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We've heard people say that
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people that invested with Madoff
were just greedy,
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and were expecting an outsized return.
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But if you'd look at the numbers,
that's factually not the case.
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It seemed like a nice, steady investment.
Nothing extraordinary.
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I had worked very hard to earn this money,
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and so I did some due diligence
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before I invested in Madoff
because of that.
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I had Madoff investigated
by a securities firm
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that offered a service to people
investigating money managers.
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And they gave him a clean bill of health.
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But even after that, I would keep track
of every story that featured Madoff,
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because he was kind of a mysterious guy.
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I would find these articles
that basically touted Madoff.
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These were articles in Forbes Magazine
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and in The Economist and so forth.
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I mean, he was a big wheel.
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So, all of that I took as, like,
"This guy's good."
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But the thing is that
the SEC didn't catch him either,
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and they had numerous opportunities.
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You have dreams about
your retirement and your future, and--
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And all that, all that went away.
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Part of the reason we suffered, I believe,
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is our government, the SEC,
really didn't do their work.
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It was such betrayal.
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I joined Rampart Investment
Management Company in Boston
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because they needed an internal sales guy.
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And we managed nine billion
of client money,
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and that was a substantial amount.
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And so, they hired me to get more clients,
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but also to innovate new product for them.
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Somebody's got to sell, right?
And that was my job.
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And I'm scrapping around,
looking for the next wave to surf.
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So I jump on a plane. Go to New York.
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And I meet
Thierry Magon de la Villehuchet,
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this wealthy individual,
who was an investor
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and an investor conduit
to some of the richest money in Europe.
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And he told me that he was really
an aristocrat from Brittany,
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that he had a 100-room castle
that belonged to the family,
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that he went grouse shooting
with the princes of Europe.
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And I'm thinking,
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"If I can get Villehuchet to take me into
the wealth management banks of Europe,
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then there's a whole new
marketplace for me."
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Here's the problem, right?
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Villehuchet gives me transcripts that
come across through the mail, every day,
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confirmations of trades.
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And he has blanked out, redacted,
the name of the firm on the top,
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in a big black Magic Marker.
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Villehuchet says,
"Oh, I have a secret hedge fund manager."
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"I can't tell you who it is,
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because if the manager found out
that I gave up his name,
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he would fire me as a client."
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"But yes, I hired the guy,
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and he's producing out
1% per month like clockwork."
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I knew in the world of finance that
that was an impossibility.
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So he starts telling me
about what this man is doing.
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And it involves options work that
I used to do on individual stocks,
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but this guy never has a loss,
according to Thierry.
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And I'm saying to myself,
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"This is crazy. It can't be done."
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And I asked Thierry,
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"How much money do you have
with this secret manager?"
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And he says, "$320 million.
My money and my clients' money in Europe."
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I assume automatically that
that manager must be running
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ten times that much money.
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I extrapolate that this places
the secret manager at three billion plus.
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The largest hedge fund manager
in the world, that no one knows about.
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If I could produce
1% a month like clockwork,
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I'd had my face on every billboard
between Boston and New York City.
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Why is this guy secret?
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Of course, I'm very curious
who the secret manager is,
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and Thierry turns around
to speak to somebody,
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and I did something a little untoward.
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I spin a confirmation on the desk
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to read the name at the top.
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"Bernard Madoff Securities."
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Why would this big dog on Wall Street
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need to be running
Thierry's money secretly?
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And Thierry told me that
he wasn't charging him a fee to do it.
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That made no sense at all.
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And I'm thinking to myself, "Bullshit."
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After that initial meeting
with Villehuchet,
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I go back to Boston
and I meet the big bosses of Rampart.
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Immediately the bosses understand
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that if I can use Thierry
as a conduit, as a client,
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to get me into
the uber-wealthy of Europe,
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we might be able to make
multiple billions of dollars.
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But I have to compete
with this secret manager,
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and this strategy that he says
he is using makes no sense.
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The bosses say, "Well, we've got to
reverse engineer what this guy's doing."
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"Let's take it down to
the Portfolio Manager, Harry Markopolos."
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"He's the math geek. I mean,
he'll figure it out immediately."
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My field was derivatives,
which is very mathematical.
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So, you need to have
a calculus and statistics background,
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and a lot of the math is complex.
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Frank comes back
with a one-page tear sheet
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of a Madoff feeder fund
with fantastic returns,
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but Frank is a marketing guy.
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He wants to know
that something works and it can be sold.
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Harry's annoyed being
called out of his office to address me,
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a sales guy.
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And he looks at this return
for a minute and he says,
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"Frank, you're an options expert.
You know this is bullshit."
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And I said, "Yes, he's not using options."
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"How's he doing it?"
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It's one page
with unbelievable performance numbers,
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almost no losses.
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And I'm looking at the characteristics
of the portfolio, saying,
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"Look, the returns are like this,
45-degree angle. Straight line."
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He says, "I can tell you
right from the get-go this is a fraud,
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and it's possibly a Ponzi scheme."
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This discussion took
a total of four minutes.
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And I said to Harry,
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"Oh my God, don't use that word 'Ponzi.'"
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"You can't call this guy a fraud,
let alone a Ponzi."
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I said, "Madoff Securities,
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they're running 7 to 10% of
the total volume of the US Stock Market."
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"I don't believe it."
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Even though I told him
these returns are not possible,
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my bosses said, "We want you
to develop a Madoff-like product."
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"Figure out how Madoff is doing it
so we can take market share."
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And so, I had to spend a few hours
modeling the returns.
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It took a couple hours,
and you'd quickly see
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that it didn't replicate anything to do
with Wall Street or the US Stock Market.
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In fact, it only looked like
the stock market 6% of the time.
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And then you total up the months,
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and you see
96.4% of the months are positive.
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Well, that doesn't exist on finance.
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His numbers were literally
off-the-charts good.
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And so people were flocking to Madoff,
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because his returns were
so seductively smooth.
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I had to compete against this guy,
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but you can't compete against
somebody who's a fraud.
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And so I wanted the dirty player
thrown off the field.
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This is my first SEC submission,
dated March 1st, 2000.
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"In 25 minutes or less,
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I will prove one of three scenarios
regarding Madoff's Hedge Fund Operation."
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"One: they are incredibly talented
and/or lucky,
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and I'm an idiot for wasting your time."
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"Two: the returns are real,
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but they're coming from some process
other than the one being advertised,
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in which case
an investigation is in order."
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"Three:
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the entire fund is
nothing more than a Ponzi scheme."
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Over 100 months of returns,
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seven down months,
his largest monthly loss…
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When Harry Markopolos
was trying to persuade the SEC
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that a gigantic,
historically huge Ponzi scheme
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was being run
at that very minute by Bernie Madoff,
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he was facing an enormous challenge,
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because the SEC relied on Bernie Madoff
as a source of Wall Street wisdom.
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He had
a tremendous reputation as being
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one of the real giants of Wall Street.
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Not only for developments
that he helped launch,
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changes in the industry
that he helped define,
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but he also spent a lot of time
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working with the SEC and
other government agencies on panels
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and assisting with
how to regulate business.
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I would like to start
with the premise that
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most of the practitioners in our industry
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come to their firms in the morning
wanting to comply with the rules,
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they want to do
what's best for their client.
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Harry Markopolos spent
tremendous time and effort
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trying to convince the SEC
to do the right thing on Bernie Madoff.
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And Harry didn't just go there once.
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He got there once, was rebuffed,
he went second time, was rebuffed.
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Any other person would've said,
"Givin' up!"
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We figured that Bernie had
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between three and seven billion dollars
in assets under management.
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And I went to the SEC,
and they looked at it
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and ignored it.
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The SEC never followed up
on anything that we wrote.
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So Harry called all the major papers.
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And they said, "We're not taking on Madoff
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based on the innuendos
from a mathematician."
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"We need a smoking gun."
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So Harry said to me,
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"Frank, you've got to find
an investigative reporter in finance."
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Where do you look that up?
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So just by happenstance,
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I guess it was the end of 2000,
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and I was speaking in Barcelona.
So I brought my wife.
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And we were at the airport,
and we get a cab.
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And it was the last cab.
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And there was a harried-looking guy
standing there with his luggage,
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banging on my window on the passenger's…
"Are you going to the conference?"
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And I said, "Yes."
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He says, "Do you mind if we share a cab?"
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He says, "Hi, I'm Michael Ocrant,"
from the front seat,
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I'm an investigative reporter
in financial fraud."
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And I looked up and I said,
"Thank you, Lord."
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I said, "Michael,
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I'll make you a dinner bet
for my wife and I in Barcelona
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that I can give you one name
of a secret hedge fund manager
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that will blow
any one of your managers away
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00:13:37,943 --> 00:13:42,030
in asset size
and risk adjusted rate of return."
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He says, "I'll take that bet."
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I said, "Bernie Madoff."
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His head spun around so quickly,
I knew I had my investigative reporter.
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00:13:57,129 --> 00:13:58,088
And I told him,
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00:13:58,171 --> 00:14:03,635
"This guy is always out of the market
the day before the market goes down,
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00:14:03,719 --> 00:14:08,765
and he's always in the market the day of,
or the day before the market goes up."
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00:14:09,558 --> 00:14:13,729
Perfect timing does not exist
by any manager in the world.
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00:14:13,812 --> 00:14:16,189
Nobody has advanced knowledge
of the market.
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00:14:18,775 --> 00:14:21,570
And Michael Ocrant says,
"I have to write an article."
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00:14:23,530 --> 00:14:26,241
We gave him all the names
of the options guys and so forth
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00:14:26,325 --> 00:14:28,368
in the United States on the floors,
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00:14:28,452 --> 00:14:30,621
and the heads of
derivatives at major banks.
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00:14:31,496 --> 00:14:33,081
And he spoke with everybody.
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00:14:33,582 --> 00:14:36,752
Ocrant couldn't believe it
when he ran the numbers.
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00:14:36,835 --> 00:14:39,338
And he was about to go to print
and he called me.
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00:14:39,421 --> 00:14:40,547
He says,
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00:14:40,631 --> 00:14:43,425
"This guy is two and a half times bigger
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00:14:43,508 --> 00:14:46,053
than my biggest hedge fund
reporting to me."
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00:14:46,553 --> 00:14:49,056
"How is he really
generating that business?"
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00:14:50,265 --> 00:14:51,433
The article comes out.
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00:14:51,516 --> 00:14:54,853
"Madoff tops the charts; traders ask how."
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00:14:55,854 --> 00:15:00,359
We were giving each other
high-fives in the office in Rampart.
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00:15:01,652 --> 00:15:03,445
Now it's in the public domain.
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Here comes the posse.
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00:15:07,741 --> 00:15:11,662
Sometime after
the MARHedge article had appeared,
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00:15:11,745 --> 00:15:15,332
a senior enforcement officer
at the SEC in Washington
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00:15:15,415 --> 00:15:17,709
decides some inquiry should be made.
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00:15:19,294 --> 00:15:24,216
It was just a surprise that Bernie Madoff
would be managing money
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00:15:24,299 --> 00:15:25,926
on such a large scale
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00:15:26,009 --> 00:15:31,598
and not have registered his investment
advisory business with federal regulators.
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00:15:34,935 --> 00:15:40,148
But the way she chooses to do that is to
pick up the phone and call Bernie Madoff.
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She knew him, because, of course,
he was well known in the industry.
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00:15:45,529 --> 00:15:47,072
And she calls him up and says,
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00:15:47,155 --> 00:15:50,158
"Hi, Bernie.
Uh, we're going to do an exam."
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00:15:50,242 --> 00:15:52,911
"We're going to have some questions
about your hedge fund."
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00:15:53,578 --> 00:15:56,248
And he says, "I don't have a hedge fund."
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00:15:57,791 --> 00:15:59,668
And she says, "Oh I didn't think so."
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00:15:59,751 --> 00:16:01,545
And he says, "Okay."
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00:16:03,213 --> 00:16:05,007
If he had a hedge fund business,
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00:16:05,090 --> 00:16:07,968
he would have to register
as an investment advisor.
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00:16:08,051 --> 00:16:10,971
Bernie Madoff did not want
to register as an investment advisor,
238
00:16:11,054 --> 00:16:13,682
because when you register
as an investment advisor,
239
00:16:13,765 --> 00:16:16,768
that subjects you to ongoing SEC exams.
240
00:16:18,020 --> 00:16:19,771
I love that episode so much
241
00:16:19,855 --> 00:16:23,025
because it illustrates,
better than anything else could,
242
00:16:23,108 --> 00:16:27,404
the esteem that the SEC felt
towards Bernie Madoff,
243
00:16:27,487 --> 00:16:29,406
the trust they had in him.
244
00:16:30,282 --> 00:16:33,243
"Let's call and ask him
if he's doing anything wrong."
245
00:16:33,326 --> 00:16:34,578
"He'll tell us the truth."
246
00:16:38,331 --> 00:16:42,210
Madoff was as lucky
in his enemies as he was in his friends.
247
00:16:43,920 --> 00:16:46,131
And he was lucky in his timing.
248
00:16:46,715 --> 00:16:50,510
Again, these early reports
are just coming in from the wire services.
249
00:16:50,594 --> 00:16:55,766
A small commuter plane apparently hitting
the side of the World Trade Center.
250
00:16:58,810 --> 00:17:01,646
There was another one.
We just saw another one.
251
00:17:18,538 --> 00:17:19,998
I'll never forget it.
252
00:17:20,082 --> 00:17:23,627
I will never forget
watching both of those buildings
253
00:17:23,710 --> 00:17:28,173
just shudder down to their knees
and then collapse completely.
254
00:17:30,258 --> 00:17:31,968
The city was so shaken.
255
00:17:33,345 --> 00:17:38,517
I remember how jangly those days were,
the weeks and months after 9/11.
256
00:17:40,644 --> 00:17:45,440
Wall Street, of course, was right
on the margins of the World Trade Center.
257
00:17:45,524 --> 00:17:49,528
The New York Stock Exchange,
two blocks away, was shut.
258
00:17:49,611 --> 00:17:53,281
Everything downtown was shut
for days and days and days.
259
00:17:56,034 --> 00:18:02,082
And there was a great sense of camaraderie
to getting the stock market open again.
260
00:18:02,165 --> 00:18:05,710
Tom Costello standing by
at the NASDAQ market site. Tom, what's up?
261
00:18:05,794 --> 00:18:09,381
The NASDAQ right now is about
an hour and a half away from trading.
262
00:18:09,464 --> 00:18:11,091
And as I mentioned an hour ago,
263
00:18:11,174 --> 00:18:14,219
this morning,
in an unusual show of solidarity,
264
00:18:14,302 --> 00:18:16,721
NASDAQ CEO Wick Simmons
will be at the NYSE.
265
00:18:16,805 --> 00:18:18,849
They will open this market together.
266
00:18:19,432 --> 00:18:22,978
The NASDAQ Market
needed to show that it could function
267
00:18:23,061 --> 00:18:26,148
in the aftermath
of this really unthinkable event.
268
00:18:27,107 --> 00:18:29,818
And Bernie helped bring that together.
269
00:18:29,901 --> 00:18:33,029
-…two, one!
270
00:18:34,614 --> 00:18:38,118
But it had another
significance for Bernie, too, that
271
00:18:38,201 --> 00:18:41,538
no one really appreciated
until it was far too late.
272
00:18:41,621 --> 00:18:44,166
The deliberate and deadly attacks,
273
00:18:44,249 --> 00:18:46,835
which were carried out yesterday
against our country,
274
00:18:47,627 --> 00:18:49,254
were more than acts of terror.
275
00:18:50,297 --> 00:18:51,673
They were acts of war.
276
00:18:53,341 --> 00:18:56,636
Resources that had been in New York City,
277
00:18:56,720 --> 00:18:58,305
on Wall Street's doorstep,
278
00:18:58,388 --> 00:19:02,559
devoted to white-collar crime, to fraud,
279
00:19:03,351 --> 00:19:05,395
were being steered away,
280
00:19:05,478 --> 00:19:11,276
were being funneled into counterterrorism
and terrorism finance issues.
281
00:19:13,236 --> 00:19:17,240
For the SEC, this was
an exacerbation of an existing problem,
282
00:19:17,324 --> 00:19:20,785
as a result of a deregulatory campaign
283
00:19:20,869 --> 00:19:23,997
that began with the election
of Ronald Reagan in 1980.
284
00:19:24,581 --> 00:19:26,541
In this present crisis,
285
00:19:27,125 --> 00:19:30,587
government is not
the solution to our problem.
286
00:19:30,670 --> 00:19:32,422
Government is the problem.
287
00:19:35,008 --> 00:19:37,552
The laws that they could rely on
288
00:19:37,636 --> 00:19:40,388
to pursue investigations
had been tightened,
289
00:19:40,472 --> 00:19:42,682
and their budgets
had been cut and cut again.
290
00:19:43,683 --> 00:19:45,852
The aftermath of 9/11
291
00:19:45,936 --> 00:19:52,651
was simply the continuation
of a long period of short rations,
292
00:19:52,734 --> 00:19:54,361
low priorities,
293
00:19:54,444 --> 00:19:58,823
even legislative changes that made it
harder for them to do their jobs.
294
00:20:00,742 --> 00:20:06,748
So, in a way,
that ghastly tragedy meant for Madoff
295
00:20:06,831 --> 00:20:10,919
a reduced level of scrutiny
at the regulatory level,
296
00:20:11,002 --> 00:20:13,588
just when he really needed it most.
297
00:20:14,256 --> 00:20:20,637
Madoff wasn't the only beneficiary
of this slow death of a thousand cuts
298
00:20:20,720 --> 00:20:22,973
that the SEC had experienced,
299
00:20:23,056 --> 00:20:26,309
but he was certainly
the biggest beneficiary of it,
300
00:20:26,393 --> 00:20:28,645
based on the scale of his fraud.
301
00:20:42,409 --> 00:20:44,244
I think there's a large dichotomy
302
00:20:44,327 --> 00:20:46,997
between the persona
Bernie put out to the world
303
00:20:47,080 --> 00:20:49,499
and what was really going on in the firm.
304
00:20:51,042 --> 00:20:55,797
It was an act to build up his business
and this persona.
305
00:20:56,715 --> 00:20:59,634
He had the perfect children for it.
306
00:20:59,718 --> 00:21:04,222
The all-American,
highly educated, family guys.
307
00:21:06,224 --> 00:21:10,312
Bernie used Andy and Mark as a shield
for when people would come in.
308
00:21:10,395 --> 00:21:12,105
"This is a family business."
309
00:21:12,605 --> 00:21:16,026
"My sons, they're highly educated,
they're running the trading room."
310
00:21:16,818 --> 00:21:21,614
But if you worked for this company,
everything was compartmentalized.
311
00:21:21,698 --> 00:21:22,741
Everything.
312
00:21:26,619 --> 00:21:32,542
We had a market-making division,
which was supervised by my son Mark.
313
00:21:33,460 --> 00:21:37,213
We had a proprietary trading division,
314
00:21:37,297 --> 00:21:40,175
which was supervised by my son Andy.
315
00:21:42,844 --> 00:21:48,600
The investment advisory side,
or the 17th floor as it's referred to,
316
00:21:48,683 --> 00:21:51,728
was basically supervised
by Frank DiPascali.
317
00:21:51,811 --> 00:21:53,980
The divisions could not
speak to each other,
318
00:21:54,773 --> 00:21:58,610
so my son Mark and Andy
could not have contact
319
00:21:58,693 --> 00:22:03,573
with what the profits or loss
of each department was.
320
00:22:06,117 --> 00:22:08,578
Mark and Andy
never went downstairs
321
00:22:08,661 --> 00:22:11,247
to the investment advisory side.
322
00:22:13,500 --> 00:22:16,211
And when clients came in,
323
00:22:16,294 --> 00:22:21,299
Mark or Andy would come to my desk
and say, "Who are those people?"
324
00:22:22,175 --> 00:22:23,843
They didn't know who they were.
325
00:22:27,430 --> 00:22:29,599
I think Bernie
dismissed them completely
326
00:22:29,682 --> 00:22:32,018
when he didn't want
to discuss something with them.
327
00:22:32,102 --> 00:22:35,146
And they learned through the years
not to push him too much.
328
00:22:37,440 --> 00:22:39,943
I remember going in
and talking to Bernie and saying,
329
00:22:40,026 --> 00:22:42,612
"You know,
your firm is a sole proprietorship."
330
00:22:42,695 --> 00:22:46,366
"It is going to cease to exist
upon your death."
331
00:22:46,449 --> 00:22:50,412
"And your sons and your brother
are going to have to get new licenses,
332
00:22:50,495 --> 00:22:52,789
they're going to open up
new bank accounts."
333
00:22:52,872 --> 00:22:58,044
"It's going to take a while before
this firm can become what it was again."
334
00:22:59,504 --> 00:23:03,466
He said, "Eh, I got 30 lawyers
working on it. Don't worry about it."
335
00:23:03,550 --> 00:23:05,176
And dismissed me completely.
336
00:23:06,219 --> 00:23:08,888
I said, "Okay."
I went and I told Mark Madoff.
337
00:23:10,390 --> 00:23:14,686
And he went in and talked to Bernie
about it and was completely shot down.
338
00:23:14,769 --> 00:23:17,147
And I think it upset him for years
339
00:23:17,230 --> 00:23:21,025
that he couldn't talk to Bernie
about anything like that.
340
00:23:24,112 --> 00:23:28,450
Bernie needed to be
the go-to guy on Wall Street,
341
00:23:28,533 --> 00:23:29,951
the king of Wall Street.
342
00:23:30,869 --> 00:23:32,620
His name was on the door.
343
00:23:32,704 --> 00:23:37,167
And there was nothing
more important in Bernie's life
344
00:23:37,250 --> 00:23:39,169
than maintaining face,
345
00:23:39,669 --> 00:23:44,716
maintaining he was running this incredibly
successful business on the 19th floor,
346
00:23:45,592 --> 00:23:49,721
but the reality wasn't quite
the way that he was portraying it.
347
00:23:51,723 --> 00:23:55,101
At what point in time
did you become insolvent?
348
00:24:01,399 --> 00:24:03,276
I would say, uh…
349
00:24:04,360 --> 00:24:07,071
probably in the early 2000s.
350
00:24:07,614 --> 00:24:09,032
In nine… Maybe…
351
00:24:09,115 --> 00:24:14,913
Somewhere between,
let's say, '98 and 2002.
352
00:24:14,996 --> 00:24:18,416
Yeah, there were problems brewing.
Yes, I would say.
353
00:24:20,043 --> 00:24:21,419
At that time,
354
00:24:21,503 --> 00:24:25,048
the competition for the flow of trades
355
00:24:25,131 --> 00:24:28,885
from giant institutions that
he's handling in his legitimate business
356
00:24:28,968 --> 00:24:30,595
was getting hotter.
357
00:24:30,678 --> 00:24:34,974
And that meant the amount you got paid
to do any one of those trades
358
00:24:35,058 --> 00:24:37,519
was getting smaller and thinner,
359
00:24:37,602 --> 00:24:40,522
so the profits
were starting to get squeezed.
360
00:24:45,985 --> 00:24:48,488
At that time,
the legitimate side of the business
361
00:24:48,571 --> 00:24:51,032
is not making the money
people think it's making.
362
00:24:53,243 --> 00:24:55,245
And between 2002 and 2008,
363
00:24:55,328 --> 00:24:57,747
there was approximately $800 million
364
00:24:57,830 --> 00:25:01,960
that was funneled
from the Ponzi side of the business
365
00:25:02,043 --> 00:25:04,045
to the legitimate side of the business.
366
00:25:07,924 --> 00:25:09,801
Mr. DiPascali takes money
367
00:25:09,884 --> 00:25:13,012
from the 17th floor
of the investment advisory business.
368
00:25:13,096 --> 00:25:15,723
That money is wired
over to London, overseas.
369
00:25:15,807 --> 00:25:20,436
That money is wired
back to the 19th floor,
370
00:25:20,520 --> 00:25:22,730
two stories above the 17th floor…
371
00:25:24,607 --> 00:25:27,360
in the guise of investments.
372
00:25:27,944 --> 00:25:29,779
United States Treasury bills.
373
00:25:32,240 --> 00:25:35,243
If your so-called legitimate
side of the business
374
00:25:35,326 --> 00:25:38,538
is not making the money
people think it's making,
375
00:25:38,621 --> 00:25:42,458
then you don't look as good
as you want people to think.
376
00:25:42,542 --> 00:25:46,921
And this would have been a way for Madoff
to protect his reputation on Wall Street.
377
00:25:51,217 --> 00:25:54,804
The reality was,
is as of the early 2000's,
378
00:25:54,887 --> 00:25:57,307
the legitimate business
would have been insolvent
379
00:25:57,390 --> 00:26:00,852
without that injection of $800 million
out of the Ponzi scheme.
380
00:26:02,312 --> 00:26:05,815
And the reason for that is
that the trading desks were profitable,
381
00:26:05,898 --> 00:26:07,692
but only in and of themselves.
382
00:26:08,735 --> 00:26:10,653
Bernie had an overhead problem.
383
00:26:10,737 --> 00:26:14,991
He was carrying too much expense,
and the firm was losing money.
384
00:26:16,284 --> 00:26:17,910
I did my own investigation,
385
00:26:18,620 --> 00:26:21,456
and basically he had
about 35 to 50 traders
386
00:26:21,539 --> 00:26:23,791
that were generating a trading profit,
387
00:26:24,292 --> 00:26:27,545
but the firm was carrying
more than 150 employees.
388
00:26:28,338 --> 00:26:32,634
Bernie would hire
all kinds of friends of key employees,
389
00:26:32,717 --> 00:26:36,471
some who were not carrying their weight
and were making a lot of money.
390
00:26:38,306 --> 00:26:41,976
He saw himself as the do-gooder,
as the people pleaser,
391
00:26:42,060 --> 00:26:43,770
as the go-to guy.
392
00:26:43,853 --> 00:26:45,897
He had to deliver, he had to produce.
393
00:26:49,525 --> 00:26:52,528
And we know, at the same time,
he's using the firm as a piggy bank.
394
00:26:53,154 --> 00:26:55,406
He's buying a yacht.
395
00:26:55,490 --> 00:26:57,325
He's got a house in France.
396
00:26:57,408 --> 00:26:59,577
He's got a shared private plane.
397
00:26:59,661 --> 00:27:04,332
Literally the colors of it
match the colors of the office.
398
00:27:05,416 --> 00:27:11,130
Ruth was busy managing
charitable balls and dinners and events,
399
00:27:11,214 --> 00:27:13,925
often which were honoring Bernie himself.
400
00:27:15,426 --> 00:27:19,389
Bernie gave a lot of money to his family.
401
00:27:19,889 --> 00:27:23,768
Mark and Andrew
both received a lot of loans,
402
00:27:23,851 --> 00:27:26,646
millions of dollars that
were never gonna get paid back.
403
00:27:27,980 --> 00:27:31,109
Buying houses,
gifts for employees…
404
00:27:31,651 --> 00:27:33,653
All of that was coming
out of the business.
405
00:27:40,827 --> 00:27:42,578
I was frustrated at work
406
00:27:42,662 --> 00:27:47,125
seeing that people that I worked with
didn't believe me that Madoff was a fraud.
407
00:27:48,626 --> 00:27:52,004
And after my first submission
to the Securities and Exchange Commission,
408
00:27:52,088 --> 00:27:55,675
the largest hedge fund publication
on the planet went to print
409
00:27:55,758 --> 00:27:58,803
basically calling Madoff a Ponzi scheme.
410
00:27:58,886 --> 00:28:00,847
But no one asked tough questions.
411
00:28:00,930 --> 00:28:03,599
And people settled
for half answers or no answers,
412
00:28:03,683 --> 00:28:05,435
and I continued to get ignored.
413
00:28:06,602 --> 00:28:09,522
But I kept getting hounded
by the bosses at my firm
414
00:28:09,605 --> 00:28:14,777
to duplicate his strategy, so we can
compete with him and split the market.
415
00:28:14,861 --> 00:28:18,322
So I had come up with something
that was sort of competitive with Madoff.
416
00:28:18,406 --> 00:28:20,032
The problem with it was
417
00:28:20,116 --> 00:28:22,702
I could lose you 50% in one month.
418
00:28:23,286 --> 00:28:25,121
So that was a risk, a known risk,
419
00:28:25,204 --> 00:28:28,291
but Thierry de Villehuchet
of Access International
420
00:28:28,374 --> 00:28:32,086
thought there was a market for it
as an alternative to his Madoff clients.
421
00:28:36,549 --> 00:28:38,468
So I went with Thierry de Villehuchet
422
00:28:38,551 --> 00:28:42,305
to a number of meetings
in London, in Paris, Geneva, and Zurich.
423
00:28:43,890 --> 00:28:46,851
One way to explain
who Thierry de Villehuchet was…
424
00:28:47,769 --> 00:28:52,356
I was in a cab, and we're going
by the Arc de Triomphe in Paris.
425
00:28:53,316 --> 00:28:59,489
And he says to me, "Harry,
look at the arc and look at those names."
426
00:28:59,572 --> 00:29:03,576
And I realize that those are
the people I was meeting with in Paris.
427
00:29:04,786 --> 00:29:08,164
Those family ties went back generations.
428
00:29:08,247 --> 00:29:11,209
Elite, private-client bankers
429
00:29:11,793 --> 00:29:15,379
that are managing money
for the royal families in Europe.
430
00:29:17,632 --> 00:29:19,550
These people were well-dressed,
431
00:29:20,635 --> 00:29:21,969
very articulate,
432
00:29:22,553 --> 00:29:23,721
had great manners,
433
00:29:24,305 --> 00:29:25,890
knew their way around a wine list.
434
00:29:29,018 --> 00:29:32,188
Thierry de Villehuchet would start
each meeting the same way:
435
00:29:32,271 --> 00:29:39,195
"Harry and Rampart are just like Madoff,
only higher risk, higher return."
436
00:29:39,821 --> 00:29:44,575
"And instead of using individual stocks,
they use indexes of stocks."
437
00:29:44,659 --> 00:29:47,036
"Other than that, very similar."
438
00:29:47,662 --> 00:29:51,874
"And that's why you need this firm
for diversification away from Madoff."
439
00:29:53,209 --> 00:29:55,545
On the first meeting the guy says,
440
00:29:55,628 --> 00:29:59,423
"You know, this is a very interesting
strategy, Harry, that you've devised."
441
00:29:59,507 --> 00:30:03,219
"It makes more money than Madoff,
but, you know, it could lose money too,
442
00:30:03,302 --> 00:30:06,389
even though you say
you've got the risk under control."
443
00:30:06,472 --> 00:30:09,642
"You know, we're invested with Madoff,
and he never loses money."
444
00:30:09,725 --> 00:30:12,812
"So why would we give you any money?"
445
00:30:13,855 --> 00:30:18,484
They did not want to hear
about real risk, realistic risk, any risk.
446
00:30:18,568 --> 00:30:20,319
All they knew is Madoff had no risk,
447
00:30:20,403 --> 00:30:23,030
and they weren't gonna trust
another manager that had risk.
448
00:30:24,115 --> 00:30:27,159
The first bank says,
"Madoff is closed, you know,
449
00:30:27,243 --> 00:30:30,788
but we at XYZ in Geneva, and only we,
450
00:30:31,789 --> 00:30:34,876
get access to this guy.
He takes our money and our money only."
451
00:30:34,959 --> 00:30:38,087
If you heard that once,
you might believe it.
452
00:30:38,963 --> 00:30:41,507
Two times, three times,
it might be a coincidence.
453
00:30:43,050 --> 00:30:47,346
Fourteen times out of 20 meetings
with private bankers throughout Europe,
454
00:30:47,430 --> 00:30:48,848
he heard the same story.
455
00:30:48,931 --> 00:30:52,059
"We're invested with Madoff,
he only takes our money."
456
00:30:53,519 --> 00:30:56,647
I walked away
from the European trip frustrated.
457
00:30:56,731 --> 00:31:00,693
No one chose to invest
except a handful of clients,
458
00:31:00,776 --> 00:31:05,156
so I ran the strategy for a while,
and it sort of dwindled from there.
459
00:31:06,365 --> 00:31:09,785
After that trip,
Harry became very nervous,
460
00:31:09,869 --> 00:31:12,038
because right away, he realized
461
00:31:12,121 --> 00:31:15,124
the fraud was bigger in Europe
than it was in the United States.
462
00:31:16,918 --> 00:31:20,796
I discovered that Madoff
had billions of dollars in Europe.
463
00:31:20,880 --> 00:31:23,382
He was always mentioned
with offshore accounts
464
00:31:23,466 --> 00:31:24,967
located in the Cayman Islands.
465
00:31:26,010 --> 00:31:27,845
Offshore money
in the Cayman Islands
466
00:31:27,929 --> 00:31:30,890
is very lightly-regulated money
467
00:31:30,973 --> 00:31:36,479
that wealthy people often are
putting there for tax avoidance schemes,
468
00:31:36,562 --> 00:31:39,106
but also houses dirty money
469
00:31:39,190 --> 00:31:41,233
that could have come through drug money
470
00:31:41,317 --> 00:31:45,071
or oligarch money
that needs to be ultimately laundered.
471
00:31:45,154 --> 00:31:49,992
And the money then would end up
housed in Bernie's fund.
472
00:31:51,619 --> 00:31:54,121
Once you realize
that Bernie is managing money
473
00:31:54,205 --> 00:31:56,624
for some of the world's
most dangerous people,
474
00:31:57,708 --> 00:31:59,043
you start to worry
475
00:31:59,126 --> 00:32:02,129
that if you're discovered
trying to turn in Madoff,
476
00:32:02,797 --> 00:32:05,633
it could cost the drug cartels
and the Russians a lot of money.
477
00:32:05,716 --> 00:32:08,094
Money that they don't want to lose.
478
00:32:08,177 --> 00:32:09,595
So, I'm at risk personally,
479
00:32:09,679 --> 00:32:12,848
because I'm seemingly
the lone voice in the wilderness
480
00:32:12,932 --> 00:32:15,142
going to the authorities
saying Madoff's a fraud.
481
00:32:15,226 --> 00:32:17,144
So, I started carrying a gun,
482
00:32:17,228 --> 00:32:19,397
and I started checking
my vehicle for bombs.
483
00:32:28,739 --> 00:32:32,868
As we built
a business relationship together,
484
00:32:32,952 --> 00:32:35,079
I became close to Thierry.
485
00:32:36,205 --> 00:32:39,000
And we would have cocktails in his office.
486
00:32:39,917 --> 00:32:44,338
One time, I met him
when I was down in New York, and,
487
00:32:45,381 --> 00:32:46,590
we talked a little bit.
488
00:32:47,174 --> 00:32:50,594
And I keep coming back
all the time in this relationship:
489
00:32:50,678 --> 00:32:54,056
"What if Harry and I, you know,
and this Madoff, it doesn't make…"
490
00:32:54,140 --> 00:32:57,393
And he goes, "Oh my God, you and Madoff.
Would you drop that bone?"
491
00:32:57,476 --> 00:33:01,063
"My gosh," he says,
"you know that I do my homework
492
00:33:01,689 --> 00:33:04,650
and that I trust this man explicitly."
493
00:33:05,192 --> 00:33:08,320
"We even did handwriting analysis
on this guy, and he passed."
494
00:33:08,404 --> 00:33:11,991
"And so, what else could I possibly do?"
495
00:33:12,658 --> 00:33:15,619
I said, "But if Harry and I are correct,
and you are wrong,
496
00:33:16,370 --> 00:33:18,039
what happens to you?"
497
00:33:20,207 --> 00:33:23,169
And he said,
"Let me put it to you this way, Frank."
498
00:33:23,669 --> 00:33:25,588
"I have all of my money in it."
499
00:33:27,131 --> 00:33:29,759
"I have most of my family's money in it."
500
00:33:30,259 --> 00:33:34,972
"I have every private banker
that I have groomed as a relationship
501
00:33:35,056 --> 00:33:36,599
in Europe in it."
502
00:33:36,682 --> 00:33:40,186
"And I probably have
half the royalty of Europe in it."
503
00:33:41,103 --> 00:33:43,731
"I have no out if I am wrong."
504
00:33:44,732 --> 00:33:48,402
"If you and Harry are correct
and I am wrong…
505
00:33:49,737 --> 00:33:51,030
I am a dead man."
506
00:34:00,539 --> 00:34:01,624
As time went on,
507
00:34:02,792 --> 00:34:08,047
Bernie became
more and more fanatical about things.
508
00:34:10,925 --> 00:34:14,053
And I would think
it's because of the added pressures.
509
00:34:14,595 --> 00:34:17,640
Because there was
so much he had to control.
510
00:34:19,350 --> 00:34:22,478
I spoke to him maybe
every 15 minutes on the phone.
511
00:34:22,561 --> 00:34:25,439
He always had to know what was going on.
512
00:34:25,523 --> 00:34:27,358
He goes, "I don't care if Peter…"
513
00:34:27,441 --> 00:34:30,528
"I don't care who gets calls,
I want to know about it right away."
514
00:34:31,779 --> 00:34:35,199
Bernie was the owner of the company.
515
00:34:35,282 --> 00:34:40,121
He wanted to make sure everybody knew
that he was in charge, he was the law.
516
00:34:40,204 --> 00:34:41,580
Peter…
517
00:34:41,664 --> 00:34:45,251
Peter was like everybody's favorite uncle.
518
00:34:47,336 --> 00:34:51,507
Peter was gregarious,
he was self-effacing,
519
00:34:51,590 --> 00:34:57,346
and he made me feel smart and useful
and productive from the beginning.
520
00:35:00,808 --> 00:35:03,936
Bernie was the older brother to Peter and…
521
00:35:04,687 --> 00:35:09,150
Bernie would bully him,
he would talk down to him.
522
00:35:10,276 --> 00:35:13,404
Peter was seeing a therapist,
for whatever reason,
523
00:35:14,488 --> 00:35:18,033
and when Bernie got wind of it,
instead of being supportive,
524
00:35:19,285 --> 00:35:20,578
he just went after him.
525
00:35:21,203 --> 00:35:24,665
He's like, "What are you, a tight-ass?
You got to go see somebody?"
526
00:35:24,748 --> 00:35:28,377
He'd start yelling at him, making fun
of him in front of the employees.
527
00:35:29,253 --> 00:35:33,257
In my mind, I said, "Look,
this is who he is. It's nothing personal."
528
00:35:33,340 --> 00:35:38,179
But his brother and the kids,
I don't think they could take it.
529
00:35:38,971 --> 00:35:41,098
So they would behave in such a way
530
00:35:41,182 --> 00:35:44,643
that they would avoid him
going into those rampages.
531
00:35:45,853 --> 00:35:50,482
Peter was, at one point,
involved in market-making.
532
00:35:50,566 --> 00:35:52,860
I'm not sure of the dates.
533
00:35:52,943 --> 00:35:58,115
And then he also handled
the compliance for the firm, and systems.
534
00:35:58,199 --> 00:36:00,159
He did a lot of things, my brother.
535
00:36:01,619 --> 00:36:04,997
I wonder how much of his compliance
536
00:36:05,080 --> 00:36:09,210
was just turning a blind eye
to what Bernie was doing on the 17th floor
537
00:36:09,293 --> 00:36:10,878
and not really knowing.
538
00:36:11,378 --> 00:36:13,839
Compliance officers are
the ones that are signing off
539
00:36:13,923 --> 00:36:15,716
that you have followed all the rules,
540
00:36:15,799 --> 00:36:19,386
that you have adhered to SEC guidelines,
541
00:36:19,470 --> 00:36:21,680
who would deal with the SEC
542
00:36:21,764 --> 00:36:25,392
and be the guy who would be
the face of Bernard Madoff to them.
543
00:36:25,476 --> 00:36:27,686
But Bernie was
a control freak about everything.
544
00:36:32,024 --> 00:36:36,528
Although the SEC
never managed to really mount
545
00:36:36,612 --> 00:36:38,781
a competent investigation of Madoff,
546
00:36:39,782 --> 00:36:45,829
tips would arise, or Harry Markopolos
would come in and pound the table again.
547
00:36:49,333 --> 00:36:54,338
In addition to Harry Markopolos's
complaints of 2000, 2001,
548
00:36:54,421 --> 00:36:57,299
there were a number of other complaints
from different people
549
00:36:57,383 --> 00:37:00,427
that were brought to the SEC
about Bernie Madoff at various times.
550
00:37:01,512 --> 00:37:03,889
In late 2004,
551
00:37:03,973 --> 00:37:07,643
they were doing an exam of another entity,
and they locate these emails
552
00:37:07,726 --> 00:37:10,646
where two individuals in this other firm
553
00:37:10,729 --> 00:37:14,566
were talking about the fact that
they think Madoff is running a fraud.
554
00:37:14,650 --> 00:37:17,611
And they were bringing up
some of these same issues
555
00:37:17,695 --> 00:37:20,572
about the returns not being possible.
556
00:37:28,038 --> 00:37:30,916
The SEC finally decides
to conduct an examination
557
00:37:31,000 --> 00:37:33,252
and assign two junior examiners
558
00:37:33,335 --> 00:37:36,630
to go into Bernie Madoff's office
and conduct the exam.
559
00:37:42,219 --> 00:37:44,972
So the day
these two junior examiners,
560
00:37:45,055 --> 00:37:47,391
pretty much fresh out of school, arrive,
561
00:37:47,474 --> 00:37:50,853
they're ushered into
Bernie Madoff's conference room
562
00:37:50,936 --> 00:37:55,065
and they're told that their personal
contact for the entire examination's
563
00:37:55,149 --> 00:37:58,777
not going to be some compliance person,
as would be the case
564
00:37:58,861 --> 00:38:02,656
in every other examination
and anything they were used to,
565
00:38:02,740 --> 00:38:06,535
but their contact is actually going to be
Bernie Madoff himself.
566
00:38:10,122 --> 00:38:11,290
Which is just unheard of.
567
00:38:11,373 --> 00:38:15,002
I mean, if you go to do
an examination of Apple,
568
00:38:15,085 --> 00:38:17,379
Tim Cook is not
following you around for two weeks.
569
00:38:17,463 --> 00:38:20,090
You're not going to hang out
with Jeff Bezos at Amazon
570
00:38:20,174 --> 00:38:22,176
when you're doing an examination.
571
00:38:23,427 --> 00:38:25,179
It's not clear
to Bernie's business
572
00:38:25,262 --> 00:38:28,098
what they're looking at,
because they don't make that clear.
573
00:38:28,182 --> 00:38:29,558
And the truth is,
574
00:38:30,225 --> 00:38:32,519
the two examiners
don't really know either.
575
00:38:34,605 --> 00:38:37,232
So these guys,
sort of straight out of school,
576
00:38:37,316 --> 00:38:42,071
were immediately faced with Bernie Madoff,
their sole contact at the firm.
577
00:38:42,905 --> 00:38:44,907
You know, he's a charismatic guy,
578
00:38:44,990 --> 00:38:48,369
and so he would tell them stories
and joke around with them.
579
00:38:49,244 --> 00:38:51,413
And in fact, at one point he tells them
580
00:38:51,497 --> 00:38:55,876
that he is on the short list
to become the next head of the SEC.
581
00:38:57,127 --> 00:39:01,715
And there's email communication between
these two junior examiners and their boss
582
00:39:01,799 --> 00:39:03,884
where the boss says to them, in joking,
583
00:39:03,967 --> 00:39:07,054
"Maybe you can be Bernie's aides
when he comes to take over the SEC."
584
00:39:08,889 --> 00:39:11,183
So they're awestruck to begin with,
585
00:39:11,266 --> 00:39:15,729
and it's very hard for them
to focus on what they need to do
586
00:39:15,813 --> 00:39:20,818
when they're just happy to be sitting
in a room, talking to Bernie Madoff,
587
00:39:20,901 --> 00:39:22,569
and learning all these things
588
00:39:22,653 --> 00:39:24,780
they didn't even know
about the SEC themselves.
589
00:39:26,657 --> 00:39:29,493
Everybody knew when
we were being investigated in the office
590
00:39:29,576 --> 00:39:31,787
that Bernie was going to become very odd.
591
00:39:34,248 --> 00:39:36,083
And he would watch everything.
592
00:39:36,166 --> 00:39:37,918
He would monitor them.
593
00:39:40,879 --> 00:39:45,551
He would make sure
that they stayed in one location,
594
00:39:46,051 --> 00:39:48,011
that we kept an eye on them.
595
00:39:48,095 --> 00:39:52,641
If they came out to make copies,
we would offer to do it for them,
596
00:39:52,724 --> 00:39:55,394
and we would take note
of what they were copying.
597
00:39:59,731 --> 00:40:02,401
I used to think of him
as Mr. Suspicious, you know.
598
00:40:02,484 --> 00:40:05,362
They were just auditing, but of course,
599
00:40:05,446 --> 00:40:07,823
you know, he was totally worried.
600
00:40:09,992 --> 00:40:15,038
As the SEC investigators
continue to pursue documents,
601
00:40:15,122 --> 00:40:19,084
accounts of relationships,
dealings that Madoff has,
602
00:40:19,668 --> 00:40:24,423
his initial welcoming mood
and graciousness begins to fray.
603
00:40:26,508 --> 00:40:28,844
He had sort of two approaches.
604
00:40:28,927 --> 00:40:32,556
If they were looking at the areas
that he wanted them to look at,
605
00:40:33,557 --> 00:40:38,061
he would be very friendly and
chat with them and flatter them.
606
00:40:38,145 --> 00:40:39,730
And if they veered from that,
607
00:40:39,813 --> 00:40:42,983
if they veered into the other area,
looking at the Ponzi scheme,
608
00:40:43,066 --> 00:40:44,985
he would get really agitated.
609
00:40:45,068 --> 00:40:47,654
Bernie Madoff pushed them
towards front-running.
610
00:40:48,155 --> 00:40:53,076
Front-running would be Bernie using
his market-making, broker-dealer operation
611
00:40:53,160 --> 00:40:54,578
in a form of insider trading
612
00:40:54,661 --> 00:40:59,249
to move the market in such a way
that you could get better returns.
613
00:41:00,709 --> 00:41:04,004
He wanted them to focus on that,
because obviously he wasn't doing that.
614
00:41:04,505 --> 00:41:07,382
He's actually been thinking about
whether to wiretap the office.
615
00:41:09,009 --> 00:41:11,512
But what he decides is that
616
00:41:11,595 --> 00:41:15,265
when the two young examiners
go out and take their lunch break,
617
00:41:15,766 --> 00:41:19,394
Bernie charges into
the glassed-in conference room
618
00:41:19,478 --> 00:41:22,814
and actually rifles
through their briefcases,
619
00:41:24,149 --> 00:41:26,360
and uncovers that they actually have
620
00:41:26,443 --> 00:41:29,905
the very first
investigative reporter articles
621
00:41:29,988 --> 00:41:32,157
Erin Arvedlund and Michael Ocrant wrote
622
00:41:32,241 --> 00:41:34,159
that basically poses the question,
623
00:41:34,243 --> 00:41:38,080
were Bernie's returns with his hedge fund
too good to be true?
624
00:41:41,208 --> 00:41:46,213
So he finds out their agenda
may be investigating the Ponzi scheme.
625
00:41:49,383 --> 00:41:51,009
And this enrages Bernie.
626
00:41:52,469 --> 00:41:53,971
He confronts them.
627
00:41:54,054 --> 00:41:56,139
"What are you looking for?", he says.
628
00:41:56,223 --> 00:42:02,729
And they wander around a bit and finally
come up with the words "hedge funds."
629
00:42:02,813 --> 00:42:06,733
"We want to know what your business is
with these hedge funds."
630
00:42:10,237 --> 00:42:11,780
"Well," he says,
631
00:42:11,863 --> 00:42:16,201
"I dealt with that
with your boss years ago."
632
00:42:17,160 --> 00:42:18,829
"They know all of that."
633
00:42:20,414 --> 00:42:23,333
"Look, no, I'm not running a hedge fund."
634
00:42:23,959 --> 00:42:29,715
"I do trades for hedge funds,
as I have explained over and over again."
635
00:42:29,798 --> 00:42:31,925
"Call Washington. They'll tell you."
636
00:42:37,222 --> 00:42:40,434
Kind of the wind, you know,
was gone from their sails.
637
00:42:43,312 --> 00:42:47,190
Turns out he knows more about
what's going on at the SEC than they do.
638
00:42:47,274 --> 00:42:51,612
And shortly after that,
they decide to close the examination
639
00:42:51,695 --> 00:42:54,573
with a determination
that there was no evidence
640
00:42:54,656 --> 00:42:57,534
that Bernie Madoff
committed anything improper.
641
00:42:59,786 --> 00:43:04,291
And there was no referral of that
to anyone else in the SEC.
642
00:43:10,631 --> 00:43:12,549
Madoff had an impeccable résumé.
643
00:43:14,134 --> 00:43:17,846
He had a very successful brokerage firm
that was legitimate.
644
00:43:17,929 --> 00:43:23,727
And everybody thought that someone with
that kind of power and industry reputation
645
00:43:23,810 --> 00:43:25,312
wouldn't stoop to stealing.
646
00:43:25,854 --> 00:43:28,940
And that would just burn me up,
because I knew it was a Ponzi scheme.
647
00:43:37,658 --> 00:43:40,577
How does $440 million just disappear?
648
00:43:40,661 --> 00:43:43,997
That's what the SEC,
the US Attorney General of Connecticut,
649
00:43:44,081 --> 00:43:46,792
and a slew of disgruntled investors
want to know.
650
00:43:46,875 --> 00:43:50,170
Former CEO Samuel Israel pleaded guilty
651
00:43:50,253 --> 00:43:52,714
to one count of conspiracy
and two of fraud.
652
00:43:52,798 --> 00:43:55,509
He told the court
he knew what he was doing at Bayou.
653
00:43:55,592 --> 00:43:57,135
He knew that it was wrong.
654
00:43:59,137 --> 00:44:01,890
In late summer of 2005,
655
00:44:02,683 --> 00:44:06,603
Wall Street is shaken by the exposure
656
00:44:06,687 --> 00:44:10,148
of a kind of flamboyant
hedge fund manager,
657
00:44:10,232 --> 00:44:13,610
who is exposed as running a Ponzi scheme.
658
00:44:14,403 --> 00:44:19,408
It sends a shock through the world
of hedge fund investors.
659
00:44:21,034 --> 00:44:25,414
At Madoff's investment advisory business,
money flowed in less fast.
660
00:44:25,497 --> 00:44:27,457
It flowed out a little faster.
661
00:44:27,999 --> 00:44:31,712
Soon, Bernie is facing a real cash crunch.
662
00:44:33,964 --> 00:44:38,552
He is down to his last $13 million
in his JP Morgan account,
663
00:44:38,635 --> 00:44:41,513
the bank account
that supported the Ponzi scheme.
664
00:44:42,514 --> 00:44:48,770
And he already has redemption requests
for more than $100 million.
665
00:44:48,854 --> 00:44:53,608
He taps some of his biggest clients,
most notably Jeffry Picower,
666
00:44:53,692 --> 00:44:57,904
who comes up with $125 million
in the nick of time.
667
00:45:00,449 --> 00:45:02,534
Bernie becomes
totally dependent on Picower,
668
00:45:02,617 --> 00:45:05,370
because when these periodic
cash crunches come up
669
00:45:05,454 --> 00:45:08,749
and the Ponzi's threatened to be exposed,
670
00:45:08,832 --> 00:45:12,711
Jeff Picower puts money in
to make sure that the business survived.
671
00:45:14,713 --> 00:45:17,132
And he has Sonja Kohn…
672
00:45:19,259 --> 00:45:22,804
this dynamic, Austrian financier.
673
00:45:22,888 --> 00:45:24,765
Grand dame of Vienna,
674
00:45:24,848 --> 00:45:28,810
who sashays into Bernie's office and
entertains everybody with her trilly voice
675
00:45:28,894 --> 00:45:33,148
and brings in a flood of cash.
676
00:45:33,231 --> 00:45:36,651
Some people say that she's
the female version of Bernie Madoff.
677
00:45:36,735 --> 00:45:39,988
Not only did she raise
a lot of money for him,
678
00:45:40,071 --> 00:45:43,533
but she, strangely enough,
looked very much like Bernie Madoff.
679
00:45:44,034 --> 00:45:46,328
It looked like
they could have been siblings.
680
00:45:46,953 --> 00:45:48,538
I met her a lot of times.
681
00:45:48,622 --> 00:45:50,540
She was a very nice woman.
682
00:45:51,458 --> 00:45:53,919
She was your typical grandmotherly type.
683
00:45:55,212 --> 00:45:58,548
She always wore
one thing in her outfit that stood out.
684
00:45:58,632 --> 00:46:01,092
Like, one time she came in
with a furry vest.
685
00:46:02,427 --> 00:46:04,554
I was like,
where the hell did that come from?
686
00:46:05,347 --> 00:46:08,266
And she would go into his office.
He would be waiting for her.
687
00:46:08,350 --> 00:46:10,393
They would always close the door.
688
00:46:10,477 --> 00:46:12,479
He didn't do that with everybody.
689
00:46:12,979 --> 00:46:16,358
They would talk,
and I didn't know what it was about.
690
00:46:17,609 --> 00:46:21,488
She had set up a network
of feeder funds all over Europe.
691
00:46:21,571 --> 00:46:24,741
The most important of them
was called the Herald Fund.
692
00:46:24,825 --> 00:46:27,911
It could be said that
without the Herald Fund,
693
00:46:27,994 --> 00:46:30,956
Bernie was done that year.
694
00:46:31,039 --> 00:46:35,126
The money that Sonja Kohn brought in
in that one fund alone
695
00:46:35,210 --> 00:46:39,256
got him out of that crisis
and back on solid ground.
696
00:46:40,215 --> 00:46:43,885
They begin a match that produces millions,
697
00:46:43,969 --> 00:46:48,932
and ultimately billions,
of dollars for Bernie Madoff.
698
00:46:49,015 --> 00:46:52,561
And a good slice
off the top for Sonja Kohn.
699
00:46:53,812 --> 00:46:57,023
She creates an entity called Bank Medici.
700
00:46:57,691 --> 00:47:03,113
Sounds like a lustrous
and long-standing institution.
701
00:47:03,196 --> 00:47:05,031
It's existed for about 15 minutes.
702
00:47:06,867 --> 00:47:10,704
But because of the way
the world was unfolding then,
703
00:47:10,787 --> 00:47:13,790
because of the burgeoning globalization,
704
00:47:13,874 --> 00:47:17,002
and the drive
of European banks, especially,
705
00:47:17,085 --> 00:47:21,131
to get bigger so they could compete
on the global stage,
706
00:47:22,048 --> 00:47:24,384
little bitty Bank Medici
707
00:47:24,467 --> 00:47:28,597
finds itself with a minority investment
from great, big Bank Austria.
708
00:47:30,599 --> 00:47:34,644
And then Bank Austria finds itself
taken over by the even bigger
709
00:47:34,728 --> 00:47:37,564
Italian banking conglomerate, UniCredit.
710
00:47:38,315 --> 00:47:41,526
So through no actions of her own,
711
00:47:41,610 --> 00:47:48,408
she now is part of this extraordinary
pedigree of European banking.
712
00:47:48,992 --> 00:47:52,746
By piggybacking on
these foreign institutions,
713
00:47:52,829 --> 00:47:56,833
Bernie was able to reach his hand
714
00:47:56,917 --> 00:48:00,712
into the pockets
of people all around the world.
715
00:48:01,671 --> 00:48:03,298
So far as I can tell,
716
00:48:03,381 --> 00:48:06,259
no major Ponzi scheme
has ever been able to do that before.
717
00:48:07,177 --> 00:48:10,388
There were so many thousands
of people involved in selling this product
718
00:48:10,472 --> 00:48:14,726
to a myriad of clients
in so many different countries.
719
00:48:14,809 --> 00:48:17,812
In the United States,
we only had 79 feeder funds.
720
00:48:17,896 --> 00:48:19,606
In Europe, it was well over 200.
721
00:48:21,441 --> 00:48:22,984
All the big French banks,
722
00:48:23,068 --> 00:48:26,196
the big German banks,
the big Swiss banks, the British banks,
723
00:48:26,279 --> 00:48:29,449
they were involved
in selling Madoff like hotcakes.
724
00:48:31,326 --> 00:48:34,371
And, unfortunately,
when a case gets that big,
725
00:48:34,454 --> 00:48:36,373
when you have that many billions at risk,
726
00:48:36,456 --> 00:48:40,335
no one wants to believe that
the emperor is not wearing any clothes.
727
00:48:49,844 --> 00:48:51,930
The folks
that gave him the money,
728
00:48:52,013 --> 00:48:53,890
they weren't asking questions, right?
729
00:48:53,974 --> 00:48:56,309
Because they liked the money
they got out of it every month.
730
00:48:57,477 --> 00:49:00,730
It became such a golden handcuff
731
00:49:01,398 --> 00:49:07,195
that hedge fund managers
were unwilling to challenge Bernie
732
00:49:07,278 --> 00:49:08,989
for his lack of disclosure,
733
00:49:09,072 --> 00:49:11,825
for his refusal
to cooperate with due diligence,
734
00:49:11,908 --> 00:49:13,076
for all of the things
735
00:49:13,159 --> 00:49:16,246
that normally would have been
red flags waving high and wide.
736
00:49:18,540 --> 00:49:21,459
Where's the money?
Where's the assets? Who's holding that?
737
00:49:22,043 --> 00:49:23,878
Is it in the bank? Where is it?
738
00:49:24,713 --> 00:49:26,798
Who's your auditor?
Who's looking at your books?
739
00:49:27,924 --> 00:49:31,970
It scares me to no end
that these questions are not being asked,
740
00:49:32,679 --> 00:49:36,099
but the sad part is,
it doesn't surprise me at all.
741
00:49:36,808 --> 00:49:42,105
They have a 100%
fiduciary responsibility to their clients,
742
00:49:42,188 --> 00:49:45,692
but how many times
have we seen people on Wall Street
743
00:49:45,775 --> 00:49:47,444
who have a duty to somebody else,
744
00:49:47,527 --> 00:49:50,989
but in the end,
who do they think their real duty is to?
745
00:49:51,072 --> 00:49:52,240
To themselves.
746
00:49:55,160 --> 00:49:57,412
I was sitting
in some of the largest banks,
747
00:49:57,996 --> 00:50:00,915
and they're telling me about
their world-class due diligence process.
748
00:50:00,999 --> 00:50:02,876
And yet, they're all selling Madoff.
749
00:50:04,461 --> 00:50:06,796
I thought that was insane,
750
00:50:06,880 --> 00:50:10,216
that they would be
that oblivious to an obvious fraud.
751
00:50:14,512 --> 00:50:16,848
Harry's motivation
in going to the SEC
752
00:50:16,931 --> 00:50:20,101
was just the purity of the business.
753
00:50:23,646 --> 00:50:28,026
And he became extremely focused,
myopic on one objective.
754
00:50:29,944 --> 00:50:33,448
And that's why
we persisted for five years.
755
00:50:34,824 --> 00:50:37,786
He's like, you ride that bicycle
when you're a kid down the street
756
00:50:37,869 --> 00:50:40,955
and a little Pekingese comes out
and barks at you
757
00:50:41,039 --> 00:50:42,791
and bites your ankle and won't let go,
758
00:50:42,874 --> 00:50:45,877
and you pedal away, and he's going
around and around and around.
759
00:50:45,960 --> 00:50:47,796
If you've had an experience like that,
760
00:50:47,879 --> 00:50:50,256
that's Harry, the Pekingese.
761
00:50:50,340 --> 00:50:52,759
He latches on and he won't let go.
762
00:50:57,889 --> 00:50:59,432
My email to Meaghan Cheung,
763
00:50:59,516 --> 00:51:03,019
Branch Chief in the New York
Regional Field Office of the SEC,
764
00:51:03,103 --> 00:51:07,023
on Monday, November 7, 2005 at 1:49 p.m.
765
00:51:07,107 --> 00:51:10,110
The title is, "The World's Largest
Hedge Fund is a Fraud."
766
00:51:12,278 --> 00:51:15,323
Harry Markopolos comes in, in 2005,
767
00:51:15,406 --> 00:51:20,036
with this very long document
with nearly 30 red flags.
768
00:51:21,037 --> 00:51:23,123
What Harry basically
came forward with was,
769
00:51:23,206 --> 00:51:26,626
the trading strategy
that Bernie Madoff had stated he used
770
00:51:26,709 --> 00:51:29,754
was just not something that could
achieve those kinds of returns.
771
00:51:29,838 --> 00:51:33,341
And he said, "Look at the numbers,
look at what he provided."
772
00:51:33,424 --> 00:51:36,678
"It's impossible that he's trading
in the volume that he says he is."
773
00:51:37,512 --> 00:51:40,932
The type of options Bernie claimed
he was trading only traded in one place.
774
00:51:41,015 --> 00:51:44,811
And on that exchange,
there were only one and a half billion
775
00:51:44,894 --> 00:51:47,647
of those options in existence
on the average month.
776
00:51:47,730 --> 00:51:49,816
Well, Bernie needed
several times that many.
777
00:51:50,525 --> 00:51:52,318
And they just didn't exist.
778
00:51:53,361 --> 00:51:56,698
And there was no independent
check and balance at the Madoff firm,
779
00:51:56,781 --> 00:51:58,950
which is also a red flag.
780
00:51:59,033 --> 00:52:01,327
Bernie's younger brother
was the compliance officer,
781
00:52:01,411 --> 00:52:03,538
so it was tightly controlled
by the same family.
782
00:52:03,621 --> 00:52:06,249
That was such
an obvious part of the fraud.
783
00:52:06,332 --> 00:52:07,333
It was laughable.
784
00:52:08,543 --> 00:52:13,506
One of the obvious red flags
was the lack of a counter-party.
785
00:52:13,590 --> 00:52:16,885
For every trade, there's a partner
or counter-party with that trade.
786
00:52:16,968 --> 00:52:21,556
And no one was able to find
counter-parties for Madoff's trades.
787
00:52:22,140 --> 00:52:26,644
He's purporting to have been trading
30, 40, 50 billion dollars in trades.
788
00:52:26,728 --> 00:52:28,438
You have to have counter-parties.
789
00:52:29,147 --> 00:52:31,232
And, at that point,
790
00:52:31,858 --> 00:52:36,112
given the wealth of evidence
that Harry Markopolos put forward,
791
00:52:36,196 --> 00:52:39,866
the SEC realized that
they had to do a full investigation.
792
00:52:47,707 --> 00:52:50,668
Unlike the 2005 investigation,
793
00:52:51,586 --> 00:52:54,130
they're going to look
at his hedge fund clients.
794
00:52:54,214 --> 00:52:58,801
They're going to look at the clients
he's supposedly just doing trades for,
795
00:52:58,885 --> 00:53:00,345
and see what they can learn.
796
00:53:01,846 --> 00:53:04,224
So they start knocking on doors
797
00:53:04,307 --> 00:53:07,060
of people who've done business
with Bernie for years.
798
00:53:08,144 --> 00:53:11,314
They call Fairfield Greenwich,
the feeder fund.
799
00:53:14,442 --> 00:53:16,527
Bernie Madoff learns about this.
800
00:53:16,611 --> 00:53:18,279
Then there was a phone call
801
00:53:18,363 --> 00:53:22,659
between Bernie Madoff
and Fairfield's compliance officer,
802
00:53:22,742 --> 00:53:26,704
where Bernie is essentially
telling the compliance officer
803
00:53:26,788 --> 00:53:28,665
what to say on the call with the SEC.
804
00:53:29,582 --> 00:53:32,877
Obviously, first of all,
this conversation never took place. Okay?
805
00:53:33,461 --> 00:53:35,129
-Yes, of course.
-Okay.
806
00:53:35,213 --> 00:53:38,132
What they do is, you know,
the commission when, they ask questions,
807
00:53:38,216 --> 00:53:40,593
they try and draw out information.
808
00:53:41,135 --> 00:53:46,808
The less you know about
how we execute and so on and so forth,
809
00:53:46,891 --> 00:53:48,101
the better you are.
810
00:53:48,184 --> 00:53:51,229
Say, "Listen, Madoff has been
in business for 45 years."
811
00:53:51,312 --> 00:53:53,940
"He's a well-known broker, you know,
812
00:53:54,023 --> 00:53:58,152
we make the assumption
that he's doing everything properly."
813
00:53:59,237 --> 00:54:03,658
The SEC had suspicions when they talked
to this compliance officer,
814
00:54:03,741 --> 00:54:04,951
that he was being coached,
815
00:54:05,034 --> 00:54:08,788
and yet that didn't affect how
they continued on in the investigation.
816
00:54:11,541 --> 00:54:14,043
For Bernie Madoff,
this has gone far enough.
817
00:54:14,127 --> 00:54:17,964
This could begin to get
really uncomfortable for him.
818
00:54:18,047 --> 00:54:19,799
So what does he do?
819
00:54:20,675 --> 00:54:24,512
He picks up the phone and tells the SEC
he wants to come in and talk with them.
820
00:54:27,849 --> 00:54:30,059
And he does. Alone.
821
00:54:30,560 --> 00:54:35,398
Without a phalanx of lawyers,
without a single employee,
822
00:54:35,481 --> 00:54:37,775
without anyone even
to carry his briefcase.
823
00:54:37,859 --> 00:54:39,235
Unheard of on Wall Street.
824
00:54:40,153 --> 00:54:43,614
He marches into
the SEC offices in New York…
825
00:54:45,825 --> 00:54:48,578
and said, "Ask me anything."
826
00:54:48,661 --> 00:54:51,289
"Ask me your questions.
What did you want to know?"
827
00:54:53,041 --> 00:54:54,208
And they press him.
828
00:54:54,292 --> 00:54:59,339
"Well, where do you trade these options
that are part of your strategy?"
829
00:55:01,215 --> 00:55:04,218
He writes out a list of banks.
830
00:55:04,302 --> 00:55:10,641
"Oh, and," they say, "we would like
to check your clearing house account."
831
00:55:12,018 --> 00:55:14,979
Basically, every time
a trade is done, there's a record of it
832
00:55:15,063 --> 00:55:18,399
at this independent,
outside entity called DTC.
833
00:55:18,483 --> 00:55:21,611
And so it's a way for regulators or others
834
00:55:21,694 --> 00:55:25,573
to check to see
if the trades are actually happening.
835
00:55:26,824 --> 00:55:31,037
"We need your account number
so we can check," they tell Bernie.
836
00:55:33,539 --> 00:55:34,707
He writes it out.
837
00:55:35,750 --> 00:55:38,127
He knows, that Friday afternoon,
838
00:55:38,211 --> 00:55:41,756
that if they call any of those banks
839
00:55:41,839 --> 00:55:45,385
expecting to hear
that they trade options with him,
840
00:55:45,468 --> 00:55:47,970
or if they check
that clearing house account
841
00:55:48,054 --> 00:55:53,393
expecting to find the billions of dollars
of assets that are supposed to be there,
842
00:55:53,476 --> 00:55:54,727
but aren't…
843
00:55:56,729 --> 00:55:57,814
the fraud is over.
844
00:55:58,856 --> 00:56:01,109
I don't know what was going
through Bernie's mind,
845
00:56:01,192 --> 00:56:04,612
but he handed them the piece of paper
846
00:56:05,822 --> 00:56:07,031
and walked out…
847
00:56:09,909 --> 00:56:14,414
and spent a weekend
wondering when the axe would fall.
848
00:56:16,749 --> 00:56:17,667
Monday comes,
849
00:56:18,292 --> 00:56:19,168
Tuesday comes,
850
00:56:19,752 --> 00:56:20,795
Wednesday comes.
851
00:56:24,966 --> 00:56:27,135
The axe never falls.
852
00:56:31,722 --> 00:56:33,307
They asked the question,
853
00:56:33,391 --> 00:56:35,893
they got the information,
they got the account number,
854
00:56:35,977 --> 00:56:37,645
but they never made the phone call.
855
00:56:39,939 --> 00:56:46,362
Inconceivable, and I never got an answer
that made any sense, to be honest,
856
00:56:46,446 --> 00:56:51,200
from the people that we questioned,
under oath in depositions,
857
00:56:51,284 --> 00:56:53,494
about this particular point.
858
00:56:54,370 --> 00:56:56,456
They forgot. They missed it.
859
00:56:57,540 --> 00:56:59,709
But it just doesn't make any sense.
860
00:57:03,546 --> 00:57:05,923
The SEC has, over and over again,
861
00:57:06,007 --> 00:57:11,179
examined, investigated, reviewed,
analyzed Bernie Madoff's operations,
862
00:57:11,262 --> 00:57:14,724
never conducting
a competent exam or investigation.
863
00:57:14,807 --> 00:57:18,811
Never uncovering the obvious fraud.
864
00:57:20,104 --> 00:57:22,356
They only concluded that he had given them
865
00:57:22,440 --> 00:57:25,776
some inaccurate information
on the investment advisory side.
866
00:57:29,113 --> 00:57:33,993
Harry wrote a thesis to the SEC
with 29 red flags.
867
00:57:34,076 --> 00:57:36,037
Now, these are not innuendos.
868
00:57:36,954 --> 00:57:39,624
Everything was delineated point by point,
869
00:57:39,707 --> 00:57:40,708
but they ignored it.
870
00:57:42,835 --> 00:57:44,795
I gave it to them on a silver platter,
871
00:57:44,879 --> 00:57:47,256
but they missed the Ponzi scheme.
872
00:57:48,716 --> 00:57:52,470
And what was tragic is,
they did take action against Madoff.
873
00:57:52,553 --> 00:57:53,930
In the summer of 2006,
874
00:57:55,264 --> 00:57:57,475
they made him register
as an investment advisor.
875
00:58:00,144 --> 00:58:03,648
And he used that
to market to his future victims,
876
00:58:04,315 --> 00:58:07,860
saying,"The SEC came in here,
they gave me a clean bill of health."
877
00:58:09,987 --> 00:58:12,532
And so the investors thought,
"Wow, it's a green light."
878
00:58:13,533 --> 00:58:16,118
"Let's invest more money with Madoff.
He's legit."
879
00:58:17,912 --> 00:58:22,124
Sadly, between 2006
and when it collapsed in 2008…
880
00:58:24,085 --> 00:58:28,256
billions of dollars poured in,
in those final years.
881
00:58:28,839 --> 00:58:31,676
This was the great mortgage market bubble.
882
00:58:31,759 --> 00:58:36,931
These were the golden years
of 2006, 7 and early 2008
883
00:58:37,014 --> 00:58:40,059
in which you could breathe and make money.
884
00:58:41,602 --> 00:58:44,313
It was this glorious time…
885
00:58:45,773 --> 00:58:49,610
…and Madoff was benefiting from that.
886
00:58:49,694 --> 00:58:52,071
To have shut that fraud down in 2006
887
00:58:52,154 --> 00:58:55,575
would have saved
billions of dollars in investor losses.
888
00:58:57,785 --> 00:58:58,953
But they didn't.
889
00:58:59,036 --> 00:59:03,624
It rolled forward
until its ultimate demise.
890
00:59:05,626 --> 00:59:07,587
Nothing my team did stopped Madoff.
891
00:59:07,670 --> 00:59:10,047
Nothing the government did stopped Madoff.
892
00:59:10,881 --> 00:59:13,676
He blew up because
the markets blew up in 2008.
893
00:59:14,719 --> 00:59:17,972
Shockwaves have hit markets
across the globe. Stocks…
894
00:59:18,055 --> 00:59:21,892
Dow fell 778 points,
making it the Dow's worst…
895
00:59:21,976 --> 00:59:23,227
That frenzy,
896
00:59:23,311 --> 00:59:26,480
that mood of fear and chaos
become the dominant mood.
897
00:59:26,564 --> 00:59:29,066
This is really shaking
the foundation of Wall Street.
898
00:59:29,150 --> 00:59:32,111
Now it's a full-scale crisis,
and has of course started…
899
00:59:32,194 --> 00:59:36,240
And the withdrawal notices
start to flow in,
900
00:59:37,116 --> 00:59:39,243
and then pour in,
901
00:59:40,328 --> 00:59:41,829
and then avalanche in.
902
00:59:41,912 --> 00:59:44,957
The US economy is in
a "once-in-a-century crisis." Those words…
903
00:59:45,041 --> 00:59:46,917
The writing's on the wall.
904
00:59:47,501 --> 00:59:49,795
Bernie is running out of money.