How Come Madoff Slipped through the Cracks?

The topic today. Emotionally Intelligent regulation, inspection and reporting - a necessity for almost any organization.

Overheard on the streets: "All cultures steal."

A key phrase that comes to mind "Do it smarter, not harder."

There was a song back in the 60s by Al Wilson called "The Snake." The lyrics: "Oh shut up, silly woman," said the reptile with a grin, "You knew damn well I was a snake before you took me in."

Snakes have fangs. Rattles. No legs. Do you know a snake when you see one?

First: The wisdom of the words of Harvey Pitt, former chairmen of the SEC on regulatory changes. See the video clip: Harvey Pitt, CEO of Kalaroma Partners, former chairman of the SEC speaks to Martin Soong and Sri Jegarahaj on the Madoff scandal.

A bit of history if you live under a rock and have not heard about this fiasco. Allegedy $22 billion alone was discovered in October when the SEC finally moved in on Madoff's Ponzi scheme and it is suspected to get worse. Update Dec. 25 - Now thought to be $50 billion.

Madoff is currently on bail of $10 million.

The interview with Harvey Pitt is entitled: SEC is Badly in Need of an Overhaul: Analyst . "Don't mean to get your back up from the get-go," begins the interviewer:

The SEC's inspection and examination program is badly in need of an overhaul,
said Harvey Pitt, former chairman of the SEC, after the SEC failed to uncover the Madoff scandal even when red flags were raised. In the videod interview, Pitt tells CNBC's Martin Soong & Sri Jegarajah what needs to change -- not more regulation, not less regulation, but smarter regulation.

Complaints were launched re: Madoff years ago. In 2005, it was found Madoff had lied to or mislead the SEC and yet the SEC took no action (William Donaldson was chairman of the SEC at that time). Credible complaints must be investigated, notes Pitt.
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Lets disconnect for a moment from a federal regulatory agency and a $50 billion fraud, to take a look at your shop. Applications for daily life?

Complaints abound, I'm sure. How do you recognize a "credible" complaint? Well, it has to do with gut feeling. About the person making the report, to begin with; and about the person being complained about, to end with.

It's a twinge when you see someone, a sense that something's wrong, smelling a rat, knowing at the gut level, as Hamlet did, that "something is rotten in the State of Denmark," and likewise, a sense that the person "complaining" is credible. Because you have a sense of trusting them - you "feel like" you can trust them. Because you've had a lot of experience with people. A SENSE ... we keep coming up with that. It's our senses (sight, smell, touch, and internal feelings) that give us the most crucial information. When you say "I KNEW he wouldn't work out," and then go back and process how you knew, and what you did not pay attention. "Against my better judgement..." Some define intuition as "knowing without knowing how you know."

More businesses and firms are dealing with theft, deception and intentional fraud these days. I spoke with a lawyer the other day whose new secretary had forged firm checks during her first week (and is now incarcerated).

Hard times increase both the possibility and the opportunity.

It helps to have keen intuition ("gut feeling"). To increase yours, to recognize its signals, and to learn to trust it. Get in touch with your feelings ... your GUT feelings ... the knot in the stomach, the sense that something's not right, the twinge at the sight of someone, the hair standing up on the back of your head, knowing whose 'got your back' and who doesn't, who lies and who doesn't, the name of that tune you keep humming when you see her ...

Lets face it, even the TSA in the DFW airport has moved to give screeners more latitude in using their instincts. Why? You tell me!

It's not always on paper. It's within us, or within those who have well-developed 'feelers.'

The Fort Worth newspaper said that the TSA was planning to "get away from the by-the-numbers mentality used to create the TSA." They plan to vet passengers' reactions and intent, not just search for banned items. Hawley, administrator of the TSA was quoted as telling screeners, "We have seen more images, more people, more shoes than anyhody ... you know what normal looks like."

Do YOU know what "normal" looks like? Do you know what a snake looks like??

Like the other emotional intelligence competencies, intuition (gut feeling) can be developed. And why would you want to? In a teleclass I taught on intuition a couple of years ago, I asked the class how you know it's intuition. Someone replied, "It's when you are absolutely certain."

Last example, a coach I trained in the UK who uses emotional intelligence training for people in high-danger jobs like oil rigs and nuclear plants. She teaches them about their intuition and how and when to trust it, their gut feeling*. Trains them to get back in touch with those "feelers" that tell us "something just isn't right" or "something has changed." In a nuclear plant you MUST notice when something is different ... a strange hiss, a silence where there should be noise, a sneaky look ...

*gut feeling probably comes from the vagus nerve. According to wikipedia, the vagus nerve is:

... the only nerve that starts in the brainstem (within the medulla oblongata) and extends, through the jugular foramen, down below the head, to the neck, chest and abdomen, where it contributes to the innervation of the viscera.

You know how when something really hits you, you say "I had a visceral response"? The vagus nerve goes from the brain stem down into the intestines. Why an anti-depressant might make you constipated. Why when you're afraid, you might sweat, throw up or have diarrhea or be unable to breathe well. Why when you mistrust someone you might get 'nervous' - tight stomach, twitching leg, urge to run away.

Lastly, your "shop" may be your family. Your kids tattle on each other all the time, right? How do you know what to believe? My mom used to say she had eyes in the back of her head.

There are signs. Pay attention to them. Learn how YOUR intuition, or gut feeling, speaks to you.

Ray Garrett, SEC, showed Emotional Intelligence

email me at susandunn@live.com

RAY GARRETT, JR. former chairman of the Securities and Exchange Commission (SEC)

Emotional Intelligence is crucial to leadership.


Read this letter written by Harvey Pitt Ray Garrett, Jr., Chairman of the SEC, 1973-75.

"He gave so much, that one can only hope he received at least half of what he gave." Is there a boss you've had that you would say that about? Do your employees talk about you that way?

Ray Garrett, Jr.: A Remembrance
by Harvey L. Pitt


It is difficult to believe or accept that Ray Garrett, Jr. has died, in the prime of his life, and at the top of his career. For those who were privileged to know him, the very mention of his name evokes images of unparalleled vivacity and boundless energy - he possessed an incredible zest for life. These facts of Ray's personality make it impossible to depict in words Ray's spirit, warmth and humanity; but, despite his untimely death, it is important that his memory, and his ideals and values, should live on after him, and be cherished. This brief reflection of some of Ray's qualities is, I hope, a modest start in that direction.


While Ray was, most assuredly, a multifaceted individual, there is a natural tendency for most of us to think principally of his Commission activities. The Commission was fortunate to have had two separate tours of duty from Ray - once in the 1950's, when he served first as Associate Executive Director and later as Director of the Commission's Division of Corporate Regulation, and once more recently, from 1973 to 1975, when Ray honored the Commission by becoming its Chairman. It was as Chairman that I first came to know Ray. It took only a few weeks until I felt as if I had known him my entire life. I respected Ray as a teacher, and I loved him as a father. He was a very special person.


The period of Ray's Chairmanship was tumultuous and difficult. The political environment in Washington at the time was taking on crisis proportions, and some of the external developments unfortunately reached the SEC. In keeping with his personal style, Ray neither coveted nor sought the Chairmanship. His family, with whom he was extraordinarily close, lived largely in Chicago. His law firm, also located in Chicago was, together with his bar commitments, the center of his professional activities. While others actively sought the job, Ray turned the President's requests down twice, before he finally agreed to assume the Chairmanship on the President's third request. Typically, it was an appeal to Ray's sense of loyalty to the Commission, and his sense of patriotism to the Country, that finally prevailed...


Ray's external accomplishments as Chairman were impressive - among other things, he spearheaded the move to unfix commission rates, he shepherded the drafting and revision of the 1975 amendments to the Securities Exchange Act, he presided over the development of Stan Sporkin's now-heralded management fraud program, he commenced the Commission's recently-culminated examination of beneficial ownership and takeover regulations, he spurred the development of important new accounting and disclosure concepts (such as differential disclosure) and, perhaps more importantly, he served as Commander-in-Chief for the Commission's successful war on the attempt to exile us all to Buzzard's Point.


It is, however, Ray's internal accomplishments as Chairman that seem most important now. By word, by deed, and by his presence, he promoted intellectual independence and professional excellence. No voice was too far down the ladder to be heard; he had time for everyone. He sought out and welcomed diverse points of view, yet he attempted to shape a consensus. He encouraged staff participation in the formation of all Commission policies. Debates at the "Table" were exciting and erudite - it was a time for both scholarship and pragmatism; a time for airing all viewpoints without caustics or public dissent and dissension. He never sought to exercise the "prerogatives" of the Chair - he viewed himself as one among five equals, but everyone knew he had no equal.


He deferred to his fellow Commissioners, and they, in turn, deferred to him. They laughed at themselves and laughed with, but never at, each other. No man possessed a greater mastery of the art of "collegiality" than did Ray. Time and again, I observed him subordinating his own views to those of this fellow Commissioners, not because he thought their views right, necessarily, but because, as he was fond of saying, "it's important for the Chairman to lose too."
By example, Ray taught courtesy, patience, respect and restraint. I never heard him raise his voice, but I could quickly tell mostly by facial content and measured words, when his patience had been tried. He was not afraid to be wrong, but it seems as if he seldom was. He never forgot that he was once a member of the staff and, as a result, his commitment to the staff was great - every major appointment during his tenure came from within the agency, without favoritism or politics. He fought for the appointment of Irv Pollack, a career SEC servant, to the five-member Commission, and he appointed Stan Sporkin to replace him. Bob Davenport succeeded Don Stocking in Denver, and I became the agency's General Counsel. Kathie McGrath and Anne Jones, who unsuccessfully attempted to reform Ray of his chauvinistic tendencies, became Executive Assistant and Director of Investment Management, respectively. Only the merits counted with Ray. He had no tolerance for indolence or superficiality. But he recognized and accepted human limitations, including the few he could claim as his own.


Ray was kind, fair, smart, loving and, above all else, a good person, but stating these qualities hardly scratches the surface. His sense of perspective - the ability not to take himself too seriously - was refreshing and awesome. He loved life, and lived it to the fullest. He gave so much, that one can only hope he received at least half of what he gave. And, he loved the Commission and was loyal to it, from both inside and out. He never criticized or attacked the agency, and he defended its records and goals, including some that were set during his tenure, but over his objection. He was, above all else, a member as well as the captain of the team, and he did not sulk when others got their way.


Ray was embarrassed by praise and rank emotional adoration, but he surely could not criticize my reliance on his own words to sum up what Ray means to all of us who have worked, or currently do work, at the Commission. In 1974, on the occasion of our 40th Anniversary Celebration, Ray said:

"It would be far more satisfying if we could have with us some of the wonderful people that have built this agency and on whose legacy we thrive. For many of us, that is what we are really remembering and dreaming of. But we must do the best
we can. And the best is to honor their memory and keep alive the strong tradition of honor, professional excellence, anddevotion to the public interest that is our heritage."

It would be more than "satisfying" to have Ray back, but we cannot will it so. We thrive, however, on Ray's legacy. He was the best, and his life and accomplishments are inspirational. In honoring Ray and his memory, we honor ourselves and those who will come after us.



From Garrett Family personal papers

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