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[wind gusting]
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[Gordon Bennet]
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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[theme music playing]
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[atmospheric music playing]
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[Frank Casey] 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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[tense music playing]
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[Casey] 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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[suspenseful music playing]
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[Casey]
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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[Markopolos] 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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[Casey] 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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[Markopolos] 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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[Casey] 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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[Markopolos] 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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[intriguing music playing]
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[Markopolos] 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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[Markopolos] 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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[H. David Kotz] 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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[Madoff] 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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[Kotz] 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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[Markopolos] 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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[printing]
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[Casey] 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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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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And I told him,
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"This guy is always out of the market
the day before the market goes down,
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and he's always in the market the day of,
or the day before the market goes up."
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Perfect timing does not exist
by any manager in the world.
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Nobody has advanced knowledge
of the market.
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And Michael Ocrant says,
"I have to write an article."
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We gave him all the names
of the options guys and so forth
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in the United States on the floors,
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and the heads of
derivatives at major banks.
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And he spoke with everybody.
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Ocrant couldn't believe it
when he ran the numbers.
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And he was about to go to print
and he called me.
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He says,
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"This guy is two and a half times bigger
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than my biggest hedge fund
reporting to me."
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"How is he really
generating that business?"
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The article comes out.
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"Madoff tops the charts; traders ask how."
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We were giving each other
high-fives in the office in Rampart.
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Now it's in the public domain.
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Here comes the posse.
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[Henriques] Sometime after
the MARHedge article had appeared,
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a senior enforcement officer
at the SEC in Washington
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decides some inquiry should be made.
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It was just a surprise that Bernie Madoff
would be managing money
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on such a large scale
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and not have registered his investment
advisory business with federal regulators.
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But the way she chooses to do that is to
pick up the phone and call Bernie Madoff.
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[phone ringing]
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[Kotz] She knew him, because, of course,
he was well known in the industry.
237
00:15:45,486 --> 00:15:47,029
And she calls him up and says,
238
00:15:47,112 --> 00:15:50,115
"Hi, Bernie.
Uh, we're going to do an exam."
239
00:15:50,199 --> 00:15:52,868
"We're going to have some questions
about your hedge fund."
240
00:15:53,535 --> 00:15:56,205
And he says, "I don't have a hedge fund."
241
00:15:57,748 --> 00:15:59,625
And she says, "Oh I didn't think so."
242
00:15:59,708 --> 00:16:01,502
And he says, "Okay."
243
00:16:03,170 --> 00:16:04,964
If he had a hedge fund business,
244
00:16:05,047 --> 00:16:07,925
he would have to register
as an investment advisor.
245
00:16:08,008 --> 00:16:10,928
Bernie Madoff did not want
to register as an investment advisor,
246
00:16:11,011 --> 00:16:13,639
because when you register
as an investment advisor,
247
00:16:13,722 --> 00:16:16,725
that subjects you to ongoing SEC exams.
248
00:16:17,977 --> 00:16:19,728
[Henriques] I love that episode so much
249
00:16:19,812 --> 00:16:22,982
because it illustrates,
better than anything else could,
250
00:16:23,065 --> 00:16:27,361
the esteem that the SEC felt
towards Bernie Madoff,
251
00:16:27,444 --> 00:16:29,363
the trust they had in him.
252
00:16:30,239 --> 00:16:33,200
"Let's call and ask him
if he's doing anything wrong."
253
00:16:33,283 --> 00:16:34,535
"He'll tell us the truth."
254
00:16:34,618 --> 00:16:38,205
[atmospheric music playing]
255
00:16:38,288 --> 00:16:42,167
[Henriques] Madoff was as lucky
in his enemies as he was in his friends.
256
00:16:43,877 --> 00:16:46,088
And he was lucky in his timing.
257
00:16:46,672 --> 00:16:50,467
[reporter] Again, these early reports
are just coming in from the wire services.
258
00:16:50,551 --> 00:16:55,723
A small commuter plane apparently hitting
the side of the World Trade Center.
259
00:16:58,767 --> 00:17:01,603
There was another one.
We just saw another one.
260
00:17:02,104 --> 00:17:04,732
[crowd screaming]
261
00:17:18,495 --> 00:17:19,955
I'll never forget it.
262
00:17:20,039 --> 00:17:23,584
I will never forget
watching both of those buildings
263
00:17:23,667 --> 00:17:28,130
just shudder down to their knees
and then collapse completely.
264
00:17:30,215 --> 00:17:31,925
The city was so shaken.
265
00:17:33,302 --> 00:17:38,474
I remember how jangly those days were,
the weeks and months after 9/11.
266
00:17:40,601 --> 00:17:45,397
Wall Street, of course, was right
on the margins of the World Trade Center.
267
00:17:45,481 --> 00:17:49,485
The New York Stock Exchange,
two blocks away, was shut.
268
00:17:49,568 --> 00:17:53,238
Everything downtown was shut
for days and days and days.
269
00:17:55,991 --> 00:18:02,039
And there was a great sense of camaraderie
to getting the stock market open again.
270
00:18:02,122 --> 00:18:05,667
Tom Costello standing by
at the NASDAQ market site. Tom, what's up?
271
00:18:05,751 --> 00:18:09,338
[Costello] The NASDAQ right now is about
an hour and a half away from trading.
272
00:18:09,421 --> 00:18:11,048
And as I mentioned an hour ago,
273
00:18:11,131 --> 00:18:14,176
this morning,
in an unusual show of solidarity,
274
00:18:14,259 --> 00:18:16,678
NASDAQ CEO Wick Simmons
will be at the NYSE.
275
00:18:16,762 --> 00:18:18,806
They will open this market together.
276
00:18:19,389 --> 00:18:22,935
[Henriques] The NASDAQ Market
needed to show that it could function
277
00:18:23,018 --> 00:18:26,105
in the aftermath
of this really unthinkable event.
278
00:18:27,064 --> 00:18:29,775
And Bernie helped bring that together.
279
00:18:29,858 --> 00:18:32,986
- [stock brokers]...two, one!
- [bell ringing]
280
00:18:33,070 --> 00:18:34,488
[applause]
281
00:18:34,571 --> 00:18:38,075
[Henriques] But it had another
significance for Bernie, too, that
282
00:18:38,158 --> 00:18:41,495
no one really appreciated
until it was far too late.
283
00:18:41,578 --> 00:18:44,123
The deliberate and deadly attacks,
284
00:18:44,206 --> 00:18:46,792
which were carried out yesterday
against our country,
285
00:18:47,584 --> 00:18:49,211
were more than acts of terror.
286
00:18:50,254 --> 00:18:51,630
They were acts of war.
287
00:18:53,298 --> 00:18:56,593
[Henriques]
Resources that had been in New York City,
288
00:18:56,677 --> 00:18:58,262
on Wall Street's doorstep,
289
00:18:58,345 --> 00:19:02,516
devoted to white-collar crime, to fraud,
290
00:19:03,308 --> 00:19:05,352
were being steered away,
291
00:19:05,435 --> 00:19:11,233
were being funneled into counterterrorism
and terrorism finance issues.
292
00:19:13,193 --> 00:19:17,197
For the SEC, this was
an exacerbation of an existing problem,
293
00:19:17,281 --> 00:19:20,742
as a result of a deregulatory campaign
294
00:19:20,826 --> 00:19:23,954
that began with the election
of Ronald Reagan in 1980.
295
00:19:24,538 --> 00:19:26,498
[Reagan] In this present crisis,
296
00:19:27,082 --> 00:19:30,544
government is not
the solution to our problem.
297
00:19:30,627 --> 00:19:32,379
Government is the problem.
298
00:19:32,462 --> 00:19:34,882
[applause]
299
00:19:34,965 --> 00:19:37,509
The laws that they could rely on
300
00:19:37,593 --> 00:19:40,345
to pursue investigations
had been tightened,
301
00:19:40,429 --> 00:19:42,639
and their budgets
had been cut and cut again.
302
00:19:43,640 --> 00:19:45,809
The aftermath of 9/11
303
00:19:45,893 --> 00:19:52,608
was simply the continuation
of a long period of short rations,
304
00:19:52,691 --> 00:19:54,318
low priorities,
305
00:19:54,401 --> 00:19:58,780
even legislative changes that made it
harder for them to do their jobs.
306
00:20:00,699 --> 00:20:06,705
So, in a way,
that ghastly tragedy meant for Madoff
307
00:20:06,788 --> 00:20:10,876
a reduced level of scrutiny
at the regulatory level,
308
00:20:10,959 --> 00:20:13,545
just when he really needed it most.
309
00:20:14,213 --> 00:20:20,594
Madoff wasn't the only beneficiary
of this slow death of a thousand cuts
310
00:20:20,677 --> 00:20:22,930
that the SEC had experienced,
311
00:20:23,013 --> 00:20:26,266
but he was certainly
the biggest beneficiary of it,
312
00:20:26,350 --> 00:20:28,602
based on the scale of his fraud.
313
00:20:37,778 --> 00:20:40,739
[dramatic music playing]
314
00:20:42,366 --> 00:20:44,206
[Ellen Hales]
I think there's a large dichotomy
315
00:20:44,284 --> 00:20:46,954
between the persona
Bernie put out to the world
316
00:20:47,037 --> 00:20:49,456
and what was really going on in the firm.
317
00:20:50,999 --> 00:20:55,754
It was an act to build up his business
and this persona.
318
00:20:56,672 --> 00:20:59,591
[Eleanor Squillari]
He had the perfect children for it.
319
00:20:59,675 --> 00:21:04,179
The all-American,
highly educated, family guys.
320
00:21:06,181 --> 00:21:10,269
Bernie used Andy and Mark as a shield
for when people would come in.
321
00:21:10,352 --> 00:21:12,062
"This is a family business."
322
00:21:12,562 --> 00:21:15,983
"My sons, they're highly educated,
they're running the trading room."
323
00:21:16,775 --> 00:21:21,571
But if you worked for this company,
everything was compartmentalized.
324
00:21:21,655 --> 00:21:22,698
Everything.
325
00:21:26,576 --> 00:21:32,499
[Madoff] We had a market-making division,
which was supervised by my son Mark.
326
00:21:33,417 --> 00:21:37,170
We had a proprietary trading division,
327
00:21:37,254 --> 00:21:40,132
which was supervised by my son Andy.
328
00:21:42,801 --> 00:21:48,557
The investment advisory side,
or the 17th floor as it's referred to,
329
00:21:48,640 --> 00:21:51,685
was basically supervised
by Frank DiPascali.
330
00:21:51,768 --> 00:21:53,937
The divisions could not
speak to each other,
331
00:21:54,730 --> 00:21:58,567
so my son Mark and Andy
could not have contact
332
00:21:58,650 --> 00:22:03,530
with what the profits or loss
of each department was.
333
00:22:06,074 --> 00:22:08,535
[Squillari] Mark and Andy
never went downstairs
334
00:22:08,618 --> 00:22:11,204
to the investment advisory side.
335
00:22:13,457 --> 00:22:16,168
And when clients came in,
336
00:22:16,251 --> 00:22:21,256
Mark or Andy would come to my desk
and say, "Who are those people?"
337
00:22:22,132 --> 00:22:23,800
They didn't know who they were.
338
00:22:27,387 --> 00:22:29,556
[Hales] I think Bernie
dismissed them completely
339
00:22:29,639 --> 00:22:31,975
when he didn't want
to discuss something with them.
340
00:22:32,059 --> 00:22:35,103
And they learned through the years
not to push him too much.
341
00:22:37,397 --> 00:22:39,900
I remember going in
and talking to Bernie and saying,
342
00:22:39,983 --> 00:22:42,569
"You know,
your firm is a sole proprietorship."
343
00:22:42,652 --> 00:22:46,323
"It is going to cease to exist
upon your death."
344
00:22:46,406 --> 00:22:50,369
"And your sons and your brother
are going to have to get new licenses,
345
00:22:50,452 --> 00:22:52,746
they're going to open up
new bank accounts."
346
00:22:52,829 --> 00:22:58,001
"It's going to take a while before
this firm can become what it was again."
347
00:22:59,461 --> 00:23:03,423
He said, "Eh, I got 30 lawyers
working on it. Don't worry about it."
348
00:23:03,507 --> 00:23:05,133
And dismissed me completely.
349
00:23:06,176 --> 00:23:08,845
I said, "Okay."
I went and I told Mark Madoff.
350
00:23:10,347 --> 00:23:14,643
And he went in and talked to Bernie
about it and was completely shot down.
351
00:23:14,726 --> 00:23:17,104
And I think it upset him for years
352
00:23:17,187 --> 00:23:20,982
that he couldn't talk to Bernie
about anything like that.
353
00:23:24,069 --> 00:23:28,407
[Jim Campbell] Bernie needed to be
the go-to guy on Wall Street,
354
00:23:28,490 --> 00:23:29,908
the king of Wall Street.
355
00:23:30,826 --> 00:23:32,577
His name was on the door.
356
00:23:32,661 --> 00:23:37,124
And there was nothing
more important in Bernie's life
357
00:23:37,207 --> 00:23:39,126
than maintaining face,
358
00:23:39,626 --> 00:23:44,673
maintaining he was running this incredibly
successful business on the 19th floor,
359
00:23:45,549 --> 00:23:49,678
but the reality wasn't quite
the way that he was portraying it.
360
00:23:51,680 --> 00:23:55,058
[lawyer] At what point in time
did you become insolvent?
361
00:23:56,101 --> 00:23:57,394
[sighs]
362
00:24:01,356 --> 00:24:03,233
[Madoff] I would say, uh...
363
00:24:04,317 --> 00:24:07,028
probably in the early 2000s.
364
00:24:07,571 --> 00:24:08,989
In nine... Maybe...
365
00:24:09,072 --> 00:24:14,870
Somewhere between,
let's say, '98 and 2002.
366
00:24:14,953 --> 00:24:18,373
Yeah, there were problems brewing.
Yes, I would say.
367
00:24:20,000 --> 00:24:21,376
[Henriques] At that time,
368
00:24:21,460 --> 00:24:25,005
the competition for the flow of trades
369
00:24:25,088 --> 00:24:28,842
from giant institutions that
he's handling in his legitimate business
370
00:24:28,925 --> 00:24:30,552
was getting hotter.
371
00:24:30,635 --> 00:24:34,931
And that meant the amount you got paid
to do any one of those trades
372
00:24:35,015 --> 00:24:37,476
was getting smaller and thinner,
373
00:24:37,559 --> 00:24:40,479
so the profits
were starting to get squeezed.
374
00:24:45,942 --> 00:24:48,504
[Bruce Dubinsky] At that time,
the legitimate side of the business
375
00:24:48,528 --> 00:24:50,989
is not making the money
people think it's making.
376
00:24:53,200 --> 00:24:55,202
And between 2002 and 2008,
377
00:24:55,285 --> 00:24:57,704
there was approximately $800 million
378
00:24:57,787 --> 00:25:01,917
that was funneled
from the Ponzi side of the business
379
00:25:02,000 --> 00:25:04,002
to the legitimate side of the business.
380
00:25:07,881 --> 00:25:09,758
Mr. DiPascali takes money
381
00:25:09,841 --> 00:25:12,969
from the 17th floor
of the investment advisory business.
382
00:25:13,053 --> 00:25:15,680
That money is wired
over to London, overseas.
383
00:25:15,764 --> 00:25:20,393
That money is wired
back to the 19th floor,
384
00:25:20,477 --> 00:25:22,687
two stories above the 17th floor...
385
00:25:24,564 --> 00:25:27,317
in the guise of investments.
386
00:25:27,901 --> 00:25:29,736
United States Treasury bills.
387
00:25:32,197 --> 00:25:35,200
If your so-called legitimate
side of the business
388
00:25:35,283 --> 00:25:38,495
is not making the money
people think it's making,
389
00:25:38,578 --> 00:25:42,415
then you don't look as good
as you want people to think.
390
00:25:42,499 --> 00:25:46,878
And this would have been a way for Madoff
to protect his reputation on Wall Street.
391
00:25:51,174 --> 00:25:54,761
[Campbell] The reality was,
is as of the early 2000's,
392
00:25:54,844 --> 00:25:57,264
the legitimate business
would have been insolvent
393
00:25:57,347 --> 00:26:00,809
without that injection of $800 million
out of the Ponzi scheme.
394
00:26:02,269 --> 00:26:05,772
And the reason for that is
that the trading desks were profitable,
395
00:26:05,855 --> 00:26:07,649
but only in and of themselves.
396
00:26:08,692 --> 00:26:10,610
Bernie had an overhead problem.
397
00:26:10,694 --> 00:26:14,948
He was carrying too much expense,
and the firm was losing money.
398
00:26:16,241 --> 00:26:17,867
I did my own investigation,
399
00:26:18,577 --> 00:26:21,413
and basically he had
about 35 to 50 traders
400
00:26:21,496 --> 00:26:23,748
that were generating a trading profit,
401
00:26:24,249 --> 00:26:27,502
but the firm was carrying
more than 150 employees.
402
00:26:28,295 --> 00:26:32,591
Bernie would hire
all kinds of friends of key employees,
403
00:26:32,674 --> 00:26:36,428
some who were not carrying their weight
and were making a lot of money.
404
00:26:38,263 --> 00:26:41,933
He saw himself as the do-gooder,
as the people pleaser,
405
00:26:42,017 --> 00:26:43,727
as the go-to guy.
406
00:26:43,810 --> 00:26:45,854
He had to deliver, he had to produce.
407
00:26:49,482 --> 00:26:52,485
And we know, at the same time,
he's using the firm as a piggy bank.
408
00:26:53,111 --> 00:26:55,363
[Andrew Ross Sorkin] He's buying a yacht.
409
00:26:55,447 --> 00:26:57,282
He's got a house in France.
410
00:26:57,365 --> 00:26:59,534
He's got a shared private plane.
411
00:26:59,618 --> 00:27:04,289
Literally the colors of it
match the colors of the office.
412
00:27:05,373 --> 00:27:11,087
Ruth was busy managing
charitable balls and dinners and events,
413
00:27:11,171 --> 00:27:13,882
often which were honoring Bernie himself.
414
00:27:15,383 --> 00:27:19,346
[Steven Garfinkel]
Bernie gave a lot of money to his family.
415
00:27:19,846 --> 00:27:23,725
Mark and Andrew
both received a lot of loans,
416
00:27:23,808 --> 00:27:26,603
millions of dollars that
were never gonna get paid back.
417
00:27:27,937 --> 00:27:31,066
[Campbell] Buying houses,
gifts for employees...
418
00:27:31,608 --> 00:27:33,610
All of that was coming
out of the business.
419
00:27:40,784 --> 00:27:42,535
[Markopolos] I was frustrated at work
420
00:27:42,619 --> 00:27:47,082
seeing that people that I worked with
didn't believe me that Madoff was a fraud.
421
00:27:48,583 --> 00:27:51,961
And after my first submission
to the Securities and Exchange Commission,
422
00:27:52,045 --> 00:27:55,632
the largest hedge fund publication
on the planet went to print
423
00:27:55,715 --> 00:27:58,760
basically calling Madoff a Ponzi scheme.
424
00:27:58,843 --> 00:28:00,804
But no one asked tough questions.
425
00:28:00,887 --> 00:28:03,556
And people settled
for half answers or no answers,
426
00:28:03,640 --> 00:28:05,392
and I continued to get ignored.
427
00:28:06,559 --> 00:28:09,479
But I kept getting hounded
by the bosses at my firm
428
00:28:09,562 --> 00:28:14,734
to duplicate his strategy, so we can
compete with him and split the market.
429
00:28:14,818 --> 00:28:18,279
So I had come up with something
that was sort of competitive with Madoff.
430
00:28:18,363 --> 00:28:19,989
The problem with it was
431
00:28:20,073 --> 00:28:22,659
I could lose you 50% in one month.
432
00:28:23,243 --> 00:28:25,078
So that was a risk, a known risk,
433
00:28:25,161 --> 00:28:28,248
but Thierry de Villehuchet
of Access International
434
00:28:28,331 --> 00:28:32,043
thought there was a market for it
as an alternative to his Madoff clients.
435
00:28:32,127 --> 00:28:35,213
[suspenseful music playing]
436
00:28:36,506 --> 00:28:38,466
[Markopolos]
So I went with Thierry de Villehuchet
437
00:28:38,508 --> 00:28:42,262
to a number of meetings
in London, in Paris, Geneva, and Zurich.
438
00:28:43,847 --> 00:28:46,808
One way to explain
who Thierry de Villehuchet was...
439
00:28:47,726 --> 00:28:52,313
I was in a cab, and we're going
by the Arc de Triomphe in Paris.
440
00:28:53,273 --> 00:28:59,446
And he says to me, "Harry,
look at the arc and look at those names."
441
00:28:59,529 --> 00:29:03,533
And I realize that those are
the people I was meeting with in Paris.
442
00:29:04,743 --> 00:29:08,121
Those family ties went back generations.
443
00:29:08,204 --> 00:29:11,166
Elite, private-client bankers
444
00:29:11,750 --> 00:29:15,336
that are managing money
for the royal families in Europe.
445
00:29:17,589 --> 00:29:19,507
These people were well-dressed,
446
00:29:20,592 --> 00:29:21,926
very articulate,
447
00:29:22,510 --> 00:29:23,678
had great manners,
448
00:29:24,262 --> 00:29:25,847
knew their way around a wine list.
449
00:29:28,975 --> 00:29:32,145
Thierry de Villehuchet would start
each meeting the same way:
450
00:29:32,228 --> 00:29:39,152
"Harry and Rampart are just like Madoff,
only higher risk, higher return."
451
00:29:39,778 --> 00:29:44,532
"And instead of using individual stocks,
they use indexes of stocks."
452
00:29:44,616 --> 00:29:46,993
"Other than that, very similar."
453
00:29:47,619 --> 00:29:51,831
"And that's why you need this firm
for diversification away from Madoff."
454
00:29:53,166 --> 00:29:55,502
[Casey] On the first meeting the guy says,
455
00:29:55,585 --> 00:29:59,380
"You know, this is a very interesting
strategy, Harry, that you've devised."
456
00:29:59,464 --> 00:30:03,176
"It makes more money than Madoff,
but, you know, it could lose money too,
457
00:30:03,259 --> 00:30:06,346
even though you say
you've got the risk under control."
458
00:30:06,429 --> 00:30:09,599
"You know, we're invested with Madoff,
and he never loses money."
459
00:30:09,682 --> 00:30:12,769
"So why would we give you any money?"
460
00:30:13,812 --> 00:30:18,441
[Markopolos] They did not want to hear
about real risk, realistic risk, any risk.
461
00:30:18,525 --> 00:30:20,276
All they knew is Madoff had no risk,
462
00:30:20,360 --> 00:30:22,987
and they weren't gonna trust
another manager that had risk.
463
00:30:24,072 --> 00:30:27,116
[Casey] The first bank says,
"Madoff is closed, you know,
464
00:30:27,200 --> 00:30:30,745
but we at XYZ in Geneva, and only we,
465
00:30:31,746 --> 00:30:34,833
get access to this guy.
He takes our money and our money only."
466
00:30:34,916 --> 00:30:38,044
If you heard that once,
you might believe it.
467
00:30:38,920 --> 00:30:41,464
Two times, three times,
it might be a coincidence.
468
00:30:43,007 --> 00:30:47,303
Fourteen times out of 20 meetings
with private bankers throughout Europe,
469
00:30:47,387 --> 00:30:48,805
he heard the same story.
470
00:30:48,888 --> 00:30:52,016
"We're invested with Madoff,
he only takes our money."
471
00:30:53,476 --> 00:30:56,604
[Markopolos] I walked away
from the European trip frustrated.
472
00:30:56,688 --> 00:31:00,650
No one chose to invest
except a handful of clients,
473
00:31:00,733 --> 00:31:05,113
so I ran the strategy for a while,
and it sort of dwindled from there.
474
00:31:06,322 --> 00:31:09,742
[Casey] After that trip,
Harry became very nervous,
475
00:31:09,826 --> 00:31:11,995
because right away, he realized
476
00:31:12,078 --> 00:31:15,081
the fraud was bigger in Europe
than it was in the United States.
477
00:31:16,875 --> 00:31:20,753
[Markopolos] I discovered that Madoff
had billions of dollars in Europe.
478
00:31:20,837 --> 00:31:23,339
He was always mentioned
with offshore accounts
479
00:31:23,423 --> 00:31:24,924
located in the Cayman Islands.
480
00:31:25,967 --> 00:31:27,807
[Campbell] Offshore money
in the Cayman Islands
481
00:31:27,886 --> 00:31:30,847
is very lightly-regulated money
482
00:31:30,930 --> 00:31:36,436
that wealthy people often are
putting there for tax avoidance schemes,
483
00:31:36,519 --> 00:31:39,063
but also houses dirty money
484
00:31:39,147 --> 00:31:41,190
that could have come through drug money
485
00:31:41,274 --> 00:31:45,028
or oligarch money
that needs to be ultimately laundered.
486
00:31:45,111 --> 00:31:49,949
And the money then would end up
housed in Bernie's fund.
487
00:31:51,576 --> 00:31:54,078
[Markopolos] Once you realize
that Bernie is managing money
488
00:31:54,162 --> 00:31:56,581
for some of the world's
most dangerous people,
489
00:31:57,665 --> 00:31:59,000
you start to worry
490
00:31:59,083 --> 00:32:02,086
that if you're discovered
trying to turn in Madoff,
491
00:32:02,754 --> 00:32:05,590
it could cost the drug cartels
and the Russians a lot of money.
492
00:32:05,673 --> 00:32:08,051
Money that they don't want to lose.
493
00:32:08,134 --> 00:32:09,552
So, I'm at risk personally,
494
00:32:09,636 --> 00:32:12,805
because I'm seemingly
the lone voice in the wilderness
495
00:32:12,889 --> 00:32:15,099
going to the authorities
saying Madoff's a fraud.
496
00:32:15,183 --> 00:32:17,101
So, I started carrying a gun,
497
00:32:17,185 --> 00:32:19,354
and I started checking
my vehicle for bombs.
498
00:32:20,396 --> 00:32:23,316
[tense music playing]
499
00:32:28,696 --> 00:32:32,825
[Casey] As we built
a business relationship together,
500
00:32:32,909 --> 00:32:35,036
I became close to Thierry.
501
00:32:36,162 --> 00:32:38,957
And we would have cocktails in his office.
502
00:32:39,874 --> 00:32:44,295
One time, I met him
when I was down in New York, and,
503
00:32:45,338 --> 00:32:46,547
we talked a little bit.
504
00:32:47,131 --> 00:32:50,551
And I keep coming back
all the time in this relationship:
505
00:32:50,635 --> 00:32:54,013
"What if Harry and I, you know,
and this Madoff, it doesn't make..."
506
00:32:54,097 --> 00:32:57,350
And he goes, "Oh my God, you and Madoff.
Would you drop that bone?"
507
00:32:57,433 --> 00:33:01,020
"My gosh," he says,
"you know that I do my homework
508
00:33:01,646 --> 00:33:04,607
and that I trust this man explicitly."
509
00:33:05,149 --> 00:33:08,277
"We even did handwriting analysis
on this guy, and he passed."
510
00:33:08,361 --> 00:33:11,948
"And so, what else could I possibly do?"
511
00:33:12,615 --> 00:33:15,576
I said, "But if Harry and I are correct,
and you are wrong,
512
00:33:16,327 --> 00:33:17,996
what happens to you?"
513
00:33:20,164 --> 00:33:23,126
And he said,
"Let me put it to you this way, Frank."
514
00:33:23,626 --> 00:33:25,545
"I have all of my money in it."
515
00:33:27,088 --> 00:33:29,716
"I have most of my family's money in it."
516
00:33:30,216 --> 00:33:34,929
"I have every private banker
that I have groomed as a relationship
517
00:33:35,013 --> 00:33:36,556
in Europe in it."
518
00:33:36,639 --> 00:33:40,143
"And I probably have
half the royalty of Europe in it."
519
00:33:41,060 --> 00:33:43,688
"I have no out if I am wrong."
520
00:33:44,689 --> 00:33:48,359
"If you and Harry are correct
and I am wrong...
521
00:33:49,694 --> 00:33:50,987
I am a dead man."
522
00:33:52,488 --> 00:33:55,408
[unsettling music playing]
523
00:34:00,496 --> 00:34:01,616
[Squillari] As time went on,
524
00:34:02,749 --> 00:34:08,004
Bernie became
more and more fanatical about things.
525
00:34:10,882 --> 00:34:14,010
And I would think
it's because of the added pressures.
526
00:34:14,552 --> 00:34:17,597
Because there was
so much he had to control.
527
00:34:19,307 --> 00:34:22,435
I spoke to him maybe
every 15 minutes on the phone.
528
00:34:22,518 --> 00:34:25,396
He always had to know what was going on.
529
00:34:25,480 --> 00:34:27,315
He goes, "I don't care if Peter..."
530
00:34:27,398 --> 00:34:30,485
"I don't care who gets calls,
I want to know about it right away."
531
00:34:31,736 --> 00:34:35,156
Bernie was the owner of the company.
532
00:34:35,239 --> 00:34:40,078
He wanted to make sure everybody knew
that he was in charge, he was the law.
533
00:34:40,161 --> 00:34:41,537
Peter...
534
00:34:41,621 --> 00:34:45,208
Peter was like everybody's favorite uncle.
535
00:34:47,293 --> 00:34:51,464
Peter was gregarious,
he was self-effacing,
536
00:34:51,547 --> 00:34:57,303
and he made me feel smart and useful
and productive from the beginning.
537
00:35:00,765 --> 00:35:03,893
Bernie was the older brother to Peter and...
538
00:35:04,644 --> 00:35:09,107
Bernie would bully him,
he would talk down to him.
539
00:35:10,233 --> 00:35:13,361
Peter was seeing a therapist,
for whatever reason,
540
00:35:14,445 --> 00:35:17,990
and when Bernie got wind of it,
instead of being supportive,
541
00:35:19,242 --> 00:35:20,535
he just went after him.
542
00:35:21,160 --> 00:35:24,622
He's like, "What are you, a tight-ass?
You got to go see somebody?"
543
00:35:24,705 --> 00:35:28,334
He'd start yelling at him, making fun
of him in front of the employees.
544
00:35:29,210 --> 00:35:33,214
In my mind, I said, "Look,
this is who he is. It's nothing personal."
545
00:35:33,297 --> 00:35:38,136
But his brother and the kids,
I don't think they could take it.
546
00:35:38,928 --> 00:35:41,055
So they would behave in such a way
547
00:35:41,139 --> 00:35:44,600
that they would avoid him
going into those rampages.
548
00:35:45,810 --> 00:35:50,439
[Madoff] Peter was, at one point,
involved in market-making.
549
00:35:50,523 --> 00:35:52,817
I'm not sure of the dates.
550
00:35:52,900 --> 00:35:58,072
And then he also handled
the compliance for the firm, and systems.
551
00:35:58,156 --> 00:36:00,116
He did a lot of things, my brother.
552
00:36:01,576 --> 00:36:04,954
I wonder how much of his compliance
553
00:36:05,037 --> 00:36:09,167
was just turning a blind eye
to what Bernie was doing on the 17th floor
554
00:36:09,250 --> 00:36:10,835
and not really knowing.
555
00:36:11,335 --> 00:36:13,796
Compliance officers are
the ones that are signing off
556
00:36:13,880 --> 00:36:15,673
that you have followed all the rules,
557
00:36:15,756 --> 00:36:19,343
that you have adhered to SEC guidelines,
558
00:36:19,427 --> 00:36:21,637
who would deal with the SEC
559
00:36:21,721 --> 00:36:25,349
and be the guy who would be
the face of Bernard Madoff to them.
560
00:36:25,433 --> 00:36:27,643
But Bernie was
a control freak about everything.
561
00:36:27,727 --> 00:36:30,354
[tense music playing]
562
00:36:31,981 --> 00:36:36,485
[Henriques] Although the SEC
never managed to really mount
563
00:36:36,569 --> 00:36:38,738
a competent investigation of Madoff,
564
00:36:39,739 --> 00:36:45,786
tips would arise, or Harry Markopolos
would come in and pound the table again.
565
00:36:49,290 --> 00:36:54,295
[Kotz] In addition to Harry Markopolos's
complaints of 2000, 2001,
566
00:36:54,378 --> 00:36:57,256
there were a number of other complaints
from different people
567
00:36:57,340 --> 00:37:00,384
that were brought to the SEC
about Bernie Madoff at various times.
568
00:37:01,469 --> 00:37:03,846
In late 2004,
569
00:37:03,930 --> 00:37:07,600
they were doing an exam of another entity,
and they locate these emails
570
00:37:07,683 --> 00:37:10,603
where two individuals in this other firm
571
00:37:10,686 --> 00:37:14,523
were talking about the fact that
they think Madoff is running a fraud.
572
00:37:14,607 --> 00:37:17,568
And they were bringing up
some of these same issues
573
00:37:17,652 --> 00:37:20,529
about the returns not being possible.
574
00:37:27,995 --> 00:37:30,873
The SEC finally decides
to conduct an examination
575
00:37:30,957 --> 00:37:33,209
and assign two junior examiners
576
00:37:33,292 --> 00:37:36,587
to go into Bernie Madoff's office
and conduct the exam.
577
00:37:36,671 --> 00:37:39,757
[intriguing music playing]
578
00:37:42,176 --> 00:37:44,929
[Kotz] So the day
these two junior examiners,
579
00:37:45,012 --> 00:37:47,348
pretty much fresh out of school, arrive,
580
00:37:47,431 --> 00:37:50,810
they're ushered into
Bernie Madoff's conference room
581
00:37:50,893 --> 00:37:55,022
and they're told that their personal
contact for the entire examination's
582
00:37:55,106 --> 00:37:58,734
not going to be some compliance person,
as would be the case
583
00:37:58,818 --> 00:38:02,613
in every other examination
and anything they were used to,
584
00:38:02,697 --> 00:38:06,492
but their contact is actually going to be
Bernie Madoff himself.
585
00:38:10,079 --> 00:38:11,247
Which is just unheard of.
586
00:38:11,330 --> 00:38:14,959
I mean, if you go to do
an examination of Apple,
587
00:38:15,042 --> 00:38:17,336
Tim Cook is not
following you around for two weeks.
588
00:38:17,420 --> 00:38:20,047
You're not going to hang out
with Jeff Bezos at Amazon
589
00:38:20,131 --> 00:38:22,133
when you're doing an examination.
590
00:38:23,384 --> 00:38:25,184
[Campbell] It's not clear
to Bernie's business
591
00:38:25,219 --> 00:38:28,055
what they're looking at,
because they don't make that clear.
592
00:38:28,139 --> 00:38:29,515
And the truth is,
593
00:38:30,182 --> 00:38:32,476
the two examiners
don't really know either.
594
00:38:34,562 --> 00:38:37,189
[Kotz] So these guys,
sort of straight out of school,
595
00:38:37,273 --> 00:38:42,028
were immediately faced with Bernie Madoff,
their sole contact at the firm.
596
00:38:42,862 --> 00:38:44,864
You know, he's a charismatic guy,
597
00:38:44,947 --> 00:38:48,326
and so he would tell them stories
and joke around with them.
598
00:38:49,201 --> 00:38:51,370
And in fact, at one point he tells them
599
00:38:51,454 --> 00:38:55,833
that he is on the short list
to become the next head of the SEC.
600
00:38:57,084 --> 00:39:01,672
And there's email communication between
these two junior examiners and their boss
601
00:39:01,756 --> 00:39:03,841
where the boss says to them, in joking,
602
00:39:03,924 --> 00:39:07,011
"Maybe you can be Bernie's aides
when he comes to take over the SEC."
603
00:39:08,846 --> 00:39:11,140
So they're awestruck to begin with,
604
00:39:11,223 --> 00:39:15,686
and it's very hard for them
to focus on what they need to do
605
00:39:15,770 --> 00:39:20,775
when they're just happy to be sitting
in a room, talking to Bernie Madoff,
606
00:39:20,858 --> 00:39:22,526
and learning all these things
607
00:39:22,610 --> 00:39:24,737
they didn't even know
about the SEC themselves.
608
00:39:26,614 --> 00:39:29,454
[Squillari] Everybody knew when
we were being investigated in the office
609
00:39:29,533 --> 00:39:31,744
that Bernie was going to become very odd.
610
00:39:34,205 --> 00:39:36,040
And he would watch everything.
611
00:39:36,123 --> 00:39:37,875
He would monitor them.
612
00:39:40,836 --> 00:39:45,508
He would make sure
that they stayed in one location,
613
00:39:46,008 --> 00:39:47,968
that we kept an eye on them.
614
00:39:48,052 --> 00:39:52,598
If they came out to make copies,
we would offer to do it for them,
615
00:39:52,681 --> 00:39:55,351
and we would take note
of what they were copying.
616
00:39:59,688 --> 00:40:02,358
I used to think of him
as Mr. Suspicious, you know.
617
00:40:02,441 --> 00:40:05,319
They were just auditing, but of course,
618
00:40:05,403 --> 00:40:07,780
you know, he was totally worried.
619
00:40:09,949 --> 00:40:14,995
[Henriques] As the SEC investigators
continue to pursue documents,
620
00:40:15,079 --> 00:40:19,041
accounts of relationships,
dealings that Madoff has,
621
00:40:19,625 --> 00:40:24,380
his initial welcoming mood
and graciousness begins to fray.
622
00:40:26,465 --> 00:40:28,801
[Kotz] He had sort of two approaches.
623
00:40:28,884 --> 00:40:32,513
If they were looking at the areas
that he wanted them to look at,
624
00:40:33,514 --> 00:40:38,018
he would be very friendly and
chat with them and flatter them.
625
00:40:38,102 --> 00:40:39,687
And if they veered from that,
626
00:40:39,770 --> 00:40:42,940
if they veered into the other area,
looking at the Ponzi scheme,
627
00:40:43,023 --> 00:40:44,942
he would get really agitated.
628
00:40:45,025 --> 00:40:47,611
Bernie Madoff pushed them
towards front-running.
629
00:40:48,112 --> 00:40:53,033
Front-running would be Bernie using
his market-making, broker-dealer operation
630
00:40:53,117 --> 00:40:54,535
in a form of insider trading
631
00:40:54,618 --> 00:40:59,206
to move the market in such a way
that you could get better returns.
632
00:41:00,666 --> 00:41:03,961
He wanted them to focus on that,
because obviously he wasn't doing that.
633
00:41:04,462 --> 00:41:07,339
He's actually been thinking about
whether to wiretap the office.
634
00:41:08,966 --> 00:41:11,469
But what he decides is that
635
00:41:11,552 --> 00:41:15,222
when the two young examiners
go out and take their lunch break,
636
00:41:15,723 --> 00:41:19,351
Bernie charges into
the glassed-in conference room
637
00:41:19,435 --> 00:41:22,771
and actually rifles
through their briefcases,
638
00:41:24,106 --> 00:41:26,317
and uncovers that they actually have
639
00:41:26,400 --> 00:41:29,862
the very first
investigative reporter articles
640
00:41:29,945 --> 00:41:32,114
Erin Arvedlund and Michael Ocrant wrote
641
00:41:32,198 --> 00:41:34,116
that basically poses the question,
642
00:41:34,200 --> 00:41:38,037
were Bernie's returns with his hedge fund
too good to be true?
643
00:41:38,120 --> 00:41:41,081
[suspenseful music playing]
644
00:41:41,165 --> 00:41:46,170
[Campbell] So he finds out their agenda
may be investigating the Ponzi scheme.
645
00:41:49,340 --> 00:41:50,966
And this enrages Bernie.
646
00:41:52,426 --> 00:41:53,928
[Henriques] He confronts them.
647
00:41:54,011 --> 00:41:56,096
"What are you looking for?", he says.
648
00:41:56,180 --> 00:42:02,686
And they wander around a bit and finally
come up with the words "hedge funds."
649
00:42:02,770 --> 00:42:06,690
"We want to know what your business is
with these hedge funds."
650
00:42:10,194 --> 00:42:11,737
"Well," he says,
651
00:42:11,820 --> 00:42:16,158
"I dealt with that
with your boss years ago."
652
00:42:17,117 --> 00:42:18,786
"They know all of that."
653
00:42:20,371 --> 00:42:23,290
"Look, no, I'm not running a hedge fund."
654
00:42:23,916 --> 00:42:29,672
"I do trades for hedge funds,
as I have explained over and over again."
655
00:42:29,755 --> 00:42:31,882
"Call Washington. They'll tell you."
656
00:42:37,179 --> 00:42:40,391
Kind of the wind, you know,
was gone from their sails.
657
00:42:43,269 --> 00:42:47,147
Turns out he knows more about
what's going on at the SEC than they do.
658
00:42:47,231 --> 00:42:51,569
And shortly after that,
they decide to close the examination
659
00:42:51,652 --> 00:42:54,530
with a determination
that there was no evidence
660
00:42:54,613 --> 00:42:57,491
that Bernie Madoff
committed anything improper.
661
00:42:59,743 --> 00:43:04,248
And there was no referral of that
to anyone else in the SEC.
662
00:43:10,588 --> 00:43:12,506
[Markopolos]
Madoff had an impeccable résumé.
663
00:43:14,091 --> 00:43:17,803
He had a very successful brokerage firm
that was legitimate.
664
00:43:17,886 --> 00:43:23,684
And everybody thought that someone with
that kind of power and industry reputation
665
00:43:23,767 --> 00:43:25,269
wouldn't stoop to stealing.
666
00:43:25,811 --> 00:43:28,897
And that would just burn me up,
because I knew it was a Ponzi scheme.
667
00:43:33,861 --> 00:43:36,363
[pulsating music playing]
668
00:43:37,615 --> 00:43:40,534
How does $440 million just disappear?
669
00:43:40,618 --> 00:43:43,954
That's what the SEC,
the US Attorney General of Connecticut,
670
00:43:44,038 --> 00:43:46,749
and a slew of disgruntled investors
want to know.
671
00:43:46,832 --> 00:43:50,127
[reporter]
Former CEO Samuel Israel pleaded guilty
672
00:43:50,210 --> 00:43:52,671
to one count of conspiracy
and two of fraud.
673
00:43:52,755 --> 00:43:55,466
He told the court
he knew what he was doing at Bayou.
674
00:43:55,549 --> 00:43:57,092
He knew that it was wrong.
675
00:43:59,094 --> 00:44:01,847
[Henriques] In late summer of 2005,
676
00:44:02,640 --> 00:44:06,560
Wall Street is shaken by the exposure
677
00:44:06,644 --> 00:44:10,105
of a kind of flamboyant
hedge fund manager,
678
00:44:10,189 --> 00:44:13,567
who is exposed as running a Ponzi scheme.
679
00:44:14,360 --> 00:44:19,365
It sends a shock through the world
of hedge fund investors.
680
00:44:20,991 --> 00:44:25,371
At Madoff's investment advisory business,
money flowed in less fast.
681
00:44:25,454 --> 00:44:27,414
It flowed out a little faster.
682
00:44:27,956 --> 00:44:31,669
Soon, Bernie is facing a real cash crunch.
683
00:44:33,921 --> 00:44:38,509
He is down to his last $13 million
in his JP Morgan account,
684
00:44:38,592 --> 00:44:41,470
the bank account
that supported the Ponzi scheme.
685
00:44:42,471 --> 00:44:48,727
And he already has redemption requests
for more than $100 million.
686
00:44:48,811 --> 00:44:53,565
He taps some of his biggest clients,
most notably Jeffry Picower,
687
00:44:53,649 --> 00:44:57,861
who comes up with $125 million
in the nick of time.
688
00:45:00,406 --> 00:45:02,491
Bernie becomes
totally dependent on Picower,
689
00:45:02,574 --> 00:45:05,327
because when these periodic
cash crunches come up
690
00:45:05,411 --> 00:45:08,706
and the Ponzi's threatened to be exposed,
691
00:45:08,789 --> 00:45:12,668
Jeff Picower puts money in
to make sure that the business survived.
692
00:45:14,670 --> 00:45:17,089
And he has Sonja Kohn...
693
00:45:19,216 --> 00:45:22,761
this dynamic, Austrian financier.
694
00:45:22,845 --> 00:45:24,722
Grand dame of Vienna,
695
00:45:24,805 --> 00:45:28,767
who sashays into Bernie's office and
entertains everybody with her trilly voice
696
00:45:28,851 --> 00:45:33,105
and brings in a flood of cash.
697
00:45:33,188 --> 00:45:36,608
Some people say that she's
the female version of Bernie Madoff.
698
00:45:36,692 --> 00:45:39,945
Not only did she raise
a lot of money for him,
699
00:45:40,028 --> 00:45:43,490
but she, strangely enough,
looked very much like Bernie Madoff.
700
00:45:43,991 --> 00:45:46,285
It looked like
they could have been siblings.
701
00:45:46,910 --> 00:45:48,495
I met her a lot of times.
702
00:45:48,579 --> 00:45:50,497
She was a very nice woman.
703
00:45:51,415 --> 00:45:53,876
She was your typical grandmotherly type.
704
00:45:55,169 --> 00:45:58,505
She always wore
one thing in her outfit that stood out.
705
00:45:58,589 --> 00:46:01,049
Like, one time she came in
with a furry vest.
706
00:46:02,384 --> 00:46:04,511
I was like,
where the hell did that come from?
707
00:46:05,304 --> 00:46:08,223
And she would go into his office.
He would be waiting for her.
708
00:46:08,307 --> 00:46:10,350
They would always close the door.
709
00:46:10,434 --> 00:46:12,436
He didn't do that with everybody.
710
00:46:12,936 --> 00:46:16,315
They would talk,
and I didn't know what it was about.
711
00:46:17,566 --> 00:46:21,445
[Henriques] She had set up a network
of feeder funds all over Europe.
712
00:46:21,528 --> 00:46:24,698
The most important of them
was called the Herald Fund.
713
00:46:24,782 --> 00:46:27,868
It could be said that
without the Herald Fund,
714
00:46:27,951 --> 00:46:30,913
Bernie was done that year.
715
00:46:30,996 --> 00:46:35,083
The money that Sonja Kohn brought in
in that one fund alone
716
00:46:35,167 --> 00:46:39,213
got him out of that crisis
and back on solid ground.
717
00:46:40,172 --> 00:46:43,842
They begin a match that produces millions,
718
00:46:43,926 --> 00:46:48,889
and ultimately billions,
of dollars for Bernie Madoff.
719
00:46:48,972 --> 00:46:52,518
And a good slice
off the top for Sonja Kohn.
720
00:46:53,769 --> 00:46:56,980
She creates an entity called Bank Medici.
721
00:46:57,648 --> 00:47:03,070
Sounds like a lustrous
and long-standing institution.
722
00:47:03,153 --> 00:47:04,988
It's existed for about 15 minutes.
723
00:47:06,824 --> 00:47:10,661
But because of the way
the world was unfolding then,
724
00:47:10,744 --> 00:47:13,747
because of the burgeoning globalization,
725
00:47:13,831 --> 00:47:16,959
and the drive
of European banks, especially,
726
00:47:17,042 --> 00:47:21,088
to get bigger so they could compete
on the global stage,
727
00:47:22,005 --> 00:47:24,341
little bitty Bank Medici
728
00:47:24,424 --> 00:47:28,554
finds itself with a minority investment
from great, big Bank Austria.
729
00:47:30,556 --> 00:47:34,601
And then Bank Austria finds itself
taken over by the even bigger
730
00:47:34,685 --> 00:47:37,521
Italian banking conglomerate, UniCredit.
731
00:47:38,272 --> 00:47:41,483
So through no actions of her own,
732
00:47:41,567 --> 00:47:48,365
she now is part of this extraordinary
pedigree of European banking.
733
00:47:48,949 --> 00:47:52,703
By piggybacking on
these foreign institutions,
734
00:47:52,786 --> 00:47:56,790
Bernie was able to reach his hand
735
00:47:56,874 --> 00:48:00,669
into the pockets
of people all around the world.
736
00:48:01,628 --> 00:48:03,255
So far as I can tell,
737
00:48:03,338 --> 00:48:06,216
no major Ponzi scheme
has ever been able to do that before.
738
00:48:07,134 --> 00:48:10,405
[Markopolos] There were so many thousands
of people involved in selling this product
739
00:48:10,429 --> 00:48:14,683
to a myriad of clients
in so many different countries.
740
00:48:14,766 --> 00:48:17,769
In the United States,
we only had 79 feeder funds.
741
00:48:17,853 --> 00:48:19,563
In Europe, it was well over 200.
742
00:48:21,398 --> 00:48:22,941
All the big French banks,
743
00:48:23,025 --> 00:48:26,153
the big German banks,
the big Swiss banks, the British banks,
744
00:48:26,236 --> 00:48:29,406
they were involved
in selling Madoff like hotcakes.
745
00:48:31,283 --> 00:48:34,328
And, unfortunately,
when a case gets that big,
746
00:48:34,411 --> 00:48:36,330
when you have that many billions at risk,
747
00:48:36,413 --> 00:48:40,292
no one wants to believe that
the emperor is not wearing any clothes.
748
00:48:41,793 --> 00:48:44,880
[tense music playing]
749
00:48:49,801 --> 00:48:51,887
[Campbell] The folks
that gave him the money,
750
00:48:51,970 --> 00:48:53,847
they weren't asking questions, right?
751
00:48:53,931 --> 00:48:56,291
Because they liked the money
they got out of it every month.
752
00:48:57,434 --> 00:49:00,687
[Henriques]
It became such a golden handcuff
753
00:49:01,355 --> 00:49:07,152
that hedge fund managers
were unwilling to challenge Bernie
754
00:49:07,235 --> 00:49:08,946
for his lack of disclosure,
755
00:49:09,029 --> 00:49:11,782
for his refusal
to cooperate with due diligence,
756
00:49:11,865 --> 00:49:13,033
for all of the things
757
00:49:13,116 --> 00:49:16,203
that normally would have been
red flags waving high and wide.
758
00:49:18,497 --> 00:49:21,416
[Campbell] Where's the money?
Where's the assets? Who's holding that?
759
00:49:22,000 --> 00:49:23,835
Is it in the bank? Where is it?
760
00:49:24,670 --> 00:49:26,755
Who's your auditor?
Who's looking at your books?
761
00:49:27,881 --> 00:49:31,927
[Sorkin] It scares me to no end
that these questions are not being asked,
762
00:49:32,636 --> 00:49:36,056
but the sad part is,
it doesn't surprise me at all.
763
00:49:36,765 --> 00:49:42,062
They have a 100%
fiduciary responsibility to their clients,
764
00:49:42,145 --> 00:49:45,649
but how many times
have we seen people on Wall Street
765
00:49:45,732 --> 00:49:47,401
who have a duty to somebody else,
766
00:49:47,484 --> 00:49:50,946
but in the end,
who do they think their real duty is to?
767
00:49:51,029 --> 00:49:52,197
To themselves.
768
00:49:55,117 --> 00:49:57,369
[Markopolos] I was sitting
in some of the largest banks,
769
00:49:57,953 --> 00:50:00,872
and they're telling me about
their world-class due diligence process.
770
00:50:00,956 --> 00:50:02,833
And yet, they're all selling Madoff.
771
00:50:04,418 --> 00:50:06,753
I thought that was insane,
772
00:50:06,837 --> 00:50:10,173
that they would be
that oblivious to an obvious fraud.
773
00:50:14,469 --> 00:50:16,805
[Casey] Harry's motivation
in going to the SEC
774
00:50:16,888 --> 00:50:20,058
was just the purity of the business.
775
00:50:23,603 --> 00:50:27,983
And he became extremely focused,
myopic on one objective.
776
00:50:29,901 --> 00:50:33,405
And that's why
we persisted for five years.
777
00:50:34,781 --> 00:50:37,743
He's like, you ride that bicycle
when you're a kid down the street
778
00:50:37,826 --> 00:50:40,912
and a little Pekingese comes out
and barks at you
779
00:50:40,996 --> 00:50:42,748
and bites your ankle and won't let go,
780
00:50:42,831 --> 00:50:45,834
and you pedal away, and he's going
around and around and around.
781
00:50:45,917 --> 00:50:47,753
If you've had an experience like that,
782
00:50:47,836 --> 00:50:50,213
that's Harry, the Pekingese.
783
00:50:50,297 --> 00:50:52,716
He latches on and he won't let go.
784
00:50:57,846 --> 00:50:59,446
[Markopolos] My email to Meaghan Cheung,
785
00:50:59,473 --> 00:51:02,976
Branch Chief in the New York
Regional Field Office of the SEC,
786
00:51:03,060 --> 00:51:06,980
on Monday, November 7, 2005 at 1:49 p.m.
787
00:51:07,064 --> 00:51:10,067
The title is, "The World's Largest
Hedge Fund is a Fraud."
788
00:51:12,235 --> 00:51:15,280
[Kotz] Harry Markopolos comes in, in 2005,
789
00:51:15,363 --> 00:51:19,993
with this very long document
with nearly 30 red flags.
790
00:51:20,994 --> 00:51:23,080
What Harry basically
came forward with was,
791
00:51:23,163 --> 00:51:26,583
the trading strategy
that Bernie Madoff had stated he used
792
00:51:26,666 --> 00:51:29,711
was just not something that could
achieve those kinds of returns.
793
00:51:29,795 --> 00:51:33,298
And he said, "Look at the numbers,
look at what he provided."
794
00:51:33,381 --> 00:51:36,635
"It's impossible that he's trading
in the volume that he says he is."
795
00:51:37,469 --> 00:51:40,889
The type of options Bernie claimed
he was trading only traded in one place.
796
00:51:40,972 --> 00:51:44,768
And on that exchange,
there were only one and a half billion
797
00:51:44,851 --> 00:51:47,604
of those options in existence
on the average month.
798
00:51:47,687 --> 00:51:49,773
Well, Bernie needed
several times that many.
799
00:51:50,482 --> 00:51:52,275
And they just didn't exist.
800
00:51:53,318 --> 00:51:56,655
And there was no independent
check and balance at the Madoff firm,
801
00:51:56,738 --> 00:51:58,907
which is also a red flag.
802
00:51:58,990 --> 00:52:01,284
Bernie's younger brother
was the compliance officer,
803
00:52:01,368 --> 00:52:03,495
so it was tightly controlled
by the same family.
804
00:52:03,578 --> 00:52:06,206
That was such
an obvious part of the fraud.
805
00:52:06,289 --> 00:52:07,290
It was laughable.
806
00:52:08,500 --> 00:52:13,463
[Kotz] One of the obvious red flags
was the lack of a counter-party.
807
00:52:13,547 --> 00:52:16,842
For every trade, there's a partner
or counter-party with that trade.
808
00:52:16,925 --> 00:52:21,513
And no one was able to find
counter-parties for Madoff's trades.
809
00:52:22,097 --> 00:52:26,601
He's purporting to have been trading
30, 40, 50 billion dollars in trades.
810
00:52:26,685 --> 00:52:28,395
You have to have counter-parties.
811
00:52:29,104 --> 00:52:31,189
And, at that point,
812
00:52:31,815 --> 00:52:36,069
given the wealth of evidence
that Harry Markopolos put forward,
813
00:52:36,153 --> 00:52:39,823
the SEC realized that
they had to do a full investigation.
814
00:52:40,949 --> 00:52:43,451
[printing]
815
00:52:47,664 --> 00:52:50,625
[Henriques] Unlike the 2005 investigation,
816
00:52:51,543 --> 00:52:54,087
they're going to look
at his hedge fund clients.
817
00:52:54,171 --> 00:52:58,758
They're going to look at the clients
he's supposedly just doing trades for,
818
00:52:58,842 --> 00:53:00,302
and see what they can learn.
819
00:53:01,803 --> 00:53:04,181
So they start knocking on doors
820
00:53:04,264 --> 00:53:07,017
of people who've done business
with Bernie for years.
821
00:53:08,101 --> 00:53:11,271
They call Fairfield Greenwich,
the feeder fund.
822
00:53:14,399 --> 00:53:16,484
[Kotz] Bernie Madoff learns about this.
823
00:53:16,568 --> 00:53:18,236
Then there was a phone call
824
00:53:18,320 --> 00:53:22,616
between Bernie Madoff
and Fairfield's compliance officer,
825
00:53:22,699 --> 00:53:26,661
where Bernie is essentially
telling the compliance officer
826
00:53:26,745 --> 00:53:28,622
what to say on the call with the SEC.
827
00:53:29,539 --> 00:53:32,834
[Madoff] Obviously, first of all,
this conversation never took place. Okay?
828
00:53:33,418 --> 00:53:35,146
- [Fairfield] Yes, of course.
- [Madoff] Okay.
829
00:53:35,170 --> 00:53:38,089
What they do is, you know,
the commission when, they ask questions,
830
00:53:38,173 --> 00:53:40,550
they try and draw out information.
831
00:53:41,092 --> 00:53:46,765
The less you know about
how we execute and so on and so forth,
832
00:53:46,848 --> 00:53:48,058
the better you are.
833
00:53:48,141 --> 00:53:51,186
Say, "Listen, Madoff has been
in business for 45 years."
834
00:53:51,269 --> 00:53:53,897
"He's a well-known broker, you know,
835
00:53:53,980 --> 00:53:58,109
we make the assumption
that he's doing everything properly."
836
00:53:59,194 --> 00:54:03,615
The SEC had suspicions when they talked
to this compliance officer,
837
00:54:03,698 --> 00:54:04,908
that he was being coached,
838
00:54:04,991 --> 00:54:08,745
and yet that didn't affect how
they continued on in the investigation.
839
00:54:11,498 --> 00:54:14,000
[Henriques] For Bernie Madoff,
this has gone far enough.
840
00:54:14,084 --> 00:54:17,921
This could begin to get
really uncomfortable for him.
841
00:54:18,004 --> 00:54:19,756
So what does he do?
842
00:54:20,632 --> 00:54:24,469
He picks up the phone and tells the SEC
he wants to come in and talk with them.
843
00:54:24,552 --> 00:54:25,929
[suspenseful music playing]
844
00:54:26,012 --> 00:54:27,722
[footsteps echoing]
845
00:54:27,806 --> 00:54:30,016
[Henriques] And he does. Alone.
846
00:54:30,517 --> 00:54:35,355
Without a phalanx of lawyers,
without a single employee,
847
00:54:35,438 --> 00:54:37,732
without anyone even
to carry his briefcase.
848
00:54:37,816 --> 00:54:39,192
Unheard of on Wall Street.
849
00:54:40,110 --> 00:54:43,571
He marches into
the SEC offices in New York...
850
00:54:45,782 --> 00:54:48,535
and said, "Ask me anything."
851
00:54:48,618 --> 00:54:51,246
"Ask me your questions.
What did you want to know?"
852
00:54:52,998 --> 00:54:54,165
And they press him.
853
00:54:54,249 --> 00:54:59,296
"Well, where do you trade these options
that are part of your strategy?"
854
00:55:01,172 --> 00:55:04,175
He writes out a list of banks.
855
00:55:04,259 --> 00:55:10,598
"Oh, and," they say, "we would like
to check your clearing house account."
856
00:55:11,975 --> 00:55:14,936
[Kotz] Basically, every time
a trade is done, there's a record of it
857
00:55:15,020 --> 00:55:18,356
at this independent,
outside entity called DTC.
858
00:55:18,440 --> 00:55:21,568
And so it's a way for regulators or others
859
00:55:21,651 --> 00:55:25,530
to check to see
if the trades are actually happening.
860
00:55:26,781 --> 00:55:30,994
[Henriques] "We need your account number
so we can check," they tell Bernie.
861
00:55:33,496 --> 00:55:34,664
He writes it out.
862
00:55:35,707 --> 00:55:38,084
He knows, that Friday afternoon,
863
00:55:38,168 --> 00:55:41,713
that if they call any of those banks
864
00:55:41,796 --> 00:55:45,342
expecting to hear
that they trade options with him,
865
00:55:45,425 --> 00:55:47,927
or if they check
that clearing house account
866
00:55:48,011 --> 00:55:53,350
expecting to find the billions of dollars
of assets that are supposed to be there,
867
00:55:53,433 --> 00:55:54,684
but aren't...
868
00:55:56,686 --> 00:55:57,771
the fraud is over.
869
00:55:58,813 --> 00:56:01,066
I don't know what was going
through Bernie's mind,
870
00:56:01,149 --> 00:56:04,569
but he handed them the piece of paper
871
00:56:05,779 --> 00:56:06,988
and walked out...
872
00:56:09,866 --> 00:56:14,371
and spent a weekend
wondering when the axe would fall.
873
00:56:16,706 --> 00:56:17,706
Monday comes,
874
00:56:18,249 --> 00:56:19,249
Tuesday comes,
875
00:56:19,709 --> 00:56:20,752
Wednesday comes.
876
00:56:24,923 --> 00:56:27,092
The axe never falls.
877
00:56:31,679 --> 00:56:33,264
[Kotz] They asked the question,
878
00:56:33,348 --> 00:56:35,850
they got the information,
they got the account number,
879
00:56:35,934 --> 00:56:37,602
but they never made the phone call.
880
00:56:39,896 --> 00:56:46,319
Inconceivable, and I never got an answer
that made any sense, to be honest,
881
00:56:46,403 --> 00:56:51,157
from the people that we questioned,
under oath in depositions,
882
00:56:51,241 --> 00:56:53,451
about this particular point.
883
00:56:54,327 --> 00:56:56,413
They forgot. They missed it.
884
00:56:57,497 --> 00:56:59,666
But it just doesn't make any sense.
885
00:57:00,542 --> 00:57:02,836
[phone ringing]
886
00:57:03,503 --> 00:57:05,880
[Kotz] The SEC has, over and over again,
887
00:57:05,964 --> 00:57:11,136
examined, investigated, reviewed,
analyzed Bernie Madoff's operations,
888
00:57:11,219 --> 00:57:14,681
never conducting
a competent exam or investigation.
889
00:57:14,764 --> 00:57:18,768
Never uncovering the obvious fraud.
890
00:57:20,061 --> 00:57:22,313
They only concluded that he had given them
891
00:57:22,397 --> 00:57:25,733
some inaccurate information
on the investment advisory side.
892
00:57:25,817 --> 00:57:27,819
[phone ringing in distance]
893
00:57:29,070 --> 00:57:33,950
[Casey] Harry wrote a thesis to the SEC
with 29 red flags.
894
00:57:34,033 --> 00:57:35,994
Now, these are not innuendos.
895
00:57:36,911 --> 00:57:39,581
Everything was delineated point by point,
896
00:57:39,664 --> 00:57:40,665
but they ignored it.
897
00:57:42,792 --> 00:57:44,792
[Markopolos]
I gave it to them on a silver platter,
898
00:57:44,836 --> 00:57:47,213
but they missed the Ponzi scheme.
899
00:57:48,673 --> 00:57:52,427
And what was tragic is,
they did take action against Madoff.
900
00:57:52,510 --> 00:57:53,887
In the summer of 2006,
901
00:57:55,221 --> 00:57:57,432
they made him register
as an investment advisor.
902
00:58:00,101 --> 00:58:03,605
And he used that
to market to his future victims,
903
00:58:04,272 --> 00:58:07,817
saying,"The SEC came in here,
they gave me a clean bill of health."
904
00:58:09,944 --> 00:58:12,489
And so the investors thought,
"Wow, it's a green light."
905
00:58:13,490 --> 00:58:16,075
"Let's invest more money with Madoff.
He's legit."
906
00:58:17,869 --> 00:58:22,081
[Henriques] Sadly, between 2006
and when it collapsed in 2008...
907
00:58:24,042 --> 00:58:28,213
billions of dollars poured in,
in those final years.
908
00:58:28,796 --> 00:58:31,633
This was the great mortgage market bubble.
909
00:58:31,716 --> 00:58:36,888
These were the golden years
of 2006, 7 and early 2008
910
00:58:36,971 --> 00:58:40,016
in which you could breathe and make money.
911
00:58:41,559 --> 00:58:44,270
It was this glorious time...
912
00:58:44,354 --> 00:58:45,647
- [bell ringing]
- [roars]
913
00:58:45,730 --> 00:58:49,567
...and Madoff was benefiting from that.
914
00:58:49,651 --> 00:58:52,028
To have shut that fraud down in 2006
915
00:58:52,111 --> 00:58:55,532
would have saved
billions of dollars in investor losses.
916
00:58:55,615 --> 00:58:57,659
[uplifting choral music playing]
917
00:58:57,742 --> 00:58:58,910
But they didn't.
918
00:58:58,993 --> 00:59:03,581
It rolled forward
until its ultimate demise.
919
00:59:05,583 --> 00:59:07,544
[Markopolos]
Nothing my team did stopped Madoff.
920
00:59:07,627 --> 00:59:10,004
Nothing the government did stopped Madoff.
921
00:59:10,838 --> 00:59:13,633
He blew up because
the markets blew up in 2008.
922
00:59:14,676 --> 00:59:17,929
[reporter 1] Shockwaves have hit markets
across the globe. Stocks...
923
00:59:18,012 --> 00:59:21,849
[reporter 2] Dow fell 778 points,
making it the Dow's worst...
924
00:59:21,933 --> 00:59:23,184
[Henriques] That frenzy,
925
00:59:23,268 --> 00:59:26,437
that mood of fear and chaos
become the dominant mood.
926
00:59:26,521 --> 00:59:29,083
[reporter 3] This is really shaking
the foundation of Wall Street.
927
00:59:29,107 --> 00:59:32,068
[reporter 4] Now it's a full-scale crisis,
and has of course started...
928
00:59:32,151 --> 00:59:36,197
[Henriques] And the withdrawal notices
start to flow in,
929
00:59:37,073 --> 00:59:39,200
and then pour in,
930
00:59:40,285 --> 00:59:41,786
and then avalanche in.
931
00:59:41,869 --> 00:59:44,949
[reporter 5] The US economy is in
a "once-in-a-century crisis." Those words...
932
00:59:44,998 --> 00:59:46,874
[Henriques] The writing's on the wall.
933
00:59:47,458 --> 00:59:49,752
Bernie is running out of money.
934
01:00:11,399 --> 01:00:14,777
[closing theme music playing]