Delving Into the Psychology of Billionaire Fraudsters


Preet Bharara laughed when asked about how he feels about “Billions,” the TV show that is loosely based on his investigation of the hedge fund SAC Capital when he was the U.S. attorney for the Southern District Court of New York.  

“It is fun for there to be a television show that is popular, even though it takes a lot of liberties, that is about the U.S. attorney as opposed to the district attorney … so that was nice,” he told ACFE vice president and general counsel John Warren, J.D., CFE, at the 32nd Annual ACFE Global Fraud Conference.

Bharara’s more than seven-year tenure as chief law enforcement officer in the Southern District of New York saw his office take down a whole raft of people for securities fraud and insider trading — and earned him the reputation as an aggressive and outspoken prosecutor.

He left that job in 2017 and now has undertaken a host of different projects, ranging from podcasts on law and politics to working on a task force to simplify insider trading rules.

Having prosecuted close to 100 Wall Street executives, Bharara knows a thing or two about how a toxic culture can infect even the most successful firms and allow fraud and other criminal activity to run rampant.

“I marvel sometimes how [firms] spend a lot of time talking about the compliance program and how much software they have to detect bad conduct or insider trading,” he said. “All of that is important, but every once in a while, you get the sense that is a box-checking exercise rather than a gut-checking exercise.”

He recalls how the general counsel and the head of compliance of a particular hedge fund tried to make the case that the repeated arrests and convictions for insider trading at their firm were not a function of bad culture.

In response, Bharara asked whether they remember the CEO ever conveying in an email, speech or memo that the firm cares about ethics and integrity and that if anyone ran afoul of these codes of conduct, they were gone no matter how much money they made.

“I remember there was a pause and the general counsel and head of compliance holding up the compliance program,” Bharara said. “I found that incredibly telling. The absence of those kinds of statements said a lot.”

Making the right hire

There are a range of psychological profiles, said Bharara. Some people are incorruptible while other are corrupt from head to toe. Most of us, however, fall somewhere in the middle, meaning that we can be molded to do the right thing or persuaded to go astray. “You can’t do much about the people on the edges, except not hire them.”

No matter how good a company’s legal counsel, it’s the wrong person if management doesn’t heed their advice, Bharara said. He cited the example of SAC Capital where general counsel warned that someone being interviewed for a portfolio manager position had a reputation for not playing by the rules and recommended not to hire that person. Management overruled that advice and gave him the job anyway.

“And lo and behold, that person began immediately to engage in insider trading and was eventually arrested by the FBI,” said Bharara.

Culture of minimalism

Often, there is what Bharara calls a “culture of minimalism” where professionals aren’t necessarily looking to break laws but are willing to test the edges of what is legal or not.

“People say ‘what is wrong with that?’ but I think smart, thoughtful people … want people to stay pretty far away from that line, a) because that is good risk assessment and b) it is good for not getting in trouble with the FBI and regulatory agencies.”

Bharara used the analogy of someone who goes to a bar and knows how to drink and eat enough to avoid a DUI charge while driving. Not only is this risky — and virtually impossible to do — but their acts will encourage other people to do the same. “Even if you have someone who knows how to go right up to the legal limit of the driving and drinking laws, 50 other people are taking their cue from you, and they don’t have anything near your wherewithal or your evil genius.”

Bharara advocates for a culture that rewards people for doing the right thing and avoiding such risks. “I know this is a tall order depending on the culture of the place,” he said. “It is hard in the financial world to reward people who have avoided loss [more] than rewarding people who have brought you money.”

“They are kind of the same thing. One is hypothetical and the other is real. Good people, whistleblowers, sometimes save the company from an existential threat.”

The psychology of fraud in the financial world is particularly interesting. It is perhaps logical that someone who comes from a poor background with fewer opportunities might contemplate wrongdoing to improve his or her lot. But why would someone with millions of dollars do the same, and risk their liberty and reputation?

“We presuppose it is about the money, but for some of these people it is about standing and competition. … It is keeping up with the Joneses on a galactic level. It is important when you investigate these things to realize that psychology is in operation.”