The Madoff Affair (full documentary) | FRONTLINE

The Madoff Affair (full documentary) | FRONTLINE

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>> NARRATOR:It was too good to be true. >> Would you believe it ,how the money rolled in? >> NARRATOR: But nobody wantedto ask questions... >> You see a willful ignorance. Nobody wants to get in the wayof all this money. >> NARRATOR:From small-time investors to sophisticated hedge fundmanagers. >> All these guys did wasjust dump money in, do no due diligence ,and count their money.

Amazing. >> SMITH:Did Madoff say to you, "Don't put mein your prospectus?" >> Yes, he did. >> SMITH:Do you think that's right? >> NARRATOR:And where were the regulators? >> "Why didn't you find him?"is the question. >> I blame the government. I really, truly do. >> NARRATOR:Tonight onFrontline, correspondent Martin Smithunravels "The Madoff Affair."

(phones ringing) >> SMITH: The news brokeon December 11, 2008, and within seconds, phones wereringing around the world. (phones ringing) Michael Bienes was in Londonwhen he got a phone call from his business partner,Frank Avellino. >> And I said,"Frank, what's wrong?" Because I could hear itin his voice. "Michael, Bernie Madoff..."

I said, "He died." In a nanosecond, "He died." "...was arrested..." I said, "Oh, no,"and then another nanosecond-- " crime or some [noaudio], you know?" "...for stock fraud." >> SMITH: Phones were ringingin Palm Beach, too.

>> I received a callfrom an investor in Aspen who said that he had heardthat Bernie was arrested. And I called Bernie's office ,and I called his secretary. And I said, "Gee, we just gotthis really strange call."

And she said, "No, no ,everything's fine." >> SMITH: Emails were flying. >> I read it. And then I read it again.

I was, like, in shock- -like, non-believing shock. And I thought he couldn't.. .he couldn't possibly have... "This isn't true. It's impossible to be true." >> SMITH: It was the largeststock fraud in history.

>> (laughs)I said, "Oh, my." You know, in an instant ,as with everybody else, you see everything just gone. (cameras clicking) >> Mr. Madoff, what you haveto say for yourself?

>> SMITH:There are lots of questions. >> What do you have to sayto the public? To your investors? >> Don't push me. >> SMITH:How did he pull it off? >> Mr. Madoff...

>> How do you feel? >> SMITH: Who helped him? >> Are you sorry for whatyou did? >> Mr. Madoff, what would yousay to all those people that lost money, Mr. Madoff? What do you say to them? >> SMITH:And when did it all begin? >> Bernie! Hey, Bernie,give me one nice shot, buddy. Bernie, turn around, buddy,come on! >> SMITH:The year was 1960.

Madoff had just graduatedfrom Hofstra College and married his high schoolsweetheart, Ruth Alpern. He was working out of herfather's accounting firm in midtown Manhattan. From there, he launcheda career as a market-maker, matching buyers of stockswith sellers on Wall Street. >> He started this littlestock trading firm, one of many in Wall Street'souter fringes at that time, and slowly built it up ,building up customers. It was kind of likea wholesale firm. >> He would actually pay clientssuch as Fidelity, Charles Schwab.

He'd pay them a penny a shareto come and trade through him. So, he saw lots of tradingvolume that way. >> SMITH:In other words, he would pay for what they call"order flow?" >> Exactly. >> SMITH: What wasn't knownon Wall Street was that Madoffhad a side business as an investment advisor. >> The investment advisorybusiness operated, so far as we can tell ,completely under the radar.

We know, to some extent ,that it began small; customers of his who go backthe longest started with very smallnest eggs. >> SMITH: Madoff's first clientswere friends and associates, recruited in places like Queens ,Long Island, and the Catskills. With promised returns of around18%, entire families jumped in. As word spread,Madoff enlisted two accountants from his father-in-law's firm. First, it was Frank Avellino,on the left, and then Michael Bienes. Now facing lawsuits ,Avellino refused to talk.

But Bienes agreed to tell us howMadoff brought him and Frank into the investment advisorybusiness. Tell me how you got goinginvesting with Bernie... >> Well, Saul,his father-in-law, had been doing it. He gave Frank a piece, and he... I got a piece when I becamea partner.

There was only about two anda half million in the account. That was big money to me. We were only taking a small clipoff the top.

It's all it was. Couldn't take more--we thought that was the rule. And we never were pigs-- that's the one thingthat kept us going. We were never pigs .We were never pigs. >> SMITH:The arrangement was simple.

With Madoff's guaranteeof 20% or better, Avellino and Bienes could pocketa few percentage points while issuing promissory notesto their clients with set rates of return. You were promising peoplehow much? >> All depends:big amounts-- 18%; smaller amounts-- 17%, 16%,even as low as 15%. >> SMITH: What made you thinkthat he could return 20%? >> I don't know.How do I know? How do you split an atom? I know that you can split them ;I don't know how you do it.

How does an airplane fly? I don't ask. >> SMITH: Did you ask him? >> Never! Why would I ask him? I wouldn't understand itif he explained it. Something with arbitragebetween bonds and stocks and blah, blah, blah, blah,blah. >> SMITH: Among the firstinvestors Bienes brought in were Arnold and Joan Sinkin. They started with $5,000.

>> Mike Bienes said to my uncle, "I know that you don't havemuch money and that I can really get youin investments that's going to do very wellfor you." And before long, there wereprobably about 18 to 20 people that were involved with Bienes. >> SMITH: Did you know wherethat money was going? >> No. >> SMITH: Had you ever heardthe name Bernard Madoff? >> Not at that time, no. >> Not at that time. >> SMITH:Madoff liked it that way.

Unbeknownst to evenhis oldest associates, he was quietly taking on otherso-called "feeders." It didn't matter to Avellinoand Bienes-- by the mid-'80s, their cut was reaching upwardsof $10 million a year just for passing alongtheir clients money. So, is this easy money ,would you say, that... that you're making with Madoff? >> Easy. Easy-peasy.

Like a money machine. I... I always said I neverlifted any heavy weights. People have said to me,even recently, "Oh, you must have workedvery hard." I said, "No, I didn't." "Oh, come on." I said, "No, I didn't."

I never worked hard. We were like an airplane-- an airplane, you know,flies itself. But if you make a mistakein your calculations-- oh, boy, you do a John Denver. You run out of fuel. >> SMITH:Did you ever think to yourself, "This just is too easy ,this is too good"? >> I said,"I'm a little too lucky.

Why am I so fortunate?" And then I came upwith the answer-- my wife and I came upwith the answer-- God wanted us to have this. God gave us this. >> SMITH: In 1987, Avellino andBienes opened a second office in Fort Lauderdale, Florida, and began looking for a new wellof investors. >> They start actually doingwhat they did in New York. They just pick up investors ,people they met-- an art dealer, friends that theypicked up, doctors. You know, they would...

they would get them involvedin the investment scheme. >> SMITH: The problem was theywere getting too many clients. By the early '90s,they had amassed over 3,000-- far too many clients to be operating as unregisteredinvestment advisors. Avellino and Bienes worried theymight get busted by the SEC. >> We had doubts. And we passed them onto Bernie in meetings.

And he said, "Listen to me,okay? "I know the biggest lawyerson Wall Street, "and I've told them about thisand they say it's okay. "You're just guys who workfor my father-in-law. "You... you're an...

you're a client of my firm,that's all you are." >> SMITH:So you did have doubts? You wondered if you should belicensed with the SEC? >> I like to be licensed. I was a licensed CPA.

>> SMITH: So why didn't you justget yourself licenses? >> Because you just can'tdo that, because Bernie didn'twant us to. >> SMITH: So Bernie is callingthe shots here? >> Oh, of course he is.Always was. I was always...we were always captive to him. He owned us.

>> SMITH: But then, in 1992,there was trouble. An investment advisor in Seattlehad called Avellino and Bienes to inquire about theirsteady returns. Those promissory notesdidn't smell right.

He was given the brush-off. The advisor called the SEC, andthey launched an investigation. They suspected that Avellinoand Bienes were running a Ponzi scheme. >> They came over, the SEC,and they talked and they looked, and they looked and they talked.

And we said, "You know"--to Bernie-- "we got to do something. "This is not going to be good. We just can't sit here." He says, "Yeah, you're right. "Let me recommend an attorney-- Ira Sorkin, who used to bewith the SEC." >> SMITH: Ira Sorkin,the lawyer Madoff recommended, had experience handling fraudcases, and in the mid-'80s, he had even run the SEC'sNew York office.

There was a lot of moneyat stake in the case. By 1992, Avellino and Bieneshad $441 million invested with Madoff. Sorkin tried to figure out a wayto keep Avellino and Bienes in business, but before he couldcome up with a solution, the SEC ran out of patience. >> All of a sudden, in November ,the SEC said, "Game over. "We're closing you down.

Sign the consent decreeor we'll run you into court." >> SMITH: Did you understand whyMichael Bienes was shut down? >> Michael Bienes saidhe had too many people that he helped invest, and the SEC said he didn't havea license. So, he was just goingto stop doing this, because it wasn't good. And we could go with Madoff. >> SMITH:At first, the SEC was worried that the moneywouldn't be there, but were relieved that the trailled back to Madoff. By then, he had a solidreputation on Wall Street.

His market-making operation washandling trades equaling 9% of all trading onthe New York Stock Exchange, and he had recently been namedchairman of NASDAQ. The SEC never paid seriousattention to Madoff. >> They had Madoffin their sights. And the SEC looked at Madoff, but it reached no adverseconclusions as to Madoff. >> SMITH: But they knew thatMadoff was servicing, as an investment advisor ,3,200 different clients. >> Yes.

>> SMITH:Madoff was not registered as an investment advisor. >> That's correct. >> SMITH:Even after Avellino and Bienes are effectively shut downand the money is returned, Madoff goes forwardand is not registered. Why? >> I can't explain why.

On the face of it, if aninvestment advisor services more than 15 clients... 15 or more clients,it is supposed to register. >> SMITH: He had 3,200. >> 3,200 seems to me...

>> SMITH: More than 15. >> To be more than 15, yes. >> SMITH: Avellino and Bieneshad to pay $350,000 in fines and return all theirinvestors' money. And while Madoff paid backthe lion's share, he didn't pay all of it-- heshortchanged them $18 million. Avellino and Bienes askedfor a meeting with Madoff at his new office in midtownManhattan's Lipstick building. >> "All right," I said, "you son of a bitch.

"It's over now. "It cost us a lot of moneyand a lot of grief, "and it's all your fault,Bernie. "[No audio] damn you ,it's your fault.

"Because we asked you, 'Should we be registered? "'Should we get registered?' "We were willing to do it. "We were willing to payany lawyer any fee. "And you said, 'No, no, no,no, no, no, no.'

"And you assured us ,big shot, that... "that we were fine,we were just investors when you knew [no audio] damnwell we weren't." Afterwards...I got done, and he says, "Look, I'm...I heard enough from you.

"Now, I want you to stop. You're starting to get to me." Very low, very cool. So I said, "Bernie, I'm sorry. "I... just a very scared person. "And let's forget what I saidand go on with this.

I apologize." >> SMITH: In a 1992 interviewwith theWall Street Journal, Madoff claimed he had no ideathat his two front men were operating illegally. Does the fact that Bernie Madoffreturned $400 million to those accountants, who thenreturned it to their clients, mean that it was a legitimateoperat ion at that time? >> Not necessarily. Many people point to that and say that it must have beenlegitimate, because he was able to raisethat much money. But we don't knowhow he raised it. We don't know where he got it.

>> SMITH:Did you ever think it was odd that you go throughall these hearings, and all the paperworkis all about you and Frank, but nothing about Bernie? And Bernie gets off scot-free, continues doing what he's doing? That seem odd to you? >> No. We just wanted to getout of it. And I wanted to run awayand hide in a cave. I didn't worry about Bernieor Ernie or Sid the kid. I was not interested. I just didn't want my namein the paper again. One day, once, and that wasenough for me.

>> SMITH: What did you tellthe clients that had left, that had gotten their moneyback? >> "Good-bye. "Here's your... here's your..." They knew. It was in the papers. "Here's your money. Don't bother me."

>> SMITH:But sources tellFrontline that's not what happened. Avellino and Bienes continuedto move money to Madoff through other front men ,taking lucrative kickbacks on the referrals. >> One case in point in FortLauderdale is Michael Sullivan, who was a friend of Avellino's. And he basically took thesepools of investors and they routed them rightinto Sullivan.

And he's moving it to Madoff. >> SMITH: Avellino knew Sullivanthrough Bible group at this Fort Lauderdale church. After 1992, Sullivan took on around 30 of Avellinoand Bienes' accounts. >> Avellino and Bienes kepttheir hands in the jar. The SEC action was simplya bump in the road. It was... it barelyslowed them down.

>> SMITH: Bienes denies routingclients through Sullivan or anyone else. >> If they called me, I said, "Listen, the only advice I cangive you is call Bernie, if you want to get... I don'tknow if he'll take you." >> SMITH:Or "call Michael Sullivan." >> No, absolutely not. Never!

>> SMITH: Now,why does that push a button? >> Because it's not so, andthat's what really bugs me. >> SMITH: But you got peoplesaying that they were advised... >> I don't care what people say,they're lying. >> SMITH: But documentsshow that after 1992, former Avellino and Bienesclients began moving their money into partnerships that wereMichael Sullivan's conduits to Madoff.

Avellino and Bienes alsocontinued to invest their own personal moneywith Madoff, and went on to amass fortunes. The Avellinos bought this $4.5million house in Palm Beach, and stocked it with paintingsby Degas, DeKooning, Hopper and Bacon, paintings worth tensof millions of dollars. The Bieneses became major donorsto charities throughout Broward County. In 2002,Bienes accepted an award from a local business college.

>> With wisdom and grace,this modern-day Renaissance man has left an indelible markon our community. Michael Bienes. >> SMITH:In the '90s, Madoff didn't really needAvellino and Bienes anymore. He had moved on to bigger poolsof money.

>> There are two piecesto a Ponzi scheme: you always have to attractnew investment, and you have to make surethat all... you don't have a sudden outflow. The key is stability. >> SMITH: By the '90s, Madoffhad already formed alliances with financiers like EzraMerkin, president of New York's prestigious Fifth AvenueSynagogue; Stanley Chais of Beverly Hills ,who worked the Hollywood crowd; and Bob Jaffe of Bostonand Palm Beach. >> People who had accessto Madoff, whether they were advisors oraccountants or attorneys or...

or fund-of-funds built a sortof a cottage industry of just feeding money to Bernieand it sort of mushroomed. >> SMITH: Madoff was also beingcourted by private bankers, mostly from Greenwich ,Connecticut, the capital of the hedge fundbusiness. One of the first to knock onhis door was Jeffrey Tucker, a former SEC lawyer witha love for horse racing.

He joined private bankerWalter Noel to found Fairfield GreenwichGroup. >> Fairfield Greenwich startedas a small-scale investment advisory business ledby a gentleman, Walter Noel, who had a pretty good reputationon Wall Street. Not just in U.S. money circles, but in foreign money circles,as well.

He attracted a partner who alsohad a... a good track record ,Jeffrey Tucker. They joined forces and gotFairfield Greenwich up and going. >> SMITH: Walter Noel'sassistant remembers how, at first, they struggleduntil they found Madoff. >> Jeffrey just told Walter, "I've got this guy who's gotreally impressive returns." You know, "Come meet him.Let's look into it.

Maybe there's a productwe can develop." Once they createdFairfield Sentry to invest exclusivelywith Madoff, that's when things reallystarted to accelerate. >> SMITH:And what attracted them was not just Madoff'ssteady returns, but an unusual fee arrangement. >> Madoff didn't charge themany fees. He said, "I'm making all mymoney on trading through my market -makingoperation and commissions, and so I won't take any feesand you can keep it all." >> SMITH: For a feeder fundlike Fairfield Sentry, those client fees added upto around $100 million a year.

>> The feeder fund is taking,you know, two in 20 or one and 10, 1% of the assetsand 10% of the returns. And all these guys did wasjust dump money in, do no due diligence ,and count their money. Amazing. >> SMITH:And while Tucker handled Fairfield Sentry's accountwith Madoff, it was Noel's family that didthe marketing. >> Walter Noel's bevy of lovelydaughters married into families that were well knownin those moneyed circles.

And the Fairfield Greenwichsales team, if you will-- the Walter Noelextended family-- began to market its servicesfar and wide. >> SMITH:Noel's eldest daughter married a Colombian investment banker,Andrés Piedrahita. Other sons-in-law marketedSentry in Latin America and the Middle East. Their annual Christmas cardchronicles their rise. >> The unofficial motto was, "If we act rich,we will become rich."

This was about being ableto finance a lifestyle that people only... that somepeople only dream about. They read about things...things inWand inTown and Country,and they wanted that sort of lifestyle. They wanted to be in society. >> Walter Noel was making anextraordinary amount of money, and all he had to do was market. And there were many people that just looked at whatFairfield Sentry was doing and said,"Hey, this is free money."

>> SMITH: Fund managerseverywher e wanted in on it-- Latin America, Asia and Europe. And they went to major bankslooking for clients-- nowhere more thanin the world's capital of discretion and secrecy,Geneva. >> These guys were going aroundto all banks, really, doing road shows and saying,"Here it is.

"We have a 2% management feeon this fund, but we give you back 1% of itif you buy the fund." >> SMITH: So, "You bringthe clients to us and we'll give you a kickback"? >> Exactly. It's... it's a way, really ,to attract, to catch, to be very aggressive incatching new clients, yeah.

>> SMITH: By 2008, one thirdof all Geneva fund managers had invested with Madoff,to the tune of $14 billion. >> It's extraordinary howthe hedge fund industry, in some way,works like Hollywood. You know, you have stars. You don't understand ,but you have big stars. And you need to invest inbig fund with big names, famous people.

You need to invest in that thingbecause it's a big name. >> SMITH: One of the biggestnames in Europe was French aristocrat Thierry dela Villehuchet, an avid sailor, well connectedwith European royalty. He approached the world'sbiggest private wealth manager, UBS, to help him gather clientsfor his Madoff fund at his company,Access International. On his marketing team werePrince Michael of Yugoslavia, and Philippe Junot, once marriedto Princess Caroline of Monaco.

At lavish parties,they marketed to people like L'Oreal'sLilliane Bettancourt, the world's wealthiest woman. >> Thierry de la Villehuchetwould say to them, "Look, come to dinner. We'll have your friends ,a good time, good wine."

And then here comesthe hard sell-- "I've got this great moneymanager in New York. "He makes money whateverthe weather. "I can introduce you ,put money into my fund, I'll hand it onto Bernie Madoff." >> SMITH:His brother, Bertrand, said Thierry believedcompletely in Madoff. >> SMITH:But Madoff had one condition he had to impose on everyone.

Funds were forbiddenfrom listing him as an investment advisorin any marketing materials. That's because Madoff wasunregistered with the SEC, even though he hadthousands of clients and billions under management. >> I met Bernie Madoffin the early '90s. >> SMITH: Sandra Manzke, thefounder of the hedge-fund giant Tremont, and later MAXAMCapital, has publicly advocated for more transparencyin the hedge fund industry. In an exclusive interviewwithFrontline she said she was unawareof how big Madoff had become.

>> Did I know about allthe feeder funds in Europe? Absolutely not. >> SMITH: Access... >> Access. I did not knowof Access.

>> SMITH:Banco Santander had a big fund. >> Didn't know that. >> SMITH: Optimal. >> Didn't know that. >> SMITH:Manzke says everyone operated by Madoff's secrecy rules. Did Madoff say to you, "Don'tput me in your prospectus?" >> Yes, he did.

>> SMITH:Do you think that's right? Do you think that's appropriate? >> Umm, I don't know. Every one of my clients knew that this was a Madofffeeder fund. >> SMITH: So why not put itin a prospectus then? >> Umm, that was one of ,always, Bernie's conditions of getting an account. >> SMITH: But you've publiclycalled for transparency. That's transparency.

>> Yes. But many funds and investorswere very secretive. They didn't mention that theyhad money with Madoff. It was somethingyou didn't talk about. >> SMITH: And that's exactlyhow Bernie Madoff wanted it.

>> The question of whenit became a fraud is fundamental tothe Bernie Madoff mystery. This went on foran astonishingly long time for a Ponzi scheme. >> Madoff was driven. He has the kind of personalitythat is extremely proud of the incredibly intricateand complex web that he's woven.

>> SMITH:Madoff's firm used to advertise its "high ethical standards." >> Hey, Dave,it's Deb at Madoff. How are you, honey? >> Good afternoon, Madoff ,Elizabeth speaking.

>> SMITH: Investors who askedwere shown the operation on the 19th floorof the Lipstick building. >> R.Y.A.N. is good at 3/8thsand pending, Erickson, 26 and five teenies. >> It was very impressive,you know? Scores of people ,basically younger people, sitting at these computers, looking away or watchingthe screen or whatever.

And, you know, and one thinks, "Lord, here are all these peoplein their 20s and 30s who are each makinga million dollars a year." (laughter) And they probably were. >> SMITH: But this was Madoff'smarket-making operation, run by his two sons, Mark andAndrew, and his brother, Peter. His wife Ruth came inonce a month.

On the street it hada good reputation. >> It was a great companyto work for. A lot of people didn't leavethat place. Usually with... with Madoff ,you... you stayed there. (phone rings) >> It was almost like you.. .you would work there and, you know, the only waythat you would get fired is unless you did somethingincredibly wrong.

>> SMITH: As is now well known,the heart of the fraud was two floors down, on 17. Here, a dozen employees workedunder the direction of a 33-year veteran ofthe firm, Frank DiPascali. >> Nobody really knew his role. I knew he was important becausehe would speak with Bernie often. And, essentially, like,whatever Frank wanted he would, for the most part, get.

>> SMITH: But few staffers ,even Caputo and Ibrahim and the rest of the IT team thathad access to the floor, understood what he did. >> We were spitting outstatements constantly. The fact that all of thesestatements were just, sort of, made out of thin airis pretty shocking. >> SMITH:Did people ever suspect that it wasn't legitimate? >> It was very rare that... since I was there that anybodywould ask questions about something in the firm. >> SMITH:You just didn't do that? >> You just didn't do it.

>> SMITH: After the statementswere printed, they were mailed to clients, Providing them a paper recordof trades in stocks, treasuries and S&P 100 indexoptions. Most customers were focusedon the bottom line. But for anyone who looked hardenough, there were a few clues. Some statements showedinvestments in Fidelity Spartan, a fund whose name had changedand was not open to new investors. AndFrontline'sown investigation of a small samplingof statements found unusual accountingof cash balances.

Also, the fact the Madoff senttrading confirmations in the mail two to five daysafter a trade was reportedly made allowed himthe benefit of hindsight by betting on a horse raceafter it had begun. Did it ever raise red flags thatall his confirmation tickets were sent to you in the mail,whereas all other broker dealers were providing electronicconfirmations? >> They were sent to usin the mail and we never thoughtanything of it. But I get my confirmations, whenI trade tickets, in the mail.

>> SMITH: But you can also optto get one electronically, which is something Bernie Madoffdidn't offer? >> Well, Bernie also... again, it was part of hisnot having the world know when he went into the market. >> SMITH: But it never seemedodd that he didn't issue an electronic confirmation? >> No. >> SMITH:But if an investor complained about how Madoff did business ,DiPascali would threaten them. >> I remember one phone callI made, he said, "If you don't like what I do ,we'll send your money back."

It was very intimidating ,because first of all, I didn't want the money back. And I didn't knowwhat was so terrible about the question I was asking. >> SMITH: So, he didn't reallywant to hear any questions? >> No, absolutely not.

And we got intimidated by it. >> SMITH:There were many on the outside who suspected somethingwas wrong. A persistent rumordogged Madoff, that he was involved in anillegal form of insider trading called front-running.

>> The idea behind that was because you had thismarket-making business. And... and market-making meansyou see the trades coming from big institutions. And the big concern with market -makers is that you can step in, in front of, say, Merrill Lynchbuying a million shares of IBM, and buy your own. So that when Merrill buysthe million shares, the stock goes up a little bitand you make some money.

>> People couldn't figure outany other way for him to make money exceptif he was front-running. >> SMITH: People ran thosesort of models and couldn't make moneydoing it? >> They couldn't make anywherenear the kind of returns that he did. Especially in... when marketswere falling. But he consistentlymade money every year.

Almost every month. >> SMITH: In Boston, a teamof risk analysts was puzzled, wondering what Madoff was up to. >> There's alwaysthat potential, that one little potential thatyou've got a rocket scientist, an Einstein here, and he's found somepiece of information that's flowing to himproprietarily, because of the natureof his business of executing big trades. >> SMITH: In the late '90s, Casey was workingwith Harry Markopolos, the now-famous whistleblower.

Casey and Markopolos first heardabout Madoff's returns from the French aristocrat ,Thierry de la Villehuchet. >> Back in those days, Iunderstand that Mr. Madoff didn't like his investorsmentioning his name, let alone what he was doing.

But Thierry, knowing that I wasan options fellow, I guess, and the fact that he wasa sailor and I was a sailor, and established some commonground and trust, I guess, and he mentionedthat it was this fellow by the name of Bernie Madoff. I said, "Well, what's he doing?" And he said, "Split strikeconversion work." I didn't say much about that, but I thought that, "Well, wait a minute. "It is predominantlya bull-market strategy. "And, umm, how can you makemoney in bear markets or down markets?" So, something's amiss.

>> SMITH:Casey asked Markopolos, who understood esoteric tactics ,like split strike conversion, to do some reverse engineering. >> I brought the return stream,the track record, back to Harry. And I said, "Harry,if you can do this for me, we can make a lot of money." Harry started engineering it,looking at it and dissecting the returns. And after four hours of work ,or so, came up and said, "Frank, this is a Ponzi scheme." I said, "Harry,that's a strong word."

And Harry says, "Look at this. "The market goes down, he...he's not hurt at all. "He produces 1%. Market goes up, he produces 1%."

>> SMITH: To be fair, he didreport a few bad months here and there. >> Sure. Harry looked at thatlater on over the years, and told me that, basically, a baseball player would haveto be hitting .925 straight for ten years in a row. Would you want to beton a player like that, that he wasn't doingsomething illegal? >> SMITH: In May 2000, HarryMarkopolos contacted the SEC for the first time,submitting an eight page memo.

Frank Casey, meanwhile, flewto meet with de la Villehuchet at his New York office. >> I said, "What happens ifyou've got all your eggs with Bernie, and he is a fraud?" And Thierry says, "He can't be .I've got all my money with him. "I've got most of my family'smoney with him. "I've got almost everyroyal family that I know has got money with him." So he says, "We really have doneour work, Frank. You just don't haveall the facts."

>> SMITH:Casey decided to hand the story to an investigative reporterwho covered hedge funds, Michael Ocrant. >> When he said "Bernie Madoff, "my ears immediately picked up. And I said,"What are you talking about? Bernie's a market-maker."

>> SMITH:Casey told Ocrant that Madoff had billionsunder management. >> I immediately knew it wasa great story, no matter what. Because just the fact thatBernie Madoff was managing this much money was a storyin itself. >> SMITH: That came asa surprise to you? >> That was a shock.I mean, nobody knew that.

>> SMITH:In his reporting, Ocrant questioned Madoff'sconsistent returns, and why other money managerswere unable to duplicate them. He then arranged for aninterview with Madoff. >> This guy was just asa calm as cucumber. You know, I didn't see any sign,and usually... and that should've been a signto me in retrospect too, Any CEO that can spend two hourswith you, they just don't do that.

Literally, at one point he justkind of chuckled and said, "Give me some respect for,you know, "being in business for 40 years, "having this greatinfrastructure we've built up, "having this... this accessto market information that we have as a result ofbeing market-makers." >> SMITH: He said to you, "Give me some respect"? >> Yeah. Oh, yeah. >> SMITH: Six days afterOcrant's article,Barron's, a prominent Wall Street weekly,picked up the thread. TheBarron'sarticle raised similar questions. This article comes out andcauses a stir in the office? >> Yeah, a lot of people knewabout theBarron'sarticle, and people were...

were, you know, having sideconversations about it. But at the time, you know,he was a... supposedly a very respectedperson on Wall Street. >> SMITH: Casey and Markopoloshoped the articles would prompt the SEC to act. It had been more than a year since Markopolos had submittedhis memo.

>> The SEC's going to swoop in. We're all sitting around ,calling each other up, and emailing each other, "It's going to happen soon, boy,the SEC's on it." Nothing happens. >> SMITH:But over at Fairfield Greenwich, now headquartered in New York, the articles did getsome attention.

Jeffrey Tucker,the senior partner who'd first begun their businesswith Bernie Madoff, went over to the Lipstickbuilding. He wanted to verifyFairfield's holdings, at that point wortharound $3 billion. He met with Bernieand Frank DiPascali. According to investigators ,Madoff showed him records of trades, and named a thirdparty who had cleared them. Tucker never askedfor any verification, and he never went downto the 17th floor to see where Fairfield's accountswere allegedly being traded.

>> They told their investorsthey were conducting extraordinary levelsof due diligence into their investment managers. >> SMITH:Stuart Singer has filed suit against Fairfield Greenwichon behalf of investors who say that the company failedto conduct due diligence. >> Fairfield's focus was onmarketing and selling the product, which was Madoff, rather than on kicking the tiresand checking to see that Madoff was real. If they had spent as much timeon due diligence as they did on marketing ,we wouldn't be here today.

>> SMITH: Even though FairfieldGreenwich was in New York, their risk managementoperation-- headed by Amit Vijayvergiya-- was located a stone's throw awayfrom this beach, in Bermuda. Why would you have a duediligence officer in Bermuda? >> That's a good question, considering that Fairfieldhas offices in New York, and Madoff is in New York. Madoff is not in Bermuda. >> SMITH: Fairfield's partnersrefused to speak toFrontline. But their attorneys insistthat their due diligence surpassed industry standards. Sherry Cohen remembersdifferently.

>> I know that there wasabsolutely no due diligence done when I worked for them. Certainly no deep questions. I mean, they didn't need to knowthe details. It's, like, too muchinformation.

Don't bore me with the details. And they wouldn't have gottenit, anyway. >> SMITH:And as for due diligence, no one seemed to questionthe fact that Madoff's accountantwas a one-man operation in this strip mall, an hour'sdrive north of New York.

Did you ask him why he had sucha small accounting firm? >> Yeah. I mean, that was his... it was his family ,you know, business. It was an accounting firm that his father-in- lawhad used for years. And he continued to use it. >> SMITH:And it didn't bother you that it was this small thing? >> Of course it bothered you. I mean, those are kind of thingsthat it would bother you.

But that was one of theconditions of doing business, that you accepted that. And part of that was his, youknow, proprietary trading model, the black box that he used, that he wasn't going to disclosewhat was in it. >> SMITH: I talked to one bighedge fund manager who told me that Madoff says that he didn'twant to expose his proprietary tradingtechnique s to competitors, and so therefore he went toa relatively obscure little accounting firm to keephis operation a little bit off the radar.

>> Well, that's hogwash, andanyone with any sophistication should know that. No one could'vecredibly believed that Bernard Madoff had to usea couple people in a little accounting firm because he was concernedthat his secret sauce, his secret investmentphilosophy, was going to get out. >> SMITH:By 2005, Markopolos, determined to get throughto the SEC, submitted a 21-page memo detailing more than two dozenred flags. >> When he wrote that letter ,and I read it, I said, "Oh my God, they're going to beon this.

"This is... you're giving itto them. You're giving 'em everything." >> SMITH: Markopolos wasn'tthe only person complaining to the SEC. There were other letters thathave surfaced that were sent to the SEC.

In October 2005, someone writes, "I'm deeply concernedthat Madoff is running a very sophisticated fraudulentpyramid scheme." There was another. "No down months and lowvolatility all the time just doesn't add up." So, there was a steady flowof letters.

It wasn't just Markopolos. >> Yes. I think it is clearthat there were letters, and it is also clearthat the SEC did look at him. What is not clear is why the SECwas unable to conclude that he was conductingthe Ponzi scheme we now know he was conducting. >> SMITH:In late 2005, Madoff learned that SECinvestigators were about to interview Fairfield'sdue diligence officer in that office in Bermuda. (phone rings) Madoff got on the phone.

He began by saying, "Thisconversation never took place." In this 65-page transcriptof a single conversation, Madoff coached him on howto handle SEC investigators. "You don't want them to think you're concerned aboutanything," he said.

"You should be casual." Madoff then instructed, "Your position is to say, "'Listen, Madoff has beenin business for 45 years. "'He executes a huge percentageof the industry's orders. "'He's a well-known broker. "'You know,we make the assumption that he's doing everythingproperly.'" Finally, in January 2006 ,prompted by Markopolos, the SEC launched an officialinvestigation.

Frontlinehas been told by insiders that when SEC lawyers visitedthe offices, Madoff personally answeredquestions and was visibly nervousand irritable. It took two years beforethe SEC issued a verdict. Madoff was cleared. >> I gave them a road map anda flashlight to find a fraud, and they didn't go where I toldthem to go.

>> SMITH: In early 2009, HarryMarkopolos finally got to tell his story. >> My questions are ,you have supposedly sophisticated investmentfund managers who are investing into this. What happened with them? Why didn't they see this? >> They were paid so muchto look the other way. Those feeder fundswere incentivized not to ask the questions, to bewillfully blind, if you will, and not get too intrusiveinto the Madoff scheme.

>> SMITH: Later that day,the SEC was called to account. >> What the heck went on? With all of your investigatorsand all of your agency and everything thatthat you all describe, one guy with a few friendsdiscovered this thing nearly a decade ago, led you tothis pile of dung that is... that is Bernie Madoffand stuck your nose in it, and you couldn't figure it out.

>> We have a pending action pending in the southern districtof New York... >> You took actionafter the guy confessed. He turned himself in.

Don't give yourself any paton the back for that. >> And, Congressman ,every time... >> "Why didn't you find him?"is the question.

>> I understand your question. And we cannot answer asto the specifics. >> SMITH: SEC officials refusedto answer questions because they said they didn'twant to compromise an ongoing investigation. But privately,officials toldFrontline the agency had for years beenseverely understaffed and overwhelmed.

>> You know, if anybodymade the case better than Mr. Markopolos-- andI don't think anybody could-- about you people beingcompletely inept, you've made the casebetter than him. >> SMITH: Linda Thomsen,the SEC's Chief of Enforcement, and one other on this panel,were forced out. When the housing bubble burstin the spring of '07 and markets collapsed ,hedge funds were hurting. >> Our economy and our marketswill not recover until the bulk of this housingcorrection is behind us. >> SMITH: As the marketscontinued to tank, down 40% by November, hundreds of hedge funds stoppedallowing clients to withdraw money,or simply shut down.

>> In October, it's the worstmarket we've seen in, you know, maybe 70 years. But Bernie's still making money. And why would you investin the equities markets when you could put a substantialportion of your monies into this fund that's generatingvery consistent returns, even in this down market? So it was very appealingto the investors. If anything, people wantedto get money out of the equities marketsand move them more into Bernie because he's the only one makingmoney, consistent money, in this marketplace. >> He stopped buying AIG andhe stopped buying Citibank. It wasn't in his basket.

They were always in his basket. And, you know, I called him. And he said... I said, "You know,it was really terrific that you avoidedall these financials." >> SMITH: What did he say? >> He said that he thoughtthat the investment bankers, and the major banks, weredestroying the United States. >> SMITH: Manzkeand de la Villehuchet placed even more money, including their personalaccounts, with Madoff.

The problem was that by December even Madoff started getting morerequests for withdrawals than deposits. >> People are losing money. Everyone's got margin calls. There are... everyone have.. there's a lot of movementof money.

So I think a lot of the largeinstitutions needed money-- even if it was parkedin Bernie's funds-- to help pay back other investorsor to run their own businesses, whatever it was. So I think anytime there'sa down market, that's when a lot of thesePonzi schemes blow up because there's often lotsof redemptions even if the investment'sdoing well. >> The fact is, he easily couldhave gone through his life without this being found out. The only reason thatthis ended was because, at one given point in time, the economy did so badly thatpeople wanted-- needed-- to get money out of Madoff'sinvestments. >> SMITH:In the final days, Madoff called his biggestfeeder, Fairfield Sentry, and demanded they stemthe bleeding. Eager to help, Noel ,Piedrahita and Tucker began a massive fundraisingcampaign, launching a new Madoff fundcalled Fairfield Emerald.

It didn't attractenough new capital, and withdrawalsfrom Sentry continued. A desperate Tuckerthen wrote Madoff. "Dear Bernie, we apologize. "These redemptionsare panic-driven.

"Our firm is very dependent onits relationship with your firm. Our mission is to remainin business with you." But it was too late.

The scheme was up. On December 11, the morning after Madoff hadallegedly confessed to his sons, the FBI knocked on his door and asked if there wasinnocent explanation. Madoff said, no, it was,"One big lie."

>> He confessed with pride. Like, "Look what I did. "I mean, you're not goingto believe what I did when you get to the bottomof this." >> Here's a guy who thinkshe got over on the world for the last 30 years anddoesn't have a bit of remorse. And too bad. >> I have no interestin psychoanalyzing Madoff.

The man... the man is a monster,he's evil. I cannot fathom hurtingevery single person I met, every dear friend, it justdoesn't get worse than that. >> There's nothing that I wouldlike to say to Bernie Madoff that I can say on television. But this may be the onlyhuge fraud in history where the governmenthas extreme complicity. So that's what I would haveto say. >> I blame the government.

I really, truly do. That red flags went upover the years and nothing was done about it. It's just... it's mind -boggling,what can I tell you? >> How do you do somethinglike that? And how do you do that to youremployees, to your family? >> SMITH: Sandra Manzkeis facing a lawsuit from a pension fundand other investors who allege she failed in herobligation to do due diligence.

She, in turn,has sued her accountants. Other Madoff feedersare being sued-- Ezra Merkin, for concealing where his clientsmoney was placed; and Frank Avellino, formisleading investors. Stanley Chais made so much moneyfrom the scheme, a court-appointed trustee claimshe must have known of the fraud. Michael Bienes and his wifeDianne are selling their 16,000 square-foot home and moved into a smallapartment. Did you have any warningthat anything was amiss? >> As God as my only judge ,on my mother's grave, not an inkling.

May he strike me dead. >> SMITH:Bienes has hired a lawyer, though no lawsuitshave been filed. >> Good morning, Mr. Sorkin. >> Good morning, how are you? >> SMITH:His old attorney, Ira Sorkin, is now representing Madoff.

Fairfield Greenwich has seenmultiple lawsuits filed. They range from gross negligenceto fraud. In late December, planned year-end multi -million dollar bonuses for Jeffrey Tucker, Walter Noeland Andres Piedrahita were cancelled. One more postscript: A few blocks from whereMadoff began his investment advisory businessnearly 50 years ago, Thierry de la Villehuchettook his own life. >> Thierry was a sailor ,and he was a hunter. He could've taken himself outany way he wanted to, if he wanted to just removehimself from the pressure.

The man chose the method he did,in my mind only, as an act of atonement. >> SMITH:Slitting his wrists? >> Watch himself bleedto death... slowly. (speaking French) >> SMITH: Meanwhile ,investigators are talking to Madoff lieutenant FrankDiPascali and others, still trying to figure outwhat happened on the 17th floor. >> Mr. Madoff, do you haveanything to say? >> Mr. Madoff, say somethingto your victims. >> SMITH: Bernard L. Madoffwill be sentenced next month.

and Andrew, from cancer in September 2014. The trustee recovering assets for Madoff victims has collected over $10 billion dollars and has distributed close to $6 billion.

2021-04-17 18:17

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