Why read the ever-growing pile of stories of tricksters and con men (and women) in our industry?

Schadenfreude – a delightful German word meaning pleasure from others' misery, especially of those more rich, famous, etc. than you – is probably why readers devour these stories. But financial services professionals should be reading them for the same reasons that law students and business school students study cases: to develop their instincts.

Madoff madness has all but hidden the stories – very different from his – of other apparent predators brought to ground in last fall's crash. Marc Dreier is one of those.

Dreier, a Harvard Law School alumnus, headed a 250-lawyer firm when arrested in Toronto on December 3 of last year. Allegedly, he stole from or defrauded clients and investors of at least $400 million. An exceptionally well written and reported article, "The Impersonator" by Robert Kolker in the April 3 New York magazine, reminds us:

"We live in an age of white-collar villains. But of all the financial bad guys out there, Marc Dreier is arguably the single greatest character of them all. … Dreier isn't just accused of swindling more than $400 million from thirteen hedge funds. Prosecutors say he carried out the deception by inventing $700 million in financial assets out of whole cloth, staging fictional conference calls, and impersonating executives, sometimes personally, sometimes with the help of an associate, all while snapping up Warhols and waterfront homes, partying with pop stars and football players, and chasing an endless parade of much-younger women. He also allegedly stole some $40 million from his clients' escrow accounts, a brazen legal sin."

Robert Kolker contrasts Madoff and Dreier implicitly and explicitly. These alleged confidence men used very different techniques toward the same end.

To my eyes, Madoff and Dreier fit archetypes embodied by Charles Ponzi and Alexandre Stavisky in the 1920s. Their stories – and the hundreds like them over the intervening 80+ years – remind me how easy it is to see frauds after the fact. And, that is why we in financial services should read and re-read them.

The only real protections we have from Ponzi-Madoffs and Stavisky-Dreiers are established processes, due diligence and our instincts – which are more learned than innate. We must ask hard questions and test the answers we get. Read these stories closely. Absorb them.

[N.B.: Dan Colarusso, on the invaluable blog Clusterstock, spotted Kolker's New York article and adds some detail on an apparent Dreier associate.

For more on Alexandre Stavisky, see this Wikipedia article, which quotes Janet Flanner's ("Genet") famous New Yorker articles on him. Those 1934 articles are well worth finding and reading. Excerpts appear in Janet Flanner, Paris was Yesterday 1925-1939 (New York: Viking Press, 1972), pp. 109-16. Also, Alain Resnais' Stavisky (1974) is among the best films of its time.

For more on how careful research protects against fraud, also see this KLD Blog article: Research that Raises Red Flags:Michael Markov's Due Diligence Cast Doubt on Madoff in 2006]