Too Good to be True- The Rise and Fall of Bernie Madoff And His Ponzi Scheme, Part 1

welcome to books of our time brought to you by the Massachusetts school of law and seen nationwide as the show was being taped on November thirtieth two thousand nine it is nearly the anniversary of the disclosure of the largest fraud in history on December eleventh two thousand eight bernie madoff sixty five billion dollar ponzi scheme as one of madoff's victim's and as a continuous blog writer on what has been going on since madoff was exposed I have a significant interest in all things madoff today we shall discuss what I think is to date the best book by far on the pre-december eleventh background and history of this unimaginable fraud the book is too good to be true by Erin Arvedlund the author is a financial journalist who has written for barrons the Wall street journal the moscow times the new York times the street dot com and portfolio dot com she's with me to discuss her book during this and the next hour of books of our time and I am Lawrence R Velvel the Dean of the Massachusetts school of law Erin thank you for coming up from Philadelphia I've done bout a hundred a hundred and forty of these TV shows you may be the first person came here from Philadelphia thanks for having me we get them from Washington new York boston Erin in case there is anybody around who has managed to avoid hearing the name bernie madoff just briefly tell what this fraud involved sure it turned out of that bernie madoff who was a very well-known figure on Wall street already for running a very innovative electronic trading brokerage firm had in addition to his legitimate brokerage a massive ponzi scheme on the side some people refer to as a hedge funds %uh it had some characteristics of a hedge fund because it was very secretive supposedly he was investing billions of dollars and he had I think in the end tens of thousands of investors what it's turned out to be is the biggest financial fraud to date in this country sixty five billion dollars is the amount that madoff claimed to have lost we can discuss of course whether that's a real number maybe later in the show but also a hallmark of this ponzi scheme was that the SEC had investigated madoff and had looked into this supposed fraud half a dozen times at least and failed to catch him and he had without getting into it he had a certain investment technique which as we will discuss later his right hand mad explained to me personally and that was the technique that was being used and so he became well known for that to how did you first hear about madoff you and a fellow named Michael Okrent within days of each other published articles in two thousand one in may yours in barrons a very well-known financial magazine and his in Marhedge which is strictly a less widely read industry publication yes its a trade publication yeah how did you happen to hear about I had been looking into writing about hedge funds more in two thousand one they were not as well known as they are today we read about hedge funds in the papers all the time there was a recent insider trading case against galleon which has been in the headlines some of the other well-known hedge fund managers include George soros but really back in two thousand one there were few household names among hedge funds mabye George soros yeah julian robertson correct maybe one or two others that that's right Jeff Vinik a former fidelity fund manager started one of the first hedge funds in the nineties I really wanted to write about a hedge fund manager who no one knew about and I had been asking around everyone to everyone I could think of on on trading floors and any source who I could think of who should I write about and finally I got a tip from a guy a who on was an equity derivatives trader and strategist and he said you should really look into this guy bernie madoff %um so I spent the next you know weeks and months I ask everyone I could what they knew about Bernie Madoff and really all I can find out was everyone on Wall street knew who he was because he and his brother ran a very successful brokerage firm very much like a Charles schwab or what we know today is etrade or ameritraid and at one point I think they were trading ten percent of all the all the volume the purchases and sales on Wall street they were wealthy man already so that's what intrigued me to begin with was that why would they bother running this billion dollar hedge fund and the key to the story was that supposedly the fund had never lost money that's how I got started looking into bernie madoff I think that out of a hundred twenty seven months or something like that that people had access to them they had lost small amounts for months but never an entire year had they lost money what their brokerage firm explain what their brokerage firm did the buying and selling and how and how they're electronic trading which they pioneered you can't say it was the end of the new York stock exchange it wasn't but it made a fantastic inroad on the new york stock exchange it made a huge dent so what we know of today is online or electronic trading it seems very easy to us you know you can look on line check your statements on line and you can trade stocks even trade options your push buttons and thats it yeah its very easy none of that existed in lets say going back to at least the nineteen seventies however there were everything was done on Wall street manually on paper by phone and can i interject something tell people how you made a trade in say nineteen sixty one or nineteen sixty two sure I called down to that floor of the new York stock exchange use a broker let's say I'm I'm the client I call you and say Erin buy me a hundred shares of IBM that's right %uh or perhaps I work for fidelity or for vanguard I call my broker who %uh maybe calls his broker or I call directly they call down to the new York stock exchange of the American stock exchange and I say I want to buy a a million shares of IBM at which point the broker quotes me a price %uh he says I you know i'll give you a bid ask a spread between the buying and selling price and generally a trade like that would take about two weeks to turn around in the nineteen sixties bernie madoff was just getting started in the brokerage firm and he went to his first client who was a guy by the name of carl shapiro and said I can make that trade for you in three days so inspired by this this speed by which madoff promised to execute these trades carl shapiro and others started backing bernie madoff strictly as a broker over time bernie madoff and his brother Peter madoff who joined him after graduating from law school in nineteen seventy pushed to bring computers to Wall street this was considered complete heresy computers technology and Wall street didn't mix the madoff's thought otherwise and they were considered real innovators on Wall street because they said wait a second we can speed up trading by taking away the manual part of it we'll have our customers send in orders to our computer the computer will check and see what inventory is available and execute the trade and by the nineteen seventies and eighties %uh they they they were able to capture a lot of business that way in addition the SEC had been mandated by congress in the seventies to break the monopoly or what was seen as a monopoly of the new York stock exchange cuz really they and the American stock exchange controlled Wall street All trading was on those floors that's right yes in order to get better prices for people like you and me congress wanted the SEC to come up with a third market and they had no idea how to do it and they turned to people like the madoffs and bernie and his brother had already set up computerized trading and really what they did was they helped push a precursor to the nasdaq all the nasdaq was is a bunch of computers linked up together and that's why they were considered such innovators and the SEC love them because they would advise the SEC and they did what congress wanted the SEC to accomplish correct so that they were great favorites over at the sec absolutely and they reduced time for making stock trades from two weeks to a nanosecond over time yes literally a nanosecond it was a few seconds and then in more recent years everyone on Wall street adopted computerized trading %uh and now to the point where I mean trades are almost being made at the speed of light this is what you're talking about a nanosecond trading yeah okay so you wrote this article at a time when and so did okrent at a time when madoff was the hero of heroes and it fell into the abyss it felt like it fell down a well what happened when the article appeared sure a lot of things were going on in our country in two thousand one what else is new the stock market had just collapsed the internet bubble had burst people were losing money left and right and % my story came out in may of two thousand one basically raising questions about madoffs you know the strategy behind the hedge fund because he claimed to be trading options but none of the options traders I talked to had ever done a trade with him he gave away the twenty percent fees which are the hallmark of hedge funds he was I think in one year alone it was said about three hundred fifty million dollars he left on the table and he asked his investors to keep it a secret after the story ran there was pretty much total silence and I just figured= either I was crazy or I was wrong yeah and it turns out that you were neither you say he was giving away money that if I understand correctly yeah well explain how hedge fund managers get paid as a normal matter sure and what they do and that will let me let the audience know what it is that he was leaving on the table sure so a hedge fund how does a hedge fund differ from a mutual fund just using a broad example so many of us have mutual funds which charge anywhere from you know a few basis points to one or two percent a year just for the privilege of babysitting our money the basis point being a hundredth of a point correct %um hedge funds which have really cropped up all over the place on the last few years in addition to that one or two percent a year they take twenty percent of the profits and how do they differ in investment style well mutual funds are really very highly regulated it pretty much buys stocks and bonds maybe some options maybe some some real estate investment trusts %uh and that's pretty much it hedge funds can invest in everything they can invest in lawsuits they can invest in commodities gold grains %uh emerging markets distress debt %um so they're really no holds barred and you do it with leverage which is to say they will borrow ninety percent of the purchase price they're paying putting ten percent of their own money if the price goes down ten percent they are wiped out that's right they've got to sell to get to get to ninety percent to get back to the people they're considered very risky yeah for that reason and madoff technically people have called them a hedge fund since the beginning but I guess it's big he's not really a hedge fund no so here's the here's the the conundrum of madoff so he and his brother had this very well-known brokerage firm for decades meanwhile they had started out I believe in the sixties %uh started sort of friends and family investment club they needed money to trade and they started offering people say twenty or twenty five percent a year returns they claim to be doing and arbitrage strategy and that I think is sort of the beginning of this quasi quote unquote hedge fund which really I think this just a ponzi scheme from the beginning which basically a ponzi scheme is just a pyramid scheme money money comes in from new investors and goes out to pay old investors and no investments are ever made do you think I see some people have said it madoff has claimed a a very trustworthy fellow has claimed that it started in nineteen ninety two the government claims started in the late eighties some people think it started at the beginning you think it started at the beginning and but do you think that at the beginning madoff was making actually making profits in the sixties or seventies you know I do I don't think it was that difficult to make twenty or twenty five percent a year because you know back in the nineteen sixties the spreads or rather thee buy and sell price for stocks on Wall street could have been several dollars you know i'd i'd buy IBM at five and i'd sell it at eight dollars thats enormous profit margin and still the broker would buy it and sell it he'd sell for the person who wants to sell he'd buy from the person wants to buy and he buys it low he sells it high make a lot money very lucrative business it's not any more partly because we have technology now and we also trade in pennies yes so I buy at a dollar and I sell at a dollar and two cents and so I think it was possible that he was actually making that money yeah now he claimed at his allocution as they call it would you stand up in and say to the judge here is what I did your honor and I committed it all he claimed that he made one mistake do you buy do you agree with that do you think that makes any sense and if so what was the mistake in your judgment did he say what the mistake was no he did not do that his mistake was being found out i think that's a you know look I I would argue that we can't believe a word that bernie madoff says %um he's a pathological liar he was swindling people up until a few days before he confessed and really the only reason that he confessed was because the stock market collapsed in two thousand and eight and all of madoff's investors who up until this point had been making ten percent a year no questions asked they were losing money in their houses their portfolios everything was losing they were losing money they all ran back to him and he could meet the redemptions actually the big feeder funds were the ones who really came back and said bernie we need three billion we need four billion they're people were pulling their investors were pulling out money that's correct and so the whole thing collapsed now what what are the questions and so by the way to get back to something else what he was not doing he was not taking the two percent a year that hedge funds do he was not taking a twenty percent of the profits at least not overtly that the hedge funds do and he was not using leverage like they at least as far as we know like to hedge funds do and so technically speaking he was not a hedge fund as we tend to think of hedge funds that's correct it was a hedge fund in name only %uh in part because first of all it was a fraud right so he was he never made a single trade as far as we can tell so so far %um at least after a period of time hedge funds generally like for instance in the case of a recent allegations against galleon they were investing the money yeah %uh is just that they're investing the money allegedly using insider information now one of the great conundrums in people's minds they're have been two great questions in people's minds generally speaking one is was the whole madoff family involved and the second is what happened to the money so let's start with the first one sure and we'll talk about his wife his brother his niece shayna his sons and his father in law who nobody talks about saul alpern so so why don't we start with saul alpern tell who he was and what he was doing for madoff and do you think he knew what was going on all right so madoff graduated from college from hofstra and in nineteen sixty he hung out a shingle trading securities he was a nobody on Wall street he married a young woman named ruth and ruth's father was a very successful accountant in manhattan so to get started ruth and bernie madoff actually set up shop in her father's offices briefly and ruth's father whose name is saul alpern was actually one of bernie madoff's first fund raisers he would recruit friends and family from up to the catskills when they went on vacation he talked up his new son in law to pretty much anyone who would listen and helped bring bring in money for this new brokerage firm now ruth was working with her husband from day one she was supposed to be a mathematical wiz yeah apparently well first of all she had a degree in psychology she had graduated from college in an era when now a lot of women went to college I think she was very ambitious she may have even you know pushed her husband to %uh you know accept the help from his father in law and I think she was a very key player here is kind of a lady macbeth type of figure someone who really wanted her husband to succeed and you know she personally wasn't you know women weren't in finance back then and I think this is really sort of a way for her and her husband to succeed at the same time you know it's very interesting and its off the subject but it's very interesting finance in the last fifteen twenty years has become one of the the major areas where women can succeed because the only thing people care about is the color green money is blind yes if you can produce the money as many of them can because they're smart people that's all they care about but you're right there were no women and Wall street back then those days very few so bernie's brother joined the firm full time in nineteen seventy and he had just graduated from law school his name is peter madoff he really was the computer genius who helped set up the innovative system where they would buy and sell stocks in a few seconds in the nineteen eighties bernie madoff's sons Mark and Andrew joined they traded new York stock exchange and nasdaq stocks and then later bernie madoff's niece peter madoff's daughter shana madoff joined as a compliance lawyer now you seem to think if I understood correctly what you said and this is the first time I've ever really heard this it has the ring of truth to it you know it was that there was a friends and family kind of deal so that that they have one big account it ultimately turned out to be what is called the seven oh three account because it's about eight members the last three of which are seven oh three at jpmorgan chase and that's where they kept all the money from the fraud and then they had another account at the bank of new York were they kept the money from the allegedly honest broker firm the legitimate brokerage firm right do you think that that I guess you think that about ruth for sure do you you think that saul knew that this is just like a friends and family thing that just had one big account money would go in money would go out it was not segregated by customer you know on I'm not sure that he knew about the particulars of that that all the investor money was basically lumped into one big account I mean he was a supposedly a CPA %um now did he understand the intricacies of you know custodial accounts and you know who had actually had custody of the assets I'm not sure %uh however he had two young accountants working for him Frank Avellino and Michael Bienes who also became major fund raisers for bernie madoff over the over the decades starting in the sixties these two guys were helping to bring money to bernie madoff and between nineteen sixty and nineteen ninety two father in law and his two accountants raised four hundred fifty million dollars and %uh did the father in law know that's a good question I think it I think I don't know that he knew the the specifics of you know whether the money was all mixed together not because investors in many cases we're getting you know quarterly payouts and really not that much in way in the way of a statement it wasn't really until I think the nineteen eighties that they started sending really more complicated statement showing the holdings we'll get into that but ties in with bienes' statement to the SEC I've learned never to put anything on paper so we don't have much in the way of statements the SEC accepted that %uh okay but so you think that ruth must have known because she was the book keeper that everything was commingled together so the madoff trustee Irving Picard whose charged with you know sorting out who gets what money has said that there is not enough evidence to indict her criminally he is suing her for forty four million dollars in ill-gotten gains basically saying and she and bernie madoff and their family family with this incredibly lavish lifestyle over the years and she needs to give all the money back okay now his brother in addition to setting up the computers originally back around nineteen seventies ninety one his brother was the compliance officer because he was a lawyer was a compliance officer for bernie madoff investment security for the whole company as compliance officer didn't he have to know that things were commingled and that madoff had more clients then he was admitting to the SEC well here's here's what is to me is the the real nail in the coffin for Peter madoff yes he is compliance officer %uh he was signing off on the filings to the SEC that were false so for instance he oversaw the brokerage firm but in addition Peter madoff was you know signing filings with the SEC I think starting in two thousand six saying that madoff also had this advisory business the hedge fund on with seventeen billion dollars worth of assets and they were making X Y and Z trades all of it was a lie and his signature was on all of those filings so on that basis alone I think he could be indicted a let me just add it is certainly my conception without every studying it but i'd be stunned if it were otherwise that when you sign off on those things you can't just blithely put your name down you have to have investigated that this is true well since sarbanes oxley CFOs have had to be much more careful because because of enron and so forth regulations were put in place that CFOs could be liable right for signing off on stuff they was false and the same would be true for peters daughter shana is that how you pronounce it I'm not sure it's either shana or shana i'm not sure I think its probably shana because that means pretty in yiddish she was compliance officer like a sub compliance officer for half the businesses and so she must have signed off on this stuff too so she probably knew something was wrong big-time didn't she I can say I can't say that for sure I think she was look she was hired there because she was peter madoff's progeny what else very likely she didn't have any other experience she came straight out of law school and went to work for her father and for her uncle bernie madoff she she was working on the you know quote unquote legitimate brokerage firm side she was a rules compliance attorney which basically I think that meant that the trading operations had to comply with certain regulations it was a very specific stuff she's also involved in getting madoff employees to speak at conferences to help she did a lot of quasi marketing she recruited SEC officials to come and speak at industry events so did she know you know I have my doubts I actually think that she was the beneficiary of of accounts that she and other family members had at this hedge fund so for instance bernie's sons Mark and andrew are being sued by the trustee because each of them over the years allegedly pulled out between fifty and sixty million dollars and it was all in accounts that were held at this so-called hedge fund now some of the trades like when it when you look at the allegations it's really it seems unreal so for instance in their hedge fund accounts which had just traded apple or intel or some of these trades were completely fabricated now mark and andrew were supposedly trading experts they're watching you know new York stock exchange and nasdaq listed stocks all day long so for instance one of them made I think it was eleven or fourteen million dollars in one of their counts starting from zero it turned out it was a back dated trade all of the family members had accounts like this we have to take a break and I want to come back after the break to the question that you're alluding to and you've you've mentioned it even more specifically which is all this money was coming out of this seven oh three account how did they not know that this was not being used as a family slush fund we'll get back into that as soon as we take a break we'll be right back stay with us those of you who watch books of our time know that many of our programs are about books that deal with history this reflects not just my own interest in history but also the widespread belief that we would do better if our people and leaders knew more about history this belief is one of the important reasons why the Massachusetts school of law is starting a new and unique college called The American college of history and legal studies ACHLS ACHLS will be a senior college offering the junior and senior years of 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mooney the phone number or addresses shown on your screen welcome back now as I did as I was saying all these folks got money out of the checks came from the same outcome how could they not have realized that this is not being used that how could they have failed to realize that this is being used as a family slush fund I find I find it very hard to believe that you know if I were trading new York stock exchange or nasdaq stocks all day long and my father was running a very successful hedge fund and I saw the trades myself and was able to see the prices and when the trades are made and so forth that I wouldn't wonder how is this money made and after all I mean you yourself said you know that that madoff commented that one day his sons were you know going to take over the hedge fund the quote-unquote hedge fund which is really a fraud %um I think what's going on right now is if the children madoff children are going to be indicted the federal prosecutors have to make an airtight case its a case they can not lose so they're taking their time it's been almost a year and the only people who have been indicted aside from bernie madoff who ultimately pled guilty and didn't cooperate because and I believe he wanted to shield his family and just you know take the fall himself a man of honor the only other people who have been indicted are bernie madoffs right hand man Frank DiPascali who has also pled guilty and now two computer programmers who apparently helped fabricate statements %uh phony trades on this you know that the hedge fund side and they made up millions of pages of documents over the years these two computer guys are guilty of the greatest crime of all which is to sell yourself cheaply I know that's a sarcastic and cynical statement but here are the two guys who were pivotal they were lynch pins of everything that madoff was doing and they sold out for a lousy sixty thousand dollars it I mean if it had been me it would have cost him millions and you know that's the old statement if you're going to be a thief steal big go big right better not to be a thief bu bernie madoff used to tell people when he was asked questions like the ones that you must have asked him and certainly others did over the years how come you're giving up the two percent and the twenty percent yeah well we're satisfied to make the commissions we make because we do all the trading for all these a stocks that we're buying and selling for people these guys knew there was no trading going on well what's so puzzling %uh so for instance I interviewed many former employees of madoff many of them traders on the legitimate brokerage firm %uh you know for people who are wondering madoff was considered a very prestigious place to work %uh it was you know a place like a Morgan stanley or merrill lynch or credit suisse goldman sachs that kind of a firm it wasn't an investment bank all they did was trade however %uh those who i interviewed said they always wondered how come they never saw any business from the hedge fund why were they not getting any any trading flow because a lot of hedge funds have set up their own brokerage firms specifically so they can get that those profits from trading they were always puzzled by it any it's it would prompt one to wonder why madoffs sons didn't wonder the same thing and they knew it was either your article or okrents or both that said back in two thousand one when madoff was asked why he was leaving the rest of the money on the table he said he was satisfied to make the commissions and you point out in your book that this was this whole that this article that you wrote and I'm sure the same is true of okrents was water cooler talk I think one of you describes one of the sons hey there's nothing to it forget it blah blah blah it's not as if they didn't know their fathers excuse was that they were making commissions of the trading which wasn't being done well that's that's what's so puzzling time I found out later you know that the articles on madoff both in marhedge and barrons came out in two thousand one and I think mark and Andrew actually got up and madoff actually got up and gave a speech to the staff and said this is baloney there's nothing to these articles and yet at the same time they knew that they weren't getting any trading commissions from the hedge fund they knew that they were standing up and lying I guess they were let's turn if we can to the role of Frank dipascal and the other people on the seventeenth floor first explain the difference between the eighteenth and nineteenth floors and the seventeenth floor madoff had a very expensive looking office in midtown Manhattan in a building called the lipstick building on fifty third and third avenue he had two floors for the brokerage firm eighteenth and nineteenth floor is they were %uh considered space age everything was computerized there was no paper allowed people wore suits and ties and this is really where madoff brought potential investors to kind of show off his operation now once you or I gave him a check however it didn't go to the eighteenth and nineteenth floors the phony hedge fund actually was on the seventeenth of this building where very few people had access the seventeenth floor was populated by chiefly frank dipascali who was bernie madoffs i call him a henchmen essentially dipascali had worked with madoff since the nineteen seventies he had a high school education he had no finance background %uh but he was very useful and he helped madoff %uh cooked up this cover story which is this this option strategy called a split strike conversion %uh which I won't even go into because as it turned out they weren't doing any trading dipascali oversaw a staff of uh he was recruited by the way by annette bongiorno who was madoffs right hand woman down there who knew Frank dipascali when he was still in high school thats right they were both from the same neighborhood this Howard beach or something howard beach the staff similarly had very little finance background many of them were clerical workers and essentially what would happene was this madoff at the end of the day would come downstairs from the the super super duper star trek trading operations %uh he would go downstairs he and frank dipascali would take the closing prices from the top stocks intel apple GE punch them into an old IBM a s four hundred computer an old dinosaur they would create a spread sheet which show phony gains and that would flow down to all the different customer accounts and now allegedly these two computer programmers would help them figure out who's going to get what portion of the profits and they would create phony statements for thousands of investors before I invested in madoff in nineteen ninety five for some reason frank dipascali agreed to talk to me so I was up in their offices on the eighteenth and nineteenth floor for about fifteen minutes madly scribbling taking notes which i've managed to figure out later on you know later that day and and i typed it up so I knew I knew about this split strike conversion strategy which made sense to a layman like me and you know strangely enough depiscali said well i'll show you %uh the trading floor which they did to everybody because it is very impressive it was really shockingly impressive it was top of the line it really was and all these you saw twenty five or thirty people in their twenties sitting at their computers obviously making a million dollars a year each back in nineteen ninety five you said oh my goodness but you know what was so strange a that that two things first that dipascali agreed to see me and a friend and secondly oh well our offices are downstairs but we don't go down there he actually mentioned that to me I can remember it it's not in my notes but i'd never forget that that was apparently a mess from the way you described it the London office you know the the window shades are everythings black and white you dare not have the %uh you know of the wrong color pen yes madoff had an obsession what gives on the seventeenth floor a complete mess %um it was really the two worlds of bernie madoff one was legitimate it was orderly seemingly above board totally transparent and it had to be because madoffs brokerage firm was trading stocks that everybody else on Wall street was trading so everyone knew what the price was %um on the seventeenth floor it was where money went to vanish and really what's so incredible is that all that money was just going into one bank account madoff had an account a longtime account at chase Manhattan which ultimately became jpmorgan chase and all the money just went straight into that account everyone's money was mixed together and if you know you or I called and said I want to redeem some this year they would just write a check you know people talk the reason I ask why dipascali agreed to tell me what was going on allegedly because so many people say that dipascali and I think bongiorno and the rest of them were rude and curt and wouldn't talk to them and if for some reason when I said i'd like to come in because you know i want to invest and I want to know what so why you know so the question arises to which there is no answer why did he talk to me and albeit it was a few years later which may have made a difference he refused time and again to tell feeder fun people and financial people what the deal was because really the deal was nothing other than something that much as a layman may not have understood or known of it it was not unfamiliar on wall street no you mean the strategy itself the strategy yes you know look I think first of all for an investor like yourself your obviously an intelligent person and a lot of very smart people a lot of people would deny but were were sucked into the madof scheme you know I I don't buy into the argument that these were all unsophisticated people in fact I think madoff came with dipasali's help came up with this split strike conversion %uh precisely because it was the type of strategy that could very well have been executed %um but it was difficult to do %uh in fact that's how Harry Markopolos came to question bernie madoff because he was trading the same thing but he was losing money because it was not that easy to make money every year on this so-called split strike conversion it was essentially it's complicated and so madoff knew was a legitimate strategy he knew it was sophisticated enough it would probably keep smart people satisfied and professionals you know maybe from asking too many questions and the people who did ask questions like fairfield and the SEC and so forth he just made up the data so for instance son I think one of the fairfield greenwich which is a feeder fund they Fed billions of dollars into madoff over the years one of the partners geoffrey tucker went into ask madoff you know I've been hearing questions rumors about your your strategy I want to see where the trades settle so madoff said allright i'm going to show you my DTC account my depository trust corporation account which is just a clearinghouse for Wall street it shows where all trades settle at the end of the day all trades go there virtually all trades and he created a phony computer screen to show this guy that's what these computer mavens these two mavens who sold-out so cheaply were doing they were making up all this fall statements including false whatever you call that computer stuff from the depository trust corporation it's as if I sat here and made up something to prove that that we are the university of Chicago its just insane but they were doing that and every time the SEC had a different question they made up the data and then they'd punch the button and say see right here on the computer here's what's so astonishing about that so you or I don't have the power to subpoena money managers and brokerage firms only regulatory agencies do the SEC or you know the OCC of people like that so all they had to do was called D T C and say how much money does bernie madoff actually run in this supposed hedge fund in fact in two thousand bernie madoff himself was interviewed in jail and he said i'd finally gave the number to the SEC in two thousand six and they never called the numbers to his alleged accounts well they were accounts he gave them the DTC account number and said he said he was astonished he gave it to them on a Friday afternoon he figured on Monday morning it would all be all over he came in Monday morning nothing happened I should correct that the SEC examiner called but she failed to ask the right question apparently from what I from what I gather and you've alluded to this there were questions about madoff all over Wall street and all over europe and for some reason nobody except markopolos and a few others ever went to the SEC with their with their questions and in fact markopolos said I never have figured out if it was Markopolis or markopolos I'm told its markopolos %uh he he's he said that to the SEC you should talk to x at goldman sachs and y at I think credits suisse and do it without lawyers being present for some reason I guess the lawyers tend to stifle people for fear of fraud or whatever of for fear of libel you mentioned a huge number of people and maybe you can just run who through some of them were credits suisse society generali laura goldman jack nash rob picard james newman archie boussons boss who are who were these people because they had suspicions and they never told the SEC their is no rule on Wall street that if you come across a crook you he have to turn him in there were also very serious ramifications for questioning somebody of madoffs stature back then even in two thousand one when I wrote the story for barrons he had been chairman of NASDAQ and the ramifications were you could lose your job bernie would call up goldman sachs and complain sure absolutely I mean one of the guys I interviewed for the article didn't want to be named he is in the book his name is ken nakayama I owe ken basically the not only the original article but the inspiration for the book and ken worked at Deutsche bank at the time he was head of research for equity derivatives and he was the one who tipped me off to this hedge fund the never lost money now ken could have faced some serious consequences for having his name used in this story here's another example one of my a sources at the time worked at merrill lynch in their alternatives department which over sees hedge funds he was terrified of of talking about madoff but he was very worried for his clients because every time he went to do due diligence on madoff he got nowhere couldn't even get a visit to the office but he didn't want to pul the money out because it turned out his boss at merrill lynch was an investor so imagine you go to your boss and you say boss I think we should pull out of bernie madoffs fund because I can't figure out what he's doing and there's a lot of funny business going on and I can't get any more on due diligence and your boss says well i'm an investor and see you later I I have assumed since I and I have asked this question so I'll return to it i'd assume for many months now that the reason that reason that depascali was willing to talk to me and a friend was that he knew we didn't know enough to question that things he was saying while some of these other people would question that the things that were being said and therefore they didn't want to talk to these people your absolutely right they avoided %uh people in finance as investors there were a few scattered around Henry kaufman I think was one doctor doom and some others very high-profile or they came in two or three steps removed there were many investors who had no idea they were invested you now they came in through a mutual fund that was sold through a bank or a feeder fund that didn't say who it was investing with right yeah yeah you know of among the reasons that that people saw red flags that were the red flags that were the red flags that people saw some way in your article some were not but they have all become famous in the last twelve months and let's start with the the use of a one-man accounting firm like a one man accounting firm right all the red flags I think the most comprehensive list was put together by harry markopolis who I did not know in two thousand one he was the years ahead of everyone else in fact he put together his initial list of red flags on madoff in nineteen ninety nine which he sent to the SEC and I believe he was among the first i'd have to go back and check on his list i think it was twenty nine red flags by two thousand five use up to twenty nine yes what you know it's like attacking everywhere when you everywhere you've attacked nowhere so a one man accounting firm it was actually in a strip mall outside of new York city %uh but for some reason a lot of the big feeder funds the billion-dollar investors didn't care it's amazing isn't it's stunning you know that gets back to something before we go on to some of these other red flags I can only tell you by the way that if I'd known some of this stuff I would have out of there in a new York minute because particularly when we start talking about options whoa but you pointed out that so many of these people were very sophisticated and yet they stayed in and I know no better example than the renaissance technologies funds this guy james simons is so successful that twice in the last five or six years he made two and a half billion dollars personally in one year and the third time the piker made one point seven billion personally and they stayed in what they did is they pulled out half yes and they left half in now these are the most sophisticated financial people in the world and they got fooled and one of the reasons they got fooled which is in of course SEC inspector generals report is they thought geez everything we know the SEC knows and if the SEC has given them this clean bill of health which he tells us it has we must be wrong I think a lot of you know look I hate to blame agencies wholesale because their were SEC examiners like and jackie van and Gordon lightfoot and some others %uh like in the boston office who Harry Markopolos went to and and said you know something's not right with with bernie madoff some of them individually said we've got to go after madoff we know something's not right here but by and large the agency as a whole dropped the ball you know you made another comment erin which is a comment which is of the essence in my opinion and its basically overlooked most of the almost all the time you said at least then and now it was not a crime not to report your suspicions to the government or others that's a walking tort case in the making and I'm doing the research I've got a pile this high because these people knew you know that something might be seriously wrong markopolos even described it in his early memos this is possibly the greatest fraud that ever took place and of course he was right and these people said nothing to the SEC and had they so much as said to the SEC even privately A guy might have called them and said hey I got some real concerns here you should know that there are those of us who have concerns God knows what would happened and how many people would have been spared disaster well I've read the SEC's inspector general report which examines how they failed to catch madoff and I think as I said earlier it like CSI meets the office its unbelievable it's really it wasn't just a few people there were turf wars between offices in boston and new York and Washington people misfiling or doing the initial investigation and never following up and you know it's it's four hundred seventy five pages its on the internet it's available for anyone to read and here's the crazy part so even if I were even if I knew about madoff and I had suspicions and I went to the SEC they didn't do anything a couple of madoff investors are banding together to sue the SEC for financial damages which is the first case of its kind basically testing the SEC's sovereign immunity as a federal agency I I have to say that while I am not yet involved in the those cases I expect one day to be and from day one I did some research on it I realized my opinion is usually the odd man out usually the odd man out but my odd man out opinion is the SEC doesn't have a prayer of getting sovereign immunity because sovereign immunity doesn't exist if you are fantastically negligent or if you are deliberately almost deliberately sabotaging the policy of your own statute and they both and they did it repeatedly well I know Markopolses lawyer Gaytri Kachroo is also filing a similar suit she's got about six hundred investors and um it's gonna be I think it's going to be a bombshell case to watch yes she's asked me to help her a number of times and who knows not that she needs my help but maybe now we have about two minutes left and let me go back to the red flags and let me bring up in the last two months the red flag of red flags which I have to say had I known for one second and that's that they were not enough options in the world literally to cover what he was doing with the whole strategy even as explained to me by dipascali was based on options which ensure that you won't have losses so the options world is considered it's a fairly I think its fairly transparent like I said you can call around to different trading floors which now are all electronic exchanges but at that time you could call around and say who's trading whose doing the big trades in gold or whose doing the big trades in you know stock of GE and there were no footprints %uh there were no traces of madoff making these big options trades and by two thousand one which is when my story ran and the marhedge story ran he was supposedly approaching ten billion in assets a fund like that would leave tracks in the market and he didn't have any well i'm going to come back to that we're going to have a break and we'll come back in just the second show about not leaving traces of trading in securities but the options weren't there and you said early on the option traders on Wall street and in Chicago had never have never done business with him a lot of them had never heard of him they said there's not enough they're not enough options on the exchange or on the over-the-counter market to support this and the whole strategy was based on options and nobody picked any of that up as they say on the internet OMG oh my god you know because that was the all-time tip off I first heard about that around December twentieth of two thousand and eight amazing thank you very much we will come back next week I'm glad your sitting for a second taping for a second hour God knows maybe we'll have a third hour and be with us again next time for the second installment with one of the the all-time experts on the bernie madoff matter Erin Arvedlund thank you very much

Channel: Massachusetts School of Law at Andover

Views: 218,922

Rating: 4.571116 out of 5

Keywords: madoff, bernie madoff, ponzi, ruth madoff, andrew madoff, harry markopolos, wall street, hedge fund, SEC, SIPC, brokerage, NASDAQ, feeder fund, avelliono, bienes, picard, dipiscali, electronic trading, arvedlund, Bernard Madoff (Organization Leader), bernie, ponzi scheme, white collar, stock market, madoff scandal, economy, bernie madoff documentary, too good to be true, bernard madoff documentary, chasing madoff, american greed madoff, madoff victims, madoff documentary

Id: K4cAGVVultk

Length: 60min 0sec (3600 seconds)

Published: Wed Dec 09 2009