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Author finds Bernie Madoff's Ponzi scheme was just too good to be true

Date: Friday, September 4, 2009
Author: Ann Belser, Pittsburgh Post-Gazette

The secret to the many years of success Bernie Madoff had in running his multibillion-dollar Ponzi scheme was that he didn't con just his investors, but that he also ingratiated himself with the Securities and Exchange Commission.

For years, Mr. Madoff and his firm were the good guys to the SEC. Bernard L. Madoff Investment Securities, Mr. Madoff's legitimate brokerage, had the same agenda as the SEC -- to break the monopoly the New York Stock Exchange and the American Exchange had on trading securities.

To do that, Mr. Madoff essentially took over the Cincinnati Exchange in the late 1970s and early 1980s in order to trade stocks by computer. The move made his brokerage the one that could clear trades in minutes instead of days or weeks in a time when the exchanges had to close on Wednesdays so written stock tickets could be sorted out and the shares filed.

In later years, the new lawyers who were employed by the SEC -- and they were almost all lawyers working there -- came to his offices to learn about how the stock exchanges worked.

By the time whistles started blowing and red flags were waving about Mr. Madoff's impossible returns on his hedge fund, the SEC would not believe it.

In 2001, Erin Arvedlund was a reporter at Barrons, casting about for a story on hedge funds "because they were becoming a force on Wall Street."

She kept hearing about Mr. Madoff and his $1 billion hedge fund, though Mr. Madoff, who was very visible as a broker, did not list his hedge fund anywhere or make himself known as the manager of a hedge fund.

Ms. Arvedlund talked to Ken Nakayama, the head of research at Deutsche Bank who had been looking into a fund that was a feeder into Mr. Madoff's fund. What he realized was that the sort of strategy Mr. Madoff was using would have left a huge paper trail, but that there was no trail to follow because he wasn't trading anything.

When Ms. Arvedlund called Mr. Madoff, he was evasive about his trading strategy, saying it was proprietary information. Her article wound up questioning his returns.

To his investors, many of whom joined his fund on the word of friends or family, investing with Mr. Madoff seemed safe. On paper he provided a very steady rate of return. In later years it was 13.5 percent a year, every year. His investors, checking their statements, saw steady returns. What they did not know was that the returns existed only on paper.

Other funds, those which called themselves funds of hedge funds, invested their money with Mr. Madoff.

The victims, Ms. Arvedlund said, "were all up and down the economic scale." Retired prison guards and plumbers were caught in the scam, as were members of the European aristocracy and wealthy denizens of Palm Beach, Fla.

There were even 33 names on the list of victims from the Pittsburgh region.

After Mr. Madoff confessed, Ms. Arvedlund, of Philadelphia, started researching his career. The result is her new book, "Too Good to Be True: The Rise and Fall of Bernie Madoff."

Ms. Arvedlund said there would be more details to come in the story of the world's largest Ponzi scheme, because, while Mr. Madoff refused to cooperate with federal investigators, his top guy in the hedge fund, Frank DiPascali, has pleaded guilty. Mr. DiPascali has agreed, as part of his plea, to work with prosecutors to piece together the whole picture.

Ms. Arvedlund believes that Peter Madoff, Bernard Madoff's brother, may be indicted in the scheme and that Ruth Madoff, Mr. Madoff's wife, will have to pay civilly.

"She worked with Bernie from the very beginning," Ms. Arvedlund said.

Mrs. Madoff's own father sent his accounting clients to invest with Bernard Madoff.

"It was impossible that she didn't know the investment business wasn't happening," Ms. Arvedlund said. A telling detail about Mrs. Madoff in Ms. Arvedlund's book is that Mrs. Madoff locked her office door every time she left, even if she was just using the restroom.

"I see her as a Lady Macbeth type of character," Ms. Arvedlund said.

While the total money taken in the scheme has been estimated as high as $65 billion, Ms. Arvedlund said that was only if all the phony profits were included. The real theft, she said, was much less. Ms. Arvedlund believes that the total will be between $12 billion and $20 billion. The final totals will have to be left to the accountants to figure out.

Reach Ann Belser at abelser@post-gazette.com or 412-263-1699.