TOPICS > Economy

Madoff’s Wall Street Schemes Snare Several Prominent Investors

December 16, 2008 at 6:25 PM EST
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The size of the scandal surrounding Wall Street trader Bernard Madoff's alleged fraud continues to unravel, drawing in charities, foundations and top investors. Mort Zuckerman, the head of a charitable trust caught up in the schemes, and an SEC analyst offer insight.
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TRANSCRIPT

JUDY WOODRUFF: The size of the scandal surrounding Bernard Madoff’s alleged fraud is beginning to come into sharp and painful relief.

The heralded investment manager and former head of the Nasdaq Stock Exchange stands accused of bilking investors of up to $50 billion.

Many Madoff clients were residents of Palm Beach, Florida, where the investor has a home. Joan and Arnold Sinkin were among Madoff’s less well-heeled investors, and their nest egg is now gone.

ARNOLD SINKIN, retiree: This is what they refer to as the golden years, where you retire and you try and enjoy life, and then you get wiped out in 48 hours.

JUDY WOODRUFF: Madoff’s pyramid scheme covered its losses by paying out fictional investment gains to older clients with money taken from new clients. Over the years, Madoff had cultivated a long list of wealthy investors seduced by his impressive, but fake track record of consistent returns.

In addition to private investors, the fraud has also affected charitable groups. One has already been forced to close. Foundations run by the Nobel Prize-winning author Elie Weisel, New Jersey Senator Frank Lautenberg, and director Steven Spielberg have acknowledged losses.

And some big companies are taking big hits. Banks, like Spain’s Banco Santander, the Royal Bank of Scotland, and the French-concerned BNP Paribas are looking at billions in losses.

For more on those losses and how the alleged fraud continued for so long, we are joined by Jacob Frenkel, a former U.S. criminal prosecutor and enforcement lawyer for the Securities and Exchange Commission. Mr. Frenkel worked at the SEC from 1988 to 1997, but was not involved in any investigations or complaints about Madoff.

And Mort Zuckerman is editor-in-chief of U.S. News and World Report. He’s also chairman and publisher of the New York Daily News. His charitable trust invested money with Madoff that lost $30 million.

Thank you, gentlemen, both of you for being with us.

Affected charities sue Ascot Fund

Mort Zuckerman
U.S. News and World Report
... we found out, to our chagrin, that the funds which many of us had devoted to charitable works were now going to be frittered away because of this firm's ridiculous decision to invest all of the money, 100 percent of their money, with Madoff.

JUDY WOODRUFF: Mort Zuckerman, let me start with you. How did the money in one of your charitable trusts end up in the hands of Bernard Madoff?

MORT ZUCKERMAN, editor, "U.S. News and World Report": Well, I had never heard of Bernard Madoff until last Friday. I've never met him; I've never heard his name anywhere.

But I did invest money, along with many other charitable institutions. We have a fund called the Ascot Fund. And that fund, which got to somewhere around $1.6 billion to $1.8 billion, put the entire amount of their fund into Madoff, 100 percent of it, against all of the understandings and the representations that they made to a number of us who found a way to invest with him.

And this was in violation of every basic principle of investment, which, amongst other things, involved diversification. So we had no idea that this man was investing all of our money with Madoff.

And last Friday, we found out, to our chagrin, that the funds which many of us had devoted to charitable works were now going to be frittered away because of this firm's ridiculous decision to invest all of the money, 100 percent of their money, with Madoff.

JUDY WOODRUFF: And we see today, it's been reported, there are other groups that were investing with the Ascot Fund that are now suing them. Should you have been aware, though, that they were putting all that money with Mr. Madoff?

MORT ZUCKERMAN: Well, none of the records that we were given, none of the conversation that I had with the head of the fund in any way indicated. Quite the opposite, all of the records and all of the statements that were made were inconsistent with the possibility that he might have invested all of these funds with Madoff.

None of us, including all the people who are suing him now, knew this until this past Friday. So I guess what I can only say is that there was no way that we could penetrate a whole tissue of misrepresentations and, indeed, lies. And that's exactly what we had to deal with. And all of the reports that we got were inconsistent with what we later found out to be what he, in fact, had done with all the money in this fund.

JUDY WOODRUFF: So you're saying that you did all the due diligence you could have done?

MORT ZUCKERMAN: Well, I'm sure that, when you think about these things afterwards, you think, was there something else that I could have done? I could have hired private detectives. I could have hired accountants to go through it all. But that is not typical.

I have many funds invested with different fund managers for this charitable trust and, indeed, some of which are also for myself personally. And I've done a lot of due diligence in all of them, similar to what I did here. I've never had an incident like this whatever.

So what you have is a situation where, unless you can get a subpoena to go into all of his records, which we were not able to do, you can be misled through misrepresentation and outright lies. That's, in fact, what happened.

Now, I wish I could think of what else I could have done. And, believe me, I would have done it, because who even would have imagined that the people who headed up this fund really were involved in a whole series of charitable organizations where they handled all of their investments? So they had long record of performance with these things.

JUDY WOODRUFF: I want to turn...

MORT ZUCKERMAN: And this was something that was -- just came out of the blue.

Investors drawn by reputation

Jacob Frenkel
Former SEC official
Certainly, Bernard Madoff is at the forefront ... but also those who chose to invest with him will need to be able to explain not only to their investors to whom they owed obligations, to whom they had duties, but also to the regulators.

JUDY WOODRUFF: I want to turn to Jacob Frenkel now. How is it that someone like Mr. Madoff persuaded people with all this money to put it in his hands?

JACOB FRENKEL, former enforcement lawyer, Securities and Exchange Commission: I use the term "reputational investing." That is that the stature that he was able to achieve in the capital markets, the name, the circles in which he traveled, bred confidence, as a result of which people chose to invest with him and had confidence and trusted in the information that he was imparting.

Because in any fraud that involves false information about the trades, usually people are generating a paper trail that at least is a basis for misleading those investors that, in fact, they are invested in legitimate instruments.

JUDY WOODRUFF: But you also -- today there were reports that some investment advisers stayed away from him. I read one in particular, they said, "We saw discrepancies in the claims that he was making," about the kinds of investment strategies he had, so some people did stay away from him.

JACOB FRENKEL: And exactly. And some people took those due diligence measures that Mr. Zuckerman, for example, would have hoped that Ascot would have taken. And I think what we're likely to see as we go down the line here is that you have tiers of responsibility, tiers of liability.

Certainly, Bernard Madoff is at the forefront, as is his conduct, but also those who chose to invest with him will need to be able to explain not only to their investors to whom they owed obligations, to whom they had duties, but also to the regulators.

Questioning regulation tactics

Jacob Frenkel
Former SEC official
The fraudulent operation that is really at issue here was something that is -- the guts of the questions raised about the hedge fund industry and regulation of the hedge fund industry.

JUDY WOODRUFF: As someone who formerly worked for the SEC, what should the SEC have been -- or should they have been involved in all this?

JACOB FRENKEL: Well, the answer is, we're going to find out. And some of those questions may ultimately be answered only by virtue of a congressional inquiry, because, in terms of what the SEC does in its investigative process, that's done under -- you know, that's basically done under the cloak of secrecy to protect the integrity of those who are being investigated.

The question really is whether the SEC did receive information or there were adequate red flags in which the SEC should have acted but didn't.

The other issue here is Bernard Madoff had a brokerage firm, what we call a broker-dealer. That was subject to full inspection and scrutiny by the SEC.

The fraudulent operation that is really at issue here was something that is -- the guts of the questions raised about the hedge fund industry and regulation of the hedge fund industry. That was done in a separate floor in his building, unregulated, and that's really where the problem arises.

JUDY WOODRUFF: And it's obviously one of the things they're looking at.

Mort Zuckerman, back to you. As somebody who's obviously made a lot of money, invested a lot of money, how do you see the role of the regulators here? Because, clearly, a lot of people believe there was not enough regulation going on.

MORT ZUCKERMAN: You know, I think this is the critical issue. What has happened is that you've had a whole shadow banking system, in effect, that has emerged in the last several decades.

In the 1930s, 90 percent of all financing was done through the commercial banks. Today it's less than 30 percent; 70 percent is done through these money market funds, through these hedge funds, through the investment banks, through private equity funds, et cetera, et cetera. These have all emerged.

And there's insufficient -- most of these are, by and large, unregulated. And there is insufficient regulation. We are going to have to find a way to regulate them, because they control so much of the finances of the United States and therefore so much of the economy of the United States.

This is really critical. And the difficulty is going to be that this world of finance is so sophisticated and complicated that it is very, very difficult to imagine that the federal government will be having a lot of people who are capable of understanding it, so there's going to have to be some quasi-public-private body, with people who've had experience in this world, so that they can understand the possibilities of what might go wrong and how you regulate them.

It is going to be critical going forward, because confidence is now shattered in the financial system for a lot of reasons. And that is what is going to impede the ability of this country to come out of a recession.

The confidence must be rebuilt, particularly through all of these, as we have seen, errors all the way through the financial system.

JUDY WOODRUFF: And, Mr. Frenkel, I hear you saying that it is regulation, but it's also -- there's also responsibility on the part of those who make the investments.

JACOB FRENKEL: But the regulator has responsibility, too. And I think Mr. Zuckerman touched on a very important piece there very briefly, and that is, unlike Enron and the other major corporate fraud cases, where the view overseas -- because you mentioned at the beginning some of the international financial institutions that were investors directly with Madoff -- there was a view that, you know, U.S. corporate governance, you know, wasn't really up to snuff.

But now you have international financial institutions -- and, more importantly, financial regulators -- that are saying the SEC did not do its job. And I think the agency's international reputation now is taking a major hit.

JUDY WOODRUFF: Well, we are -- this is one I'm sure the questions are going to go on for a long time to come. Jacob Frenkel, thank you very much.

Mort Zuckerman, thank you. Gentlemen, we appreciate it.