The New York Times
Too Good to Be True: The Rise and Fall of Bernie Madoffby Erin Arvedlund
"Despite all the headlines about Bernard Madoff, who pleaded guilty to running a $65 billion Ponzi scheme, he is still shrouded in mystery. Why (and when) did he turn his legitimate business into a massive fraud? How did he fool so many smart investors for so long? Who among his family and employees knew the truth?" "The best person to answer these questions - and… See more details below
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"Despite all the headlines about Bernard Madoff, who pleaded guilty to running a $65 billion Ponzi scheme, he is still shrouded in mystery. Why (and when) did he turn his legitimate business into a massive fraud? How did he fool so many smart investors for so long? Who among his family and employees knew the truth?" "The best person to answer these questions - and tell the full story of Madoff's rise and fall-is Erin Arvedlund. In early 2001, she was suspicious of the amazing returns of Madoff's hedge fund, which no one could explain. Her article in Barron's, based on more than one hundred interviews, could have prevented a lot of misery, had the SEC followed up." "Now Arvedlund tackles the tough questions that are still unanswered in the wake of Madoff's collapse:" "Did he start off as a legitimate money manager or was he a fraud from the beginning? Were there indications of larceny at the very start of his career?" "Why did Madoff's biggest supporters within the industry, such as Walter Noel of Fairfield Greenwich and Ezra Merkin of Gabriel Capital, ignore the warning signs that were so apparent? Did they choose to remain ignorant as long as their commissions rolled in?" "Why did SEC investigations fail to catch Madoff's Ponzi scheme even though several people had voiced concerns about his operation?" Who else helped Madoff carry out his scam? His family and close associates have denied any involvement, but was it possible for one man to engineer a heist of such scope?
The New York Times
- Penguin Publishing Group
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Read an Excerpt
On the morning of March 12, 2009, Bernard Lawrence Madoff stood inside courtroom 24-B on the twenty-fourth floor of the Daniel P. Moynihan U.S. Courthouse in downtown Manhattan. Outside, a strong, wintry spring wind blew, but inside the air was stuffy and hot with tension. The seventy-year-old Madoff sat just past the wooden barrier that separated the public seating gallery. He did not look at anyone, just stared straight ahead, as everyone in the room and on the closed-circuit television watched his every move. Always impeccably dressed, Madoff wore a bespoke business suit in his trademark charcoal gray, paired with a lighter gray silk tie. He was flanked by four attorneys, two on either side of him. His longtime lawyer, Ira Sorkin, was seated on his immediate right, and another attorney, Daniel Horwitz, sat to his left. In front of Madoff and his lawyers were another table and chairs, full of federal prosecutors, but Madoff could see only the backs of their heads.
Just a few months before, Madoff had commanded the respect and admiration of Wall Street, of his wealthy friends and his charities, of his thousands of investors and believers. But on this day, he commanded nothing and no one, except his own voice. On this morning, at ten a.m. exactly, Madoff faced up to 150 years in prison on eleven criminal counts.
Madoff rested his fingers on the top of the table in front of him and occasionally took a sip of water from a glass. As U.S. District Judge Dennis Chin entered, everyone in the room stood, including Madoff, the phalanx of attorneys, dozens of reporters, and a court sketch artist. There was also a mob of angry Madoff investors, calling themselves "victims" and "casualties," who had come to seek vengeance on the man who had done them wrong.
"You wish to plead guilty to all eleven counts?" Judge Chin looked up matter-of-factly and spoke somewhat kindly to Madoff.
Nodding his head of wavy, pewter-colored hair, Madoff listened and answered calmly throughout Judge Chin's many questions and clarifications that followed: "You understand you are giving up the right to a trial? If there were a trial, you could see and hear witnesses, offer evidence on your behalf," and so forth. Judge Chin wanted to make sure this was what Madoff had chosen: to plead guilty, and thus not to cooperate with the government's investigation or to indict anyone else in his crime, the $65 billion Ponzi scheme that was proving to be America's largest financial fraud ever. No, Madoff didn't want a public trial; he didn't want to have to point the finger at anyone else. Given the scope of the charges against him, it was a stubborn move.
To each question, Madoff answered, "Yes, I do." Madoff was waiving his right to due process in a court of law. He was going to plead guilty and would alone admit to everything he was charged with, including securities fraud, mail fraud, wire fraud, money laundering, making false statements, and perjury.
And that was exactly how he wanted it.
Madoff's blue eyes looked weary and his expression resigned. No longer was he sporting that insane-looking smirk, the smile — of what? the unburdened? — that had incensed everyone who had seen him walking around freely while he was out on bail in the days after his December 11, 2008, confession and arrest. Now, three months later, the smirk had vanished. He began wringing his hands. One of the prosecutors in front of him, Acting U.S. Attorney Lev Dassin, stood up to address the court. "The charges reflect an extraordinary array of crimes committed by Bernard Madoff for over twenty years," Dassin said. "While the alleged crimes are not novel, the size and scope of Mr. Madoff's fraud are unprecedented." Assistant U.S. Attorney Marc Litt, the chief prosecutor in the case, then stood up and told the judge that Madoff could face up to 150 years in prison under federal sentencing guidelines.
Finally, it was Madoff's turn to speak. The room stilled.
"Mr. Madoff, tell me what you did," Judge Chin said. Madoff had prepared a statement, which he read out loud from stapled paper pages. He took full blame. He wasn't going to cooperate with the prosecutors, wasn't going to help them out and bargain for leniency or a lesser sentence. He wasn't about to indict his family or anyone else for helping in this fraud — a fraud so large, encompassing more than four thousand client accounts, that even the Nobel Peace Prize winner and Holocaust survivor Elie Wiesel, whose charity had lost millions, had been driven to calling Madoff "a thief and a scoundrel" in public.
Madoff's voice was a strange blend of Queens-accented Noo Yawk and a soft but firm monotone: "Your honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme. . . . I am actually grateful for this first opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. . . . I am painfully aware I have deeply hurt many, many people.
"When I began my Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. I am here today to accept responsibility for my crimes by pleading guilty and, with this plea allocution, explain the means by which I carried out and concealed my fraud. . . . I always knew this day would come. I never invested the money. I deposited it into a Chase Manhattan bank."
Madoff's statement took only about ten minutes, and while he spoke he did not turn to or eye the packed crowd in the gallery. When he finished, he sat down, and the courtroom broke out into a series of murmurs. Madoff would not have to spell out any details of his crime, nor would he implicate anyone else. There was just his guilty plea and no further explanation.
The tension crescendoed, for now it was time for three victims to make short statements. The first, George Nierenberg, took the podium and glared over at Madoff.
"I don't know if you've had a chance to turn around and look at the victims!" Nierenberg snapped.
Madoff then glanced over his shoulder, but Judge Chin admonished Nierenberg to return to the argument at hand. For what reason, if any, should the judge not accept Madoff's guilty plea, and not send him to jail?
A filmmaker whose family had lost everything, Nierenberg wanted to know why there was no conspiracy charge by the government — surely there were other people who had helped Madoff in his decadeslong fraud who should be held accountable too. "He didn't commit this alone. I'm not suggesting that you reject the plea, but that there is another count to consider," Nierenberg said. Madoff had just said that the fraud had started in the early 1990s, but even the prosecutors disputed that claim, saying they thought it had started much earlier.
The second victim to address the court, Ronnie Sue Ambrosino, pointed out that the full extent of Madoff's crimes might never be uncovered if he was not forced to provide more information. Madoff's two sons, Mark and Andrew, and his brother, Peter, worked at the same firm too but had not been charged in the Ponzi scheme.
"Judge, I believe you have the opportunity today to find out where the money is and who else is involved in this crime," Ambrosino said. "And if this plea is accepted without those two pieces of information, I object to it being taken."
After the victims had made their statements, Judge Chin nodded and thanked them for speaking. Then he ordered Bernard Madoff remanded to prison. He would be sentenced three months later, in June 2009.
Applause broke out in the courtroom. The thief would not be going back to his million-dollar penthouse apartment on the Upper East Side of Manhattan, where he had been under house arrest for the previous three months.
Outside the courthouse, at 500 Pearl Street, near the intersection of Pearl and Cardinal Hayes Place, the people who had invested with Madoff felt eerily unsatisfied. Some got a small thrill from seeing and hearing the metal handcuffs click around Madoff's wrists as Judge Chin ordered Madoff to prison for the first time since his confession to the FBI.
"He wasn't speaking the truth. It was a disgrace to the court," said Brian Felsen, a twenty-three-year-old Minnesotan whose grandfather had invested with Madoff in the 1980s. "I'm happy my grandfather didn't live to see this. His life's work was stolen. He would have been horrified." Felsen's family had come to Madoff through Minne apolis-based money manager Michael Engler, a pillar of the local Jewish community who'd also been duped by Madoff. "To see Madoff in the flesh . . ." Felsen said. "It opened the wound."
Other victims couldn't have cared less that Madoff had pleaded guilty and would probably go to jail for life — the time he served would not repay the lives he hurt. Adriane Biondo of Los Angeles asked out loud on the sidewalk, among a crowd of reporters and Madoff victims, "Where's the money, Bernie?"
Where was the money? It was a question that everyone across the nation — and the world — had been asking ever since news of the scam had broken. Was it in London, where two of Madoff's longtime fundraisers had set up an office? Was it in Switzerland, where Madoff had successfully courted Swiss banks like Safra Bank and Edgar de Picciotto's UBP? Was it in Asia, even, where Madoff had traveled in a desperate last bid to raise money before the scam unfolded?
Just three months earlier, Bernard L. Madoff had been relatively unknown outside of the close-knit circles of Wall Street. Now Madoff was a household name, a verb meaning "to rip off," as in, "I was Madoffed." His name was now equated with a crime bigger than Enron, bigger than WorldCom, bigger even than those of Charles Ponzi himself, the man whose name would grace the type of scheme that Madoff had taken to a whole new level. Madoff's crime spanned the world and involved tens of billions of dollars, all of which had seemingly vanished overnight.
Among financial traders on the Street and within the halls of the Securities and Exchange Commission (SEC), the government agency that regulates financial institutions, Madoff had been a prominent figure for decades. "Bernie," to those who knew him well, and his brother, Peter, had made names for themselves in the 1970s and 1980s by starting a then-revolutionary electronic trading business. Their system, which allowed them to buy and sell stocks in seconds — instead of hours or even days — helped promote a onetime backwater exchange known as the NASDAQ. Today it is one of the largest trading venues in the world. Aside from a few close associates, few of Madoff's Wall Street contemporaries ever suspected that he was at the same time pulling off one of the greatest cons in history.
Madoff had also made a name for himself in Washington, D.C., and specifically on Capitol Hill, as a generous donor to both Republican and Democratic election campaigns and as an aggressive lobbyist for stock market restructuring. Wall Street regulators knew Madoff because, as an expert on market structure and trading, he sat on committees and volunteered as an adviser to the SEC. At elite beach clubs in Palm Beach and Los Angeles, ski resorts in Switzerland, and aristocratic dinner parties in London, Madoff was highly sought after, but only a few actually knew him. "Bernie," as he was also known to his investors, would manage your money and promised a guaranteed 10 percent, even 12 percent or higher, annual return — as long as you didn't ask any questions.
Until his arrest in December 2008, however, Madoff was relatively unknown outside the financial world. It wasn't until he admitted to his massive $65 billion fraud scheme over the course of — potentially — several decades that Main Street began to take notice.
Overnight, America came to know Bernard Madoff as a man living a life of luxury and deception — not just for months or years, but possibly for his entire adult life — paid for with other people's money. It quickly became apparent that much of the vanished money had never existed except on paper. The numbers represented profits that Madoff told investors he had made for them, when in fact he had spent the money they had given him and not invested it at all. The exact amount of actual money lost may never be known. What we do know is that, for decades, Madoff looked his investors in the eye with a smile, shook their hands, and never showed any indication — let alone remorse — that he was robbing them blind. He fooled his closest friends and family, as well as hundreds of university endowments, charities, and pension funds; he stole people's hard-earned savings, their futures, and their dreams by faking investment returns under the cover of a legitimate Wall Street firm. And when he was caught, there was little recourse for his victims because, by then, the money had disappeared. Such is the nature of the pyramid scheme.
Madoff's crime, painstakingly carried out over many years, was audacious but based on a simple premise: he paid earlier investors with later investors' money. This type of scam was made famous in America at the turn of the twentieth century by Charles Ponzi. Although he was not the first to engage in the practice, Madoff expanded the scam across decades and on a multibillion-dollar scale. The effects of Madoff's lies rippled across the globe, and when he was exposed, investors around the world wondered how he could have managed such a vast fraud for so long without regulators catching on, despite numerous red fl ags and warnings.
This is one of the many revelations that infuriated Madoff's victims. How did regulatory agencies such as the SEC or FINRA (the Financial Industry Regulatory Authority), which are charged with monitoring financial institutions, fail to notice that one man was operating the largest Ponzi scheme in history? The SEC has said it found no evidence of foul play at Madoff's firm, but there were plenty of warning signs that something was amiss.
In the spring of 2001, I first heard about Bernard Madoff while working for Barron's magazine. Several of my contacts mentioned his name to me and told me he was a hotshot in the hedge fund world, churning out consistent 15 percent annual returns on investments despite fl uctuations of the market. Like legendary hedge fund managers George Soros and Julian Robertson, Madoff supposedly ran a $6 billion hedge fund, but unlike Soros or Robertson, Madoff's performance numbers never seemed to show up in any of the usual databases or magazines. Strangely, Madoff asked his investors not to tell anyone he was managing their money; investors were intensely loyal to Bernie and were willing to keep their money with him for years. But others I spoke to were wary of Madoff and said his investment strategy did not make sense; even experts in his so-called strategy couldn't duplicate his returns. After no luck getting an interview, I phoned his office one more time to say the story was running anyway. Suddenly, he was made available. Over a scratchy international phone line, Madoff told me he was in Switzerland; I asked Madoff how he was able to accomplish his amazing returns. "I can't go into it in great detail. It's a proprietary strategy." Madoff further dismissed skeptics who tried to reverse-engineer his secret formula, saying they "didn't do a good job. If he did, those numbers would not be unusual." He sounded untroubled, affable, and didn't tell me much of anything.
In May of that year, my article on Madoff ran in Barron's. It quickly became watercooler fodder in Wall Street circles as it questioned how Madoff could be making such great returns using a strategy that other investment professionals could not replicate. Unfortunately, despite the buzz generated by my article, the SEC, Madoff's investors, and others connected to the scam turned a blind eye. Madoff continued to recruit unsuspecting clients around the world.
I was not alone in my suspicion of Madoff. A week before my article ran, Michael Ocrant, a reporter at the industry publication MAR Hedge, published a similar story asking the same questions. His article received the same response: immediate buzz but otherwise a surprisingly lackluster reaction by those who could have intervened. Harry Markopolos, a financial analyst who had been introduced to Madoff's firm in 1999 and was familiar with the strategy Madoff said he used — known as the "split-strike conversion" — realized that Madoff was running a fraud and made it his mission to expose him for the thief he was. Unfortunately, despite Markopolos's years of attempts to out Madoff — including warning the SEC on multiple occasions — Madoff continued to fl y under the radar.
Madoff's story is not just that of a financial mastermind and criminal. It is a complex, ever-changing, and expanding tale of a fraud of unprecedented proportions. How did Madoff defraud so many of his clients? How did human nature and his investors' willingness to delude themselves play a role? In a sense, the fraud was a vast, unwitting conspiracy among Madoff, his colleagues, family, friends, and investors. The conspiracy perpetuated a fantasy. Madoff promised returns that were too good to be true, and everyone else conspired to believe his unbelievable promises. Madoff was a master illusionist.
There are many frustrating questions looming over l'affaire Madoff. Why would one of Wall Street's icons create a web of so much deception and rob so many people of what would amount to billions of dollars of their money? Why did Madoff's investors put all their financial eggs into one basket, including what they'd intended to bequeath to children and grandchildren? Why did so few people heed the warning signs that were evident all around Madoff? What motivated Madoff? Was one month of losses enough for him to start faking returns? What was the turning point, the moral line of demarcation between just some lax business practices and a much larger betrayal? Was Madoff a good person covering up a bad decision, or was he a lifelong sociopath? Who helped him perpetuate the fraud: his family, the feeder funds who enabled him, or people inside the regulatory agencies? Are there other Madoffs in the hedge fund world, and if so how can they be found out and stopped? Perhaps one positive to come out of this breathtaking crime is that secretive hedge funds will be dragged out into the light for public scrutiny, and there will be fewer shadows where crooks like Bernie Madoff can hide.
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Meet the Author
Erin Arvedlund began her career as a reporter at Dow Jones newswires in 1993. In 1996, she moved to Moscow to write about business and emerging markets for The Moscow Times. In 1998, she joined TheStreet.com, one of the first real-time news and stock market web sites. She then moved to Barron's magazine to cover options, mutual funds and hedge funds from 2000-2003. From late 2003 to 2005 Arvedlund reported on business and politics in the former Soviet Union for The New York Times. She also has Wall Street experience, having worked in the hedge fund industry at two separate firms, Vision Opportunity Capital Management and Sanford C. Bernstein.Arvedlund has a B.A. from Tufts University in International Relations and studied abroad for a semester at Leningrad State University in St. Petersburg. She has also freelanced extensively for print and online magazines such as Fortune, Outside, The Economist Intelligence Unit, Portfolio.com, and Slate.com. She is married and divides her time between New York and Philadelphia.
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