Too Good to be True- The Rise and Fall of Bernie Madoff and his Ponzi Scheme - part 2

welcome to books of our time brought to you by the Massachusetts School of Law and seen nationwide thank you for joining us as we continue our discussion of Bernie Madoff's 65 billion dollar Ponzi scheme with financial journalist Erin Arvedlund Erin has written for Barrons the Wall Street Journal The Moscow Times The New York Times thestreet.cokm and portfolio.com she is with me to again discuss her book too good to be true the rise and fall of bernie madoff and I am Lawrence R Velvel the dean of the Massachusetts School of Law thank you for sitting for a second hour Erin we may even do a third hour we'll see I i think this program is going to be the Bible on Madoff I really do because the news media in general the print media has done such a bad job and so did other other television shows gave it short shrift but OK be that as it may we were on the red flags and we had discussed the one-man accounting firm and we had discussed the lack of ops sufficient options why don't you explain that custodial situation which was not unique to madoff but was somewhat unusual sure so most of us have mutual funds as our investments and in the fine print on your statements or what you can usually check online as well most of the big mutual funds in in this country do not actually have custody of your money they don't actually control the money all they do is buy and sell on your behalf it's complicated and basically what that means is there's usually an independent third party that's the custodian of your assets so if your portfolio manager actually is touching your money that's not a good thing right normally the way it works is if you have a financial advisor so for instance let's I'm an independent financial advisor and you're my client your assets are in custody with say Charles Schwab or Vanguard or fidelity or American Funds and I just direct what we buy and sell on your behalf Bernie Madoff didn't do that madoff was like some other hedge funds and you know we can talk a little bit about the differences between hedge funds and mutual funds anyway but he kept custody of all his customers money so if I wrote a check to Bernie Madoff it went into a bank account which he controlled that is a very unusual arrangement there are some other hedge funds on Wall Street that still do it but it is increasingly discouraged in fact the custodial arrangement having a third party between your money manager and and your money I think could one day become the law of the land because it's the reason why there are so few frauds in mutual funds right it's very hard to steal the money so having an independent custodian hopefully will prevent this kind of thing in the future however it is still possible to do that it's not illegal and its it's a question that investors should always ask of themselves or you can call year 1 800 number and say who's the custodian of my assets it's your right as an investor you know this is a sort of a digression but that as background back in the sixties and all times before that when you bought stocks like suppose I call you and I say Erin buy me a thousand shares of IBM I should only be able to afford that you would call somebody down on the floor that that person would the stocks would actually come in to your office they would be taken around Wall Street there were runners running all over wall street with securities so that you actually man you captured the physical pieces of paper which would then send to me this caused such fantastic what were called back office problems that they started doing all this electronically so that the Securities don't run around wall street they're all in the possession I guess of the Depository Trust Corporation well the results of the trades yes are in the DTC which the organ is one of the two organizations that the SEC didn't bother to call correct on madoff's behalf so that this custodian stuff is not quite what it once was but still you always want somebody between let's put it this way the more the responsibility gets split up the more difficult it is for anybody to make off with the money to steal your money that's right yeah okay so madoff made sure he did it in a way that he could steal your money yep okay now a people talk about the consistency of his returns he never lost money do you think that is is a true red flag most people think it is do you think it is I think never having single down year can be you can be an enormous red flag that warrants further investigation yeah yeah like we were talking earlier Bill Miller had a fantastic record for for years he had a losing your and you know why because people lose money in the stock market I hate to break it to you but nobody makes money a hundred percent of the time no yeah so I think it's not a stand-alone red flag but it's a place to start asking questions there were four months out of about 127 or something where just to be cautious he reported a loss madoff reported some minor loss yeah like half a percent or something but in no year did he report a loss now it's always seemed to me i can remember talking to my accountant well you know I don't know how this guy does that but somehow or rather he does it and I think what affected people dramatically in this way were one he never stopped he never pretended he was delivering big returns that's right in fact the last thing dipascali said to me when I one of the last things when I met with him we swing for singles not home runs to the average bloke in the street this makes a lot of sense if you're not greedy absolutely and so that was one thing and the other thing was people like Bill Miller who ran Legg Mason primary trust fund I think that four 12 or 15 straight years he beat the S&P and then there's of course as somebody pointed out the recently I wasn't smart enough to think about it myself Warren Buffett sure so these geniuses do exist but they sometimes lose money too but but see Miller and Buffet never lost Miller lost money starting in about 2006 or didn't do as well as yeah he lost money but he went about over 15 years beating the S&P every year and not losing money and I think Buffet has gone god well about who knows how months his average is 23 or 27 percent so you kinda figured there are these rare geniuses around sure but does it require my attention okay fair enough so you know it could be something that warrants further investigation right um you were talking when I so rudely cut you off about the lack visibility in the market of his security alleged securities trades right why don't you explain that a little more Bernie Madoff and his brother Peter ran a very successful brokerage firm and they were innovators on wall street and everything about that business really was fairly transparent although the madoffs were also famous for a practice known as payment for order flow they pioneered this on wall street and basically what it meant was they would will call up their customers the big clients you know like Bear Stearns or fidelity or Charles Schwab and say we'll pay you a penny a share for every order you send our way so a penny say um didn't seem like a lot of money but you know when you getting into the millions of shares a day that's a lot of money you bet at the time madoff was just castigated up and down Wall Street particularly by the New York Stock Exchange however madoff sat on a very influential committee an SEC advisory committee and and others and he basically convinced them that payment for order flow was a good idea and not long afterwards pretty much everyone on Wall Street started doing it it's now standard practice now can I make an let me interject something here payment for order flow has been called a bride and if you did it in an ordinary business it would be called a bribe and graft and we have rules against in in in the foreign you know companies doing business abroad and the reason I think that the you can comment on this if you like that the SEC adopted this was probably because it was the only way known to break the monopoly of the New York Stock Exchange make it with people's while to send stuff to madoff because he's paying them these bribes and you'll do that and you break the monopoly of the New York Stock Exchange and ultimately the investor pays a lot less money for execution of his trade now is there any merit in that idea you know Ipayment for order flow there there is merit to that argument I'm but there also there's merit to the counter-argument which is I'm you know well basically what Wall Street says is well if it's disclosed then it shouldn't matter but you and I and everyone else in America really may not have any idea that our broker is getting a kickback essentially for selling your order my my stock order does it make for more liquid market maybe there've been so they've been actually many academic studies looking at payment for order flow so I I actually leave it to the experts but I guess what I'm my point really is to to show that madoff on the brokerage side of his business was always pushing for faster computerized trading for a way to win more business whether it be you know legal or some say you know sort of not quite on the up-and-up however the practices that they innovated now have become standard yeah and interestingly putting that just to one side for second lot of people said that the giving up all this money to his feeder funds the two percent the 20 percent very much like payment for order flow you make it worth people's while to do so sure I mean madoff was the master at greasing palms that's the whole story I and it wasn't just the feeder funds I mean look at Jeffry Picower you know there were couple of couple of key investors who acted almost like these big billion dollar feeder funds and in return they were getting extra-special returns so picower for instance allegedly one year got nine hundred percent in one of his accounts in exchange he kept bringing in more money now now sadly he is he's dead now he died in the last couple of months and so we'll never actually know you know what he knew but I guess the point was that madoff knew that if you you kept the cash coming in and you kept and you let the money raisers keep all the fees then business was going to keep going cash will keep coming in we'll return to picower in just a few minutes the man was found at the bottom of his Pool the alleged victim of a heart attack I think if you believe that you believe that Lee Harvey Oswald acted alone I'm not saying either one's wrong but I certainly wouldn't see either ones right either but ok we'll talk about that in just a few minutes the idea that everything was run by family members on wall street this is a real no no as I was telling you during the intermission as it were to those of us who grew up in immigrant families and the same is true of the Vietnamese today the koreans today the whole family always worked in the family business you had a little store you had a little printing plant a this or that this was no big deal but on wall street the fact that everything was controlled by one family that was a real red flag to people cuz it makes it too easy to cheat cuz your family's not gonna turn you in will right you know it's it's a it's actually a rarity on wall street that families work together i mean Sandy Weill's daughter went into the business in a separate company I'm trying to think of some other examples he fired his son in law right Hank Greenberg's sons both went into the insurance business at competing hank greenberg of AIG but to actually work at the same company and control all the levers of you know the funds the compliance and the money that was very unusual and another one was that people thought that the amount of securities that he claimed to be trading they would affect the market you know even if just a little bit but nothing ever seemed to affect the market now this is interesting in another way which goes maybe the next time we talk we'll get into it but picard the madoff trustee could buy stocks over time when people buy or sell big blocks of stocks hundreds of millions of shares they don't do it all at once they space it out over time so as not to affect the market Bernie Madoff never claimed he was spacing it out over time yet you never could see any result market didn't go up down didn't go down because of madoff right so that that was another thing which you have mentioned finally the last one which is something that you know most people right over their heads he went into Treasuries every at the end of each quarter explain why that was on these phony statements that madoff and his you know cronies on the 17th floor operation of his office building on these statements that he created many times it would show that investors money want to cash at the end of the quarter and the year work cash meaning treasuries or a riskless investment maybe a money market fund yeah madoff claimed that this is because he was timing the market he knew when to get in and out I just learned this myself that many forensic accountants say that if someone goes to cash at the end of each quarter at the end of each year that's apparently the hallmark of a fraud because it means that at the end of a quarter when people really looking at their statements there's no record of where the money has been invested so to say that some things in cash apparently it's its it's a hallmark fs someone who's stealing doesn't want to know what he's doing exactly I understand Erin is this true that at the end of each quarter brokerages have to send the SEC lists of their holdings but not if they're in cash or treasures that's right it a provided being in cash provided madoff a loophole whereby he didn't have to report anything of substance to the SEC right and he was sophisticated enough because he had been in the brokerage firm for so long because he knew the loopholes and there are many between brokers and and financial advisors and money managers there's what they call a lot of regulatory arbitrage that goes on he knew all the loopholes and he knew that if he was in cash at the end of important periods he wouldn't really have to report much right Erin at the beginning at the last show I said there are two things that people are interested in one was the extent to which the family was involved right and the question of was the family business fraud I and the others where did the money go now it is said that over the course the Ponzi scheme something like a hundred and seventy billion dollars went in and out right at the end about one year before the end came it is alleged he had over somewhere between 17 and 20 billion dollars in this 703 account at chase morgan and how that came to be taken out so that at the end he was left with a few million we'll get into my question at the moment is where do you think the money went do you believe that it all went to redemptions there a lot of numbers tossed around right in the Madoff case now let me interject something right there because this is a perfect place the government knows Irving Picard the trustee knows the government and Irving Picard tell the rest of us very little as little as they can get away with right and they claim it's because they're doing investigation meanwhile people are sitting there there are literally people going through dumpsters for food and as our government always says you know ever since nineteen forty one I take it back that far secrecy is the order the day in government and quasi government and that's what we're facing but okay I interrupted and I apologize I'll address the IRS some and the trustee on the matter of numbers so I tend to stick with so madoff's original confession was that he lost $65 billion dollars and let's assume for arguments sake that that's the right number now that $65 billion dollars included all the phony profits that he had claimed to be making for decades um I actually believe it went back almost to the very beginning so 1960 so let's assume madoff claims he's lost $65 billion dollars we take out an average return of 10 percent a year going back several decades probably the real cash lost was closer to 20 or 21 billion still a staggering amount of money now that's at the and right that's at the end that's in 2008 because a lot of the rest of it people took back so this is what the madoff trustee is now sorting out yeah who took out more than they actually put it because those people are me may be subject to what's known as a clawback and Irving Picard who is the lawyer charged by SIPC with sorting this mess out is apparently trying to reconstruct the records of who took what money in and out and so there were two big winners let's assume that all those phony profits right so that adds up to about forty five billion dollars right as an investor I pay taxes on that money so a third of that all those phony profits went to the IRS right the IRS probably made over the life of the Madoff Ponzi scheme I would make a very non mathematical estimate of fifteen billion dollars in taxes now how much of that money do you think the IRS is going to give back this is what investors are now contemplating not only did they lose their investment but they paid taxes on that money if they were at least if they were from you know not taking the money out so the IRS was a big winner and then of course now we have a question can I interject something right there it's entirely possible and we don't know and the IRS is not talking and Picard is not talking and the FBI is not talking it is possible that forty five billion was fictitious profits it's also possible that was a hundred billion right and it's possible that the taxes now a lot of the money was tax free because It went to charities but it's also possible that something like forty five or fifty billion dollars worth went to taxes and the IRS says I guess the Commissioner of the IRS I hear is a very nice fellow its kinda you know this is a digression but he's the son of people my wife and I have known since nineteen fifty eight or nine my wife was his mothers roommate in a sorority and the guy who is the Koch whose the Inspector General for the for the SEC i think is the son or grandson of my wife's doctor in washington I got these tentacles out there you know I don't even know I've got but the IRS will give back maybe five ten fifteen billion it's keeping an awful lot and saying hey after the after three years or five years whatever the rule you can't go back to 1995 and get your money back that you paid us because the SEC messed up so we got all this fictitious this tax money there is a bill in congress under consideration or being sponsored anyway in congress which would allow victims of any financial fraud not just the madoff fraud to get their back taxes for the life of the financial crime it's not it's not the law of the land yet but is that the meeks bill your talking about I believe so yeah so um anyway then of course there were the favored investors like Carl Shapiro Jeffry Picower Stanley chais and about I believe it's 245 special accounts who they got more than just the ten percent a year they got extra-special big fat returns and the speculation is that they they got that money cuz they were bringing in a lot more so let me ask you something about Jeffry Picower now I can understand all of that about Stanley chais and about other people who were part it like the cohens of Comad and like Walter Noel of of Fairfield Greenwich yeah thank you Fairfield funds including Fairfield Greenwich these guys all made hundreds of millions in commissions and so forth off of madoff but Jeffry Picower was as far as has been told again the government's not talking was not a feeder fund he was a lone investor yes who put in to madoff something like 1.5 billion dollars but who took out over 7 billion now why is madoff here's my point unless this money is being laundered by picower who used to run tax shelters so he'd be the perfect guy to do it or unless the money's going to either the American sicilian Italian or Russian or Israeli mafia or unless it's going to the CIA the Mossad her MI6 in Britain why is Jeffrey picower why is he giving Jeffry Picower 7 plus billion dollars when he only put in 1.5 boy I would love to know the answer to that this is what the madoff trustee was going to question Jeffry Picower about and anybody surprised that he ended up at the bottom of the pool I have to tell you it gave me gave me chills when I heard when I heard the news Picard is still going after Jeffry Picower and a bunch of other you know large investors who became billionaires as a result of being in madoff many them I believe in avoided taxes yeah through madoff because in addition to creating phoney gains for his special clients he was also creating phony losses yeah yes so for instance if I were a big developer and I had a big capital gain one year I could call up my buddy Bernie Madoff and get an offsetting loss so Jeffry Picower died under very mysterious and of course he was physically apparently quite frail but very at you know um striking circumstances and we'll never know do you think if you have any way of knowing which you may or may not do you think there was any involvement behind the scenes of either some secret service or some mafia you know I've heard rumors of this when I was researching the book a few people told me that some of madoff's early early investors were actually garments garment industry moguls people who you know didn't want to use conventional banks and wanted a way to launder money then I heard you know it was the Florida mob the Jewish mafia then I heard you know it was all rumors none of it was substantiated right you know Harry Markopolos has his own book coming out and he testified in front of Congress that's he believes other agencies maybe government agencies or overseas banks or maybe drug cartels were involved I couldn't find any proof of that if he has it boy I cannot wait to read the book do you think to switch back to something we were discussing a while ago the press in general not you well I can't say not you again I can't say not not you I don't know I presume not you the the press in general seems to take the position that that people who invested in madoff who were not the moguls not the feeder fund just the ordinary folks ordinary folks of whom I would be one and I have to say that the point becomes even more true because although I am one of them I am probably more sophisticated than many of the others and I think you've got a judge by the others rather than by me and I was fooled completely as were the jim simons of the world and so many others but don't people like us depend on the SEC and that Wall Street crowd foolishly but don't we in effect depend on them to keep that crooks honest to keep the crooks from doing crookedness yes here here's what I find so distressing the same SEC who failed to catch madoff the same agency is now regulating non madoff investors they're regulating mutual funds they're regulating and you know this is obviously an agency that has a brand new head Mary Schapiro robert Khuzami who came out of Deutche bank and you know they're trying very hard to put in place suggestions you know like like a whistleblower program or things that other agencies have like the IRS the IRSis famous for catching up with those of us who owe them money and you know Harry Markopolos who has started I believe he has a practice whereby he's a Certified Fraud Examiner and will sue frauds on behalf of the US government in other words if someone's defrauding the US government of money he goes after them right for a fee none of those are in place yet and can we blame the SEC yeah of course this gets back to what I was saying before why there's there there's a potential tort case here in the first order against people who in past years for fifty hundred years would never have been liable to third parties like a feeder fund is yeah it's liable to its investors never to a third party for lack of diligence I think that's going to come into question because when you're dealing with the experts and the experts are in one way or another on the take or fearful you pointed out that they were scared to death they would lose their jobs and don't at least tell the government what's going on the rest of us are as they say in the polite-ist of company SOL we just we just invest with no possibility well in we we invest at our peril and that's one of the things that's coming out of this for all investors in the United States I totally agree I think the other thing that investors the rest the rest of the non madoff investor world might want to know is that you know the the insurance agency behind our accounts is this group called SiPC and this is the agency that you know at the end at the bottom of your statement says your account is insured by you know Sipc the securities investor protection corporation SiPC is broke and the only reason that we now know that is because ofthe madoff fraud that has been revealed because SiPC doesn't have the money to pay people like you know yourself and other investors or at least they claim not to have the money and so the rest of us who you know own mutual funds plain old vanilla investments might want to know might want to call up your broker and find out you know if something were to go wrong with my account would Sipc be behind my my investment yep we have to take a break I want to come back to SiPC because you're raising a very essential point which also involves the question of the Federal Deposit Insurance Corporation by way of either contrast or comparison or both its a most important point for the american economy but we'll discuss that right after the break stay with us we'll be right back with Erin Arvedlund hey those of you who watch books have 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 I people in the news you more about this belief is one of the important reason Massachusetts law starting a new and unique college call the American College in history in the studies Aceh Cal a CHL it will be a senior college offering it to you senior years of undergraduate UK it will focus entirely on American history including the history of some important field American law it will offer specific pathways to law school with those who choose to become weak including inference into law school after the junior year for those who do well in Aceh LS and education with usually prepares those symptoms public feels them all it's teaching will be entirely by the discussion method in which all students participate as it MSL itself and other pride possible it will have very small plastic only fifteen to twenty schools its tuition will be only ten 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have to pony up forty billion because they are because FDIC is paying out so much money to broke banks SIPC by way of contrast has for forty years and why has the media paid so little attention to this other than an article in 2000 or 2001 by Gretchen Morgenson in the times SIPC has instead made it its business to pre to to what it's like a regular insurance company it won't pay for anything if if can avoid it that's right yep imagine lets see so first of all SIPC charges I think charged until recently charged its member firms on Wall Street a hundred and fifty dollars per year and that's not a hundred and fifty dollars for each of our accounts that's a hundred and fifty dollars to Goldman Sachs to Goldman Sachs was giving out $20 billion in in in bonuses now now SIPC I think has applied to raise those sees double them I think perhaps like I think it's up to 250 or or possibly more 250 dollars SIPC is basically a captive to the Wall Street firms that are its members its exactly like an insurance company that to which you and I have to put in claims which they will fight based on whether or not they want to pay out the current SIPC trustee in the Madoff case who has been there go to guy for at least 10 to 15 if not twenty to twenty-five years as was disclosed in a major article in the NYTimes in 2000 or 2001 as far back s that he was there go to guy in 1991 he made an argument on SIPC's behalf that was so meritless that a federal judge said in print if went after the fact that the trustee presses this argument so vigorously I would not discuss it but would instead just dismiss it as frivolous and that kind of argument a that kind of statement about SIPC's arguments are all over the place in the legal profession the press has never been interested for some reason well I think what's going on now this is a question of what's called net equity currently yes up until the madoff case I believe they've been very very few frauds of the size in the in i wall street's history never been one like this size what's going on is the Madoff trustee on behalf of SIPC is trying to argue that madoff investors should not be compensated based on what their last statement was but on with their early investment was cash in cash out you took out more than you put in you're behind the eight ball that's right and for those people who took out more money than they put in they may be subject to clawback so for instance you know if I not only lost the money in madoff over the years but I took out more over the years I might actually have to give money back there are people who do that they've been there twenty thirty years they're using it to pay taxes they were using it to live they're using it like you might use a bank account if you have a bank account of three or four million dollars right now some madoff investors are pointing out that SIPC has never before used this definition net equity and that they allege the investors allege that they're doing so because they don't want to have to pay out on the insurance that they promised and part of SIPCs argument is that well you know you were never really invested in anything cuz the whole thing was a fraud to which madoff investors say yeah but I was getting statements every month from a brokerage firm that looks legitimate and I thought I was invested so if I if I'm playing with chips in the casino and it all looks real I figure I'm gonna get paid if I win hen well you know you could just imagine what the reaction would be in this country if the FDIC were to say when a bank goes under yes you've been getting a bank statements for thirty years and the bank statements show that you have a positive sum in the bank for about a hundred and fifty thousand dollars but the bank was a fraud for the last fifteen years you've got nothing there therefore we will give you nothing now that the bank ihas gone under there'd probably be a revolution in this country I agree and the only reason the same thing I think is not being thought the same revolutionary fervor if Imay put it that way is not being expressed with regard to SIPCis so few people know about SIPC and what it does and they figure all investors are rich anyway which is not true a lot of these people lost money are firemen and policemen and workers in pension plans right so here's one of the myths of the madoff fraud I think what a lot of people don't know is there were many middle-class and not wealthy investors in madoff many of them had no idea even that he was the portfolio manager they were one step removed or they came in through a bank or a feeder fund or for instance like in the case of the West Palm Beach Police Department their pension fund had put some money into a feeder that ultimately went into madoff so they were several steps removed and you know I think what's important to realize is also is that I hedge funds are here to stay they're going to be with us they're going to be in our pension funds they're going to be probably one day in our you know retirement accounts or they'll be an option in our retirement accounts they may very well be regulated soon potentially by the SEC so it's going to be even more important to be vigilant and to ask the right questions about your investment there are other myths too I think about the Madoff case most of the dollars invested for instance or much of it came from charities it was not just a Jewish problem most of the money came from endowments foundations and there were small investors many of whom had say started with a hundred thousand dollars so I think it was a warning sign for the rest of us which exposed a lot of the issues you know that's really interesting it was that canary in the coalmine we'er uncovering so much fraud now and so much potential for fraud and it's really both bigoted and wrong and wrong to dismiss it is a well it was just a Jewish problem a bunch of rich Jews in new york city and Florida and Los Angeles ets an awful lot of people who are not jewish and who are not rich and all of their money is at risk now because SIPC you know SIPC doesn't have the money to cover it doesn't want to cover it has spent decades fighting having to cover and hedge funds are thus far unregulated and Lord all I can say is FDIC if this were the FDIC the country would be going under let's go back to something that will take this into the and change the problem again I appointed these SEC inspector general mentioned in his report but did not dwell upon with regard to motive yeah I is that in 1992 the SEC for the for investigated made up for the first time as a byproduct of investing two people BNs and Avelino you have spoken about previously and when be an issue Natalie know we're required to shut their business the SEC made is most incredible statement in the wall street journal statement which securities lawyers in which I once was for a couple years tell me is never made in it in the wall street journal that the Security and Exchange Commission official said right now there is no fraud which led lots of people to invite continue their investment with main office that can be honest natalino yep that other people myself included to invest for the first time but people for years afterward to continue putting money why do you think I media any notion why the SEC made is most unusual statement in the wall street journal the only thing I can think of is that they were so relieved that the money was there or at least most if it was there you know a that they decided to let the guys well essentially this is the beginning I've made of I'm flying career because he told he told the FTC well I had no idea the these two guys who are raising money for me we're doing it legally arm when they believed him to me that was the SEC's it was their first IOM let down had made of at the time was chechen admired figure at the st. and liberty made of said their hey here's the money and the story hmm they just didn't care probably the money came from the Ponzi scheme that he you know that he said you up will pay back and then he call people here I know I have read people said he action call their families that if you want to leave the money directly with me you know find out take that's right and I'm I've also read interviews with others who said one one month I was getting a statement from an accountant and then the next month I got it from Bernie Madoff yeah great rail what the you you have meant old one other thing in 2004 the Internal Revenue Service which as you pointed out has made billions from a dog it made more than Jeffry Picower national anthem a pickup truck a a and you know what we're estimating here somewhere between fifty 15 and 50 billion we don't know the government's being secret we have no idea in 2004 made of applied to be what is called a a non-bank custodian a by race there's a whole statute and and the the IRS approved him is a non-bank estonian a IRA's you now the IRS I i've written to him a couple times and to my amazement they wrote back and they made clear that all that you have to do to become a non-bank SW to buy raises fill out the forms and if you fill out the forms they you know neid in by the way the Congress gave them 77 plot seventy million plus dollars in nineteen seventy what did you 3 to set up this organization for nine it just segment that the 70 million guests like maybe 250 million today and %uh they do the required to file some forms so this help 30 made of two but you say that in 1992 that's when he began using the computer began using this cover story the split strike conversion coverage during and is that with his mate when he began her is that when he begins splitting out statements liar this now very old-fashioned computer and the 17th floor I actually think EM he was sending out very sort of vague statements almost Purley Way back when until the seventies I mean not a lot of investors kept records going back that far however yeah I think inman in the early nineties is when I am made of needed more cash he came up with this much more sophisticated sounding strategy it was one that was mom sounded very liquid and very enticing to big institutions like these fun funds in the feeder funds we've heard about so they started putting in billions of dollars and you know I think it was a way for him to perpetuate the fraud but it also made it so much bigger om you know by the time Harry Markopolos started sniffing around in 1999 I think he estimated that made office between five and seven billion yeah and by 2008 it was going on what what we were not sure what it was but I am you're probably going on twenty you you know what are the things that surprise me about that things in her remarks hapless said particularly in his testimony to Congress was that he only knew about the Peter fact he was and a we are the small individuals within investing with Madoff just like this small individuals I sell for $1 will complete you know where the Peter fast I think I am bed of did that was by design yeah made up wanted different investor group to be operating independently yeah because it helped him keep money coming in you know he also was able to he you know perpetuated that velvet rope trick where he made everyone feel special yeah right in fact mark up a list testified from Congress amid it's in his his testimony he said he went on a trip to Europe met with the you know what does dinner we're happy about two dozen banks and each of them separately told him we're made of. we get special access yeah I must say that I I never felt special I know a lot of people are said to have felt special I mean even small people that is that when I'm lucky I have a friend who's been there for a long time so we took me so I'm lucky enough that but then I don't think it things the way other people do you know like special around okay to fancy character you know a lot other a lot of people do think that way Catherine what was the role his lawyer if any a name Irish Sorkin in all of this and how does one explain the fact if it needs explanation debts or cans family pull their money out about a year before the collapse after been made of for years as I is i gather nature right but i gather yeah there were a number of investors who pull their money out have everyone and rather a short period prior to main office confession so among them were I am I believe is actually a resurgence I'm either his mother or I'm was a an account on inherited account I'm JP Morgan Chase pull their money out on behalf of their clients a few months before are made of confessed and you know we can get into why I'm lucky I wish you would that's important said JP Morgan Chase mom withdrew money from made of not it was probably not even three months prior onto his confession may have been in since September and he confessed since in December to JP Morgan had an unusual bomb window into made of and the reason was this first evolved may have had a chase bank account that was his you know cash in cash out account right said everybody's really a everybody's money in May in the phony hedge fund went into the same bank account and over the years the account group into the billions so ready made up was wanna chase's best clients right they made hundreds of millions of them they a well he had an enormous balance which he maintained now roundabout early 2008 Bear Stearns collapsed and Bear Stearns had a very long trading relationship with with me now from the brokerage side they did a lot of business together Bear Stearns collapses JP Morgan took them over and in the meantime they had also by Chase Bank years earlier so now JP Morgan had to Windows into made of they bought they had brought chase so they had custody over his bank account and in the meantime they bought Bear Stearns which had a long trading relationship and in 2008 as you know the stock market started to collapse the S&P was down about 45 percent meanwhile madoff's bank account was starting to close in on zero and and JP morgan started to get worried they started asking their their um coworkers at Bear Stearns you know you've got a long relationship with Madoff how does he do it with his hedge fund how does he make 10 percent a year well we have no idea basically the the allegation is and I think this will be born out and in court or at least it will be answered in court is that a JP Morgan couldn't either they had early warnings based on the fact that they had a window into madoff's bank account and they had a relationship with an old old friend on wall street. which was bear stearns they had worries and questions that they couldn't answer and they pulled their money out right cuz they had this deal that people that they invested in where they were invested de facto they and their customers were investing in madoff and that's what they pulled all that money out right that's right so they saved their money they saved their customers money they didn't tell the SEC anything well actually some of their investors are suing J JP Morgan Chase because that the bank pulled its own money out but not not all of its clients money and one of the accusations is that over the years because of the money flowing back and forth to madoff's London office we haven't gotten into that but in essence the London office was doing with the same kind of a slush fund that the 703 account was and to fool people sometimes he would make he would send money to London and have London send it back you know money to London london send it back and he would tell people well i'm doing business with people abroad and that's how I do this and that the options and so on and and the allegation is that this is typical of money laundering and when more than ten thousand dollars is involved a bank a JP Morgan Chase no less than anybody else has a responsibility has a legal duty to inform the government that something looks fishy here and they never did he had a legitimate brokerage firm and the and the phony hedge fund he had to figure out a way to make it look like he was actually trading on behalf of the fund whereby he would you know go to the JP Morgan Chase account and basically wire money to London where he had an office in some cases you know hundreds of millions of dollars and then just wire it back that's money laundering in our country right and that was one of the the counts on which madoff was charged aside from securities fraud now hedge funds you know are are a very easy place to launder money as I said there there not yet regulated by congressman you know they're not overseen by the SEC in large part and its it's still possible to do it so you know its we don't know who the investors are many times we don't know the source of the money or can come in through a corporate entities so um it's still very possible I think JP Morgan's got years ofs massive lawsuit ahead of it because it's got the money to pay every investor I think and there's no doubt that what JP Morgan did based on what I've read in the complaints it would seem that JP Morgan has some things to answer for and you you're the one I think from where I read it in the last year something like 12 or $15 billion I forgot the exact total got pulled out of the 703 account by people who were redeeming if JP Morgan had blown the whistle there would be at least another three to six maybe twelve billion dollars left for the investors who were defrauded well that's what the lawsuit alleges yet they were tipped off early right and Frank Avelino told his his housekeeper a few days before your money's lost how did he know you know you talk and not too many people have about the repeal of glass-steagall as setting the stage and making possible this massive fraud this this repeal of glass steagle which essentially started in the nineteen eighties by rulings of the comptroller of the currency I think it was in the Federal Reserve Board in 1999 per greenspan and robert rubin and larry summers and all the people who are still running our economy made sure that there was repeal of glass-steagall explain briefly in about two and a half minutes what glass steagall was why it came about right and how its repeal set the stage for all of this glass steagall was once the law of the land which separated commercial banks or depositor banks from investment banks and so with the rise of big financial groups like Citibank which wanted to be in both businesses the law was repealed a it depositary bank is what we we put our money and take checks out a savings deposititory and Goldman Sachs that was an investment bank so then it became possible in the nineteen nineties for you know these these financial supermarkets to offer everything investment banking mutual funds you know deposits and as a result however risk it became possible for these big banks to take risks that had never before been taken with with depositors money that's crucial including getting into hedge funds AIG for instance was able to gamble with policyholders money on these credit default swaps right and the firm almost went under but for government bailout and there were a bunch of other examples now I'm I'm not an expert on glass steagall and those people are out there so I'll I guess for madoff investors sake what's interesting is that you know glass-steagall's not coming back and if you go to a bank or you go to your mutual fund or you go to an investment bank it's very hard to tell the difference between them which is why it's so important you know like I said to find out who has custody of your assets is there an independent party in between you your money and your money manager because there should be people have said that banking commercial banking taking deposits giving you a checking account it's not profitable is supposed to be a boring business it is supposed to be a boring business when these commercial bankers were permitted to start buying all the stuff with tranches and h securitized mortgages and the default swaps that set the stage for disaster and that's what glass steagall did and it was done by the geniuses who are running our economy now this is a terrible situation that's my personal opinion folks not not the not my employers well Erin a I do believe that this is likely to become a lot of people's Bible about what happened in the Bernie Madoff case it there's a lot more that we can and will talk about after you do maybe even before you the sequel to your book because I've got some other things planned about this and I want to thank you from coming from Philadelphia and enlightening us you've done a lot of work for many years well many years ago and then again in the last year and a half and it's great that you shared shared so much of that with our audience well than you for having me thank you to the audience thank you very much and be with us again next time

Channel: Massachusetts School of Law at Andover

Views: 90,877

Rating: 4.7012749 out of 5

Keywords: bernie madoff, madoff, ruth madoff, madoff documentary, harry markopolos, andrew madoff, ponzi, IRS, Too Good To Be True: The Rise And Fall Of Bernie Madoff, FDIC, shapiro, chaise, picower, fairfield, mafia, Glass-Steagall, Too Good to be True, mutual fund, wall street, hedge fund, SEC, SIPC, electronic trading, brokerage, NASDAQ, feeder fund, avelliono, bienes, picard, dipiscali, erin Arvedlund, ira sorkin, jp morgan chase, money laundering, Bernard Madoff (Organization Leader), Trading

Id: 8CdqYJZfyq0

Length: 60min 0sec (3600 seconds)

Published: Fri Dec 11 2009