.
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. Pat

    I may be a lone voice, although I haven't read all of the comments. I am very angry that such a man was working a lie with people's life savings, and that many people were wiped out because of his actions. I am, however, stunned that there were so many seemingly intelligent, and undoubtedly hard-working people who would hand their all of their hard-earned money over to just one individual. I understand he did have accolades from many big players, I still would be reluctant to do that. I'm sorry for their loss, but don't understand what I see as foolish behavior.

    March 12, 2009 at 9:38 pm |
  2. Dylan

    This guy has been stealing money since I was in grade school. I'm 31 years old now. What's funny to me is that many of his investors are probably still so arrogant themselves that they think people my age are still children. I think everyone probably got what was coming to them. Now they know how it feels to be in my shoes with no pension, no social security and no savings. At least I can manage what I have.

    March 12, 2009 at 9:33 pm |
  3. matthew

    The Judge who placed this man on 10 million bail, on this mans fancy new geeyork appartment, but the appartment was bought with his theft from thousands of people, why he thought this man had any assets of his own?....he admitted guilt to try to cover for his family's involment, and make no deal with feds on any plea deal to where he hid the money for his family to get too later after the smoke blows away in maybe swiss bank accounts in other peoples name, only God knows all he has done to cover for his family, I think his family will enjoy all the money he has stole from all the people...... God will judge them all soon..........

    March 12, 2009 at 9:25 pm |
  4. Pauli

    Madoff filed noticeof appeal to reverse his bond revocation this afternoon to the 2nd circuit Court of Appeals.

    March 12, 2009 at 9:24 pm |
  5. Peter

    I think we need to change the name of Ponzi Scheme. Maybe Madoff Mania or Madoff Madness.

    March 12, 2009 at 9:24 pm |
  6. DON

    so, the SEC will be the next set of people sent up the river for 150 years, right? since they are accomplices? routine law enforcement issue, right? ok, just waiting for tommorrows. headlines....

    March 12, 2009 at 9:19 pm |
  7. Terry

    Why is no one asking how in the world a number of people lost everything? I won't even invest all of my "bonds money" with a single company, even through PIMCO. I don't even rely just on the 401K.

    March 12, 2009 at 9:17 pm |
  8. Ladont

    The $50B is not real but no one really knows yet what the real number is. If someone invested $1M and Madoff sent statements reflecting 15% appreciation, in 5 or 6 years, the investor would think s/he had $2M. Unfortunately, some real people lost real money and now Madoff is going to go to prison and be protected from anyone and everyone. Better he should suffer the fate of Jeffrey Dammer.

    March 12, 2009 at 9:14 pm |
  9. Joyce Storehalder

    "Bernie" Madoff's name is so appropriate – He made off with all his clients' money!

    March 12, 2009 at 9:09 pm |
  10. phoeb jefferson

    In america you had Madoff in Jamaica we had Carlos Hill. It is amazing how we allow greed to blind our eyes and sense of reasoning. f these people were successful as they thought they were going to be we would not have heard about the.

    March 12, 2009 at 9:08 pm |
  11. gorn by any other name

    Gerard said:

    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…
    --------
    Nice strawman you constructed there, Gerard. I hardly think your description applies to "the whole country" rather than a tiny minority. Most people being swallowed by the crisis at this point are only collateral damage – they did nothing wrong. They are caught by history. Equating them to this shameless crook is an outrage.

    March 12, 2009 at 9:06 pm |
  12. mitch

    The "tribe" is noted for their sense of "guilt". Now their "rabbi" has fallen on his sword, and is wallowing in it. Oh, mea culpa, mea culpa – forgive me for I have sinned! There is no forgiveness on Wall St, and his followers should have been more aware of where their "gilt" was going!

    March 12, 2009 at 9:02 pm |
  13. LaVerne

    Just a few minutes ago I heard an interview with a man who lost 4 million dollars to Madoff and now wants the government to DO something to help him financially! Yes, everything that can be done should be done to restore some of the $$ Madoff stole, but where does it all end. People with their hands out expecting the government to take care of them because of poor decisions they made. Look, I have worked hard my entire life; supported two children (no child support); my house is paid for; other than school loans I have very little debt, but have basically zero savings. What is the government going to do for the people who did things right by living within their means and staying out of debt? I'm ANGRY! Why should my tax dollars go to help those whose greed put them where they are? Sure Madoff is a crook and he and his entire family should have to pay but I am sick of people crying foul and asking the government (you and me) to bail them out! I never had enough money to invest! During the twenty-two years I was raising my children I received food stamps a total of 6 months! Don't talk to me about suffering financially when you've lost 4 million dollars-you should have saved part of it instead of being so greedy!

    March 12, 2009 at 8:55 pm |
  14. RLG

    If he's looking for sympathy, he's looking in the wrong places. His apology is too little, too late. There were obviously others involved in his scheme, let's get them too and also have his wife give back all the cash and properties she is claiming are hers.

    March 12, 2009 at 8:54 pm |
  15. Kathy

    AC
    Not that anyone is responsible for someone else's actions, but his wife goes back to the penthouse and people are living in tents.Live within your means.We do, why shouldn't they.

    March 12, 2009 at 8:53 pm |
  16. Chris

    Hopefully he will get what he deserves...prison justice.

    March 12, 2009 at 8:52 pm |
  17. Ken

    Mr. Madoff's theft is only exceeded by the greedy bastards who thought they were the – better and more clever and more connected than everyone else, anointed ones who gave their money to him.
    I don't feel sorry for any of them.
    BIrds of a feather..............

    March 12, 2009 at 8:51 pm |
  18. Michael Latz

    I was a victim of a ponzi scheme by a man I know for 20 years named
    James Tetrault from Williamsville NY. He stole 5.3 milliion from 56 people and only got 46 months in a nice federal prison. Unlike Madoff it took the goverment almost 2 years to sentence him. Unless the laws are changed drastically these types of criminals will be continuing to steal money all will as the punishmet is a joke.
    James Tetrault will be laughing at us victims who will be suffering
    far longer than his short time in prison. He will get out and act as thought nothing ever happened and move on with his life. The betrail and financial loss will be felt by his victims will never go away. I hope his wife has the sense to divorce him. I hope he will suffer some kind of loss so he can feel some pain as well.

    March 12, 2009 at 8:46 pm |
  19. Mike Newman

    Hey.. why are so many people surprised ? Greed is the name of the game... and Madoff was the king of the mountain. Any dummy knew that good common sense had gone to the wind.... everyone wanted more . .more .. more... Now they are all acting like they have been "violated" .... they are as guilty as Madoff of pursuing the benefits of a Ponzi scheme. I have no sypathy for Madoff or anyone who invested with him... How dumb can you be ???

    March 12, 2009 at 8:42 pm |
  20. Woody

    Two suicides due to this, means NOTHING?

    He'll get two hots and a cot every night for the rest of his life (for free), and the ones that he stole from???

    The only thing I give bernie credit for is pleading guilty.

    March 12, 2009 at 8:42 pm |
  21. TinaTinaTina

    He will get out of jail because he is old and frail. It started in court with him wringing his hands. Korvorkian couldnt even get out of jail for murdering people but Madoff will get out. Mark my words, its in motion right now.

    March 12, 2009 at 8:37 pm |
  22. Jan

    Madoff and all involved must be tried – I agree that those who worked for him are liable as well, but they need to be tried and either confess as did Madoff or be convicted – I find it interesting that in the Stanford case, the woman who was the investment VP was arrested, but not here. However, here's what think we need to understand – had these people's money been invested in the average investment, what number would be the real loss? Remember that the rest of us have lost give or take 50% of our investments over the past year – what is the real number. I also understand that people will be able to apply for tax overpayments based on the phantom income – those need to be adjusted for the average potential income, When you net out the $500K, the restated returns and losses, and the returns from income tax (kind of a savings plan for funds that didn't get lost in the downturn), what is the real impact on these investors?

    March 12, 2009 at 8:36 pm |
  23. Alex

    Bernie took money from his clients – the more well to do – and instead of investing the money honestly- he just spread the wealth around...hmmmmm.

    March 12, 2009 at 8:36 pm |
  24. Indiana Steven

    If ever a RICO conviction was justified, Madoff and his family and colleagues are all culpable. Don't expect it to happen – the old man took the fall with very limited investigation and hopes it will all stop now. And it probably will, since these guys are pillars of the Wall Street community. Which gives you a pretty good idea of the kind of people held in high regard on that street. Incidentally, those are the same people that run the Treasury – funny thing about that.

    March 12, 2009 at 8:33 pm |
  25. amy

    the final portion references "reporter at forbes" but it's a reporter at barron's.....

    March 12, 2009 at 8:32 pm |
  26. Joaquin

    Where's the money? He would have had to go through almost $6 million/day – EVERY DAY FOR 25 YEARS! – to spend $50 billion.

    March 12, 2009 at 8:32 pm |
  27. jp

    If I would have pulled of this scam as just a regular joe blow i would have been thrown in jail from day 1. Why do people like Madoff and Chris Brown get to hang with their homies until some stupid judge decides it time to put them in jail. There is 2 America's 1 for the rich & famous and another for nobody smucks like me.

    March 12, 2009 at 8:31 pm |
  28. toolittletoolate

    Here's something: Book deal. ALL proceeds go to the victims. Maybe a little to the publishing house and/or editor. Topic: "How I made fools out of unsuspecting decent citizens and ruined their lives while I upgraded mine"...or something to that effect. I'm sure the tabloid-crazy American would buy this book up in minutes! I'm sure a lot of money could be made...send it all to the victims!!!

    March 12, 2009 at 8:31 pm |
  29. Steve Apolinsky

    Bernie, "where is the beef?" There must be 10-20 billion somewhere.

    March 12, 2009 at 8:30 pm |
  30. Truth

    I think Madoff should be punished. I think he should feel shameful of what he did. In addition, I think that the SEC should be investigated as well to figure out in full scope as to who played a supporting role in this scheme. Madoff should shoulder the blame but it was far more individuals and businesses involve. There is no excuse for his action however (investors) need to take responsibility for their own actions and decisionsthe make. I thought investments or investing money in stocks was a risk! I mean how can one investor invests half of his savings or whole savings with someone without fully investigating who they are investing their monies with. Based on the info provided in the media about this, I gauge that most of these folks invested with Madoff by way of referral. I think as a whole every investor involve should be accountable for the investment decisions they made that resulted into this. It's sad, really sad, and I hope the government thoroughly investigates the SEC. If they are found at fault, I think they should be heavily fined and forced to pay a portion of this monies back to the investors.... Remember, LESSONED LEARNED!

    March 12, 2009 at 8:28 pm |
  31. Marc

    The U.S. government should confiscate ALL monies that have gone to Madoff's wife, kids, grandkids, uncles, aunts, friends, even his pets. None of them have legitimate jobs. Therefore, by definition, ALL MONEY THEY HAVE IS FROM THE FRAUD. If Madoff's relatives get off scott free, then the money will be cleansed within a generation. Madoff's victims aren't so lucky, and neither should his family be. The U.S. government should not allow for this.

    March 12, 2009 at 8:28 pm |
  32. Sharon

    Even if all investors were paid back, as they should be and pronto, all family members should have their assets frozen until everyone is paid back. Then if there is no money left over oh well. I would say the sons of Madoff have re-located funds for safe keeping, it was reported that Mrs. Madoff took off with 12 million her share perhaps, since when does a spouse get a share of "a crime"? So, no her assets should be frozen as well. It is owed to people that this whole scheme has hurt. No one, family included should profit here and if the family doesn't want to "co-operate" we can find them a walk in closet space as well. I can only remember the picture of the gentleman who committed suicide because of this, true he should not have done it but this is what evil does to people it makes them so helpless beyond understanding. I don't think this will be over until everyone is paid back in full, and all guilty compensate or be jailed it should be that pure and simple. Sharon

    March 12, 2009 at 8:26 pm |
  33. Manny

    I cannot believe some of these so called victims of Madoff are crying to the press, the people and now the government for JUSTICE. Where they looking to the future consequences, when some of them new, and when ahead with it, that those returns where unrealistic and impossible. I dont believe for a second that the majority of the American people feel sorry for them. They played Russian Rullet with their life savings and got what they bargain for, in other words they looked for a bargain and that is what they got, NOTHING. As for Madoff he deserves many life sentences and with him his family and specially his wife his partner in crime. I can only imagine how his greedy victims feel, to see her sail away with all those millions....

    March 12, 2009 at 8:21 pm |
  34. John

    He should be publicly cain and made an example.

    March 12, 2009 at 8:20 pm |
  35. Brett from California

    We know about Madoff, but you don't steal that kind of money and do it for that long without plenty of help. That includes the SEC folks who simply refused to investigate him! Clearly there are plenty more guilty folk around who need to spend a long time in prison, but I'll bet that many who should won't.

    March 12, 2009 at 8:14 pm |
  36. brian

    Please tell me who at the SEC will also go to jail for turning their heads away from this mess?

    March 12, 2009 at 8:12 pm |
  37. Sujit

    Any resaon he should not be sent to Guantanamo Bay? He has destoryed more lives and families than most of the terorists we despise.

    March 12, 2009 at 8:10 pm |
  38. T Dunlap

    Maybe we should regress back to debtors prisons but in this case thieves prisons. Possibly these people would exceed the population of those also incarcerated for other crimes.

    Madoff should be taken out and executed in front of a firing squad without a blindfold

    March 12, 2009 at 8:10 pm |
  39. Frederick

    Let's get real here,
    what we need are more stimulus packages aimed at helping the loan corporations fund China and Africa so we can get lending back to the people using the dividends from the growing nations economic sanctity. Then invest in blog sites using the toxic debt that will now be turned into healthy debt due to the fact is it used as collateral against the debt from Chinas out sourcing. Raise the price of McDonald's hamburgers by 1 dollar and soon America will be right back where it belongs...
    conquering the rest of the developing world with corruption and breast implants.
    Thank something we have Obama and Palin.

    March 12, 2009 at 8:09 pm |
  40. Donjuvi

    No sympathy here. No bailout. You play with the dog you get it's flee.
    Deal with it.

    March 12, 2009 at 8:07 pm |
  41. the vonns

    There is no way he played this ponzi game by himself.

    March 12, 2009 at 8:06 pm |
  42. Dan

    I think there is still more to the fraud. I hope he lives for 149 years, 11 months, and 30 days in the MANY years to come.

    March 12, 2009 at 8:05 pm |
  43. Rob

    GREED will and will always be the downfall of Mankind. GREED on both sides of the fence, Madoff and the pigs who put all their eggs in 1 basket. I just feel sorry for the few who put their money in Feeder Funds and had little controll as to were their money went. But for the PIGS who wanted to get fatter, Hey welcome to the real world now!!!!

    March 12, 2009 at 8:04 pm |
  44. John Y, Indiana

    If this were to happen in China, I don't think they would waste much time before they executed him.

    March 12, 2009 at 8:04 pm |
  45. Timely

    It all started when the Tresury at the time wanted a bailout (TARP) of 700B with out any accountablity or oversight. Like someone stated previously ,sorry but this is only the tip of the Iceberg.

    March 12, 2009 at 8:03 pm |
  46. Teresa Chicago

    I think Madoff funnel money to offshore and as soon as his story will get quiet he will be removed from prison and be free man Since day one I see some conspiracy in that case. he stays in his condo he is full prepare to surround without assets and valuable staff. I think there is so many big big fishes standing behind his back to make sure that he will survive!! Look for so many years this guy was doing this!!! Some one was covering him!!! There is no way that this guy was alone doing this Even his guilty plea today is suspicion to me!!!

    March 12, 2009 at 8:02 pm |
  47. Rose

    Put a lean against Everything his whole owns and get some of these peoples money back. I can't understand why the focus is just on him, he had help and they need to pay the piper too. Go Get Them! Start with the wife and sons.

    March 12, 2009 at 7:56 pm |
  48. Larry

    Come on, let's be real here. The folks who gave him money were sophisticated investor who knew it was too good to be true. There was a lot of wink-wink-nod-nod going on. They just didn't expect it to fall apart before they got their cuts out of it.

    March 12, 2009 at 7:53 pm |
  49. Harry

    What really gets me is how people can be so offended by Madoff. Ponzi schemes are nothing new and they are operated by thousands of people in the United States daily. Albeit at a smaller scale than Madoff's scheme, but people are still suffering from this scheme.

    HOWEVER, what bothers me is the only people care about this scheme is because it effects rich people. If he made this money off 25 million poor people no one would be crying their eyes.

    March 12, 2009 at 7:51 pm |
  50. Robert Bockenkamp

    If you read todays transcript closely you can see that they are not ruling out a scenario where Madoff will be relaxed at a future date.
    They talk about his being sent BACK should he be release and then break the terms of his release at which time he would have to serve the entire term of his sentence.
    I doubt that, with the past history of the wealthy getting a better break from our judicial system, that anyone doubts that this is a ppssibility.

    March 12, 2009 at 7:48 pm |
1 2 3