1
Week 3
Walls of secrecy and silence: The Madoff case and
cartels in the construction industry by Bunt (2010)
According to the SEC’s complaint, Madoff had admitted that the investment advisory business of his
firm, BMIS, was just one big lie and basically, a giant Ponzi scheme. For years, he had been paying
returns to investors from their own money or from that of subsequent investors rather than from
any actual profit earned. The scale of the Madoff securities fraud (up to $50 billion) exceeds that of
any previous financial scandal. Neither the SEC nor his investors became suspicious or asked critical
questions.
The Dutch construction fraud consisted of extensive cartel arrangements among several companies
involved in the construction of buildings, roads, and bridges. The construction firms engaged in
secret price and market agreements preceding government tenders. In practice, no real competition
took place among the firms because they all would agree in advance on who was to submit the
lowest bid and thereby obtain the contract. In this way, they divided the work among themselves.
The mutual agreements were recorded meticulously in so-called shadow accounts. Ad Bos tried in
vain to alert the public prosecutor’s office to these illegal activities.
What is remarkable in Madoff ’s case is that so many investors, intermediaries, and his next of kin,
were unaware of the fraud. The perpetrators necessarily maintained secrecy, and this issue certainly
played a major part in the perpetuation of their big lies, but the silence of the victims, bystanders,
and relevant control agencies also contributed significantly to the longevity of the frauds.
Maintaining Secrecy through Isolation and Concealment
Secret Societies
Secret societies are groups that protect their activities by maintaining secrecy. This protective
function of secrecy is important when the activities, ideas, or values of the group are not tolerated by
the outside world. Secrecy is achieved by selectively providing information, which implies that the
external environment is being kept uninformed as to the true nature of the group’s activities.
According to Simmel, it is essential that all secret society members can trust each other not to betray
the secrets of the group to any nonmember. Simmel suggested that groups sharing a secret always
have the same characteristics because the organization of the relationships between the members is
determined by the need for secrecy and mutual trust. A clear hierarchy exists, intent on gaining
complete control over the members of the group. Total surrender and dedication are expected to
ensure that no one is tempted to betray his fellow members. New members are required to undergo
initiation rites to mark the moment of their admittance. According to Simmel, secrecy can be
maintained effectively as a result of these organizational features.
Madoff ’s Secret Society
Madoffs organization corresponded in several ways to the characteristics of secret societies. First, he
ensured that his people were screened off from the other employees of BMIS. Madoff had bought
their dedication, and he ensured that no one had an interest in giving away the big secret. Although
his assistants were not made to undergo any initiation rites or swear an oath, Madoff ’s investment
advisory division displayed many of the characteristics of Simmel’s secret society.
Secret Activities without Secret Societies
Despite efforts to conceal their actions, the cooperative arrangement between the building
companies does not conform to the concept of secret societies. In other words, the characteristics of
, 2
secret societies mentioned by Simmel are not applicable to the open construction world of the
Netherlands.
Silence
Recent publications about Madoff mention the many red flags that should have given rise to
suspicion and critical questions but were ignored by almost everyone—laymen and experts alike.
Again, several individuals and agencies must have known about this massive fraud, but they all
remained silent.
Facilitative Social Contexts
It is important to remember that secret societies never exist in isolation. Their members usually
participate fully in other social groups and networks, and it is this social embeddedness that
increases the chances of maintaining secrecy. Secrets do not remain hidden because the people
involved isolate themselves from the world, but rather because the actors and their illicit activities
are socially embedded.
Respected Perpetrators Are above Suspicion
Madoff definitely was above suspicion. It was a well-known fact that many of his intimate friends and
respectable charities were among his customers. These circumstances in themselves contributed to
the idea that Madoff was a reliable fellow. Madoff ’s social environment ( his investors) was his best
advertisement. Madoff ’s strength lay not only in his ability to shield himself and his illegal activities
from prying eyes, but also in the way he managed to gain people’s trust by actively participating in
his social environment. Probably without Madoff being aware of it, he could take advantage of the
theory of cognitive dissonance, which states that people have a strong tendency to avoid
inconsistencies in their cognitions (knowledge, attitudes, emotions, etc.) and behavior. Someone who
has invested their life savings with Madoff will be particularly susceptible to opinions and facts that
seem to support the idea of Madoff ’s integrity and reliability.
After Ad Bos his dismissal from the company, he presented the public prosecutor with concrete
evidence of illegal price- and market-fixing agreements in which he had been involved. So strong was
the belief in the innocence of the respectable captains of the construction industry that even the
public prosecutors thought it safe to ignore these allegations.
Absence of Interest in Disclosing the Truth
It is not just a matter of inability, but also of unwillingness, to hear or disclose an inconvenient truth.
A second category consists of people who were aware of the situation but flatly deny that they knew
anything about it ( they are lying). In most cases, however, by-standers are aware of what is going on,
but they are not lying when they deny or keep silent about the abuses. Hughes called this mindset
the absence of a determined and heroic will to know and to publish the truth. Aloofness is the
attitude of people who have an interest in perpetuating a certain construction of reality. They did not
want to know, and they justified this ignorance by pointing out that they could not know. Secrets can
be kept as long as people think they can mount a defense when the secret gets out. To support a
claim of ignorance and to avoid guilty knowledge, it is best not to know too much. Within an
organization where constant interaction occurs between managers and operatives, the need for
information control results in a tacit understanding between the parties involved: Both
superordinate’s and subordinates have common interests in limiting the knowledge each obtains
about the other unspoken arrangements of concerted ignorance are essential to widespread
organizational deviance. Concerted ignorance happens at all levels of complex organizations.
Inaction in the Face of Knowing
Inaction in the face of knowing means that people know something is wrong, but they take no
Week 3
Walls of secrecy and silence: The Madoff case and
cartels in the construction industry by Bunt (2010)
According to the SEC’s complaint, Madoff had admitted that the investment advisory business of his
firm, BMIS, was just one big lie and basically, a giant Ponzi scheme. For years, he had been paying
returns to investors from their own money or from that of subsequent investors rather than from
any actual profit earned. The scale of the Madoff securities fraud (up to $50 billion) exceeds that of
any previous financial scandal. Neither the SEC nor his investors became suspicious or asked critical
questions.
The Dutch construction fraud consisted of extensive cartel arrangements among several companies
involved in the construction of buildings, roads, and bridges. The construction firms engaged in
secret price and market agreements preceding government tenders. In practice, no real competition
took place among the firms because they all would agree in advance on who was to submit the
lowest bid and thereby obtain the contract. In this way, they divided the work among themselves.
The mutual agreements were recorded meticulously in so-called shadow accounts. Ad Bos tried in
vain to alert the public prosecutor’s office to these illegal activities.
What is remarkable in Madoff ’s case is that so many investors, intermediaries, and his next of kin,
were unaware of the fraud. The perpetrators necessarily maintained secrecy, and this issue certainly
played a major part in the perpetuation of their big lies, but the silence of the victims, bystanders,
and relevant control agencies also contributed significantly to the longevity of the frauds.
Maintaining Secrecy through Isolation and Concealment
Secret Societies
Secret societies are groups that protect their activities by maintaining secrecy. This protective
function of secrecy is important when the activities, ideas, or values of the group are not tolerated by
the outside world. Secrecy is achieved by selectively providing information, which implies that the
external environment is being kept uninformed as to the true nature of the group’s activities.
According to Simmel, it is essential that all secret society members can trust each other not to betray
the secrets of the group to any nonmember. Simmel suggested that groups sharing a secret always
have the same characteristics because the organization of the relationships between the members is
determined by the need for secrecy and mutual trust. A clear hierarchy exists, intent on gaining
complete control over the members of the group. Total surrender and dedication are expected to
ensure that no one is tempted to betray his fellow members. New members are required to undergo
initiation rites to mark the moment of their admittance. According to Simmel, secrecy can be
maintained effectively as a result of these organizational features.
Madoff ’s Secret Society
Madoffs organization corresponded in several ways to the characteristics of secret societies. First, he
ensured that his people were screened off from the other employees of BMIS. Madoff had bought
their dedication, and he ensured that no one had an interest in giving away the big secret. Although
his assistants were not made to undergo any initiation rites or swear an oath, Madoff ’s investment
advisory division displayed many of the characteristics of Simmel’s secret society.
Secret Activities without Secret Societies
Despite efforts to conceal their actions, the cooperative arrangement between the building
companies does not conform to the concept of secret societies. In other words, the characteristics of
, 2
secret societies mentioned by Simmel are not applicable to the open construction world of the
Netherlands.
Silence
Recent publications about Madoff mention the many red flags that should have given rise to
suspicion and critical questions but were ignored by almost everyone—laymen and experts alike.
Again, several individuals and agencies must have known about this massive fraud, but they all
remained silent.
Facilitative Social Contexts
It is important to remember that secret societies never exist in isolation. Their members usually
participate fully in other social groups and networks, and it is this social embeddedness that
increases the chances of maintaining secrecy. Secrets do not remain hidden because the people
involved isolate themselves from the world, but rather because the actors and their illicit activities
are socially embedded.
Respected Perpetrators Are above Suspicion
Madoff definitely was above suspicion. It was a well-known fact that many of his intimate friends and
respectable charities were among his customers. These circumstances in themselves contributed to
the idea that Madoff was a reliable fellow. Madoff ’s social environment ( his investors) was his best
advertisement. Madoff ’s strength lay not only in his ability to shield himself and his illegal activities
from prying eyes, but also in the way he managed to gain people’s trust by actively participating in
his social environment. Probably without Madoff being aware of it, he could take advantage of the
theory of cognitive dissonance, which states that people have a strong tendency to avoid
inconsistencies in their cognitions (knowledge, attitudes, emotions, etc.) and behavior. Someone who
has invested their life savings with Madoff will be particularly susceptible to opinions and facts that
seem to support the idea of Madoff ’s integrity and reliability.
After Ad Bos his dismissal from the company, he presented the public prosecutor with concrete
evidence of illegal price- and market-fixing agreements in which he had been involved. So strong was
the belief in the innocence of the respectable captains of the construction industry that even the
public prosecutors thought it safe to ignore these allegations.
Absence of Interest in Disclosing the Truth
It is not just a matter of inability, but also of unwillingness, to hear or disclose an inconvenient truth.
A second category consists of people who were aware of the situation but flatly deny that they knew
anything about it ( they are lying). In most cases, however, by-standers are aware of what is going on,
but they are not lying when they deny or keep silent about the abuses. Hughes called this mindset
the absence of a determined and heroic will to know and to publish the truth. Aloofness is the
attitude of people who have an interest in perpetuating a certain construction of reality. They did not
want to know, and they justified this ignorance by pointing out that they could not know. Secrets can
be kept as long as people think they can mount a defense when the secret gets out. To support a
claim of ignorance and to avoid guilty knowledge, it is best not to know too much. Within an
organization where constant interaction occurs between managers and operatives, the need for
information control results in a tacit understanding between the parties involved: Both
superordinate’s and subordinates have common interests in limiting the knowledge each obtains
about the other unspoken arrangements of concerted ignorance are essential to widespread
organizational deviance. Concerted ignorance happens at all levels of complex organizations.
Inaction in the Face of Knowing
Inaction in the face of knowing means that people know something is wrong, but they take no
