Chinese Classics & Business Strategy - Individual Written Report

NANYANG TECHNOLOGICAL UNIVERSITY
THE DARK SIDE

OF BUSINESS PRACTICES
NANYANG BUSINESS SCHOOL

THE NANYANG MBA
B6090
Chinese Classics & Business Strategy
Individual Written Assignment
Written & Submitted by:

Chong Sheng Jiat, Corey
19 December 2008
Chinese Classics & Business Strategy – B6090 Page 1 of 38

The Nanyang MBA 2008
INTRODUCTION
Any casual observer would have noticed that the current financial tsunami has unveiled
shocking, unethical or controversial business practices, or even downright fraud committed
by high profile leaders around the world (Bernard Madoff). There were numerous news
reports about such practices by major news agencies, both local and overseas.
We reside in dark and dire times. This paper‟s topic of Dark Side of Business Practices was
chosen to reflect the current turbulent times that we are living in today. We attempt to
decipher how the subprime crisis engulfs global markets which in turn leads to unveiling of
dark business practices, how businessmen employ unethical business techniques to
achieve profits for themselves and the harmful effects these actions bestows upon every
man and woman on the street.
This paper shall explore and discuss on the dark side of businessmen in earning profits that
causes harm to other „innocent‟ people, either knowingly or unknowingly. Harm includes
excessive consumption, fraud, loss of jobs, unethical behavior, actions that destabilized
markets, profiteering, et cetera. Examples of unethical practices include the illegal Ponzi
scheme (Swisscash and the infamous Bernard Madoff case), the controversial made-in-
Singapore Sunshine Empire and its links to the legitimate multi-level marketing (MLM)
business model. Please note that passing of judgment is not intended for this paper.
Rather, the author‟s objective is to describe past controversial affairs or unethical business
practices, mapping them to the current turmoil and dive into the effects of such practices on
people and local communities.

METHODOLOGY
Past business analogies and current affairs will be cited to dive into business leaders‟
thoughts and actions that lead to unethical behaviors. As such, selected economic events
will be examined in detail, of the series of actions undertaken by hotshot business leaders.
We shall analyze the business practices employed by these practitioners, and drawing
relationships to Chinese sayings and Strategems. Newspaper articles and online references
related to these examples can be found at the Appendix section.
As part of the paper requirement, we will also list, analyze and map the above business
analogies with Chinese classics, saying or proverbs. Applicable words of wisdom and
Chinese sayings will be extracted from Chinese classics, such as the Annals of the Three
Kingdoms, and analyzed on how they can be or has been applied in the modern business
context.
In order to provide a balanced analysis, selected Western (non-Chinese) wisdom and
sayings that are similar to the 36 Strategies of the Chinese or Principles of Tao Zhu-gong,
shall be described and examples will be given on their application to such business
practices. These famous philosophers, sayings, leaders and military theorists include:
1. Carl Philipp Gottlieb von Clausewitz, Prussian militarist.
2. Aristotle, Greek philosopher.
3. Ecclesiastes, an extract from the book of the Hebrew Bible.
4. Demosthenes, Greek Statesman and Orator of Ancient Athens.

CAUSES AND EFFECTS OF THE CURRENT FINANCIAL CRISIS
By Year 2000, the world reeling from the blow of the Asian Financial Crisis of 1997-98 was
on the road to economic recovery. The boom of the U.S. property market (see Figure 1)
from 2001 to 2006 was the result of self-regulation (or deregulation from government point
of view) of American investment banks, subprime lending practices for U.S. mortgages, and
lowered lending standards during the Clinton and Bush administration eras.
Figure 1: Total US Housing Transactions
Subsequently, with the economic rise of China and India together with the series of „positive‟
U.S. events, triggered excessive consumer consumption and fueled a bull run in the global
stock exchanges, as future prospects seemed bright. Particularly with the Dow Jones
Industrial Average closing above 14,000 for the first time in July 2007 while the S&P500
Index raised above 1553 (Yahoo! Finance).

Figure 2: Net Lending to Developing Countries (USD billion)
Figure 2 shows clearly how
development loans by the World
Bank, the IMF, and the regional
development banks had been
crowded out by private-sector
lending throughout the boom
period of 2002 to 2007.
The end of the American party is signaled by the U.S. subprime crisis. What began as a
U.S. housing problem mushroomed into a crisis that rocked investor sentiments and shaken
stock markets around the world.
In January 2008, the global nature of the stock market plunge debunked the theory that
foreign investors were immune to the growing U.S. crisis because the U.S. economy "is
decoupled" from Europe and Asia.
Somewhere in California, drivers were tuning in to CNBC on the radio as radio
commentators started to celebrate the bottom of the housing market. Since the credit crisis
has its roots in the U.S. housing market, most of these analysts thought that a resolution of
the housing market will return credit markets to whatever will look like normalcy for the
future. This was February 2008.
For other countries, this seemed like a US-isolated problem. As the Chinese saying goes,
“各人自扫门前雪，莫管他人瓦上霜 (ge ren zi shao men qian xue, mo guan tar en wa shang
shuang”, well describes this event as the rest of the world watches what would transpire.

“各人自扫门前雪，莫管他人瓦上霜” means during the winter season, every individual will be
clearing the snow in front of their homes and would not bother about “snow on top of other
people‟s roofs” (other people‟s problems).
The U.S. crisis continued to worsen as even lower quality loans made over the remainder of
2005 reset over the course of 2007, triggering more and more defaults. On the ground, it
takes an average 15 months from the date of the first missed payment by a homeowner to
liquidation of the home. Thus, the Q1 2005 U.S. housing loans that defaulted in Q1 2007
are leading to foreclosures and auctions in early 2008.
Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of
Lehman Brothers Holdings, as he takes his seat to testify at a House Oversight
and Government Reform Committee hearing on the causes and effects of the
Lehman Brothers bankruptcy, on Capitol Hill in Washington, October 6, 2008.
The near-collapse of Bear Sterns triggered the first wave of panic selling globally as the
credit crisis materialized to be closer to reality in March 2008. American banks started to
write off billions and billions of mortgage losses and toxic assets, akin to a big bath
phenomenon. Massive panic selling and fear subsequently erupt due to the filing of

Chapter 11 by Lehman Brothers. Together with the melamine poisoning case of China‟s
dairy products that hurts food companies like Nestlé and Carlbury, all these caused a
domino “tsunami” effect on market sentiments and strikes down investors‟ confidence. As
the Chinese saying “雪上加霜 (xue shang jia shuang)” means to add frost to snow, as one
disaster happens after another.
The spreading of the contagion of the global credit crisis from the industrialized countries to
the emerging markets has taken some time to develop. Then, in October 2008, it spread
rapidly, afflicting all emerging markets, without any distinction or regard to their so-called
“fundamentals”. The complexity and multi-faceted nature of this event meant that no single
country or any collation of financial entity is able to stop the huge sell off in this globally
connected capital market. It calls for an integrated response from all countries that came
too late in Oct 2008 when Bush hosts G7 finance ministers, as well as heads of the World
Bank and International Monetary Fund (IMF).
Major U.S. newspapers started to report Main
Street citizens talking about the “Corruption in Wall
Street” had resulted in the financial crisis. They
complained of irresponsible financial institutions
CEOs who created this mess in the first place and
protest against the U.S. Government in using tax
payers‟ money to bailout these institutions.
American voters also realized and demanded that

Barack Obama in Pennsylvania. Photo:
it's time to turn the page on over two decades of Reuters
trade and economic policies that have favored Wall Street over Main Street. Democratic

President-elect Barack Obama repeatedly highlighted the tackling of “Corruption in Wall
Street” for his “Time for Change” campaign, and to change the old, tired, and worn-out
theory of the government giving more to billionaires and corporations and hope that
prosperity, somehow, trickles down to everyone else in the U.S. He also slammed the
oversight of the U.S. Government and the Securities and Exchange Commission (SEC) that
leads to corruption at Wall Street and me-first mindset. He noted that common sense rules
and regulation was abandoned because of some U.S. politicians and influential lobbyists,
leading to the lax monitoring of Wall Street.
Investors, both financial institutions, pension funds and individuals, worldwide had suffered
paper loss in investment vehicles like equities, funds and derivatives, as lots of money are
being pulled out to safe havens – first to commodities (causing a rise in food, gold and oil
prices), then to government bonds (causing a sharp fall in short term bond yields) and
Treasury bills, leaving “value” destruction along its path:
1. Gold prices bolted above $1,000 on March 14, 2008, hitting a new record after the
liquidity crisis at Bear Stearns Cos. stunned Wall Street and resulted in buying of
safe-haven investments [1].
2. By December 2008, speculators are fleeing to safer havens such as government
bonds. Credit Suisse chief economist Joseph Tan said that the dramatic fall in oil
prices was due to “massive unwinding” by these speculators, causing the collapse of
prices from US$150 range down to US$50 [2].
By September 2008, the Chairman of U.S. SEC, a longtime proponent of deregulation,
acknowledged that failures in a voluntary supervision program for Wall Street‟s largest

investment banks had contributed to the global financial crisis, and he abruptly shut the
program down [3].
On November 12, 2008, U.S. Treasury
Secretary Henry Paulson said that the
$700-billion U.S. government rescue
program will not be used to purchase
troubled assets as originally planned [4].
But a new goal for the bailout program,

Treasury Secretary Henry Paulson brokered a deal
according to Paulson, is to support among three major banks. (Charles Dharapak/AP)
financial markets, which supply consumer credit in such areas as credit card debt, auto
loans and student loans. The Chinese sayings “出尔反尔 (chu er fan er)” and “此一时, 彼一
时” well describe this scenario. “出尔反尔”, 成语出处:《孟子·梁惠王下》, means that the
same verbal promise to do something came from the person but breaking that promise was
also from that same person, implies inconsistency and contradiction. While, “此一时，彼一
时 (chi yi shi, bi yi shi)”, 成语出处: 《孟子·公孙丑下》, means that because times have
changed, it will be different before then, as compared to now.
Henry Paulson‟s announcement caused the Dow Jones Index to shed 411 points from
8693.96 to 8282.66 as confidence shakes the market due to inconsistent information from
the U.S. Treasury. In relation to a similar context, there were several playacting involving
several banks amidst a cash-starved environment:
1. “Wells Fargo, not Citi, to buy Wachovia” headlines for October 3, 2008.

2. Wachovia rejected Citigroup in favor of Wells Fargo in a deal that calls for Wells
Fargo to buy all of Wachovia for $7 a share and requires no assistance from the
Federal government.
3. Citigroup executives fuming, and weighing their legal options to stop Wells-Wachovia
deal was "in clear breach" of an exclusivity agreement between Citigroup and
Wachovia.
4. For afternoon trading in New York, shares of Wells Fargo were up $3.21, or 9.1
percent, at $38.37. Citigroup shares were down $1.91, or 8.5 percent, at $20.59.
Wachovia shares were up $3.03, or 77.5 percent, at $6.94.
The above could be an example of „playacting‟ so as to stimulate investor sentiments,
restore industry confidence, and creating a façade by saying that major U.S. banks can still
acquire their competitors. This is curiously identical to how banks collaborated during the
Wall Street Crash of 1929, on Friday, October 25, where several leading Wall Street
bankers met to find a solution to the panic and chaos on the trading floor. This meeting
included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the
Chase National Bank; and Charles E. Mitchell, president of the National City Bank. They
chose Richard Whitney, vice president of the Exchange, to act on their behalf. With the
bankers' financial resources behind him, Whitney placed a bid to purchase a large block of
shares in U.S. Steel at a price well above the current market. As amazed traders watched,
Whitney then placed similar bids on other "blue chip" stocks. In this case, this historic
attempt boost up stock prices but the respite was only temporary and we all know the
ending.

The above tactic resembles the 36 Strategies of the Chinese Strategems “围魏救赵 (wei wei
jiu zhao)” and “声东击西 (sheng dong ji xi)”, which is to confuse the public and tries to create
opportunities. But as the Chinese saying “纸是包不住火 (zhi shi bao bu zhu huo)”, means
that one cannot hide the truth from being revealed, any attempt to hide it shall be temporary.
The American party may be over but as Aristotle said “It is best to rise from life as from a
banquet, neither thirsty nor drunken.” The lesson learnt from this financial crisis taught every
men and women on the street that failure to control and curb excessive consumption, and
failure to promote accountability into systems to rein in even the most prominent
corporations or respected businessmen, meant that such humanistic error can wreck entire
economies.
The financial services industry has been making people, who run the industry, incredibly rich.
Yet at this inflexion point, one can observe that this industry has been destroying value and
creating phony wealth, instead of true economic value creation. As some non-American
financial industry experts might say, the entire crisis episode is a big U.S. con job. The
Chinese Strategem “空城计 (kong cheng ji)” correctly describes the hollow wealth created
by the financial industry had lured millions of people into the trap.
The erosive corrupting effect generated by this phony wealth creeps from Wall Street, into
the global financial system, and intoxicated every capital market to gravitate towards the
“American Dream”. The lives of men and women on the street meant nothing to these
super rich or Wall Street aspirants. Their unethical business practices wreck havoc, with
speculators pushing food prices up and inflation incredibly high, all in the pretence of
achieving unsustainable high returns, while poor people had one meal less on the table.

The pay system on Wall Street unbelievably rewards the appearance of profit lavishly, and
even if that appearance turns out to be a bubble-to-be-burst charade, the Wall Street
manager still keeps his bonuses.
In a side note dedicated to damage control for the crisis, Carl Philipp Gottlieb von
Clausewitz, Prussian militarist, wrote in his classic book “On War” that, “one must keep the
dominant characteristics of both the belligerents in mind and that out of these characteristics
a certain center of gravity develops, the hub of all power and movement, on which
everything depends. That is the point against which all our energies should be directed.”
Democratic President-elect Barack Obama correctly identified the center of gravity to be
Wall Street and the flagging American economy. Clausewitz‟s strategy resembles the
Chinese Strategem “擒贼擒王 (qin zei qin wang)”, which is to get to the root of the problem.

COMPARISON OF 1997 ASIAN FINANCIAL CRISIS &
THE CURRENT FINANCIAL CRISIS
During the early and mid-1990s, the economies of Southeast Asia had high interest rates to
attract foreign investors looking for a high rate of return. This resulted in a large inflow of
foreign capital and drove up asset prices in Southeast Asia. The resulting large quantities
of credit that became available generated a highly-leveraged economic climate, pushing up
asset prices to an unsustainable level [5]. However, as the U.S. economy recovered from a
recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began
to raise U.S. interest rates to lower inflation. Hot money began to flow from Southeast Asia
to U.S. The U.S. dollar appreciates as a result, causing Southeast Asian nations' currencies
pegged to the U.S. dollar to rise in tandem and exports suffered.
By 1997, these asset prices eventually began to collapse, causing individuals and
companies to default on debt obligations. The resulting panic among lenders led to a large
withdrawal of credit from the crisis countries, causing a credit crunch and further
bankruptcies. South Korea's currency also lost half of its value against the greenback, and
its stock market lost 40 percent of its value in domestic currency [5]. Foreign investors swop
in to acquire South Korean corporations, for example, Korean Air Lines with a $5 billion debt.
Heavily indebted corporations were facing a credit crunch and desperate to sell off assets to
raise cash. Under a US$16 billion rescue package structured by the IMF, the Thai economy
was rescued and damage control finally sets in.
In terms of similarities, the 1997 Asian Financial Crisis is identical in every aspect to the
current crisis, except with differences in sequence and magnitude – the Asian Crisis started
off with downward volatility in currency exchange, which grown into a credit crunch situation

and triggering corporate bankruptcies. Although the Asian Crisis is isolated to East Asia and
ASEAN countries, the economic impact also dented the U.S. and Japan markets. In terms
of magnitude, on 27 October 1997, the Dow Jones industrial plunged 554 points or 7.2%
amid investor concerns about the Asian economies and a lot of Japanese companies
declared bankruptcy. This market plunge is relatively mild compared to the current crisis
(refer to Table 1).
Major World Asian Financial Crisis Current Financial Crisis

Indices (1997-1998) Highest & Lowest Prices (2007-2008) Highest & Lowest Prices
Nikkei 20,605 (Jun-97) -> 13,406 (Sep-98) 18,138 (Jun-07) -> 8,512 (Nov-08)
Hang Seng 16,365 (Jul-97) -> 7,275 (Aug-98) 31,352 (Oct-07) -> 13,888 (Nov-08)
S&P500 757 (Mar-97) -> 1,229 (Dec-98) 1,549 (Oct-07) -> 871 (Dec-08)
Dow Jones Ind 6,813 (Jan-97) -> 9,181 (Dec-98) 13,930 (Oct-07) -> 8,519 (Dec-08)
Table 1: Market Volatility of Major World Indices between the Crises
In comparing differences, current investors have faster access to information compared to
1997. Current investors have also learnt from previous financial history i.e. the dot-com
bubble and Asian Financial Crisis. Therefore, the current market reaction is faster and
market plunge is much greater in tenacity as we can observe from Table 1 above. The
Current Financial Crisis has also claimed victims that were unprecedented, like AIG
Insurance, the three major U.S. Automobile companies, historical investment banks and
small state banks.

THE PONZI SCHEME
A Ponzi scheme is a fraudulent investment activity that involves paying or promising
abnormally high returns to investors, using money paid in by subsequent investors, rather
than from actual profits generated by real businesses. It was named after Charles Ponzi,
who became notorious for using the technique in the U.S. in 1903. Ponzi was not the
person who invented the scheme, but he conned so much money that it was the first to
become famous. His original scheme was in theory based on arbitraging international reply
coupons for postage stamps, but soon diverted investors' money to support payments to
earlier investors and Ponzi's personal wealth.
The Pyramid scheme resembles the Ponzi scheme, which is a non-sustainable business
model that involves the exchange of money primarily for enrolling other people into the
scheme, often without any product or service being delivered, or having to pay a high “entry”
product fee to buy a product or service that one would not normally pay for.
Multi-Level Marketing (MLM) business, on the other hand, sell real products and rely on the
price differentials between the manufacturer's dispatch ramp and the retail counter. It lies at
the borderline between “real” and ''scam'' in comparing to the Pyramid scheme (author‟s
opinion). The MLM business, like a Pyramid scheme, requires a constant exponential inflow
of new members, by selling more entry fee in the form of a product for the business model
to be sustained; else a declining inflow of registrants will eventually lead to a collapse in
sustaining the business. The following sections shall discuss the infamous Bernard Madoff
case, and local controversy Sunshine Empire and online Ponzi operation Swisscash.

BERNARD MADOFF CASE
Bernard L. Madoff, founder of Madoff Investment Securities which is a money management
or hedge fund firm, admitted to carrying out a decade long Ponzi scheme that took investors
on a multi-billion-dollar fraud bath. Madoff reportedly is accused of orchestrating a $50
billion fraud, one of the largest in U.S. history. As we speak, this case is still under U.S.
investigation.
Bernard L. Madoff, founder of Bernard L. Madoff Investment Securities LLC
A Hofstra Law School graduate, who started his career with $5,000 saved working as a
lifeguard. Madoff spent 48 years in his successful career, pioneering electronic trading and
the development of the Nasdaq Stock Market. He was Nasdaq‟s chairman in the early
1990s and served on the boards of the National Association of Securities Dealers and the
Securities Industry Association. He was a well respected man in the financial industry, both
as a market maker (a huge client for major banks) and a voice of authority. Madoff sat on
various U.S. SEC advisory panels. His Investment Securities firm was one of the top three
market makers in Nasdaq stocks, had over 600 brokerage clients and claimed to often
contribute 10% of New York Stock Exchange trading volume.

Details of the Madoff Scheme
According to the Madoff website‟s marketing materials, the firm has been executing trades
for broker-dealers, banks, and financial institutions since its incorporation in 1960. Madoff
reported that the firm had more than $600 million in firm capital and it was ranked among
the top 1% of U.S. Securities firms. Using “sophisticated proprietary automation, market
based, algorithmic approach to defining price improvement and enhanced liquidity and
unparallel client service, the Madoff firm was able to deliver enhanced executions with price
improvement, speed, and enhanced liquidity”, or so Bernard Madoff claims.
His fund generated steady average returns of 11% to 13% per year consistently for decades.
According to data compiled by Bloomberg [6], New York-based Fairfield Greenwich Group‟s
Fairfield Sentry fund invested exclusively with Madoff, and historically had an average
annual return of 11% and not once with negative returns since 1990.
Madoff was spectacularly successful at marketing his fund to the ultra-rich communities in
New York and Florida, as well as at European ski competitions attended by the ruling elite.
His clients also range from movie director Steven Spielberg to real-estate developer
Mortimer Zuckerman. The alleged Ponzi scheme ensnared investors from New York to
Lucerne, Switzerland, and Bermuda.

Below is an illustration of Bernard Madoff‟s unethical business practices and his Ponzi
Scheme linked to the 36 Strategies of the Chinese:
Deceiving the heaven to cross the sea 瞒天过海

Bernard started out as a real money management business
but probably things turned bad in 1990- he resorts to fraud.
Replacing superior beams & pillars with inferior ones 偷梁换柱

Devised a phony proprietary secret investment strategy –
the Madoff’s option split strike conversion strategy.
The beauty scheme 美人计 Deck the tree with flowers 树上开花
Bernard was a charming and Didn't advertise, Bernard kept it
respected figure in the industry. exclusive, adding to its mystery & allure.
Luring the tiger from its lair in the Guest takes over as host 反客为主
mountains 调虎离山
Invited to cocktail and black-tie parties,
Using his existing ultra-rich & made use of his own high profile to sell
influential clients, through word of to luminaries.
mouth, he is able to lure more
victims - purportedly the Jewish
community of Palm Beach.
Tossing out a brick to get a jade 抛砖引玉
Generates steady average annual return
Remove the ladder after enemy of 11% and no down years since 1990.
ascends to the roof 上屋抽梯 As long as no full redemption he is safe.
Victims are trapped, happy with the
steady returns.

Madoff’s Personal Network to the Ultra-Rich
Madoff did his networking at the Palm Beach Country Club, an oceanfront hideaway
founded by Jews, in one of America's wealthiest towns. Carl Shapiro, a 95-year-old
philanthropist of the famous U.S. charitable foundation, was the one who introduced Madoff
to the Jewish community at the Palm Beach Country Club. Carl said he had about 45
percent of assets, $345 million at the end of 2007, invested with Madoff.
With steady returns and a powerful personal network to the ultra-rich, Madoff‟s business
allure was spread by word of mouth, and ensnares European banks and wealth managers
buying into Madoff funds for their own rich clients. The Madoff scheme spreads far and wide.
At the time of this report, the American authorities have yet to unravel how Madoff is able to
pull off the Ponzi scheme for decades. In terms of hedge fund operations, managing a $50
billion fund is an enormous task as executing trades is going to generate a huge presence
in the U.S. exchanges. It would be obvious to employees of Madoff firm whether these were
real trades executed or just bogus plain money changing hands. According to the SEC
complaint, Madoff told two unnamed senior employees that his fund was "all just one big lie"
and "finished" with "absolutely nothing." Madoff allegedly said that he still had as much as
$200 million that he wanted to distribute to family, friends and employees before he turned
himself in. It was only then the employees alerted authorities.
Madoff’s Proprietary Options Trading Strategy
The Bloomberg news report [6] state that the Bernard Madoff‟s options trading strategy that
was supposedly used for 17 straight years would have required at least 10 times the
contracts that trade on U.S. exchanges. Prior to this incident, there is no case for anyone to

map Madoff‟s strategy to actual contracts in U.S. exchanges, but this finding is astounding.
And according to Chicago-based Options Clearing Corp., which settles all trading of
exchange-listed contracts, Madoff‟s firm “was not a significant player in the options industry”.
As everyone on Wall Street knows, one can limit the downside or enhance the upside, but
not both at the same time and certainly not for free. There are certainly other market makers,
like Madoff Securities, who will charge investors for the trading fees and risk premiums.
One‟s best guess is that Madoff Securities originally had a unique automated trading system
but the trades itself was becoming less and less lucrative as competition heats up. Bid-ask
spreads and available arbitrage profits began to shrink and it became harder for Madoff to
generate steady returns for his clients. Madoff may have reassessed his position (unique
professional background and extensive personal network) and he desperately needed the
assets under management to keep his firm afloat, so he started to make up the bogus
numbers.
Madoff‟s scheme may have gone on forever. But one possible reason for his fall is that he
would never have expected the current Financial Crisis to hit everyone so hard, making
redemptions increasingly high. Redemption is an event when investors decided to pull their
money out of the money management firm. The firm will be fine if it‟s only a few percentages
of the entire assets. However, if investors are pulling out most of their investments, Madoff
will have difficulty in providing cash out of empty coffers and when he is unable to find new
victims. The list of firms exposed to Madoff‟s fraud can be found in Appendix. Examples of
banks include Nomura, Fortis, BNP Paribas, UBS and HSBC. As we know, these banks are
attempting to shore up cash due to the credit crunch, which may prove that the redemption
story is valid.

Impact of Madoff’s Unethical Business Practices
In the present rare calamity, Madoff‟s unethical business practices has further sent ripples
throughout the financial industry, crippling the ability of banks, economies, pension funds
and charities to weather the financial storm. It has dragged the entire hedge fund industry
into distrust as well.
Ironically, Madoff Securities is a member of both Financial Industry Regulatory Authority
(FINRA) and Securities Investor Protection Corporation (SIPC), as can be seen from this
screenshot taken from the firm‟s website:
FINRA is the largest independent regulator for all securities firms doing business in the United
States and their role is to “protect investors by maintaining the fairness of the U.S. capital markets.”
Clearly, FINRA has failed. SIPC, on the other hand, acts as trustee or works with an
independent court-appointed trustee in a missing asset case to recover funds from failed
brokerage firms, which is sorely needed by investors at times like this.

SWISS MUTUAL FUND 1948 AND SWISSCASH CASE
Madoff case was only one of the few Ponzi schemes. During these past few years, such
schemes include the People in Profit System (Pips Inc.) and Swisscash, who operated using
Malaysian-based servers, and the International Trading Corporation NZ Limited (IT4US)
registered in New Zealand.
Details of the Swisscash Scheme
Taking the Swisscash case into perspective - According to online sources, Swisscash
markets itself as the “ultimate global financial facility” of the current financial market as part
of a Swiss Mutual Fund.
The Swiss Mutual Fund was claimed to be established after World War Two in 1948 (refer
to image) by the Cheviot family of France and their operation was based in Berne,
Switzerland for 48 years before shifting to the Commonwealth of Dominica in 1996, due to
changes in financial regulations in Europe. Swiss Mutual Fund is reported to have been
registered in the Commonwealth of Dominica but with a New York address: 280 Madison
Avenue, 912 - 9th Floor, New York. NY10016, U.S.A. P.O. Box 2342 (which turns out to be
an empty office space).

Other claims include:
1. Offshore countries provide a flexible financial environment, taxation scheme and
regulations that offer their clients with more stable and higher returns on their
investment.
2. Swiss Mutual Fund is fully licensed by the Government of Dominica, and the Central
Bank of Dominica and the Securities Commission of Dominica ensure adherence to
international standards of performance, service and confidentiality for Banks and
Trust, Securities Broker Dealers, and Securities Investment Advisors.
3. The Dominican has established a comprehensive regulatory framework that includes
five regulators and supervisors.
4. 60 years of investment trademark and reputation.
5. Minimum direct investment in Swiss Mutual Fund is $ 2,000,000. But direct
investment in Swisscash is only $100.
Swisscash had a very impressive and well-designed website, passed off as an e-investment
trading platform for investors to take part in the Swiss Mutual Fund. Swisscash‟s stated
objective is to make “ordinary people a Swisscash Millionaire” with a “Guaranteed Fix
Return” investment. Total investment in Swisscash financial facility by global investors as of
September 2005 is $27.2 Million and targeted to grow to $3 Billion by 2010.

Under the FAQ section, the Swisscash website states in poorly written language:
“Why SwissCash is able to offer such high return for SIP Programs?
Put it this way. If an investor invest USD1,000,000 with Swiss Mutual Fund and we promise to trade
his money in International Market today and yield him back USD1,010,000 in one Trading Day, it will
be considered a low return. Bare in mind, 10,000 returns on 1,000,000 is 1% per day. On average,
there are 20 Trading Days per 30 Calendar days. Therefore, SwissCash SIP payment of 20% per
calendar month is a moderate return rate. International Banks such as Citibank occasionally offer
Investors a 700% returns per annum for a minimum of USD10 million deposits.”
The Swisscash case was yet another elaborately planned Ponzi scheme that targeted
gullible and less educated internet audience, spreading to countries like Vietnam, Malaysia,
Singapore, China and even Caribbean countries. Like all Ponzi schemes, Swisscash‟s
much touted objective is to enrich the lives of ordinary people and promises of fortune. All
these were just an echo of the untruths that have hovered on the lips of conmen since the
dawn of time. The whims of the gullible can still be heard on forums dedicated to Swisscash,
as one can sense their desperation and blinded loyalty to fight for Swisscash legitimacy:
“Swisscash pays to worldwide investors every month without fail. Transactions of over US 70
millions has been made previously. Recently HSBC, a widely known world local bank, has been
working with them. For bank to work with swisscash, they ought to do their due diligence extensively
before committing …… Bank in-charge personnel don't just listen to investment company unverified
words. If the authorities found out that swisscash from swiss mutual fund is operating illegally
scamming people, having ponzi scheme, banks in-charge personnel will also be prosecuted. The
FIU(Financial Intelligents Unit) and FBI did not announce that swisscash is scam .… Imagine a scam
company have the guts to spread to 6 continents (Asia, Africa, Europe, America and Latin America)
having about 170,000 investors…. Why is swisscash from Swiss Mutual Fund still operating now
(Jan 2007) since April 2004? Do you mean the authorities (FIU and FBI) and is „sleeping‟?”

With regards to regulators and public interest protection against such schemes, according to
a spokesperson from the Monetary Authority of Singapore (MAS), Swisscash and Swiss
Mutual Fund have been on MAS‟ Investor Alert List since September 2006. The
spokesperson also said: “If a consumer chooses to deal with persons, particularly with
persons based overseas that are not regulated by MAS, he or she forgoes the protection
afforded under laws administered by MAS.”
The Swisscash fraud has reached as far as Jamaican, where it gain traction because it
appealed to Jamaican investors who were eager but unable to deposit funds with their
popular Turks & Caicos-based foreign currency trading firm. The Jamaican authorities were
also unable to act because Swisscash operates in the borderless internet world. What their
authorities ever did was to launch a media campaign warning Jamaican citizens to "Think
and check before you invest."
Ng Choon Beng, speaking in one of the Swisscash

Event. Aka “B.B. Ng”.
Amir bin Hassan, Collaborator in Swisscash Scam

Amir bin Hassan‟s Swisscash account with 95% returns in 7 months.
Swisscash US$ 50,000 Investment Certificate.
Enforcement and Civil Suit against Swisscash Collaborators
In 2006, two Malaysian datuks and six others were placed in remand by Malaysian
authorities to aid investigations into SwissCash, reported The Business Times [10]. In
China, police found that 170,000 people had placed 1.36 billion yuan ($268 million) with
SwissCash, Xinhua news agency reported. On June 21 2007, in a milestone enforcement
action against investment scams, Malaysia‟s Securities Commission (SC) obtained a
worldwide Mareva injunction against persons involved in the Swisscash scam, preventing
them from disposing their assets in and outside of Malaysia [11].
The Mareva was sought following the filing of a civil suit against defendants Albert Lee Kee
Sien, Kelvin Choo Mun Hoe, Amir bin Hassan, Dynamic Revolution Sdn Bhd, Swiss Mutual
Fund (1948) SA, SMF International Limited and SMF (1948) International Limited.

Illustration of Swisscash Fraud Linked to Chinese sayings
Disguise and hoodwink the public 乔装打扮，掩人耳目

Collaborators schemed and change their disguises to act as
Swisscash Investors.
Swisscash’s Michael Mansfield is a fictitious character,
masqueraded the MD of Mansfield Visoiu Capital Management
firm, based in Hollywood.

Devised a bogus investment company website, leveraging on
Swiss Bank’s golden history, to deceive victims to part with their
money.
Taunting the General Deck the tree with flowers 树上开花

Engage various sales leaders called Swiss Mutual Fund Gathering on the 5 April
“SC Facilitators” to show their 2007 at Riverfront Hotel, Singapore to lure
cheques, Swisscash returns & bank more victims.
statements (see Appendix [12]).
One arrow hit two condors 一箭双雕

Luring the tiger from its lair in the Use Citibank, HSBC & JP Morgan business
mountains 调虎离山 bank accounts to wire “returns” to investors,
marketing itself as a legitimate company at
Leverage on SC Facilitators in the same time.
Singapore, China and Malaysia to
widen the Ponzi web and lure more
victims. Tossing out a brick to get a jade 抛砖引玉
Returns 10% to investor in 1st month.
Remove the ladder after enemy Investor needs to invest more to get 25%
ascends to the roof 上屋抽梯 returns or to get more referrals, else
Swisscash will not payout anymore.
Victims’ funds are trapped in
Swisscash Bank Accounts. Pay
more to get back the principal.
Escape - the best scheme 走为上计
At the last minute, scam collaborators
transferred victims’ money to offshore
accounts, at the same time, asking victims
to invest more money, before shutting down
the website & cashing in.

SUNSHINE EMPIRE CASE
In Nov 2007, the Singapore Commercial Affairs Department (“CAD”) of the Singapore Police
Force launched an investigation into the business affairs of Sunshine Empire Pte Ltd,
because of undisclosed reasons but CAD simply states that Sunshine Empire may have
breached the law. Under the topic of Swisscash in the SgForums website [13], there are
accusations stating that the founder of Sunshine Empire, James Phang, is the mentor of Ng
Choon Beng, who in turn is accused of being the mastermind behind the Swisscash scam.
The Sunshine Empire “Business Model”
Sunshine Empire declared in their website that they are a “direct sales company” but the
Direct Selling Association of Singapore (Direct Selling Association of Singapore, DSAS) said
that this company is not an Association member.
Details of the Sunshine Empire‟s business model, touted as a Multi-level Marketing (MLM)
program, include the following information:
1. Non-members have to pay an entry fee of $12,000 to become "marketing business
associates". After which these members shall receive e-points from the Company,
and by logging into their website, members can purchase health-care products,
electrical appliances, et cetera.
2. However, unlike other MLM companies, Sunshine Empire's business do not used
monthly performance appraisal system for dividends payout (note that commissions
are generally called dividends in the MLM industry). For example, members need
not reach a certain sales level to earn dividends or points (e-Points). As long as

members are able to recruit people, they will receive bonuses in the form of e-Points.
These e-Points can be “readily” converted into cash and not necessarily to be used
for purchasing of the advertised products in their website.
3. According to the Sunshine Empire founder James Phang‟s sales pitch, the Sunshine
group is involved in project or type of industry such as network marketing,
entertainment, energy, real estate, telecommunications, health and beauty,
insurance, finance and other businesses, with a total asset of more than US$ 300
million.
4. An “affiliated company” of Sunshine Empire, Empire Communications Technology
(Emcom), has claimed on its website that it plans to invest more than $20 million in a
broadband project in Taiwan. Sharing the same registered address as Sunshine
Empire at the Toa Payoh Hub, Emcom claimed that they will be constructing “a
seamless wireless broadband that will cover more than 95 per cent of the city of
Taichung” [14]. Taichung City government responded that this project was given to
the Asia Pacific Telecom Group (APTG) and they had no dealings with Sunshine
Empire.
5. Representatives of Sunshine Empire, in a bid to attract business, claimed that the
Malaysian State of Sabah has given Sunshine Empire‟s affiliated company, Empire
Property Venture, the approval to develop the Malacca Empire Marine Theme Park
and A Magic Kingdom Theme Park in Sabah [15]. However, the Malaysian local
government has indicated that they did not know the existence of such projects.

6. Empire Property Venture also claimed that they will hold a ground-breaking event on
9 September 2007 for a Sunshine Villa project, with 300 out of 510 flat units sold, in
Malacca, Malaysia [15].
7. The above images were taken from Sunshine Empire‟s website showing the prizes,
in the form of luxury cars and large amounts of cash, given to members during their
company event held in Indonesia.
8. A similar “International Lions‟ Rally” was also held in Singapore (images above).
9. A youngster told an interesting story about how Sunshine Empire recruits members,
and asking him to borrow money from parents [16].

10. During a recruitment campaign, James Phang told prospective members that they
have the opportunity to get back invested funds of $12,000 within a year [17].
Thereafter, for a period of seven years, the company may payout monthly dividends
of $1,000, depending on the company's profits, or so James Phang claimed.
11. Investors who have pumped money into Sunshine Empire may have problems
getting their money back, now that Singapore‟s CAD is investigating into the
company. There were newspaper reports stating that in Nov 2007, Sunshine Empire
told members who wished to withdraw money that they would have to fulfill three
criteria [18][17]:
 Member will have to pay an administrative fee of S$ 600.
 Member need to wait up to 21 days for withdrawal.
 If member wished to expedite withdrawal, he or she will have to recruit
another non-member.

Illustration of Sunshine Empire’s Business Practices Linked to Chinese Sayings
Disguise and hoodwink the public 乔装打扮，掩人耳目

Sunshine Empire registered multiple “affiliated” companies
using the same address in Singapore. Using these
companies to illustrate to prospective members the wide
businesses Sunshine Empire is engaged in. Package the
funds from members and claimed to invest into various
projects.

CAD is still investigating the company. If the above holds
true, the firm might be operating a pyramid scheme.
Taunting the General Scheme Deck the tree with flowers 树上开花
Engage various sales leaders called Various visits and events held in Indonesia,
“marketing associates” to show–off China and Singapore. Note that Malaysia is
their cheques, luxury cars, & the not under its radar, given the Swisscash
fabricated million-dollar projects. uproar.
One arrow hit two condors 一箭双雕

Luring the tiger from its lair in the Earn E-Points by referring more members or
mountains 调虎离山 to purchase more Sunshine Empire’s range
of products.
Leverage on ALL members in
Singapore, China and Indonesia to
lure more members.
Tossing out a brick to get a jade 抛砖引玉
Luxury cars and prize money of USD
100,000 were presented to “Top Sales”
Slow down the enemy 缓兵之计 individuals in large company gatherings.
Propaganda effect to attract more members.
Members’ funds are trapped in
Sunshine Empire’s Bank Accounts.
Lay down last-minute rules to
prevent members from withdrawing Escape - the best scheme 走为上计
money (see Appendix [17]).
This scheme has not been executed - yet.

Detailed explanation on the Chinese sayings used in the illustration:
1. “Taunting the General Scheme,” is commonly used throughout the Annuals of the
Three Kingdoms, especially when an attacking army is besieging a defending city,
the general needs to lure the defenders out from city walls by throwing taunts and
insults, so as to anger the defending general to make the wrong move. In applying to
Sunshine Empire‟s business practices, greed or the allure of money is usually a
factor to taunt the other party into becoming a member. By showing off cheques and
luxury cars, the “attacker” effectively taunts the other party into action by saying that
“you can be rich too”.
2. The scheme “Slowing down the enemy, 缓兵之计” is actually a tactic used by Zhuge
Liang (also known as 孔明), in the Annuals of the Three Kingdoms:
第九十九回：“孔明用缓兵之计，渐退汉中，都督何故怀疑，不早追之?”
The purpose of this tactic is to retreat gradually back to a more favorable position and
in the meantime, use schemes to slow down the enemy as the main force retreats.
The last minute “withdrawal of money rules” lay down by Sunshine Empire is actually
making use of this scheme.
3. “One arrow hit two condors, 一箭双雕 ” is a commonly used Chinese idiom to
describe that a particular action has resulted in multiplied benefits (not necessary
factor of two). By structuring the e-Points system as described above, Sunshine
Empire effectively used the legal MLM business model, for members to purchase
products (legitimate) and at the same time, rewards members who are able to recruit
more members (Pyramid scheme) using the e-Points.

IMPACT OF SWISSCASH AND SUNSHINE EMPIRE
Financial loss was bad enough for naive less-educated investors. But the social impact was
disastrous and severe, especially for small communities in Singapore, Malaysia and even
China. Some investors were trying to get more referrals in an attempt and hoping that
Swisscash will return their principal invested amount. But they failed to mention to their
potential clients that Swisscash had not been paying significant amounts since August 2007,
are setting themselves up for private lawsuits from enraged members. Others had involved
friends and family members into what they had thought were a guaranteed investment
opportunity. The misery caused by Swisscash collaborators‟ dark business practice, hiding
behind the false name of legitimate business making, only serves to disrupt normal society
functioning and serves no economic purpose except unethical self-profiteering.
In closing, the sentence from Ecclesiastes 10:19, a book of the Hebrew Bible, draw deep
thoughts about money:
“A feast is made for laughter, and wine makes merry: but money answers all things.”
And a quote from Demosthenes is dedicated to the gullible:
"A man is his own easiest dupe,
for what he wishes to be true
he generally believes to be true."
**************

APPENDIX
[1] “Gold Tops $1,000 on Bear Stearns Crisis.”, The Associated Press, March 14, 2008.
Available: http://www.abcnews.go.com/Business/wireStory?id=4453314
[2] The Straits Times, Saturday December 20, 2008, Page A15.
[3] “S.E.C. Concedes Oversight Flaws Fueled Collapse”, The New York Times,
September 26, 2008. Available:
http://www.nytimes.com/2008/09/27/business/27sec.html?_r=1&em
[4] “Paulson announces change in focus of bailout plan”, The Associated Press,
November 12, 2008. Available:
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20081112/paulson_bailout_081112/2
0081112?hub=World
[5] FDI Firesale. Available: http://web.mit.edu/krugman/www/FIRESALE.htm
[6] “Madoff Strategy Dwarfed Market in Trades „Never Done‟”, Bloomberg News,
December 19, 2008. Available:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=audn.j3PIjnI
[7] “Madoff Scandal Shaking Real Estate Industry”, The New York Times, December
17, 2008. Available: http://www.nytimes.com/2008/12/18/business/18brokers.html?em
[8] “Op-Ed: Ponzi, Ponzi Everywhere...”, Minyanville, Dec 16, 2008. Available:
http://www.minyanville.com/articles/nasdaq-debt-Deficit-SEC-congress-
regulation/index/a/20353
[9] List of firms exposed to Madoff‟s fraud:
* FAIRFIELD GREENWICH GROUP * BANCO SANTANDER SA * TREMONT HOLDINGS INC *

ASCOT PARTNERS LLC * ACCESS INTERNATIONAL ADVISORS * FORTIS NV * HSBC
HOLDINGS PLC * BENBASSAT & CIE * UNION BANCAIRE PRIVEE * NATIXIS SA * ROYAL
BANK OF SCOTLAND GROUP PLC * BNP PARIBAS SA * SWISS LIFE * REICHMUTH & CO *
BBVA * MAN GROUP PLC * DEXIA SA * NOMURA HOLDINGS INC * MAXAM CAPITAL
MANAGEMENT LLC * EIM GROUP * AOZORA BANK LTD * CREDIT INDUSTRIEL ET
COMMERCIAL SA * UNICREDIT SPA * UBI BANCA * NORDEA BANK AB * BENEDICT
HENTSCH * THE TOWN OF FAIRFIELD, CONN. EMPLOYEES PENSION * BALOISE * AUSTIN
CAPITAL MANAGEMENT * BANK MEDICI * KINGATE GLOBAL UND LTD * UBS AG *
BRAMDEAN ALTERNATIVES LTD * BOSTON PROPERTIES INC * CHAIS FAMILY
FOUNDATION

[10] The New Paper, Dec 22, 2007. Available:
http://business.asiaone.com/Business/News/My%2BMoney/Story/A1Story20071224-42299.html
[11] Malaysia Securities Commission Press Release on 2007 Internet Scam Available:
http://www.sc.com.my/main.asp?pageid=440&linkid=77&yearno=2007&mod=paper
[12] Bank Statement posted by Amir Bin Hassan to lure Swisscash victims:
[13] Forum discussion on Swisscash and related news article. Available:

http://sgforums.com/forums/14/topics/277500
[14] The New Paper, Nov 18, 2007. Available:
http://business.asiaone.com/Business/News/SME%2BCentral/Story/A1Story20071119-
37516.html

[15] Left: Reports on Sunshine Empire‟s investments in Malacca, Kuala Lumpur and
Taichung (Taiwan); Right: China Press related news article. –
[16] Prospective member illustrates Sunshine Empire‟s recruitment practice,

http://forums.hardwarezone.com.sg/showpost.php?p=27230980&postcount=3044
[17] Epoch Times, News Article on Sunshine Empire. Available:
http://www.epochtimes.com/b5/7/11/8/n1894722.htm

[18] Local newspaper on Sunshine Empire, 14 November 2007:


Chinese Classics &amp; Business Strategy - Individual Written Report

Cargado por

Información del documento

Derechos de autor

Formatos disponibles

Compartir este documento

Compartir o incrustar documentos

Opciones para compartir

¿Le pareció útil este documento?

¿Este contenido es inapropiado?

Copyright:

Formatos disponibles

Chinese Classics &amp; Business Strategy - Individual Written Report

Cargado por

Copyright:

Formatos disponibles

NANYANG TECHNOLOGICAL UNIVERSITY

THE DARK SIDE

NANYANG BUSINESS SCHOOL

Written & Submitted by:

Chinese Classics & Business Strategy – B6090 Page 1 of 38

shocking, unethical or controversial business practices, or even downright fraud committed

dark business practices, how businessmen employ unethical business techniques to

man and woman on the street.

people and local communities.

Chinese Classics & Business Strategy – B6090 Page 2 of 38

related to these examples can be found at the Appendix section.

In order to provide a balanced analysis, selected Western (non-Chinese) wisdom and

1. Carl Philipp Gottlieb von Clausewitz, Prussian militarist.

2. Aristotle, Greek philosopher.

3. Ecclesiastes, an extract from the book of the Hebrew Bible.

4. Demosthenes, Greek Statesman and Orator of Ancient Athens.

Chinese Classics & Business Strategy – B6090 Page 3 of 38

Figure 1: Total US Housing Transactions

Index raised above 1553 (Yahoo! Finance).

Chinese Classics & Business Strategy – B6090 Page 4 of 38

Figure 2 shows clearly how

development loans by the World

Bank, the IMF, and the regional

development banks had been

crowded out by private-sector

lending throughout the boom

period of 2002 to 2007.

stock markets around the world.

decoupled" from Europe and Asia.

Somewhere in California, drivers were tuning in to CNBC on the radio as radio

future. This was February 2008.

Chinese Classics & Business Strategy – B6090 Page 5 of 38

people‟s roofs” (other people‟s problems).

are leading to foreclosures and auctions in early 2008.

Chinese Classics & Business Strategy – B6090 Page 6 of 38

disaster happens after another.

Bank and International Monetary Fund (IMF).

Major U.S. newspapers started to report Main

Street citizens talking about the “Corruption in Wall

Street” had resulted in the financial crisis. They

complained of irresponsible financial institutions

CEOs who created this mess in the first place and

protest against the U.S. Government in using tax

payers‟ money to bailout these institutions.

American voters also realized and demanded that

Chinese Classics & Business Strategy – B6090 Page 7 of 38

leading to the lax monitoring of Wall Street.

Treasury bills, leaving “value” destruction along its path:

safe-haven investments [1].

2. By December 2008, speculators are fleeing to safer havens such as government

prices from US$150 range down to US$50 [2].

By September 2008, the Chairman of U.S. SEC, a longtime proponent of deregulation,

Chinese Classics & Business Strategy – B6090 Page 8 of 38

program down [3].

On November 12, 2008, U.S. Treasury

Secretary Henry Paulson said that the

$700-billion U.S. government rescue

program will not be used to purchase

troubled assets as originally planned [4].

But a new goal for the bailout program,

时” well describe this scenario. “出尔反尔”, 成语出处:《孟子·梁惠王下》, means that the

changed, it will be different before then, as compared to now.

several banks amidst a cash-starved environment:

Chinese Classics & Business Strategy – B6090 Page 9 of 38

Chinese Classics & Business Strategy - Individual Written Report

Chinese Classics & Business Strategy - Individual Written Report