Inside the Madoff Scandal: Chapter One

[Music] they cut us off at our knees it's all fabrication Mr you have anything to say wife and I are resilient we're strong I think we're going to make it Mr say something to your victim sir [Music] Shakespeare understood probably better than anybody else how complicated human beings are there was a status element to investing with Bernie made off a lot of rich people gave him their money and you could say to other people oh I have this guy and he invests with Bernie made off and if he's good enough for the Palm Beach puas then that says something about me as well Bernard maof charged with fraud and money laundering stands at the heart of perhaps the largest financial scandal in history I'm Dennis Burman of the Wall Street Journal government documents tell plenty about Mr mid off but there's still so many on answer questions where did the money go why did people trust Bernie maid off how did Mr maid off pull off his alleged scheme what mid did very quickly and very Savvy for his own purposes was he covered up what he was doing he concentrated power in his own hands no one knew his strategy he wouldn't s he wouldn't tell anyone he presented it as so brilliant that it could not possibly be shared lest your head explode with the genius of it all he had this sort of under the radar investment operation that if you were in the right circles you knew plenty about when this Scandal broke that's what surprised a lot of people is a lot of people didn't know he had an investment operation and just sort of knew the brand the madeof brand as this uh trading uh as this trading business made off start came in the 1960s he was trading penny stocks at the time over time though mid got further into the plumbing of Wall Street helping people use electronic trading methods to move millions of shares around the stock markets sometime during the 1980s mid off got less interested in moving stocks around the market and more interested in managing money for wealthy individuals it's this advisory business that's in the crosshairs of the government investigation he operated for about 15 years before he came onto the scene by uh making an investment in the um Cincinnati stock exchange and becoming more of a player in electronic trading up until then he had operated in the world of of uh over-the-counter stocks if you look at his early clients they were people that he knew from his neighborhood in in Queens and in Long Island uh there were people that that knew uh either his parents or his wife Ruth's parents he found a lot of people who were very successful and Wealthy but not necessarily financially sophisticated uh he worked in the trading business for 40 years and it's notable that a lot of his clients on the investing side did not come from that business [Music] I think there's been a lot of misunderstanding about why people gave their money to ma off and the word I keep hearing is greed people invested with made off because they were greedy and there's no doubt some people did but I think it was mostly about trust people who were already on the in inside with mid off were very well respected in their communities at the Country Club um you know at the uh business Societies in their towns and somebody looking for a money manager would turn to that person and say who should I go to and that person would say oh you know Ma off is the best but you know he only you can only get in by invitation and I don't know if you know he'll take you but I could ask and then people are just hooked the wealthy over the past few years ran into all of these Investments that they didn't understand in fact for many of the wealthy the less they could understand it the better it was above all it was Mystique what was it about Bernie ma off that made people hand over their life savings what made Bernie so convincing people were asking the same questions back back in the 1920s when a sweet talker named Charles Ponzi had a plan that no one could refuse buy his International reply coupons abroad convert them in the United States for Cold Hard Cash the scheme fell in on itself and Ponzi landed in jail for 5 years but every generation it seems has its Charles Ponzi all you need to sustain a Ponzi scheme is for more money to come in than to go out and as long as the incoming money is greater than the outgoing money you can sustain it forever there's two types of of Ponzi schemes there's there's one that from the start um is is is a fraud where the operator says I'm going to take this money and as long as I keep getting more money I can keep this alive the other is it starts out legitimate something goes wrong you make a Bad Bet on the market and you can't tell your clients that you did this because you know if you do it they'll probably lose confidence in your business is over I think what probably happened is a wave of redemptions hit made off and he panicked and he said I can't do it anymore then he fessed up then the whole thing fell apart my team and I tried our best to get the SEC to investigate and shut down the Mad off Ponzi scheme with repeated incredible warnings to the SEC that started in May 2000 when the manof Ponzi scheme was only a three to7 billion fraud we knew then that we had provided enough red flags and mathematical proofs to the SEC for them where they should have been able to shut him down right then and there there have been warning signs for the better part of a decade in 2000 a Boston based money manager named Harry maropis raised his concerns to the Securities and Exchange Commission SEC investigated and made off continued in 2001 Barons wrote in a magazine article it's concerns about made off's investment returns maropoulos was a competitor to made off in a lot of ways um and I'm sure that one of the reactions to his complaints might have been well that's just sour grapes in 2001 there were two articles written about Bernie made off's investment strategy and he basically described in Broad terms uh a strategy using stock options that in at least in some quarters um created a lot of of of doubt about what he was actually [Music] doing information I had from the options uh guys I had talked to didn't square with the returns that was one sign then when I talked to um some investors people who had either cashed out of the fund or who had remained and thought made was you know terrific but even they couldn't explain what he was doing that was the second sign and um and then when I couldn't get him on the phone that was the third sign the SEC continues to roar like a mouse and fight like a flea but what I find the most disturbing about the manof case is that no one from the SEC has stepped forward to admit personal responsibility the Achilles heel of the SEC or the nasd is that those regulatory bodies have the same revolving door that the Food and Drug Administration has the Environmental Protection Agency it's essentially if you work there you know that 3 5 10 years down the road you're going to end up getting a job in the industry you are now [Music] regulating Kevin B his wife Kira Sedwick Steven Spielberg all trusted their money with Bernie maid off hedge funds Banks even mid son lawyers came to rely on what was quietly known as the Jewish Bond money flowed in from around the world from unassuming places like Charities and nonprofits one victim that's trying to make do is the Queen's Council on the Arts which just lost a $10,000 a year Fellowship we are the first stop for an artist who needs support money Community feedback anything to support an artist and an artist dream we had absolutely no idea that there was anything arai it was really the day before the news broke I got a phone call from a mutual friend the um funds that you have allotted for the fellowship may be in danger and that was all I knew and then the next day the news broke I don't think I have the words to say any to a man who perpetrated something as unbelievable as that

Channel: The Wall Street Journal

Views: 317,553

Keywords: Bernie Madoff, madoff, madoff scandal, ponzi scheme, Bernard Madoff, Ponzi Scheme, Inside (2007 Film), Economy, Crisis, Economic, Economics, WSJ

Id: cxFBurk12Gs

Length: 10min 12sec (612 seconds)

Published: Tue Dec 27 2011