[cnn-photo-caption image=http://i2.cdn.turner.com/cnn/2009/CRIME/03/12/madoff.victims/art.madoff.arrives.afp.gi.jpg caption="Disgraced financier Bernard Madoff, right, arrives at a federal courthouse Thursday."]
CNN Senior Executive Producer
It was a little lie that was supposed to die young. That is Bernard Madoff’s version of how his investment company became the largest Ponzi scheme ever. “When I began the Ponzi scheme” Madoff told a U.S. District Court Judge in Manhattan this morning, “I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come.”
If you believe Madoff’s account in court today (and, remember, it was only five pages long, so it’s a tiny slice of the story) he developed his scheme because he felt pressure to satisfy investors who had already committed their money to him. Large investors with high expectations. It began, “to the best of my recollection,” in the early 1990s. I felt compelled to satisfy my clients’ expectations, at any cost.” And so, he lied. “I therefore claimed that I employed an investment strategy I had developed, called a ‘split strike conversion strategy,’ to falsely give the appearance to clients that I had achieved the results I believed they expected.”
SPLIT STRIKE CONVERSION STRATEGY
“Split strike conversion strategy” may sound like it’s from the imagination of a Major League Baseball coach or a minor league con artist. But it’s a real investment strategy used by legitimate money managers. It combines putting money into large big name stocks, and hedging those investments by also betting against some of those very same stocks. There’s more to it than that, of course. What struck many professional investors as unlikely was not that such a strategy could produce profits, but that it was consistently earning Madoff such stunning profits - 15 percent returns year after year he had claimed.
Today in court Madoff admitted to filing a lot of false paperwork to cover up his lies. More recently he used this method: “I wired money between the United States and the United Kingdom to make it appear as though there were actual securities transactions executed on behalf of my investment advisory clients.” (See CNN’s report from London on this scheme by reporter Jim Boulden.”
THE GUYS WHO WERE ON TO MADOFF
Back around the year 2000, Madoff’s “returns” were getting so much buzz, that an investment house in Boston assigned one of its analysts to see if he could duplicate Madoff’s results with that “split strike conversion strategy.” The Boston investment adviser who got the assignment was a guy named Harry Markopolos – whose account was relayed in a previous post.
Markopolos says he crunched the numbers and said “within 5 minutes I suspected it was a fraud” - that Madoff could not be getting the returns he claimed to be getting. As you may already know, Markopolos blew the whistle on Madoff and kept blowing for nearly a decade. The government regulators at the SEC wouldn’t listen.
The financial publication Barron’s was also on to Madoff. You’ve got to read this piece from back in 2001 in which Barron’s reporter Erin Arvedlund combined good reporting and common sense to raise a red flag on Madoff.
Barron’s actually challenged Madoff on his unusually strong financial returns. Madoff’s response to Barron’s those seven years ago: “Whoever tried to reverse-engineer, he didn’t do a good job. If he did, these numbers would not be unusual.” Barron’s told of one investment manager who pulled his investment in a Madoff fund. Why? “When he couldn’t explain how they were up or down in a particular month I pulled the money out.”
THE MADOFF DEPOSITS
So what was Madoff really doing all this time with all that money from investors? “… those funds were deposited in a bank account at Chase Manhattan Bank,” he told the judge. A TRADITIONAL BANK ACCOUNT! After all this time and all these years and all those life savings that have disappeared, here is the painful irony. Madoff’s investors would have been better off putting all their money in a Chase Manhattan bank account.
Lesson for investors and everyone else: If you can’t explain it, don’t feign it. Harry Markopolos understood that about Bernie Madoff nearly a decade ago. A reporter from Forbes understood it back in 2001. And so did a number of common sense investors.
The SEC was investigating Madoff in 2006 and had him testify on May 19th of that year. Today, Madoff admitted, “I knowingly gave false testimony under oath.” The SEC had Madoff in their hands, and let go. Madoff recounts so many ways he hid his Ponzi scheme and kept it going. The Madoff transcript will give you a taste.
They say it’s easier to start a war than to end it. It’s the same with a lie.
Bernard L. Madoff Securities LLC. The money didn’t grow. The lie did.
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