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March 12th, 2009
06:06 PM ET

Madoff's little lie

[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."]

Michael Schulder
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.”

PERFORMANCE ANXIETY

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.

soundoff (109 Responses)
  1. paul

    i feel sorry for these people. Not only did this man steel from them but the government knew about it and did nothing about it. And if they didn;t know about it it was simple because they stupidly were not paying attention.

    once again the government fails us

    March 12, 2009 at 11:00 pm |
  2. Barbara

    I am sick and tired of hearing about Madoff's "unknowing family"..they are also common thieves who found a way to live the good life with other people's money. I am sure "their stolen money" is well hidden in some off shore accounts that no one but themselves know where it is. What a joke!.. The name of the game is greed. I assure you if lots of money was coming into my house, I would surely be asking where it came from. Why couldn't they work like everyone else and make an HONEST living. Instead this greed has caused great hardship on many people. Let Madoff and his family live in a shack with a dirt floor and see if they like it. Or better yet, make them see the movie "The Super" and if they have any heart at all, they will realize the error of their ways!

    March 12, 2009 at 11:00 pm |
  3. northcountrystan

    So how many SEC people should be arrested?

    We pay their income and they just screwed up.

    How about 10 years in jail each?

    March 12, 2009 at 10:58 pm |
  4. alex

    hey bernie , good thing it isn't 1939, and this isn't Berlin

    March 12, 2009 at 10:55 pm |
  5. jerry

    Get the waterboard out and lets put all his pals in this away.

    March 12, 2009 at 10:16 pm |
  6. Joan

    It's just old-fashioned GREED! The investors wanted a higher return on their money than legitimate institutions could provide, and their own greed resulted in their losses. Madoff's greed will result in shame and prison.

    March 12, 2009 at 10:05 pm |
  7. Tom

    Frankly, I don't know why everyone states the "family" wealth should be taken ONLY IF they had knowledge or were involved. Does it really matter whether they were involved or not, his entire family benefitted enourmously from Maddoff's scheme. Their wealth should be forfeit with or without their knowledge to what Bernie was doing.

    March 12, 2009 at 9:43 pm |
  8. Robert, Australia

    Regarding Madoff and his "victims" I personally do not feel sorry for people who are not satisfied with the money they already have enough off but always want more. Apart from the ones that are just trying to increase their "real" long time savings. To many are saying that they invested millions. Wake up people most of us who worked hard all our lifes have never seen 1 million in our savings accounts!!!! let alone have been in the position to invest for more.

    They all got greedy like the CEO's of Wall Street and the big corporations.

    As for Madoff he does not deserve to be looked after by the taxpayer for the rest of his life in a jail with free lodging, food and clothing.
    He lived well and used billions of others.
    Let him feel what it is like to have nothing and dump him in the middle of
    a big city without money and clothing and let the "law of the streets" take care of him.

    March 12, 2009 at 9:40 pm |
  9. Nick

    Yea he did wrong but for the investors to just give their money away without any paper trail is STUPID on their part. Plus why would you invest everything you got. I only have a high school diploma and I 'm smart enough to know that you don't give anyone all your money SHAME ON THE INVESTORS for not handling their Millions

    March 12, 2009 at 9:39 pm |
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