[wind gusting]
[Gordon Bennet] We've heard people say that
people that invested with Madoff were just greedy,
and were expecting an outsized return.
But if you'd look at the numbers, that's factually not the case.
It seemed like a nice, steady investment. Nothing extraordinary.
I had worked very hard to earn this money,
and so I did some due diligence
before I invested in Madoff because of that.
I had Madoff investigated by a securities firm
that offered a service to people investigating money managers.
And they gave him a clean bill of health.
But even after that, I would keep track of every story that featured Madoff,
because he was kind of a mysterious guy.
I would find these articles that basically touted Madoff.
These were articles in Forbes Magazine
and in The Economist and so forth.
I mean, he was a big wheel.
So, all of that I took as, like, "This guy's good."
But the thing is that the SEC didn't catch him either,
and they had numerous opportunities.
You have dreams about your retirement and your future, and...
And all that, all that went away.
Part of the reason we suffered, I believe,
is our government, the SEC, really didn't do their work.
It was such betrayal.
[theme music playing]
[atmospheric music playing]
[Frank Casey] I joined Rampart Investment Management Company in Boston
because they needed an internal sales guy.
And we managed nine billion of client money,
and that was a substantial amount.
And so, they hired me to get more clients,
but also to innovate new product for them.
Somebody's got to sell, right? And that was my job.
And I'm scrapping around, looking for the next wave to surf.
So I jump on a plane. Go to New York.
And I meet Thierry Magon de la Villehuchet,
this wealthy individual, who was an investor
and an investor conduit to some of the richest money in Europe.
And he told me that he was really an aristocrat from Brittany,
that he had a 100-room castle that belonged to the family,
that he went grouse shooting with the princes of Europe.
And I'm thinking,
"If I can get Villehuchet to take me into the wealth management banks of Europe,
then there's a whole new marketplace for me."
Here's the problem, right?
Villehuchet gives me transcripts that come across through the mail, every day,
confirmations of trades.
And he has blanked out, redacted, the name of the firm on the top,
in a big black Magic Marker.
Villehuchet says, "Oh, I have a secret hedge fund manager."
"I can't tell you who it is,
because if the manager found out that I gave up his name,
he would fire me as a client."
"But yes, I hired the guy,
and he's producing out 1% per month like clockwork."
I knew in the world of finance that that was an impossibility.
So he starts telling me about what this man is doing.
And it involves options work that I used to do on individual stocks,
but this guy never has a loss, according to Thierry.
And I'm saying to myself,
"This is crazy. It can't be done."
[tense music playing]
[Casey] And I asked Thierry,
"How much money do you have with this secret manager?"
And he says, "$320 million. My money and my clients' money in Europe."
I assume automatically that that manager must be running
ten times that much money.
I extrapolate that this places the secret manager at three billion plus.
The largest hedge fund manager in the world, that no one knows about.
If I could produce 1% a month like clockwork,
I'd had my face on every billboard between Boston and New York City.
Why is this guy secret?
Of course, I'm very curious who the secret manager is,
and Thierry turns around to speak to somebody,
and I did something a little untoward.
I spin a confirmation on the desk
to read the name at the top.
"Bernard Madoff Securities."
[suspenseful music playing]
[Casey] Why would this big dog on Wall Street
need to be running Thierry's money secretly?
And Thierry told me that he wasn't charging him a fee to do it.
That made no sense at all.
And I'm thinking to myself, "Bullshit."
After that initial meeting with Villehuchet,
I go back to Boston and I meet the big bosses of Rampart.
Immediately the bosses understand
that if I can use Thierry as a conduit, as a client,
to get me into the uber-wealthy of Europe,
we might be able to make multiple billions of dollars.
But I have to compete with this secret manager,
and this strategy that he says he is using makes no sense.
The bosses say, "Well, we've got to reverse engineer what this guy's doing."
"Let's take it down to the Portfolio Manager, Harry Markopolos."
"He's the math geek. I mean, he'll figure it out immediately."
[Markopolos] My field was derivatives, which is very mathematical.
So, you need to have a calculus and statistics background,
and a lot of the math is complex.
Frank comes back with a one-page tear sheet
of a Madoff feeder fund with fantastic returns,
but Frank is a marketing guy.
He wants to know that something works and it can be sold.
[Casey] Harry's annoyed being called out of his office to address me,
a sales guy.
And he looks at this return for a minute and he says,
"Frank, you're an options expert. You know this is bullshit."
And I said, "Yes, he's not using options."
"How's he doing it?"
[Markopolos] It's one page with unbelievable performance numbers,
almost no losses.
And I'm looking at the characteristics of the portfolio, saying,
"Look, the returns are like this, 45-degree angle. Straight line."
[Casey] He says, "I can tell you right from the get-go this is a fraud,
and it's possibly a Ponzi scheme."
This discussion took a total of four minutes.
And I said to Harry,
"Oh my God, don't use that word 'Ponzi.'"
"You can't call this guy a fraud, let alone a Ponzi."
I said, "Madoff Securities,
they're running 7 to 10% of the total volume of the US Stock Market."
"I don't believe it."
[Markopolos] Even though I told him these returns are not possible,
my bosses said, "We want you to develop a Madoff-like product."
"Figure out how Madoff is doing it so we can take market share."
And so, I had to spend a few hours modeling the returns.
[intriguing music playing]
[Markopolos] It took a couple hours, and you'd quickly see
that it didn't replicate anything to do with Wall Street or the US Stock Market.
In fact, it only looked like the stock market 6% of the time.
And then you total up the months,
and you see 96.4% of the months are positive.
Well, that doesn't exist on finance.
His numbers were literally off-the-charts good.
And so people were flocking to Madoff,
because his returns were so seductively smooth.
I had to compete against this guy,
but you can't compete against somebody who's a fraud.
And so I wanted the dirty player thrown off the field.
This is my first SEC submission, dated March 1st, 2000.
"In 25 minutes or less,
I will prove one of three scenarios regarding Madoff's Hedge Fund Operation."
"One: they are incredibly talented and/or lucky,
and I'm an idiot for wasting your time."
"Two: the returns are real,
but they're coming from some process other than the one being advertised,
in which case an investigation is in order."
"Three:
the entire fund is nothing more than a Ponzi scheme."
[Markopolos] Over 100 months of returns,
seven down months, his largest monthly loss...
When Harry Markopolos was trying to persuade the SEC
that a gigantic, historically huge Ponzi scheme
was being run at that very minute by Bernie Madoff,
he was facing an enormous challenge,
because the SEC relied on Bernie Madoff as a source of Wall Street wisdom.
[H. David Kotz] He had a tremendous reputation as being
one of the real giants of Wall Street.
Not only for developments that he helped launch,
changes in the industry that he helped define,
but he also spent a lot of time
working with the SEC and other government agencies on panels
and assisting with how to regulate business.
[Madoff] I would like to start with the premise that
most of the practitioners in our industry
come to their firms in the morning wanting to comply with the rules,
they want to do what's best for their client.
[Kotz] Harry Markopolos spent tremendous time and effort
trying to convince the SEC to do the right thing on Bernie Madoff.
And Harry didn't just go there once.
He got there once, was rebuffed, he went second time, was rebuffed.
Any other person would've said, "Givin' up!"
[Markopolos] We figured that Bernie had
between three and seven billion dollars in assets under management.
And I went to the SEC, and they looked at it
and ignored it.
[printing]
[Casey] The SEC never followed up on anything that we wrote.
So Harry called all the major papers.
And they said, "We're not taking on Madoff
based on the innuendos from a mathematician."
"We need a smoking gun."
So Harry said to me,
"Frank, you've got to find an investigative reporter in finance."
Where do you look that up?
So just by happenstance,
I guess it was the end of 2000,
and I was speaking in Barcelona. So I brought my wife.
And we were at the airport, and we get a cab.
And it was the last cab.
And there was a harried-looking guy standing there with his luggage,
banging on my window on the passenger's... "Are you going to the conference?"
And I said, "Yes."
He says, "Do you mind if we share a cab?"
He says, "Hi, I'm Michael Ocrant," from the front seat,
I'm an investigative reporter in financial fraud."
And I looked up and I said, "Thank you, Lord."
I said, "Michael,
I'll make you a dinner bet for my wife and I in Barcelona
that I can give you one name of a secret hedge fund manager
that will blow any one of your managers away
in asset size and risk adjusted rate of return."
He says, "I'll take that bet."
I said, "Bernie Madoff."
His head spun around so quickly, I knew I had my investigative reporter.
And I told him,
"This guy is always out of the market the day before the market goes down,
and he's always in the market the day of, or the day before the market goes up."
Perfect timing does not exist by any manager in the world.
Nobody has advanced knowledge of the market.
And Michael Ocrant says, "I have to write an article."
We gave him all the names of the options guys and so forth
in the United States on the floors,
and the heads of derivatives at major banks.
And he spoke with everybody.
Ocrant couldn't believe it when he ran the numbers.
And he was about to go to print and he called me.
He says,
"This guy is two and a half times bigger
than my biggest hedge fund reporting to me."
"How is he really generating that business?"
The article comes out.
"Madoff tops the charts; traders ask how."
We were giving each other high-fives in the office in Rampart.
Now it's in the public domain.
Here comes the posse.
[Henriques] Sometime after the MARHedge article had appeared,
a senior enforcement officer at the SEC in Washington
decides some inquiry should be made.
It was just a surprise that Bernie Madoff would be managing money
on such a large scale
and not have registered his investment advisory business with federal regulators.
But the way she chooses to do that is to pick up the phone and call Bernie Madoff.
[phone ringing]
[Kotz] She knew him, because, of course, he was well known in the industry.
And she calls him up and says,
"Hi, Bernie. Uh, we're going to do an exam."
"We're going to have some questions about your hedge fund."
And he says, "I don't have a hedge fund."
And she says, "Oh I didn't think so."
And he says, "Okay."
If he had a hedge fund business,
he would have to register as an investment advisor.
Bernie Madoff did not want to register as an investment advisor,
because when you register as an investment advisor,
that subjects you to ongoing SEC exams.
[Henriques] I love that episode so much
because it illustrates, better than anything else could,
the esteem that the SEC felt towards Bernie Madoff,
the trust they had in him.
"Let's call and ask him if he's doing anything wrong."
"He'll tell us the truth."
[atmospheric music playing]
[Henriques] Madoff was as lucky in his enemies as he was in his friends.
And he was lucky in his timing.
[reporter] Again, these early reports are just coming in from the wire services.
A small commuter plane apparently hitting the side of the World Trade Center.
There was another one. We just saw another one.
[crowd screaming]
I'll never forget it.
I will never forget watching both of those buildings
just shudder down to their knees and then collapse completely.
The city was so shaken.
I remember how jangly those days were, the weeks and months after 9/11.
Wall Street, of course, was right on the margins of the World Trade Center.
The New York Stock Exchange, two blocks away, was shut.
Everything downtown was shut for days and days and days.
And there was a great sense of camaraderie to getting the stock market open again.
Tom Costello standing by at the NASDAQ market site. Tom, what's up?
[Costello] The NASDAQ right now is about an hour and a half away from trading.
And as I mentioned an hour ago,
this morning, in an unusual show of solidarity,
NASDAQ CEO Wick Simmons will be at the NYSE.
They will open this market together.
[Henriques] The NASDAQ Market needed to show that it could function
in the aftermath of this really unthinkable event.
And Bernie helped bring that together.
- [stock brokers]...two, one! - [bell ringing]
[applause]
[Henriques] But it had another significance for Bernie, too, that
no one really appreciated until it was far too late.
The deliberate and deadly attacks,
which were carried out yesterday against our country,
were more than acts of terror.
They were acts of war.
[Henriques] Resources that had been in New York City,
on Wall Street's doorstep,
devoted to white-collar crime, to fraud,
were being steered away,
were being funneled into counterterrorism and terrorism finance issues.
For the SEC, this was an exacerbation of an existing problem,
as a result of a deregulatory campaign
that began with the election of Ronald Reagan in 1980.
[Reagan] In this present crisis,
government is not the solution to our problem.
Government is the problem.
[applause]
The laws that they could rely on
to pursue investigations had been tightened,
and their budgets had been cut and cut again.
The aftermath of 9/11
was simply the continuation of a long period of short rations,
low priorities,
even legislative changes that made it harder for them to do their jobs.
So, in a way, that ghastly tragedy meant for Madoff
a reduced level of scrutiny at the regulatory level,
just when he really needed it most.
Madoff wasn't the only beneficiary of this slow death of a thousand cuts
that the SEC had experienced,
but he was certainly the biggest beneficiary of it,
based on the scale of his fraud.
[dramatic music playing]
[Ellen Hales] I think there's a large dichotomy
between the persona Bernie put out to the world
and what was really going on in the firm.
It was an act to build up his business and this persona.
[Eleanor Squillari] He had the perfect children for it.
The all-American, highly educated, family guys.
Bernie used Andy and Mark as a shield for when people would come in.
"This is a family business."
"My sons, they're highly educated, they're running the trading room."
But if you worked for this company, everything was compartmentalized.
Everything.
[Madoff] We had a market-making division, which was supervised by my son Mark.
We had a proprietary trading division,
which was supervised by my son Andy.
The investment advisory side, or the 17th floor as it's referred to,
was basically supervised by Frank DiPascali.
The divisions could not speak to each other,
so my son Mark and Andy could not have contact
with what the profits or loss of each department was.
[Squillari] Mark and Andy never went downstairs
to the investment advisory side.
And when clients came in,
Mark or Andy would come to my desk and say, "Who are those people?"
They didn't know who they were.
[Hales] I think Bernie dismissed them completely
when he didn't want to discuss something with them.
And they learned through the years not to push him too much.
I remember going in and talking to Bernie and saying,
"You know, your firm is a sole proprietorship."
"It is going to cease to exist upon your death."
"And your sons and your brother are going to have to get new licenses,
they're going to open up new bank accounts."
"It's going to take a while before this firm can become what it was again."
He said, "Eh, I got 30 lawyers working on it. Don't worry about it."
And dismissed me completely.
I said, "Okay." I went and I told Mark Madoff.
And he went in and talked to Bernie about it and was completely shot down.
And I think it upset him for years
that he couldn't talk to Bernie about anything like that.
[Jim Campbell] Bernie needed to be the go-to guy on Wall Street,
the king of Wall Street.
His name was on the door.
And there was nothing more important in Bernie's life
than maintaining face,
maintaining he was running this incredibly successful business on the 19th floor,
but the reality wasn't quite the way that he was portraying it.
[lawyer] At what point in time did you become insolvent?
[sighs]
[Madoff] I would say, uh...
probably in the early 2000s.
In nine... Maybe...
Somewhere between, let's say, '98 and 2002.
Yeah, there were problems brewing. Yes, I would say.
[Henriques] At that time,
the competition for the flow of trades
from giant institutions that he's handling in his legitimate business
was getting hotter.
And that meant the amount you got paid to do any one of those trades
was getting smaller and thinner,
so the profits were starting to get squeezed.
[Bruce Dubinsky] At that time, the legitimate side of the business
is not making the money people think it's making.
And between 2002 and 2008,
there was approximately $800 million
that was funneled from the Ponzi side of the business
to the legitimate side of the business.
Mr. DiPascali takes money
from the 17th floor of the investment advisory business.
That money is wired over to London, overseas.
That money is wired back to the 19th floor,
two stories above the 17th floor...
in the guise of investments.
United States Treasury bills.
If your so-called legitimate side of the business
is not making the money people think it's making,
then you don't look as good as you want people to think.
And this would have been a way for Madoff to protect his reputation on Wall Street.
[Campbell] The reality was, is as of the early 2000's,
the legitimate business would have been insolvent
without that injection of $800 million out of the Ponzi scheme.
And the reason for that is that the trading desks were profitable,
but only in and of themselves.
Bernie had an overhead problem.
He was carrying too much expense, and the firm was losing money.
I did my own investigation,
and basically he had about 35 to 50 traders
that were generating a trading profit,
but the firm was carrying more than 150 employees.
Bernie would hire all kinds of friends of key employees,
some who were not carrying their weight and were making a lot of money.
He saw himself as the do-gooder, as the people pleaser,
as the go-to guy.
He had to deliver, he had to produce.
And we know, at the same time, he's using the firm as a piggy bank.
[Andrew Ross Sorkin] He's buying a yacht.
He's got a house in France.
He's got a shared private plane.
Literally the colors of it match the colors of the office.
Ruth was busy managing charitable balls and dinners and events,
often which were honoring Bernie himself.
[Steven Garfinkel] Bernie gave a lot of money to his family.
Mark and Andrew both received a lot of loans,
millions of dollars that were never gonna get paid back.
[Campbell] Buying houses, gifts for employees...
All of that was coming out of the business.
[Markopolos] I was frustrated at work
seeing that people that I worked with didn't believe me that Madoff was a fraud.
And after my first submission to the Securities and Exchange Commission,
the largest hedge fund publication on the planet went to print
basically calling Madoff a Ponzi scheme.
But no one asked tough questions.
And people settled for half answers or no answers,
and I continued to get ignored.
But I kept getting hounded by the bosses at my firm
to duplicate his strategy, so we can compete with him and split the market.
So I had come up with something that was sort of competitive with Madoff.
The problem with it was
I could lose you 50% in one month.
So that was a risk, a known risk,
but Thierry de Villehuchet of Access International
thought there was a market for it as an alternative to his Madoff clients.
[suspenseful music playing]
[Markopolos] So I went with Thierry de Villehuchet
to a number of meetings in London, in Paris, Geneva, and Zurich.
One way to explain who Thierry de Villehuchet was...
I was in a cab, and we're going by the Arc de Triomphe in Paris.
And he says to me, "Harry, look at the arc and look at those names."
And I realize that those are the people I was meeting with in Paris.
Those family ties went back generations.
Elite, private-client bankers
that are managing money for the royal families in Europe.
These people were well-dressed,
very articulate,
had great manners,
knew their way around a wine list.
Thierry de Villehuchet would start each meeting the same way:
"Harry and Rampart are just like Madoff, only higher risk, higher return."
"And instead of using individual stocks, they use indexes of stocks."
"Other than that, very similar."
"And that's why you need this firm for diversification away from Madoff."
[Casey] On the first meeting the guy says,
"You know, this is a very interesting strategy, Harry, that you've devised."
"It makes more money than Madoff, but, you know, it could lose money too,
even though you say you've got the risk under control."
"You know, we're invested with Madoff, and he never loses money."
"So why would we give you any money?"
[Markopolos] They did not want to hear about real risk, realistic risk, any risk.
All they knew is Madoff had no risk,
and they weren't gonna trust another manager that had risk.
[Casey] The first bank says, "Madoff is closed, you know,
but we at XYZ in Geneva, and only we,
get access to this guy. He takes our money and our money only."
If you heard that once, you might believe it.
Two times, three times, it might be a coincidence.
Fourteen times out of 20 meetings with private bankers throughout Europe,
he heard the same story.
"We're invested with Madoff, he only takes our money."
[Markopolos] I walked away from the European trip frustrated.
No one chose to invest except a handful of clients,
so I ran the strategy for a while, and it sort of dwindled from there.
[Casey] After that trip, Harry became very nervous,
because right away, he realized
the fraud was bigger in Europe than it was in the United States.
[Markopolos] I discovered that Madoff had billions of dollars in Europe.
He was always mentioned with offshore accounts
located in the Cayman Islands.
[Campbell] Offshore money in the Cayman Islands
is very lightly-regulated money
that wealthy people often are putting there for tax avoidance schemes,
but also houses dirty money
that could have come through drug money
or oligarch money that needs to be ultimately laundered.
And the money then would end up housed in Bernie's fund.
[Markopolos] Once you realize that Bernie is managing money
for some of the world's most dangerous people,
you start to worry
that if you're discovered trying to turn in Madoff,
it could cost the drug cartels and the Russians a lot of money.
Money that they don't want to lose.
So, I'm at risk personally,
because I'm seemingly the lone voice in the wilderness
going to the authorities saying Madoff's a fraud.
So, I started carrying a gun,
and I started checking my vehicle for bombs.
[tense music playing]
[Casey] As we built a business relationship together,
I became close to Thierry.
And we would have cocktails in his office.
One time, I met him when I was down in New York, and,
we talked a little bit.
And I keep coming back all the time in this relationship:
"What if Harry and I, you know, and this Madoff, it doesn't make..."
And he goes, "Oh my God, you and Madoff. Would you drop that bone?"
"My gosh," he says, "you know that I do my homework
and that I trust this man explicitly."
"We even did handwriting analysis on this guy, and he passed."
"And so, what else could I possibly do?"
I said, "But if Harry and I are correct, and you are wrong,
what happens to you?"
And he said, "Let me put it to you this way, Frank."
"I have all of my money in it."
"I have most of my family's money in it."
"I have every private banker that I have groomed as a relationship
in Europe in it."
"And I probably have half the royalty of Europe in it."
"I have no out if I am wrong."
"If you and Harry are correct and I am wrong...
I am a dead man."
[unsettling music playing]
[Squillari] As time went on,
Bernie became more and more fanatical about things.
And I would think it's because of the added pressures.
Because there was so much he had to control.
I spoke to him maybe every 15 minutes on the phone.
He always had to know what was going on.
He goes, "I don't care if Peter..."
"I don't care who gets calls, I want to know about it right away."
Bernie was the owner of the company.
He wanted to make sure everybody knew that he was in charge, he was the law.
Peter...
Peter was like everybody's favorite uncle.
Peter was gregarious, he was self-effacing,
and he made me feel smart and useful and productive from the beginning.
Bernie was the older brother to Peter and...
Bernie would bully him, he would talk down to him.
Peter was seeing a therapist, for whatever reason,
and when Bernie got wind of it, instead of being supportive,
he just went after him.
He's like, "What are you, a tight-ass? You got to go see somebody?"
He'd start yelling at him, making fun of him in front of the employees.
In my mind, I said, "Look, this is who he is. It's nothing personal."
But his brother and the kids, I don't think they could take it.
So they would behave in such a way
that they would avoid him going into those rampages.
[Madoff] Peter was, at one point, involved in market-making.
I'm not sure of the dates.
And then he also handled the compliance for the firm, and systems.
He did a lot of things, my brother.
I wonder how much of his compliance
was just turning a blind eye to what Bernie was doing on the 17th floor
and not really knowing.
Compliance officers are the ones that are signing off
that you have followed all the rules,
that you have adhered to SEC guidelines,
who would deal with the SEC
and be the guy who would be the face of Bernard Madoff to them.
But Bernie was a control freak about everything.
[tense music playing]
[Henriques] Although the SEC never managed to really mount
a competent investigation of Madoff,
tips would arise, or Harry Markopolos would come in and pound the table again.
[Kotz] In addition to Harry Markopolos's complaints of 2000, 2001,
there were a number of other complaints from different people
that were brought to the SEC about Bernie Madoff at various times.
In late 2004,
they were doing an exam of another entity, and they locate these emails
where two individuals in this other firm
were talking about the fact that they think Madoff is running a fraud.
And they were bringing up some of these same issues
about the returns not being possible.
The SEC finally decides to conduct an examination
and assign two junior examiners
to go into Bernie Madoff's office and conduct the exam.
[intriguing music playing]
[Kotz] So the day these two junior examiners,
pretty much fresh out of school, arrive,
they're ushered into Bernie Madoff's conference room
and they're told that their personal contact for the entire examination's
not going to be some compliance person, as would be the case
in every other examination and anything they were used to,
but their contact is actually going to be Bernie Madoff himself.
Which is just unheard of.
I mean, if you go to do an examination of Apple,
Tim Cook is not following you around for two weeks.
You're not going to hang out with Jeff Bezos at Amazon
when you're doing an examination.
[Campbell] It's not clear to Bernie's business
what they're looking at, because they don't make that clear.
And the truth is,
the two examiners don't really know either.
[Kotz] So these guys, sort of straight out of school,
were immediately faced with Bernie Madoff, their sole contact at the firm.
You know, he's a charismatic guy,
and so he would tell them stories and joke around with them.
And in fact, at one point he tells them
that he is on the short list to become the next head of the SEC.
And there's email communication between these two junior examiners and their boss
where the boss says to them, in joking,
"Maybe you can be Bernie's aides when he comes to take over the SEC."
So they're awestruck to begin with,
and it's very hard for them to focus on what they need to do
when they're just happy to be sitting in a room, talking to Bernie Madoff,
and learning all these things
they didn't even know about the SEC themselves.
[Squillari] Everybody knew when we were being investigated in the office
that Bernie was going to become very odd.
And he would watch everything.
He would monitor them.
He would make sure that they stayed in one location,
that we kept an eye on them.
If they came out to make copies, we would offer to do it for them,
and we would take note of what they were copying.
I used to think of him as Mr. Suspicious, you know.
They were just auditing, but of course,
you know, he was totally worried.
[Henriques] As the SEC investigators continue to pursue documents,
accounts of relationships, dealings that Madoff has,
his initial welcoming mood and graciousness begins to fray.
[Kotz] He had sort of two approaches.
If they were looking at the areas that he wanted them to look at,
he would be very friendly and chat with them and flatter them.
And if they veered from that,
if they veered into the other area, looking at the Ponzi scheme,
he would get really agitated.
Bernie Madoff pushed them towards front-running.
Front-running would be Bernie using his market-making, broker-dealer operation
in a form of insider trading
to move the market in such a way that you could get better returns.
He wanted them to focus on that, because obviously he wasn't doing that.
He's actually been thinking about whether to wiretap the office.
But what he decides is that
when the two young examiners go out and take their lunch break,
Bernie charges into the glassed-in conference room
and actually rifles through their briefcases,
and uncovers that they actually have
the very first investigative reporter articles
Erin Arvedlund and Michael Ocrant wrote
that basically poses the question,
were Bernie's returns with his hedge fund too good to be true?
[suspenseful music playing]
[Campbell] So he finds out their agenda may be investigating the Ponzi scheme.
And this enrages Bernie.
[Henriques] He confronts them.
"What are you looking for?", he says.
And they wander around a bit and finally come up with the words "hedge funds."
"We want to know what your business is with these hedge funds."
"Well," he says,
"I dealt with that with your boss years ago."
"They know all of that."
"Look, no, I'm not running a hedge fund."
"I do trades for hedge funds, as I have explained over and over again."
"Call Washington. They'll tell you."
Kind of the wind, you know, was gone from their sails.
Turns out he knows more about what's going on at the SEC than they do.
And shortly after that, they decide to close the examination
with a determination that there was no evidence
that Bernie Madoff committed anything improper.
And there was no referral of that to anyone else in the SEC.
[Markopolos] Madoff had an impeccable résumé.
He had a very successful brokerage firm that was legitimate.
And everybody thought that someone with that kind of power and industry reputation
wouldn't stoop to stealing.
And that would just burn me up, because I knew it was a Ponzi scheme.
[pulsating music playing]
How does $440 million just disappear?
That's what the SEC, the US Attorney General of Connecticut,
and a slew of disgruntled investors want to know.
[reporter] Former CEO Samuel Israel pleaded guilty
to one count of conspiracy and two of fraud.
He told the court he knew what he was doing at Bayou.
He knew that it was wrong.
[Henriques] In late summer of 2005,
Wall Street is shaken by the exposure
of a kind of flamboyant hedge fund manager,
who is exposed as running a Ponzi scheme.
It sends a shock through the world of hedge fund investors.
At Madoff's investment advisory business, money flowed in less fast.
It flowed out a little faster.
Soon, Bernie is facing a real cash crunch.
He is down to his last $13 million in his JP Morgan account,
the bank account that supported the Ponzi scheme.
And he already has redemption requests for more than $100 million.
He taps some of his biggest clients, most notably Jeffry Picower,
who comes up with $125 million in the nick of time.
Bernie becomes totally dependent on Picower,
because when these periodic cash crunches come up
and the Ponzi's threatened to be exposed,
Jeff Picower puts money in to make sure that the business survived.
And he has Sonja Kohn...
this dynamic, Austrian financier.
Grand dame of Vienna,
who sashays into Bernie's office and entertains everybody with her trilly voice
and brings in a flood of cash.
Some people say that she's the female version of Bernie Madoff.
Not only did she raise a lot of money for him,
but she, strangely enough, looked very much like Bernie Madoff.
It looked like they could have been siblings.
I met her a lot of times.
She was a very nice woman.
She was your typical grandmotherly type.
She always wore one thing in her outfit that stood out.
Like, one time she came in with a furry vest.
I was like, where the hell did that come from?
And she would go into his office. He would be waiting for her.
They would always close the door.
He didn't do that with everybody.
They would talk, and I didn't know what it was about.
[Henriques] She had set up a network of feeder funds all over Europe.
The most important of them was called the Herald Fund.
It could be said that without the Herald Fund,
Bernie was done that year.
The money that Sonja Kohn brought in in that one fund alone
got him out of that crisis and back on solid ground.
They begin a match that produces millions,
and ultimately billions, of dollars for Bernie Madoff.
And a good slice off the top for Sonja Kohn.
She creates an entity called Bank Medici.
Sounds like a lustrous and long-standing institution.
It's existed for about 15 minutes.
But because of the way the world was unfolding then,
because of the burgeoning globalization,
and the drive of European banks, especially,
to get bigger so they could compete on the global stage,
little bitty Bank Medici
finds itself with a minority investment from great, big Bank Austria.
And then Bank Austria finds itself taken over by the even bigger
Italian banking conglomerate, UniCredit.
So through no actions of her own,
she now is part of this extraordinary pedigree of European banking.
By piggybacking on these foreign institutions,
Bernie was able to reach his hand
into the pockets of people all around the world.
So far as I can tell,
no major Ponzi scheme has ever been able to do that before.
[Markopolos] There were so many thousands of people involved in selling this product
to a myriad of clients in so many different countries.
In the United States, we only had 79 feeder funds.
In Europe, it was well over 200.
All the big French banks,
the big German banks, the big Swiss banks, the British banks,
they were involved in selling Madoff like hotcakes.
And, unfortunately, when a case gets that big,
when you have that many billions at risk,
no one wants to believe that the emperor is not wearing any clothes.
[tense music playing]
[Campbell] The folks that gave him the money,
they weren't asking questions, right?
Because they liked the money they got out of it every month.
[Henriques] It became such a golden handcuff
that hedge fund managers were unwilling to challenge Bernie
for his lack of disclosure,
for his refusal to cooperate with due diligence,
for all of the things
that normally would have been red flags waving high and wide.
[Campbell] Where's the money? Where's the assets? Who's holding that?
Is it in the bank? Where is it?
Who's your auditor? Who's looking at your books?
[Sorkin] It scares me to no end that these questions are not being asked,
but the sad part is, it doesn't surprise me at all.
They have a 100% fiduciary responsibility to their clients,
but how many times have we seen people on Wall Street
who have a duty to somebody else,
but in the end, who do they think their real duty is to?
To themselves.
[Markopolos] I was sitting in some of the largest banks,
and they're telling me about their world-class due diligence process.
And yet, they're all selling Madoff.
I thought that was insane,
that they would be that oblivious to an obvious fraud.
[Casey] Harry's motivation in going to the SEC
was just the purity of the business.
And he became extremely focused, myopic on one objective.
And that's why we persisted for five years.
He's like, you ride that bicycle when you're a kid down the street
and a little Pekingese comes out and barks at you
and bites your ankle and won't let go,
and you pedal away, and he's going around and around and around.
If you've had an experience like that,
that's Harry, the Pekingese.
He latches on and he won't let go.
[Markopolos] My email to Meaghan Cheung,
Branch Chief in the New York Regional Field Office of the SEC,
on Monday, November 7, 2005 at 1:49 p.m.
The title is, "The World's Largest Hedge Fund is a Fraud."
[Kotz] Harry Markopolos comes in, in 2005,
with this very long document with nearly 30 red flags.
What Harry basically came forward with was,
the trading strategy that Bernie Madoff had stated he used
was just not something that could achieve those kinds of returns.
And he said, "Look at the numbers, look at what he provided."
"It's impossible that he's trading in the volume that he says he is."
The type of options Bernie claimed he was trading only traded in one place.
And on that exchange, there were only one and a half billion
of those options in existence on the average month.
Well, Bernie needed several times that many.
And they just didn't exist.
And there was no independent check and balance at the Madoff firm,
which is also a red flag.
Bernie's younger brother was the compliance officer,
so it was tightly controlled by the same family.
That was such an obvious part of the fraud.
It was laughable.
[Kotz] One of the obvious red flags was the lack of a counter-party.
For every trade, there's a partner or counter-party with that trade.
And no one was able to find counter-parties for Madoff's trades.
He's purporting to have been trading 30, 40, 50 billion dollars in trades.
You have to have counter-parties.
And, at that point,
given the wealth of evidence that Harry Markopolos put forward,
the SEC realized that they had to do a full investigation.
[printing]
[Henriques] Unlike the 2005 investigation,
they're going to look at his hedge fund clients.
They're going to look at the clients he's supposedly just doing trades for,
and see what they can learn.
So they start knocking on doors
of people who've done business with Bernie for years.
They call Fairfield Greenwich, the feeder fund.
[Kotz] Bernie Madoff learns about this.
Then there was a phone call
between Bernie Madoff and Fairfield's compliance officer,
where Bernie is essentially telling the compliance officer
what to say on the call with the SEC.
[Madoff] Obviously, first of all, this conversation never took place. Okay?
- [Fairfield] Yes, of course. - [Madoff] Okay.
What they do is, you know, the commission when, they ask questions,
they try and draw out information.
The less you know about how we execute and so on and so forth,
the better you are.
Say, "Listen, Madoff has been in business for 45 years."
"He's a well-known broker, you know,
we make the assumption that he's doing everything properly."
The SEC had suspicions when they talked to this compliance officer,
that he was being coached,
and yet that didn't affect how they continued on in the investigation.
[Henriques] For Bernie Madoff, this has gone far enough.
This could begin to get really uncomfortable for him.
So what does he do?
He picks up the phone and tells the SEC he wants to come in and talk with them.
[suspenseful music playing]
[footsteps echoing]
[Henriques] And he does. Alone.
Without a phalanx of lawyers, without a single employee,
without anyone even to carry his briefcase.
Unheard of on Wall Street.
He marches into the SEC offices in New York...
and said, "Ask me anything."
"Ask me your questions. What did you want to know?"
And they press him.
"Well, where do you trade these options that are part of your strategy?"
He writes out a list of banks.
"Oh, and," they say, "we would like to check your clearing house account."
[Kotz] Basically, every time a trade is done, there's a record of it
at this independent, outside entity called DTC.
And so it's a way for regulators or others
to check to see if the trades are actually happening.
[Henriques] "We need your account number so we can check," they tell Bernie.
He writes it out.
He knows, that Friday afternoon,
that if they call any of those banks
expecting to hear that they trade options with him,
or if they check that clearing house account
expecting to find the billions of dollars of assets that are supposed to be there,
but aren't...
the fraud is over.
I don't know what was going through Bernie's mind,
but he handed them the piece of paper
and walked out...
and spent a weekend wondering when the axe would fall.
Monday comes,
Tuesday comes,
Wednesday comes.
The axe never falls.
[Kotz] They asked the question,
they got the information, they got the account number,
but they never made the phone call.
Inconceivable, and I never got an answer that made any sense, to be honest,
from the people that we questioned, under oath in depositions,
about this particular point.
They forgot. They missed it.
But it just doesn't make any sense.
[phone ringing]
[Kotz] The SEC has, over and over again,
examined, investigated, reviewed, analyzed Bernie Madoff's operations,
never conducting a competent exam or investigation.
Never uncovering the obvious fraud.
They only concluded that he had given them
some inaccurate information on the investment advisory side.
[phone ringing in distance]
[Casey] Harry wrote a thesis to the SEC with 29 red flags.
Now, these are not innuendos.
Everything was delineated point by point,
but they ignored it.
[Markopolos] I gave it to them on a silver platter,
but they missed the Ponzi scheme.
And what was tragic is, they did take action against Madoff.
In the summer of 2006,
they made him register as an investment advisor.
And he used that to market to his future victims,
saying,"The SEC came in here, they gave me a clean bill of health."
And so the investors thought, "Wow, it's a green light."
"Let's invest more money with Madoff. He's legit."
[Henriques] Sadly, between 2006 and when it collapsed in 2008...
billions of dollars poured in, in those final years.
This was the great mortgage market bubble.
These were the golden years of 2006, 7 and early 2008
in which you could breathe and make money.
It was this glorious time...
- [bell ringing] - [roars]
...and Madoff was benefiting from that.
To have shut that fraud down in 2006
would have saved billions of dollars in investor losses.
[uplifting choral music playing]
But they didn't.
It rolled forward until its ultimate demise.
[Markopolos] Nothing my team did stopped Madoff.
Nothing the government did stopped Madoff.
He blew up because the markets blew up in 2008.
[reporter 1] Shockwaves have hit markets across the globe. Stocks...
[reporter 2] Dow fell 778 points, making it the Dow's worst...
[Henriques] That frenzy,
that mood of fear and chaos become the dominant mood.
[reporter 3] This is really shaking the foundation of Wall Street.
[reporter 4] Now it's a full-scale crisis, and has of course started...
[Henriques] And the withdrawal notices start to flow in,
and then pour in,
and then avalanche in.
[reporter 5] The US economy is in a "once-in-a-century crisis." Those words...
[Henriques] The writing's on the wall.
Bernie is running out of money.
[closing theme music playing]