How - Dov Seidman [95]
Before he was apprehended in 2004 and sentenced to 30 years in prison, James Paul Lewis Jr., a trusted man, ran perhaps the biggest Ponzi scheme in U.S. financial history. He used the money he raised from new investors to pay returns to old ones, meanwhile skimming millions of dollars for personal use, including supporting the usual assortment of wives and girlfriends. Over the years, Lewis defrauded as many as 5,000 investors of the money they had earmarked for their retirement. (Ironically, he was eventually discovered by Barry Minkow, who had spent seven years in prison for defrauding investors as owner of ZZZZ Best carpet-cleaning company. Minkow is now a private fraud investigator.)16
Extending trust is a rational act. To whom you extend it, under what circumstances, and to what end are questions resolved in the complicated interstices where certainty, predictability, behavior, and opportunity meet. Sometimes the choice is made consciously, as an analytical calculation: “This guy has treated me fairly and conducted himself honestly, so I’ll trust him.” “This woman’s reputation is impeccable. Surely, she can be trusted.” Sometimes the decision comes from deep, unconscious triggers, a feeling that a certain person can be trusted. The oxytocin fires in your brain, and a doorway to trust opens. But even these unconscious beginnings must be backed up by a procession of trustworthy actions, or they, too, fall off the ladder.
Ponzi schemes, like all con jobs, thrive on trust. Trust is such a powerful thing that it fuels the worst in us as well as it does the best. The world is a dangerous place, and business, even in the best of times, can be rough as well. I don’t want you to think me a Pollyanna, suggesting that if we all hold hands, trust one another, and sing Kumbaya that all will be well. Of course it will not. There will always be people out to game the system, abuse your trust, and operate out of limited self-interest and opportunism, and they often think that those who do not are either naive, fools, or both. We must be vigilant and wise, and perform our due diligence at all times and in all situations.
Although Ralph the doughnut guy ran a trust-based business, his daily presence acted as a built-in deterrent against wide-scale cheating and abuse. Within large organizations, everyone must be vigilant for incidences of fraud and abuse of trust, because no matter how much trust you extend, there will always be some small percentage of those who will cheat or game the system. “Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it,” Warren Buffett wrote in a 2006 memo to the Berkshire Hathaway’s top managers. “That’s inevitable. . . . But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. And culture, more than rule books, determines how an organization behaves.”17 It would be impractical to run a large business without some sort of monitoring and compliance system, for instance; you would have anarchy. But how you maintain an environment of trust while catching and punishing malfeasance makes a difference. That’s what the old Russian proverb, doveryai, no proveryai, “trust, but verify,” is all about. (Although President Ronald Reagan made this something of a