies of unlimited success, power, brilliance, beauty or ideal love;

11. Believes that he or she is “special” and unique and can only be understood by high status people;

12. Requires excessive admiration;

13. Is interpersonally exploitative, i.e., takes advantage of others to achieve his or her ends;

14. Lacks empathy, is unwilling to recognize or identify with the feelings and needs of others;

15. Is often envious of others or believes that others are envious of him or her;

16. Shows arrogant, haughty behaviors or attitude.

Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition (DSM IV)

Some of these characteristics remind us of Scott Rothstein, Bernard Madoff, or other noteworthy criminals of the 21st century. Criminal NPD’s likely exaggerate the above characteristics, as they are considered extreme on the continuum of NPD.

What lessons do these diagnostic tools offer ordinary investors? What real-world applications do these tools have to investor decisions? Human behavior is not susceptible to strict compartmentalization. Individuals who exhibit many of these same tendencies cannot easily separate their behavior between different facets of their lives. Their bad behavior bleeds into every component and facet of their lives, work, personal, play, etc.

Individuals exhibiting these behaviors must be critically examined. Quantitative tools must be especially keen, and third-party verification must be a component of this analysis. Trust, even once earned, must not be granted lightly, or taken for granted by the recipient.

Bernard Madoff and Scott Rothstein exhibited many or most of the above diagnostic characteristics. Both had severe entitlement issues, exhibited grandiosity, lack of remorse, and exhibited great sensitivity to criticism or suspicion. How no one bothered to apply quantitative analysis to these individuals or their businesses is nearly beyond belief or incredulity. Certainly, even the regulatory agencies missed the Madoff scandal, and Scott Rothstein’s law partners failed to critically examine Rothstein’s income sources.

Human behavior is fairly predictable, and science has done a fairly nice job of summarizing bad behavior. What has not kept pace is our ability, as humans, to discern bad behavior and act defensively. Either because we’ve chosen to ignore the warnings or because we’ve never learned to see them, we continue to fall prey to the criminal NPD. Frankly, not much has changed since the days of Charles Ponzi, whose scam originated in South Florida. Not much has changed, sadly.


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