INTRODUCTION
Following the collapse of the world’s largest Ponzi scheme in 2008, individual and institutional clients of Bernard L. Madoff Investment Securities lost an estimated $65 billion in unrealized gains. In hindsight, investors detected major alarm bells that signaled Madoff’s returns were too good to be true: they were impossibly steady and high at 11 percent per year, never experiencing a down year, and were consistently higher than those of the S&P 500 index with surprisingly little volatility. Madoff employed a small, three-person auditing firm that had only one active principal accountant; the other principal was an 80-year-old retired accountant living in Florida. He was extremely secretive about his investment strategy and selective about who could investin his funds. Despite these telltale signs of fraudulent behavior, Madoff’s Ponzi scheme was not uncovered for more than a decade, a fact that surprised even Madoff himself. Although a few investors noticed Madoff’s fundsseemed ‘‘too good to be true,’’ many investors,including those with extensive knowledge of finance, were either completely blindsided or failed to act on their suspicions. Behind the scandal were two groups of individuals who contributed to the growth of the Ponzi scheme: (1) the perpetrators who knowingly committed unethical acts, including those at Madoff Investment Securities who created fraudulent records of nonexistent transactions, and (2) the financial investors, advisers, and regulators who had the financial expertise and fiduciary responsibility to detect fraudulent behavior but failed to do so. This research focuses on the latter group ofindividuals, many of whom advised their clients to invest in Madoff’s funds or invested themselves in the funds without awareness of the unethical nature of the funds. We seek to understand the factors that help individuals notice unethical behavior and acton theirsuspicions.Inparticular, we investigate how activating a mindset of vigilance prior to making decisions is a critical first step to noticing unethical behavior in the environment.
