Madoff with the Money (25 page)

He was Mr. Outside to the nth degree.

With Bernie on the cover in a lengthy March 2009 profile called “Before the Fall,” the magazine noted that Peter “was the firm's original computer whiz and eventually assumed responsibility for the trading operations. It was Peter, in fact, who saw the potential in trading securities listed on the New York Stock Exchange. And it was that decision that catapulted the firm into the big leagues of wholesaling.”

He was Mr. Inside to the nth degree.

A former Wall Street big recalled how it was Mr. Outside who “always made himself available in the early days of Nasdaq when it was hard to get volunteers. . . . After a while, he became a leading voice and was influential and valuable to Nasdaq.” Another told
Traders Magazine
, “Bernie's strategy was to get actively involved in all aspects of the industry,” and noted that he had “a much bigger presence than the size of his firm would naturally warrant. By being visible, he'd boost his business.... It was a very smart move.”

When, in the late 1970s, Madoff bought seats on the Cincinnati Stock Exchange—a competitor of sorts to the NYSE in terms of trading platforms and operational styles—Mr. Inside, Peter, was elected to the board, and also joined the Cincy's trading and technology committees, mainly because of his expertise in those areas, not because he was seeking to overshadow his ruling brother; Bernie would never allow it.

By the early 1980s, Bernie “could hang out his shingle as a full-fledged alternative to the New York Stock Exchange,” stated
Traders Magazine
. Bernie, always the spokesman, was quoted as declaring, “We set the standard at the Cincinnati,” and he began securing steady order flow from the likes of Charles Schwab & Company.

Madoff was growing bigger every year, with Bernie working the system from the outside and Peter keeping things under control on the inside. Madoff soon had the ability, with Peter's expertise, to execute orders quickly—even faster than the NYSE.

Moreover, brokers were actually being paid by Madoff for their business. Complaints were registered with the SEC by the NYSE and other exchanges that Madoff wasn't playing by the long-established rules.

Bernie's response was to ignore the rules.

Business boomed, with Madoff nearing 10 percent of the volume of the NYSE in the 1990s. Madoff had become Wall Street's 70th largest firm during the Clinton years, doing as much as 25,000 trades daily. In that same time frame, Bernie was named to the chairmanship of Nasdaq's board of directors, and Peter served on the board for several years. But he still ran the firm's trading show and oversaw compliance. He was Bernie's number two in the chain of command, other than those few individuals Bernie may have had working in his clandestine investment advisory operation—the Ponzi scheme, of which Peter later would claim all innocence.

The Madoff joint was jumping.

With Bernie blowing the Madoff horn, the firm was generating positive publicity because Bernie always made it a point to talk to journalists when they called, or invited them over to tour the trading floor.

Laurel Kenner, who had been Roger Madoff 's stock market editor at Bloomberg before she left the news service in 2000, recalls how Bloomberg's New York bureau chief at the time, aware that Roger was a member of the “dynamic Madoff family,” would visit Madoff headquarters “to meet and greet and hang out and see what was going on.” Adds Kenner, “Everybody was encouraged to go out and meet the people we were writing about for story ideas. When we did market preview stories in the morning, we would call Madoff for a London quote because they had the London office.”

The business media and Madoff had a beautiful relationship.

After Bernie's Ponzi operation was revealed, Kenner opined that Bloomberg had missed the boat, the biggest financial fraud in history. “It's embarrassing,” she says. (After the scandal broke, however, Bloomberg was on the story, breaking a number of exclusives.) And Kenner observes, “I'm so glad Roger isn't here to see this, and second of all, how in the world could Bernie Madoff have pulled off a fraud of such magnitude? Where's the family in all this?”

With Bernie pumping things up, BLMIS was consistently in the business news in a highly positive way for years.

A trade publication,
Wall Street & Technology
, profiled “The Madoff Dynasty” in its August 2000 issue as part of a story called “Family Influence” that examined three families involved in financial technology, and their impact on the industry. The Madoffs were chosen because they were considered to be among “the most influential.” The highly complimentary article noted that Bernie's brother, sons, nieces, and nephews orbited around him, but that when the firm was started “there was only his wife, Ruth, who helped with some bookkeeping—and dreams of Wall Street success.”

The article pointed out that the day-to-day Madoff business “found its way to the dinner table at home.”

Mark Madoff, who joined the firm in 1986 after graduating from the University of Michigan, was quoted in the article as saying, “All of his [Bernie's] family members grew up with this being our lives. When it is a family-operated business you don't go home at night and shut everything off, so you take things home with you, which is how all of us grew up. . . . What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there. That's a good feeling to have. To Bernie and Peter, that's what it's all about.”

Affirming Mark's statement, Kenner recalls a wide-eyed Roger telling her that his cousins “all could remember 14 different stocks, and keep all the prices in their heads.”

But less than a decade after the Madoff profile appeared, Mark had to change his tune, since it was Mark and his brother Andy who turned in their father to authorities. Andy Madoff melodramatically told a friend that what their father did was “a father-son betrayal of biblical proportions.” While the sons consistently maintained through intermediaries that they were hoodwinked just like all of Bernie's other victims, their dealings with their crooked father came under investigation.

“I'm unemployed, I don't have any money, and I'm just trying to stay out of jail—my name is mud,” Andy whined to a friend, according to
Vanity Fair
.

The brothers cut off all communication with their mother, likely because of legal advice, and refrained from visiting their father in the slammer.

But before the fall of Bernie, it all looked so perfect to outsiders like the business reporters, and even to family insiders like the innocent Roger Madoff. But a longtime family friend, veteran Madoff employee, and eyewitness asserts, “There were massive fights between Bernie and Peter, and between Mark and Andy—but no long-term feuds.”

With Bernie behind bars, and with a number of the Madoff family business principals being scrutinized by authorities after the patriarch's arrest, the reporter who wrote the “Madoff Dynasty” story almost a decade earlier, Anthony Guerra, observes, “It's very difficult to know somebody from the level of the stories that we do in journalism when you're looking at their business life. That's a surface-level snapshot. You would have probably had to dig so, so, so deep, and you're talking about a situation where family members may not have known.”

He adds, “It's a sad story to me that you can have so much, and it not be enough. That's the larger human drama in the Madoff story.”

Red flags, however, soon started to be furiously waved.

In May 2001,
Barron's
, under a headline “Don't Ask, Don't Tell: Bernie Madoff Is So Secretive, He Even Asks Investors to Keep Mum,” reported, “Some folks on Wall Street think there's more to how Madoff generates his enviable stream of investment returns than meets the eye. . . . Even adoring investors can't explain his enviable steady gains.” The report by Erin Arvedlund noted that “few on the Street” were aware that Bernie was managing billions of dollars for rich clients, enough to rank Madoff among the three largest hedge funds in the world.

Bernie called the Wall Street speculation “ridiculous.” And when asked by
Barron's
to explain how his money-management operation “never had a down year,” he responded, “It's a proprietary strategy. I can't go into it in great detail.”

Bernie said it was called a “split-strike conversion,” which was gobbledygook to most.

His real strategy had been conceived some eight decades earlier by the man whom Bernie would surpass as the greatest swindler of his time, Charles Ponzi, from whom the term
Ponzi scheme
was derived—whereby early investors are paid with ill-gotten funds from later investors.

As it turned out, the Jewish guy from Queens had out-Ponzied the Ponzi guy from Italy who came to America to commit his crimes.

Like Bernie, Ponzi had a respectable-sounding firm, Securities Exchange Company, to hustle his fraud. And like Bernie, Ponzi was a dapper schmoozer, a
macher
, a Mr. Outside.

Ponzi's scheme began shortly after the end of the Great War and at the start of the Roaring Twenties.

As with the reporter from
Barron's
, a business writer raised the first red flag that questioned Ponzi's high returns. With incredible chutzpah, Ponzi sued and won a $500,000 libel suit. But his scheme soon ran out of steam. With revelations that he was robbing Peter to pay Paul, there was a run on his company with investors seeking their money—millions of dollars back then, not anywhere close to Bernie's billions.

In the end Ponzi was charged with 88 counts of mail fraud. He pleaded guilty to one and spent three and a half years of a five-year sentence in a federal prison. He was later charged with larceny by the state of Massachusetts. It took three trials before he was found guilty and sentenced to a maximum of nine years in prison. He was eventually deported to his native Italy, where he pulled off more scams. He died in a charity hospital in 1949.

And it was expected that the biggest Ponzi artist of all, Bernie Madoff, would die in prison.

Around the time
Barron's
ran its probing story about Bernie (which received scant public attention, especially from investors in Madoff, who were happy enough with the returns they were getting), a genuine financial wizard, mild-mannered and studious Harry Markopolos, was assigned by his employers at Rampart Investment Management, a Boston options trading firm, to determine if there was any way they could come close to matching Madoff's steady returns—incredible double-digit returns—in both up and down markets.

Markopolos attempted to reverse engineer Madoff numbers using data from Madoff 's trades in options and stocks, but all efforts at simulation failed. A math whiz, Markopolos was stymied. As he later observed in a newspaper interview, “You can't dominate all markets. You have to have some losses.” He finally came to the conclusion that what he was trying to match was, in fact, a genuine, full-blown, red-blooded, all-American Ponzi scheme.