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Control Fraud Theory: When CEOs go bad
November 8, 2010 3:01 PM   Subscribe

Ken Lay & Enron. Bernie Madoff. Bernie Ebbers & WorldCom. What is it about CEOs that makes them uniquely capable of pulling off the most audacious & expensive kind of white collar crime? Control Fraud Theory has the answer. Via the ever-enlightening Bruce Schneier.
posted by scalefree (37 comments total) 15 users marked this as a favorite

 
Bruce Schneier for President of Everything.
posted by boo_radley at 3:07 PM on November 8, 2010 [6 favorites]


Isn't this just moral hazard with a different name?
posted by Cool Papa Bell at 3:15 PM on November 8, 2010


Moral hazard is not necessarily fraudulent, just a decoupling of decision makers & the risks resulting from their decisions. Which is always unwise & often unethical but not always involving fraud.
posted by scalefree at 3:23 PM on November 8, 2010 [1 favorite]


Isn't this just moral hazard with a different name?

No, moral hazard is when if you shield people from the consequences of their actions, which in turns causes those actions to be more common. Just like how seat belts cause people to drive faster.

Control Fraud is when people in control user their power to steal. It's like if someone put their seat-belt on, then purposely got into an accident, hoping to injure their passenger.
posted by delmoi at 3:24 PM on November 8, 2010 [1 favorite]


Would increasing taxes on the wealthiest people disincentivize large scale control fraud?
posted by Xoebe at 3:33 PM on November 8, 2010


Would increasing taxes on the wealthiest people disincentivize large scale control fraud?

Not when they have the power to give themselves a pay increase to offset the taxes.
posted by coolguymichael at 3:36 PM on November 8, 2010


Would increasing taxes on the wealthiest people disincentivize large scale control fraud?


I doubt it. Removing incentive-based compensation would curb control fraud, but then again, it would also curb inventive.
posted by GuyZero at 3:36 PM on November 8, 2010


Madoff ran a ponzi scheme. It is different. The rest were control frauds.
posted by Ironmouth at 3:43 PM on November 8, 2010


This sounds suspiciously close to my Asshole Theory.
posted by Tavern at 3:52 PM on November 8, 2010 [8 favorites]


Madoff was CEO of Bernard L. Madoff Investment Securities LLC, so I think what he did can still be called a control fraud.
posted by scalefree at 3:53 PM on November 8, 2010


AAAH OBNOXIOUS INTEL VIDEO AD WITH SOUND ON PAGE LOAD HATE HATE KILL KILL KILL
posted by JHarris at 4:00 PM on November 8, 2010 [6 favorites]


Madoff ran a ponzi scheme. It is different. The rest were control frauds.

Eh. Maybe Madoff got away with his Ponzi scheme because of his control fraud.
posted by I_pity_the_fool at 4:04 PM on November 8, 2010


tl;dr -> You give the only gun in the house to the only person who knows the combination to the safe. In addition to this virtually unchecked power, you give him the option of taking money from the safe whenever he wants, just so long as he tells everyone when and why. No one actually checks the money in the safe. Rather, two unarmed men walk in, asked the guy to tell them how much is in there, he tells them or puts a couple bucks in their pocket, and they meet at the country club later on.

As much as people want to believe the Sarbanes-Oxley auditing process prevents this stuff, it only works when the CFOs don't like the CEO. Trust me, with the utmost ease, billions of dollars can be hidden with a simple "Those funds are overseen by our Asian/European counterparts." They can make the paper say whatever they want.
posted by Bathtub Bobsled at 4:09 PM on November 8, 2010 [13 favorites]


Would increasing taxes on the wealthiest people disincentivize large scale control fraud?

No. But neither would it incentivize it. Obscene, rapacious wealth among upper management is a separate problem to that of criminal dishonesty among those people, although the first might naturally attract people capable of the second.
posted by JHarris at 4:10 PM on November 8, 2010 [2 favorites]


Cool Papa Bell: Isn't this just moral hazard with a different name?

I think it's not exactly moral hazard but more like the principal-agent problem. In fact, the entire structure of modern corporations -- where ownership is separated from control -- looks like an embodiment of the agency problem. It's surprising that it's not talked about more. Or perhaps not surprising at all.
posted by mhum at 4:11 PM on November 8, 2010 [5 favorites]


my Asshole Theory.

I'd share my Asshole Theory with you all, but I'm afraid you'd have a go at self-evident image posting.
posted by Joey Michaels at 4:19 PM on November 8, 2010


I'm not actually sure these people are that good at what they did - those are the ones who got caught. I'm not saying this theory is wrong, just that it seems to be based on examples of people who eventually crashed and burned.

Reminds me of the story of WWII airplane mechanics who realized that the places that needed reinforcing on their bombers were the places where there were no bullet holes on planes returning from bombing sorties. This is because the places where the returning planes did NOT get hit were the places where planes that didn't return DID get hit and didn't survive.
posted by Salvor Hardin at 4:25 PM on November 8, 2010 [17 favorites]


Also that article wins Most Annoying Inline Text Ad Links EVER. That thing's like a freakin minefield.
posted by Salvor Hardin at 4:26 PM on November 8, 2010 [1 favorite]


Well I have a new word for today: "criminogenic."

Also, I couldn't help but think of the blowout. (Oh and while I was poking around over there.)
posted by kipmanley at 4:26 PM on November 8, 2010 [3 favorites]


I read about a similar study. I've been trying to find it just then to no avail. But one thing the Professor lady did say that has stuck with me. THIS was the defining moment of the Enron scandal:

In a conference call on April 17, 2001, now-Chief Executive Officer (CEO) Skilling verbally attacked Wall Street analyst Richard Grubman,[68] who questioned Enron's unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that ... asshole." This became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact, with slogans such as "Ask Why, Asshole". However, Skilling's comment was met with dismay and astonishment by press and public, as he had previously brushed off criticism of Enron coolly or humorously, and many believe that this began a downward spiral that would unravel the company's deceptive practices.http://en.wikipedia.org/wiki/Enron_scandal

And similar antics in other similar scandals. ie. She had noticed a pattern of avoiding the question and ad hominem attacks. A huge red flag that says "sell sell sell!"

Note the reaction from his faithful minions. I also read that the finance community thought it was LULZ at the time, because no one liked this Grubman chap.
posted by uncanny hengeman at 6:02 PM on November 8, 2010 [3 favorites]


this is why i cringe whenever somebody who wants to "run government like a business" gets elected.
posted by TrialByMedia at 7:18 PM on November 8, 2010 [5 favorites]


Those who possessed 10% of the wealth now possess a full one-quarter. Economic disparity has gone out-of-bounds error, blue screen. Each and every time it gets about this bad, society goes kablooey.

And that's when heads start to roll.
posted by five fresh fish at 7:23 PM on November 8, 2010 [1 favorite]


JHarris: "AAAH OBNOXIOUS INTEL VIDEO AD WITH SOUND ON PAGE LOAD HATE HATE KILL KILL KILL"

Are you the last person to discover the need for Adblock Plus?
posted by pwnguin at 7:48 PM on November 8, 2010 [2 favorites]


Are you the last person to discover the need for Adblock Plus?
Just having Flashblock would be enough to stop that sort of obnoxious crap.
posted by WhackyparseThis at 10:01 PM on November 8, 2010 [1 favorite]


Each and every time it gets about this bad, society goes kablooey.

In previous eras, in addition to inequality you also had widespread poverty and, in many cases, famine. That is not the case today, at least not in large numbers.

Inequality may be a necessary condition for a popular economic revolt, but it does not appear to be a sufficient condition. Apparently it would seem, you can keep things stable even at high levels of inequality as long as absolute standards of living remain above some minimum level, or perhaps just as long as appropriate bread and circuses are dispensed.

If the grocery store shelves were to suddenly run empty ... then things might get ugly very fast. No wonder it's so heavily subsidized.
posted by Kadin2048 at 11:32 PM on November 8, 2010


While I know its always in fashion to hit on CEO's on Mefi. Please note while these three assholes took their shareholders and employees down the tubes, tens of thousands of honest ethical CEO's worked their asses off to try and build their companies for the benefit of their shareholders and employees. You don't hear about them in exactly the same way you don't hear about the thousands of lawyers, doctors, accountants etc. that do the same thing. All you hear about is the handful of scumbags found in every profession that make us look bad.

LWTG is a CEO of a really tiny start-up, working hard to make it bigger.
posted by Long Way To Go at 11:46 PM on November 8, 2010 [3 favorites]


What is it about Bruce Schneier that allows him to comment as an expert on a huge variety of unrelated issues, and get respected for it?

I actually enjoy reading his commentary, but he's a specialist in computer security and therefore a layman in just about everything else. He's actually even all that well respected within the computer security community for giving various kinds of poorly-worded misguided advice that newbies take as gospel truth.
posted by miyabo at 6:22 AM on November 9, 2010 [1 favorite]


Everyone knows this Milton Friedman quote:

"There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits."

That's the one his supporters and detractors like to haul out to defend or condemn actions such as these. Why do these CEOs do this? Because they are encouraged to do so and rewarded for doing so.

However, the full quote is this:

"There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Nobody ever seems to remember or quote that second part, which I think says something. If even an amoral, predatory, destructive monster like Friedman acknowledged limits, what does it say about those who don't?

source
posted by Legomancer at 6:33 AM on November 9, 2010 [2 favorites]


>>Are you the last person to discover the need for Adblock Plus?
>>Just having Flashblock would be enough to stop that sort of obnoxious crap.


Not if you're running the Firefox 4 beta, which has gone on longer than usual and still isn't "real" enough to developers for them to update their extensions.
posted by JHarris at 10:08 AM on November 9, 2010


Miyabo,

1) Fror a systems perspective, computers and corporations are very similar. Consider the process a web broswer uses to decide if a particular bit of Javascript code is allowed to read your Metafilter cookie. Compare that to the process a corporation uses to decide if an employee's travel expenses should be reimbursed. Finding vulnerabilities in these two processes requires very similar analysis techniques.

2) Bruce Schneier is not famous for creating encryption algorithms or discovering security vulnerabilities. He is famous for writing clear, accessible books and articles about security.

Bruce Schneier is a good security researcher, but he's a great writer. The best in his field, by miles.
posted by ryanrs at 10:48 AM on November 9, 2010 [2 favorites]


You're right of course. I actually just finished reviewing a computer security book for a technical publisher and while the factual accuracy was fine, the quality of the writing was ... lacking somewhat. Perhaps I'm just jealous of Schneier because I wish I could get paid to write about stuff that interests me.
posted by miyabo at 11:12 AM on November 9, 2010


@uncanny hengeman: Thanks for letting me know there's an Enron apologist blog: http://caraellison.wordpress.com/. I'll have something to do if I tire of trolling the Nixon was a great man and the Civil War wasn't about slavery sites.
posted by kjs3 at 11:29 AM on November 9, 2010 [2 favorites]


I actually enjoy reading his commentary, but he's a specialist in computer security and therefore a layman in just about everything else. He's actually even all that well respected within the computer security community for giving various kinds of poorly-worded misguided advice that newbies take as gospel truth.

His commentary is sometimes insightful, but his most useful comments are the ones directed at the sort of systemic failures that have already been exploited in the wild--in a nutshell, security. In theory, it's the same analytical process, only the language has changed.

And just because he may specialize in one area, it does not follow that he doesn't have anything relevant to say about other areas. I don't read him all that often, but I have yet to see anything remotely resembling an argument from authority. That some people take what Schneier says to the bank says more about them than it does about Schneier.
posted by Hylas at 12:12 PM on November 9, 2010 [1 favorite]


@uncanny hengeman: Thanks for letting me know there's an Enron apologist blog: http://caraellison.wordpress.com/. I'll have something to do if I tire of trolling the Nixon was a great man and the Civil War wasn't about slavery sites.

Yeeks. Thanks for the heads-up, kjs3. I don't endorse that site. In fact I should have picked up on it, coz I read a few comments claiming that scheming analysts brought down Enron!

I was just looking for a link saying Mr Grubman was an unpopular man, and that was the first one I saw.
posted by uncanny hengeman at 5:48 PM on November 9, 2010


OMG, uncanny hengeman & kjs3, you are So Damn Right!:

The world needs Mike Rose, and Jeff Skilling, and other Enron executives like Scott Yeager, Rex Shelby, Ken Rice, Joe Hirko, Louise Kitchen, and John Sheriff. We need them because they create things – and even if they don’t work at Enron anymore, they’re creating a million little Enrons, little nexuses of achievement. You may hate the oil industry or Enron, but no decent person could hate the things these men and women have created. What they have done is worthy of poetry.

She actually seems to believe Enron executives "create things" (obviously, I mean other than corrupt profits and intentional brownouts).
posted by IAmBroom at 6:07 PM on November 9, 2010


@IAmBroom: I missed that. An energy arbitrage company "making" something. Apparently, they don't have irony on her planet.
posted by kjs3 at 7:17 PM on November 9, 2010


Sure, they make things. Contracts. And populist outrage.
posted by pwnguin at 7:59 PM on November 9, 2010


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