Wall Street Confidential

Confidence Man

Wall Street Journal
August 15, 2009

by Edward Jay Epstein


On July 29, Bernard Madoff was sentenced to spend 150 years in prison for his part in running a multibillion-dollar confidence game. His scheme sucked in more than 8,000 investors, ­including seven financially sophisticated funds that—by the time the whole thing collapsed in December 2008 accounted for well more than two-thirds of Mr. Madoff's money.

Despite the complexity of the massive swindle, three books now attempt to give an account of it and of the man behind it all. They are Erin Arvedlund's "Too Good to Be True": Andrew Kirtzman's "Betrayal"; and Jerry Oppenheimer's "Madoff With the Money." Each tells a similar story.

Mr. Madof, who grew up in Queens, N.Y., and once worked as a lawn-sprinkler installer, married his high-school sweetheart and, at age 23, opened his own brokerage ­company. It soon became one of America's largest market makers for the business of trading outside the confines of the New York Stock Exchange . Mr. Madoff himself became one of the leading lights of the new Nasdaq exchange and briefly its chairman.

Despite this respectable face, Mr. Madoff was running a Ponzi scheme under the guise of an investment-advisory business. It operated in a suite of locked offices one floor below his ­renowned ­brokerage company. The swindle itself had nothing to do with Wall Street, aside from the facade. Mr. Madoff bought no stocks or options. He simply took in money from investors and issued bogus monthly statements showing that they were making "profits." When an investor asked to withdraw his money, Mr. Madoff paid him with the funds of other investors.

The tale is fairly lurid in itself, but the authors of these Madoff books try to enliven their narratives with anecdotes (for instance, from Mr. Madoff's high-school chums) and with heart-wrenching stories from early small investors who, thanks to Mr. Madoff, lost their life savings. Such stories do little to explain just how Mr. Madoff managed to con savvy international funds out of about $10 billion.

Ms. Arvedlund's "Too Good to Be True" is the most fully reported of the three books. She was one of the earliest journalists to investigate Mr. Madoff's suspicious activities, having written a critical piece on him in ­Barron's in 2001. She not only brings great lucidity to the subject but supplies invaluable context about the devices that Mr. Madoff used to perpetuate his confidence game. She even shows how the Securities and Exchange Commission works”or fails to work.

Mr. Kirtzman's "Betrayal," though accurate and highly readable, lacks such contextual depth. He gives a thorough account of the suspicions of analyst Harry Markopolos, whose warnings about Mr. Madoff to the SEC were ignored. As for Mr. Oppenheimer's "Madoff With the Money," it often reads like a celebrity profile. It is packed with titillating stories about Mr. Madoff's personal life about sexual massages and adulterous affairs but almost all of the material is speculative or anonymously sourced. (Ironically, he missed the avtual affair that Madoff had withSheryl Weinstein). And Mr. ­Oppenheimer's financial reporting is something less than stellar. He writes of Irving Picard, the court-appointed trustee who is supposed to recover whatever he can of Mr. Madoff's money that Mr. Picard is seeking to recover a "billion dollars" of what Mr. Oppenheimer describes as an "estimated $65 billion lost." Actually, as Mr. Picard's interim report to the court tells us, he is seeking to recover over "$13.7 billion" by way of eight lawsuits. The "$65 billion" figure was invented by Mr. Madoff for the false book-keeping he used to dupe his investors. Mr. Picard (and, for that matter, the government) ­estimates the total loss to be under $15 billion from 1995 to December 2008.


The problem with many of details of the whole Madoff scandal is that it is really too early to know what is true. Mr. Picard, the FBI, the SEC and various prosecutors are still engaged in pursuing evidence, as are authorities in Britain and Austria. Since these books went to press, for example, Frank DiPascali, Mr. Madoff's chief deputy for three decades, has pleaded guilty to multiple counts of conspiracy, securities fraud, investment-adviser fraud, mail fraud, international money laundering, perjury, tax evasion and falsifying records.

When prosecutors presented the case against Mr. DiPascali, they cited unnamed "co-conspirators" who helped steal the money and convert it "to their own use and the use of others. Presumably, these co-conspirators will be named and indicted in the near future. Unfortunately, readers of these early books will miss such crucial information.

Here is what we don't know now but may know soon. First, we do not know when the Ponzi scheme was launched. The electronic records of Mr. Madoff's activities, at least those that have been made public, go back only to 1995. The trustee's forensic accountants are now reconstructing microfilm records that go back much further, to the 1970s.

Chronology is a key piece of the puzzle. If it turns out that the Ponzi scheme was in existence for roughly 30 years, its authorship appears in a different light. Thanks in part to the meticulous research of Ms. Arvedlund, there is evidence showing that Mr. Madoff's father-in-law, Sol Alpern, initially financed Mr. Madoff's brokerage business and then, together with his associates Frank Avellino and Michael Bienes, raised more than $440 million for Mr. Madoff to manage before the SEC shut the brokerage firm down in 1992 (because Avellino and his associates were not licensed to sell securities). Investors were guaranteed up to a 20% annual return, no matter how the market fared. (This was the type of guaranteed deal that Charles Ponzi made with his own investors in the early 20th century.)

Second, we do not now know how, or by whom, billions were siphoned out of the Ponzi scheme. It is clear that more than $8 billion exited by way of a few dozen accounts controlled by two long-time Madoff associates. Some of these accounts were stuffed with extraordinarily high notional profits. The money redeemed through the accounts amounted to more than two-thirds of the money that Mr. Madoff looted between 1995 and 2008. Mr. Picard, the trustee, has filed civil suits charging that the men controlling these accounts were either part of the fraud or privy to it. These men deny the charges and have not yet had their day in court.


Finally, we do not know the extent of the conspiracy. At the time these books were written, Mr. Madoff was swearing that he acted alone. He claimed that he personally forged all the fake trades that generated the imaginary $64.7 billion in client accounts. This feat required precisely counterfeiting tens of thousands of confirmation slips so that they matched the price range of actual stocks and options within the daily volume of trades. As of Tuesday, Mr. DiPascali, facing a 125-year sentence, is telling a different story. He admits that he and others complicit in the conspiracy assisted Mr. Madoff by counterfeiting trades, fabricating records and laundering money. His sentencing in May 2010 is contingent on his continued cooperation with the SEC, the FBI and prosecutors, so we are likely to hear much more from him. We can be glad for these early Madoff portraits in book form, but we do not yet have a picture of how one of the largest swindles in the annals of crime was perpetrated.