Here’s why Madoff employees went along with his scam

It’s one of the more baffling elements of the Bernard L. Madoff saga.

Why did so many employees of the disgraced money manager go along with the record-setting Ponzi scheme rather than blow the whistle on such a brazen financial felon?

Eight of his former employees, including his brother, have pleaded guilty to crimes related to the fraud. Madoff pleaded guilty in March 2009 and is serving a 150-year sentence in federal prison.

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Part of the explanation may lie in research by Scott Wiltermuth, an assistant professor of management and organization at the USC Marshall School of Business.

Wiltermuth studies how people rationalize unethical behavior, hoping to shed light on the contorted logic used to justify wrongdoing.

The unwillingness to speak up is partly obvious, Wiltermuth said. Madoff was a domineering figure. People feared for their jobs and – of course – their bountiful paychecks. Employees also likely comforted themselves in the notion that they were only following instructions and didn’t initiate the scam themselves.

But it goes deeper, Wiltermuth said.

Even though the scam was hurting people – specifically, new investors unknowingly pouring in their money – employees likely told themselves they were helping other people – older investors who wanted to cash out. They were also aiding their coworkers in nearby cubicles who needed their jobs.

In other words, people deluded themselves into somehow thinking they were doing the right thing.

“He created a very cultlike culture that offered real rewards for employees, not only in terms of profiting themselves but also in profiting longtime colleagues and longtime investors,� Wiltermuth said.

Consider an experiment Wiltermuth conducted: People were asked to complete a series of word jumbles, and told they would get $2 for every sequence solved in order. Despite clear instructions, one in five people cheated by doing the jumbles out of order.

Here’s the rub, however: When told that completing the task would result in them getting $1 and someone else getting the other dollar, the cheating jumped to 35%.

Twisted? No doubt. But such justification is common.

“People find a way to rationalize it,� Wiltermuth said. “They’ll say, ‘Well I’m not greedy. I’m not unethical. I’m just trying to help out this other person.’�

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