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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. Geraldine M. Wagner

    As Kipling wrote" Trust some men, but none too much."

    Another quote my Dad was fond of quoting: "Oh what a tangled web we weave, when first we practice to deceive."

    Then from the Old Testament: "Put not your trust in man, in whom there is no salvation." Amen.

    Madoff was too sure of his reputation and the investors were too trusting, and I'm sorry to say, greedy.

    Now everyone should know why there must be regulations! Ronald Reagan and the Congress at the time of his presidency, destroyed these regulations. Obama is restoring them. What a tragedy for some of these investors who lost everything. Too late!

    March 12, 2009 at 7:46 pm |
  2. Sven

    All of Madoff's assets should be seized and all bank accounts frozen.
    Bernie Madoff and his wife should both be placed in custody.
    At the very least she should be held on conspiracy charges. Or obstruction of justice.
    My question is would this case fall under Ricco statutes concerning any other family members?

    March 12, 2009 at 7:46 pm |
  3. Raven Darke

    The saddest part of this turgid tale aside from the lost lives, which alone warrant Madoff no sympathy and the rest of his life in prison, lies in the fact that Madoff seems to bear all the earmarks of a psychopath. He says he is ashamed but I doubt that. If he were forced to undergo the same psychological examination an ordinary felon would endure I strongly suspect that Bernie Madoff lacks empathy.

    Moreover, I am wondering in the light of Enron and all the other financial disasters befalling everyone how many of these corporate CEO's and CFO's are just like Madoff. I think that much tighter regulation is the bare minimum we need here. Ideally I feel that people tat commit white collar crime finally need to serve the same penalties that someone robbing a bank would do.

    March 12, 2009 at 7:46 pm |
  4. Ben Martin

    II hate to say it, but these people who lost money were also themselves responsible for their fate. Anyone knows that you should never put all your money into a single entity. They knew that they we making unrealistic returns but choose not to ask questions or spread their money around. Their own greed gave them a blind eye. Also I can't believe that his wife will walk away untouched. I know if I buy stolen goods I can be charged with a crime. Everything Ruth Madoff has, has been bought with stolen money – why is she able to shield her assets

    March 12, 2009 at 7:44 pm |
  5. Don

    I know that all prisons are just that – prisons. But I hate the thought of Madoff going to Allenwood or one of the other, white collar, country club facilities. Some place like Attica would be more appropriate. Let the punishment fit the crime, and his is a crime of incredible dimensions. Until the courts do that, these paragons of greed really have little to fear that is meaningful.

    March 12, 2009 at 7:44 pm |
  6. Phil Charach

    I am not exonerating Bernie Madoff in any shape or form, but I am asking the following question: Who is better off, the one who lost money in the stock market, or the one who lost it in the Madoff scam?

    Let's compare the two scenarios:

    When Bernie Madoff announced that it was all a Ponzi scheme, he thereby also opened a door for all of his investors to be able to deduct the full amount of their loses on their income tax returns, on the basis of theft, while someone who has lost a similar amount of money with disappearance of Lehman Brothers or in Citibank, for argument's sake, will only be able to claim a very small percentage of what he had lost as a stock loss.

    March 12, 2009 at 7:43 pm |
  7. Carol in Iowa

    Where will this all end? Hopefully, the continuing investigation will call in ALL family members for extensive questioning. As stated above, these billions of dollars have got to be "stashed" somewhere. If it were anyone else, wouldn't all the assets have been frozen? I guess when you are a billionnaire, things are handled differently. At least he went to jail today. I'm thinking the family sould be shaking in their shoes for what lies ahead..........

    March 12, 2009 at 7:42 pm |
  8. Annie Kate

    So Bernie says he did it because of the expectations of his investors? Isn't that a nice shifting of blame! Not only is he a crook but a coward as well not to stand up and say yes I cheated people and it was my fault. To blame it on his clients is insult to injury. I hope they take everything he has starting with that apartment he is luxuriating in rather than a jail cell – his victims deserve their money back. Unfortunately no one will probably get their money because Madoff profited on it for years and has nothing left to show for it except his own style of living.

    March 12, 2009 at 7:41 pm |
  9. mike

    I still don't believe he did that himself. How about his inner circle family that work in his investment firm? no one know for this for 13 years....Harry Markopolos questioned it 7 years ago and his two sons didn't know anything? Are this 2 idiots worked for his dad and get executive paid and bonuses from the people who work hard and invested their money!. I think the goverment should take some money from Bernie family to pay back the investor!

    March 12, 2009 at 7:41 pm |
  10. John Lynch

    Hi AC,

    This Madoff is monster. He has destroyed charities, families, and good social institutions. He puts an ugly dent in our society. What continues to bother me though is these tales of folks (and institut
    ions) investing everything with Madoff. I'm no financial genius but for 20+ years I've heard the term "diversify" very often in association with investing as well as this little gem: If it seems to good to be true, it probably is. Shame on Madoff's greed but shame too on the greed of those who went all in with him looking to make a killing and tossing their common sense aside.

    Like Gump said "...stupid is as stupid does..."

    March 12, 2009 at 7:40 pm |
  11. Alllen

    The Social Security system in the US is nothing more that a ponzi scheme- maybe Maydoff should run it.

    March 12, 2009 at 7:39 pm |
  12. Michelle H

    I took time to read all the comments. There is some good insight there. Many of you asked – where did the money go? From the reports I have seen on the news, this guy lived quite a lavish lifestyle. His monthly nut alone had to be in numbers regular people like us can't even imagine. And, yes, all his "friends" who invested with him were to a point greedy. These were some nice returns he was advertising. But nonetheless, all their investmant did was fund HIS and his familys lavish lifetstyle for years.

    March 12, 2009 at 7:38 pm |
  13. Patrick

    Wow here is a guy that steals $50 billion dollars and his whole family works with him but does not no anything about it going on. How dumb do they thank we are? Why has the government not frozen all the assest of his family and everyone that work with this crook? As he goes to jail he will go to one of the federal jails that is a big nice Hotel. He should have to spend his time in a state prision and deal with real people who could show him what it is like to lose everything and what it feels like to get screwed!!! This guy is a crook who stole and his family who worked with him is also crooks who need to lose everything he is 70 years old and knows his life is over so he is trying to protect his family

    March 12, 2009 at 7:37 pm |
  14. A Mohsen

    The part that I do not get is how could his employees not know anything about this. I mean, what were they doing all day long? Did no one ever suspect. Seems very suspicious to me.

    March 12, 2009 at 7:37 pm |
  15. gary amarillo

    Mr Madoff certainly was not stupid and he stated he knew years ago that his day of reconing was to come, we have to know that he was devious enough to move large amounts of money somewhere in the world for the future, the question is where did it go and how to get it back to the victims.

    March 12, 2009 at 7:36 pm |
  16. Brian Bishop, M.D.

    So, who in the mainstream media is going to be the "Harry Markopolos" who pulls the curtain back to expose Wizard of Ob...

    March 12, 2009 at 7:35 pm |
  17. Mary

    Well, Madoff has a retirement plan of sorts. Downsized place, 3 meals a day, exercise program, medical care. Maybe he can volunteer his time tutoring other inmates. Some of those he bilked don't have as secure a future and will have to continue working. Life is strang.

    March 12, 2009 at 7:33 pm |
  18. TessP

    So if all the money from the investors were kept in a bank account, have the Madoff's spent it all? If not, why can't any money that's left be recovered and be used to repay investors, even if it's only a portion. His family should be made to sell everything and make restitution. I don't understand why they are allowed to keep anything.

    March 12, 2009 at 7:32 pm |
  19. robyncaffrey keyser west virginia

    att anderson"

    i'm sorry "' but if he had the smarts to pu'll this sheme off,
    ( believe me ) he had the power to tell his investors he didnt want to get involved anymore " as he knew this was all wrong.

    ( he made his bed now. )

    March 12, 2009 at 7:31 pm |
  20. Rosanne S Cohn

    I can't comment on this because it's beyond human comprehension, that there were people and companies that either knew or had knowledge of the possibility of this........and did nothing. they are just as culpable as he is.

    March 12, 2009 at 7:31 pm |
  21. Wendy Colby

    During his statement in court today, Madoff said he knew this day would eventually come. He's admitting he's had years to plan and hide the money and erase blame from others involved. I say retreive everything he mailed out to family and friends, then confiscate everything from him, his wife and any family that worked in the business because they're all at least guilty by association. Then offer one son cash if he rats on the rest.Greed doesn't fall far from the tree. Madoff has been too smug and too sure of himself and his manipulations. Bring it all down around his ears, only then will his jailing be a punishment and not some grand martyrdom for his family.

    March 12, 2009 at 7:29 pm |
  22. Frieda

    I feel heartfelt sadness for all who were ripped off by this awful man and his family. I believe they all had a hand in this. I think the government needs to step in and take everything that this skunk and his family have and distribute it to all the victims. It is too bad this didn't happen in a different country, he would of been shot and all the monies taken away from him. no questions asked and he would deserve it!

    March 12, 2009 at 7:29 pm |
  23. S Nichols

    If this guy, and his associates, aren't enemies of the State – then who would be? Impound all of their assets, and deport them.

    March 12, 2009 at 7:29 pm |
  24. Brian Bishop, M.D.

    So who in the mainstream media is going to be the "Harry Markopolos" who pulls the curtain back to expose Wizard of Ob...

    March 12, 2009 at 7:28 pm |
  25. G2 in No. Cal

    Yeah, the guy's a scumbag and deserves time. But c'mon! 15% return year after year after year..? If it defies logic then it's not real. So many people should not have been this easily fooled.

    March 12, 2009 at 7:27 pm |
  26. ldsa

    Unbelievable!!! Utterly unbelievable the number of people who blindly gave this man their life savings without sure proof of what he was doing! I say good for them all, perhaps they now understand what it feels like to have everything you hold dear so blatantly taken away. Like taking candy from a baby! So you take all of my material possesions and I take my life? WTF? You mean the life that I did not give to myself? What arrogance and greed. Don't cry now - had this worked out the other way, had these "investlments" panned out, I would know nothing of you. Exactly what I wanted to know! You want my sorrow? Rather than help your fellow man, you tried to help yourself and got taken to the cleaners. Boy talk about poetic justice!!!!!

    March 12, 2009 at 7:26 pm |
  27. Merrick

    Bernie won. He has lived a good life. I'm sure he cant be sitting in jail eating bologna sandwiches. I'm sure after he was led out of the courthouse in handcuffs and behind closed doors he got special treatment.

    March 12, 2009 at 7:20 pm |
  28. Lady Solano`

    Again no one chose to listen. Just like this mortgage mess we are in...everyone chose to ignore the fact that loans were being given out to people who couldn't afford them. Let's continue to turn our backs when things are almost slapping us in the face.

    March 12, 2009 at 7:19 pm |
  29. Allan, AZ

    If regulators had listened to Markopolos, this could have been stopped. Why wasn't it? Too many argue regulation is an imposition on free market capitalism. I love capitalism, but it's the Madoff's of the world that bring capitalism down ...not regulation. Thousands of scammers affect our system everyday. Economic crimes are placed on investigation back-burners since the perception is that no one gets hurt. Ask retirees, charities, pension funds and others what their lives would be like if Mr. Markopolos had been listened to. Madoff is the poster child for why sensible and forceful regulation is necessary to protect capitalism.

    March 12, 2009 at 7:18 pm |
  30. Stephen, Charlotte, NC

    Madoff said he deposited the money into a Chase Manhattan bank account. This would have been in the billions with an incredible amount of activity both incoming and outgoing. I thought our government takes a look at activity greater then $9,999.99. How is it possible that such activity did not send up a RED FLAG for bank officials to look at this. What a shame for the Madoff investors. They never lost their assets. It was stolen. In my opinion the SEC and now whoever monitors bank transactions at $10,000 and over really failed the good people who invested with this lunatic. I hope he rots in jail. I hope the people in jail teach him a thing or two.

    March 12, 2009 at 7:16 pm |
  31. Sandra

    I guess I am not totally sorry about these investors. They made this investment because it returned abnormally high returns. There were red flags but they got greedy. They didn't care, just wanted the money. They could have been more thoughtful investors...checking out funds and investments, diversifying. But they put it all in one basket. A fool and his money are soon parted. And if someone can't stand the loss of that money, then they should have been more careful and thoughtful about where they invested it. He was a con artist. Do we provide for every victim of a con artist. Our whole financial system has been conned by the people trading derivitives. Let's put them all in jail.

    Remember, if it seems too good to be true, it usually is. Why didn't these "smart" investors realize that?

    March 12, 2009 at 7:16 pm |
  32. Robert

    How were all of these millionaires scammed? The media isn't asking this question – why not? When everyone else was loosing money they were making money. If it sounds too good to be true it is. They weren’t stupid.

    I am convinced that some that "invested" huge sums knew or suspected but thought, "well as long as I'm making money I don't care how I make the money".

    I know – don’t blame the victim but some of these people are not victims. They were greedy and greed was their downfall.

    March 12, 2009 at 7:16 pm |
  33. Mary

    The real shame? Madoff is not alone. There are too many liars and thieves to count these days. They are everywhere. In banking as well as investment houses. They are in ordinary homes– having lied about their down payment on the very home they purchased. How?
    When buying a home they could not afford, the seller, realtor and loan officer got together to inflate the purchase price to reflect a ficticious
    down payment so that the deal could go through. WE are all paying for the lie on paper - foreclosures are at the highest point in history, all started by lies on paper -- called fraud in the old days. Not sure what the thieves call it today, except America under siege - held hostage by lies.

    March 12, 2009 at 7:16 pm |
  34. Gerard

    Bernie was doing what the whole country's been doing, just on a larger scale. When you have 7 credit cards and you're taking a hit on one to make absurd minumum payments on the other 6, and buying a $750,000 home on a $45,000 salary, defaulting on it and hoping taxpayers will bail you out...virtually none of this is your money! It belongs to the banks who now also need to be bailed out by the taxpayers because they have no more money, just massive debt. So...just get in line behind the Madoff victims.

    March 12, 2009 at 7:15 pm |
  35. gene

    The thing that makes me crazy is "where is the money??" We are talking 50 billion dollars and from reports I have read far less than 1 billion will be recovered. What happened to the money? You can´t just make 49 billion dollars go away. Where is the "stuff" they spent the money on? Stamp collections, homes, land, boats....something!! I mean how do you spend billions of dollars and have nothing to show for it.
    Odds are the big part is stashed in off shore banks, never to be seen again except by the family. We know the crime, now lets learn the truth.

    March 12, 2009 at 7:14 pm |
  36. Gary Chandler in Canada

    Is the $50,000,000,000 LOSS the PAPER amount that it grew to, for a more sensational news story???

    March 12, 2009 at 7:10 pm |
  37. dan

    Anderson: Look what their greed for money has done. We will pay for the excesses of the last 25 years. We will undergo a fundamental restructure of American life. It's going to be real painful. Bernie is just the tip of the ice-berg.

    March 12, 2009 at 7:08 pm |
  38. Deborah

    There can be absolutely no doubt that Madoff's wife – the bookkeeper, for god's sake – was intimately involved in the scheme. What did she, and the rest of the family, think when money was being deposited into the Chase account and funneled back and forth between a UK bank account to make it appear that investments were being made? Doesn't the company's bookkeeper, the crook's own wife, read the bank statements and the company's own financials??!!

    Words are inadequate to describe the disgust I feel for these people. ALL assets need to be seized immediately, ALL family members need to go to jail awaiting trial so that they don't have the opportunity to hide more funds. Maybe when one of them rats out the others for a better deal, more of the money can be found and returned to the rightful owners.

    March 12, 2009 at 7:07 pm |
  39. John

    Serves the little bastard right! Unfortantly he'll probably get under 20 years.

    March 12, 2009 at 7:04 pm |
  40. Dorothy

    If we are to believe that Madoff is truly sorry and feels ashamed what he has done to people who trusted him with their money, then WHY did he give away expensive items to family/friends and also hide money? Why does he not just sell EVERYTHING he and his family have, and clean out all monies/accounts, etc and start giving back to those he took advantage of without regard to their futures? More than likely his family were either in on this from the beginning, or they discovered it at some point but decided to remain quiet as long as they were the ones profiting. He and his family will never suffer like those who trusted him!

    March 12, 2009 at 7:02 pm |
  41. Gerry Hertzberg

    So as I understand it Madoff has been paying taxes all these years on his income. But that income was not income – it was theft. So don't the Feds and NY State owe thet money back to the victims? No one else is allowed to keep stolen propety – right?

    March 12, 2009 at 7:01 pm |
  42. Erik

    This Evil man has hurt many people and the Jewish People as a whole. He represents all the wicked stereotypes that our ancestors died for. I know I worked for Citi. They were and are just plain evil. They make deals ($$) to stop people from going to regulators. Our Royalty was the Corporate elite: Maurice Greenberg (AIG), Sandy (The Thief) Weil from Citi Robert Rubin (Clintons boy on the board of Citi), etc. The evidence was there all the time.

    March 12, 2009 at 7:01 pm |
  43. more commonsense

    While the lady in Calif. is convicted of embezzling 9 million, they took her house and vehicles, money and her dam shoes. Yet, Bernie Madoff who cheated millions has been able to stay in this fancy apartment and his wife will probably get to continue to do so. Where is the fairness? They should have to sell all to try and make some of the people that lost life savings whole.

    March 12, 2009 at 6:59 pm |
  44. Jim Carroll internet free press.com

    GET RID OF THE GOVERNOR OF SC.
    The essentials of life are: a roof over your head, food on the table, clothes on your
    back, lights on, water running, four wheels, cell phone, health care, a little spending
    money and an income to pay for it all. The governor of South Carolina has it all, but
    he doesn’t give a damn about the people who elected him. A recall should start based
    on ignorance and insensitivity.

    March 12, 2009 at 6:59 pm |
  45. Larry

    At least several hundred high level personnel in the Securities and Exchange Commission should be sent to jail and serve the same sentence that Madoff does. Just draw the names out of a hat. Give them a fair trial before they are sent to the same prison as Madoff.

    March 12, 2009 at 6:58 pm |
  46. oldtimer

    I find it interesting that most of the investors were of jewish decent, since i was always told that a jewish person didn't screw another jewish person in a business deal. So much for loyalty. I guess when your rich and greedy, and just want to get richer, this is what you can expect.

    March 12, 2009 at 6:57 pm |
  47. Julie F. Los Angeles

    I am astonished and shocked to learn that the FBI hasn't frozen all of the Madoff's family's assetts and anyone elses involved in his business!! Why don't they immediately give themselves "Power of Attorney" and only dole out money to them to pay immediate expenses while they get this long, intensive investigation under way? They're giving them plenty of time to dispose of and hide their assetts and their victims are unlikely to see any of it. I'm sure since Madoff knew this day was coming, he has been preparing for it and his sole concern has been the protection of his and his family's stolen wealth.

    March 12, 2009 at 6:53 pm |
  48. Lloyd

    Regarding Bernard Madoff, a little a lot too late. He will die in shame if his mind will even let him process what he has done. The only ultimate fair result will be to bring down his wife and sons if they had any involvement in this. Particularly his sons as they have plenty of years left to reflect on the pain and suffering they have inflicted if indeed found guilty. All efforts should be expended on finding out who knew what and when. Bernie is done and now it is time to get the partners in crime…the financial terrorists.

    March 12, 2009 at 6:23 pm |
  49. Anderson Cooper

    Anderson,
    I just want mention that the sentence of Madoff sentence should include the two lives that were lost to suicide. I am sure the loss of a lifetime of savings were more than these people could bare in these hard economic times. I believe those others involved mainly the wife,sons and brother should hear the stories of those lost lives and the elderly who lost life savings. Is there anyway for you to do a story on Madoffs victims. This would be putting a face on the victims.Thanks for all your good work.

    Rick

    March 12, 2009 at 6:22 pm |
  50. Sherry, N. Calif.

    Uncover a liar you uncover a thief everytime!

    I found the company I worked for was embezzled from in Aug. of last year by my vacation replacement. We filed charges and she was convcited by the State of Calif.

    Sad thing for some people, not for me. It was a catharsis long coming for me. I knew this person all her life. Her Mother was a friend of mine for 40 years! I cannot trust anyone. It is hard enough to get into my car and trust other drivers not to hit me.
    Lesson learned: You have to trust, but watch out how much of a given is in that trust.

    March 12, 2009 at 6:21 pm |
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