Swindler’s list: the Bernie Madoff story

Harry Markopoulos is a name you’re no doubt unfamiliar with.

Well here’s a heads up. Get used to the name: Mark-o-pou-los. You’re going to hear it over and over and over again, as the swindle of the century is investigated, dissected and unfurled for all to see. History will register Mr Markopoulos as the loudest whistle blower nobody heard.

When US District Court Judge Denny Chin on June 29 - in US v Madoff, US District Court, Southern District of New York (Manhattan) - imposed on Bernard L. Madoff a sentence of 150 years, many in the media from Wall Street to Fleet Street to the streets of the Emerald City, patted themselves generously on the back for closing the book on the thief. They immediately sought to outdo each other with their guesstimates as to the quantum of the scam - from a few billion dollars to over US$67 billion - and quickly turned their eyes away from Mr Madoff and towards his victims' efforts to salvage whatever they could from the financial train wreck that allegedly was his criminal enterprise.

But was it his alone?

Or were there armadas of advisors and brigades of brokers that aided and abetted Mr Madoff? Middlemen who wilfully averted their gaze in exchange for their snouts being allowed to gorge at Madoff’s trough, ever so generously?

Putting aside the numerous sideshows, including that, to date, only a small fraction of what was allegedly deposited with Bernard L. Madoff Investment Securities (BMIS) has been recovered, the real story is what possessed the hedge funds and a bevy of money managers (collectively known as “feeder funds”) to channel billions of their clients’ funds with great regularity to BMIS? And without verifying what exactly BMIS was doing?

As at July 2009, prosecutors identified more than 1,300 investors who have lost more than US$13 billion since 1995 from Madoff's Ponzi scheme. But that sum excludes the feeder accounts. While the total losses are expected to rise significantly, to date a measly US$1.2 billion has been recovered.

To get a grip on the feeder funds and the brokers that ran them, as well as a sketch of what made Mr Madoff tick, one could do worse that read Catastrophe - The Story of Bernard L. Madoff, The Man who swindled the World, by husband and wife team, Gerald and Deborah Strober.

For years, Mr Madoff had the reputation of a money manager with the golden touch. Regardless of how well or bad the economy travelled, as sure as the sun came up in the morning, his clients could count on a healthy growth in their “investments”.

A small part of the cash funnelled Mr Madoff’s way was applied to lubricate his sumptuous lifestyle, which included multi million dollar homes in Manhattan, in Montauk, Long Island and in the well heeled enclave of Palm Beach, Florida. Oh, and to prop up his taste for the high life, such as the US$100,000 AmEx bill for January 2008, 11 months before his house of cards imploded.

Deborah and Gerald Strober in Catastrophe point to many lessons over the years that apparently went unheeded. Chief among them was the necessity for transparency in Mr Madoff’s financial transactions. In addition they expose the cult-like adoration of Mr Madoff by many professionals and amateur investors, as they apparently paid too much notice to the "emperor's new clothes".

The emperor in question was outed several years ago by a do-gooder with a wealth of financial market experience, Mr Harry Markopolous. His 2005 submission to the United States Securities & Exchange Commission is included in the book’s appendix. But the SEC nor any money manager (or hedge fund operator for that matter) paid the necessary attention to Mr Markopolous’ warnings of the Ponzi scheme. Apart from Mr Markopoulos, it seems that nobody openly queried the mathematically impossible returns they were receiving from Madoff’s “management” of their money. Either the brokers and money managers were in on Mr Madoff’s scam or they were fools. And it’s hard to see the wizards of Wall Street as fools.

While they don’t prove the point, the authors certainly allege, and plausibly so, that the main player in the scam was Mr Bernard L. Madoff, a highly respected well connected financier, previous NASDAQ chairman, and a member of a retinue of exclusive clubs. Involved since 1960 in managing financial assets, he claims to have an uninterrupted record of consistent market-defying mind-blowing financial performance. So as to enhance his financial reputation, he often turned away investors only too eager to participate.

While there is no disputing his involvement in the scam, it is reasonable to conclude that he was far from being the only player.

While financial expert Mr Harry Markopolous was the loudest to warn of Mr Madoff in 2005, an alarm with no less than 29 red flags identifying inconsistencies and untruths in what BMIS claimed, he was preceded in 2001 by the well-respected publication Barron's, which published a similar exposé. Unfortunately, both alerts fell on deaf ears.

As to the victims of the Madoff scam, the list includes dozens of major banks, hedge funds, charities, and universities, as well as individual investors.

Having interviewed more than two dozen people, including classmates, attorneys, investors, and Wall Street experts in the month following Madoff's arrest on December 11, 2008, Strobers' book is unsurprisingly constrained by the few facts printed in the media and a handful of individual victims' perspectives. Details as to the quantum of the scam, the number of victims, the size of the damage inflicted on charities, as well as whether Madoff acted alone, all remain very sketchy.

Questions aplenty are raised regarding who knew what and when.

Did he act alone? How could he, given the size of the scam? After all, an enterprise as far reaching as Bernard L. Madoff’s, who claims to have managed US$17 billion in clients’ funds, would require the labours of hundreds of administrators and not those of one individual. Not so?

Three names are canvassed as most likely to be in on the scam, but that’s not to say they were not joined by others.

It is alleged that first among the swindlers (after Bernie) was his brother, Peter. A graduate of Fordham Law School (class of 1967), he joined BMIS in 1970. In BMIS promotional literature he is featured on page four as being “deeply involved” in the firm’s activities.

Bernie’s first born, Mark, 44, a graduate of the University of Michigan was the firm's Director of Proprietary Trading at BMIS. The younger son, 42 year-old Andrew, a graduate of the University of Pennsylvania, was the firm’s Director of Trading.

All deny involvement in the Ponzi scheme. You don’t say?

While Mr Bernard L. Madoff clearly deceived a host of investors including famed director Steven Spielberg; Senator Frank Lautenberg (Democrat-NJ) who lost US$12.8 million of his foundation’s $13.8 million in assets; and husband and wife actors Kevin Bacon and Kyra Sedgwick, the issue remains: did he deceive those who ought to know better?

Or were institutions like Yeshiva University (lost US$110 million), HSBC, Austria’s Bank Medici (potentially lost US$2.1 billion through its funds Herald USA and Herald Luxemburg, mentioned in ABC1's Four Corners program), Switzerland’s Union Bancaire Privée, hedge funds, and the biggest “investor” in BMIS of all, Fairfield Greenwich (a “feeder fund”) which ploughed US$7.2 billion in BMIS and was rewarded with US$0.5 billion in fees willing accomplices?

In addition, a vast array of charities lost so much that their very existence hangs in the balance.

If he really had $17 billion and was geared say, 3:1, then one can say his portfolio controlled $50 billion. This is the number repeated ad nauseum by the likes of the New York Times but such figures are misleading. Of course he didn’t need to leverage a jot, because he didn’t invest the money, he just shuffled it through his Ponzi scheme. His crime was not losing money but running the Ponzi scheme.

The authors interview Mr John Najarian (an acquaintance of Madoff’s and an options trader for decades) who asks: what did the staff at BMIS really do? Not trade and yet receive annual bonuses? For not making money? And if they did trade, they certainly could not be making money using the strategy BMIS claimed to be employing. Najarian explains that Madoff’s strategy of using options cannot constantly yield double-digit returns as Madoff claimed. “It’s just not possible”. And he should know.

While much has been said regarding Madoff’s swindling of charities per se, Lawrence Leamer, the author of Madness Under the Royal Palms: Love and Death Behind the Gates of Palm Beach, interviewed in the book is convinced that charities were collateral damage, and the real target of Madoff’s scams were philanthropists with whom he congregated, be it in country clubs or at A-list parties.

To appreciate the class of crime perpetrated by Madoff, according to a former federal prosecutor, Douglas T. Burns, one must see Madoff not as someone who one day decided to steal, say, US$50 billion. That is not what happened. What happened, in this case is that this guy (Madoff) started robbing Peter to pay Paul. And then robbing some other rich shmuck to pay Peter.

In the unlikely event that Bernard L. Madoff swindled on his own, as he claims, then he alone knows the full extent of his wickedness. But if, as is more likely, Madoff had assistance in executing his nefarious deeds, he will have to decide whether to surrender his co-conspirators to the authorities.

Of course even if, one day, Madoff does sing like a canary, would he be singing the truth? The whole truth and nothing but the truth? So help him Mammon?