By Phil Read, September 2011
The phrase to “turn a blind eye” is said to originate from an incident involving Admiral Nelson. Early in his career he had been blinded in one eye. In the Battle of Copenhagen, a signal was sent to Nelson (using of course the traditional semaphore) giving him the order to retreat when needed. Nelson, not wanting to retreat, lifted the telescope to his blind eye, and declared that he could not see the signal. The popular meaning of the idiom then is the process of ignoring inconvenient facts or activities.
In organizations this behaviour manifests itself as a game.
It is manipulative, distorts communication, privileges a personal agenda over an organizational agenda, and has a payoff for the person playing the game. Although this game is played by many of us in all sorts of corporations, big banks have been a fertile observation ground for games over the last years.
Turn a Blind Eye and the Madoff case
Irving Picard had accused HSBC, UniCredit and Pioneer of violating a duty to Madoff's customers¹ by failing to detect the Ponzi scheme² and ignoring "red flags" of the fraud. During the first week of August 2011, Judge Rakoff said a federal law addressing the liquidation of brokerages "conveys no authority" on a trustee to bring such claims, and has dismissed them. However, this does not mean that banks were not playing “Turn a Blind Eye”; it just means that a trustee cannot bring the claim.
What game was being played in the Madoff case?
I would like to distinguish this game from the “original game” (the Ponzi scheme itself). Here is the game that was being played:
1. Madoff was securing, year after year, returns that were at consistently high levels
2. Madoff never disclosed how he was making the returns
3. The bankers benefitted from this situation with their clients (bigger fees, happy clients, lower work), and actively marketed the funds on the basis of this without digging deeper
4. The investors appeared to also benefit from this situation so also were playing the game (and no doubt in some cases “egging on” their bankers, rather than just passive victims of the fraud)
5. Regulators may also have been playing the game, however possibly more from lack of resources to investigate their own leads and suspicions than any gain (or perhaps “afraid” of Madoff’s reputation?)
6. The bankers always had a plausible “excuse” if anything would go wrong, in the form of Madoff´s reputation, plus a lot of small print in contracts which would ensure that they had minimum risk in court
7. Therefore there was a Blind Eye turned to what many must have known was at best “suspicious’, and at worst fraudulent
Let’s first hear Madoff on the subject.
Of course he was a notorious liar prior to coming forward. However he seems not to have much to lose right now, serving a 150 year sentence. "They had to know," Madoff said in his first interview since his December 2008 arrest. "But the attitude was sort of, 'If you're doing something wrong, we don't want to know.’” Why don’t they want to know? Because of the payoff. “Look,” he said, “these banks and these funds had to know there were problems.” Madoff told them absolutely nothing about how he made those returns. “I wouldn’t give them any facts, like how much volume I was doing. I was not willing to have them come up and do the due diligence that they wanted. I absolutely refused to do it. I said, ‘You don’t like it, take your money out,’ which of course they never did.”
But, maybe Madoff is just trying to spread the blame around to ease his conscience. Let’s turn to a more impartial commentator. “While I'm reluctant to accept the word of a "liar, a thief and a con man”," says Alain Sherter at BNET, “I don't find it hard to believe that the banks who dealt with Madoff "knew something was fishy, but chose to look away." After all, that's in line with the "prevailing ethos during the financial crisis." The entire industry was caught up in a "daisy-chain of wilful ignorance."
Here we have some clear statements of the type of game that “Turn a Blind Eye” represents: “wilful ignorance”, “chose to look away”.
The real question then for all of us is not whether this is the truth or not (right now we just have the circumstantial evidence that points strongly in the direction of this game having been played).
The real question is: in our own companies, in our own units and teams, we ourselves: are we ever playing the game “Turn a Blind eye”? (Which is often played in conjunction with “Kill the Messenger” and “No Bad News”). And what are the consequences of playing this game?
In the case of the banks, the answer will range financially from somewhere up to 17 billion dollars in legal awards. But that is only part of the cost. The other costs are loss of credibility with clients who remain, loss of credibility of the industry, tightened regulations, and loss of clients who are disgusted or who have just lost their cash. As with most games, short term, a few people get a payoff, long term, institutions and many people get a bad deal (such as loss of their entire retirement savings), and the consequences are often tragic even for those initially benefitting (such as the suicide and imprisonment in the Madoff family).
Let’s all make an effort to play games less, and less “hard”. The stakes are a lot bigger than we think – for others, and for ourselves.
1. Bernard Lawrence "Bernie" Madoff (born April 29, 1938) is an American former stock broker, investment advisor, non-executive chairman of the NASDAQ stock market, and the admitted operator of what has been described as the largest Ponzi scheme in history.
2. A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.