Markers in his four-decade career and vast deception
Bernard L. Madoff
After graduating from Hofstra College -- and one year after marrying his high school sweetheart Ruth Alpern -- Madoff starts his business with $5,000 saved from odd jobs, including lifeguarding and sprinkler installations. He works out of Ruth's father's accounting firm in midtown Manhattan.
His plan is to make money as a market maker -- matching buyers and sellers who want to trade smaller stocks that aren't listed on the big exchanges.
"In those days, with over-the-counter stocks [there was] no automation," Madoff recalled in 2007. "So you would call a broker; the broker would call up … any number of dealers like myself. … We would negotiate over the telephone."
"Wall Street then was a very different world than it is now," explains New York Times reporter Diana Henriques. "… It was a very, what they call white-shoe world. … And then down below where small, unlisted stocks traded it was really a free-for-all. Small firms could get started with a little stake, trade unlisted stocks of sometimes reputable, sometimes not-such-reputable quality and make a living at it if they had good instincts as traders."
Avellino & Bienes
It's not known exactly when Madoff starts managing money for clients, but according to SEC documents, by 1962 he's managing investments channeled through his father-in-law, accountant Saul Alpern, and one of Alpern's partners, Frank Avellino. The first investors are friends and associates, recruited in places like Queens, Long Island and the Catskills.
Michael Bienes, an accountant who joined Alpern & Avellino in 1968, remembers Madoff "took a few straight accounts from Saul's people in the beginning. And then he said to his father-in-law: 'No. I cannot handle small accounts like this. This is a pain in the neck and a pain in the butt.'"
Bienes says that to make it easier Alpern suggested Madoff pool the small investors together; Alpern himself would then deal with the record-keeping details. "[Alpern] gave Frank [Avellino] a piece," Bienes explains. "And I got a piece, when I became partner."
"[Madoff] developed that investment advisory business at a time when the investment advisory business was far less regulated than it is now," says Henriques. "Outside of the mutual fund world, which was regulated, investment advisers didn't operate in the kind of spotlight that they do today."
Gibraltar Securities, registered under the name of Sylvia R. Madoff, is one of dozens of firms investigated by the SEC for failing to file financial reports. In the end she withdraws her registration; in January 1964, the SEC drops charges. According to reports in Fortune and The New York Times, Bernie Madoff's childhood friends don't remember his mother trading; the Fortune article hypothesizes that perhaps Madoff's father Ralph, who had previously been in trouble with the IRS, put his wife's name on the application. "Either way," the authors write, "one of Bernie Madoff's parents was involved in securities -- and got into trouble for it."
Over these decades Madoff's trading business skyrockets. Through a controversial but legal practice known as "pay for order flow," he is able to profit on the large spread -- 12.5 cents -- between the buy and sell price on each trade. Madoff would pay brokerage firms, such as Charles Schwab, a penny or two per share for sending orders through his firm, but he more than made up in volume for the few cents he was paying out.
The practice earns the wrath of the stock exchanges -- but Madoff isn't done. "In about 1971, computers showed up and were being used," he recalled in 2007. "So we saw -- meaning my brother and myself -- that there was an opportunity to bring automation into the over-the-counter marketplace and create some visibility and transparency in the marketplace."
"He could see the way electronics were going to change things," explains Diana Henriques. "… He continued to push for automated ways of trading. And regulators heard that message … because automated trading was cheaper not just for you and me as retail customers but for big pension funds, for institutional investors who were responsible for government money and for institutional money. They were paying a lot for this face-to-face trading infrastructure that had existed for centuries, and this electronic trading promised a cheaper way to trade."
Over the years Madoff often portrays himself as one of the founders of the Nasdaq exchange -- a claim that has been called into question by several press reports. However, as Henriques explains, "He worked assiduously for the notion of an automated stock exchange," and pushed regulators on the idea.
According to a 1992 interview that he gave the Wall Street Journal, Madoff says he began using a new options strategy for his investment business back in 1982: "The basic strategy was to be long on a broad-based portfolio of S&P securities and hedged with derivatives,' such as futures and options. Such a strategy, he said, allowed the investors 'to participate in an upward market move while having limited downside risk.'"
Their accounting business is becoming a headache, so Frank Avellino and Michael Bienes decide to drop it and "live off the Madoff" -- go full time into recruiting clients for him. By the mid-80s their cut is reaching several million dollars a year.
Managing the Madoff feeder fund was "easy-peasy," Biennes recalls. In 1987, he moves to Fort Lauderdale, Fla., and opens a second office.
He serves on the council for four years; he also sits on numerous NASD committees and task forces, chairing several.
Several sources later tell Trader's Magazine that Madoff actively pursued a presence on the regulatory body. One former NASD committee member and former head of trading at a New York firm recalls: "Bernie's strategy was to get actively involved in all aspects of the industry. He had a much bigger presence than the size of his firm would naturally warrant."
Madoff is introduced to Jeffrey Tucker and Walter Noel, partners in Fairfield Greenwich Group, an investment firm located in Greenwich, Conn. In July 1989, Noel and Tucker give Madoff $1.5 million to manage and follow up the in January 1990 with an additional $1 million. In November 1990, Fairfield Greenwich starts the Fairfield Sentry Limited Fund, its $4 million entirely managed by Madoff. "Once they created Fairfield Sentry to invest exclusively with Madoff, that is when things really started to accelerate," recalls Sherry Cohen, Walter Noel's former assistant.
Around this time Madoff connects with Ezra Merkin, a well-known Wall Street money manager and philanthropist. In 1990, Merkin gives Madoff "a significant portion of the assets" of two of his hedge funds -- Ariel and Gabriel -- to manage, which Madoff does through 1992. In 1992, Merkin creates Ascot Partners LP and Ascot Fund Limited funds, which are managed almost exclusively by Madoff through 2008.
It was also around this time that Sandra Manzke, founder of hedge fund giant Tremont and later MAXAM Capital, tells FRONTLINE she met Madoff. When she begins investing with him, she says Madoff, whose investment advisory business is not registered with the SEC, insisted that she not publicly name him in her prospectus.
Madoff's unusual fee arrangement is attractive to hedge fund managers: Rather than charging fees, he tells them he makes his money through commissions.
That's what Madoff claims in his 2009 confession (PDF). "To the best of my recollection, my fraud began in the early 1990s," he says. "At that time the country was in a recession and this posed a problem for investments in the securities markets. … While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients' expectations, at any cost. … In fact, I never made the investments I promised clients, who believed they were invested with me in the split-strike conversion strategy."
Investigators have yet to determine exactly when the fraud started.
He develops a solid, but sometimes controversial, reputation as a market maker. During the decade, his market-making operation was handling trades equaling 9 percent of all trading on the New York Stock Exchange. He serves as non-executive chairman of Nasdaq from 1990 to 1993 and uses the position to lobby Washington.
The controversy over "pay for order flow" continues to dog him. In 1990, the NASD forms a study committee; it releases a report in 1991 saying it found "no legal basis to restrict the practice."
But the exchanges continue to fight back. On the brink of 1993 congressional hearings, The Washington Post publishes an article "A Broker and the Angry Exchanges; Bernie Madoff's Stock Buying Rivalry Irks NYSE, Amex."
"Who is Bernie Madoff and why is he driving the,Wall Street establishment crazy?" the article begins. Madoff is quoted defending his practices: "I just don't see how anybody can make an argument against the practices of competition," he says. "People would like to apply pejorative-type terms. … I think people that use that kind of terminology are unhappy that they're losing business."
But Madoff's impressive cash-generating days are numbered. In 1997, trading spreads are slashed from 12.5 to 6.5 cents per share, and in 2001, they fall to a penny.
Lawyer Ira Sorkin
A tip from a Seattle investment adviser suspicious of Avellino & Bienes' promise of steady returns of up to 18 percent leads to an SEC investigation into whether the two men are running a Ponzi scheme.
By now, Avellino & Bienes has more than 3,200 Madoff clients and has funneled $441 million to Madoff. But the two men are not licensed as investment advisers; according to Michael Bienes, Madoff didn't want them to register. "We were always captive to him," he explains to FRONTLINE. "He owned us."
On Madoff's recommendation they hire attorney Ira Sorkin -- a former SEC official who will later represent Madoff himself after his 2008 arrest. Sorkin tries to figure out a way to keep the men in business, but before he comes up with a solution the SEC runs out of patience and orders Avellino & Bienes to return Madoff investors' money and pay $350,000 in fines.
In an interview with The Wall Street Journal, published shortly after the SEC crackdown on Avellino & Bienes, Madoff claims ignorance about his two front men operating illegally. He returns the lion's share of the money to them to distribute to their clients, although he shortchanges them $18 million.
"Many people point to [Madoff's ability to return the majority of the money] and say that [his business] must have been legitimate because he was able to raise that much money," says New York Times reporter Diana Henriques. "But we don't know how he raised it. We don't know where he got it."
Bienes says that he and Avellino got out of the investment advisory business after the '92 SEC probe. But sources tell FRONTLINE the two men continued to move money to Madoff through other front men -- a charge Bienes emphatically denies. Both men continue to invest their own money with Madoff, amassing fortunes.
Boston-based Frank Casey, former vice president of marketing for Rampart Investment Management, first hears about Madoff and his split-strike conversion strategy from French aristocrat and fund manager Thierry de la Villehuchet.
He asks his colleague Harry Markopolos to do some reverse engineering on Madoff's trades. "I said, 'Harry, if you can do this for me, we can make a lot of money,'" he recalls. "Harry started engineering, 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's not hurt at all. He produces 1 percent. Market goes up, he produces 1 percent.'"
Casey tells FRONTLINE Markpolos's analogy was, "a baseball player would have to be hitting .925 straight for 10 years in a row. Would you bet on a player like that, that he wasn't doing something illegal?"
He submits an eight-page memo outlining his concerns to the SEC's Boston office. His Boston contact is unable to persuade his superiors to investigate and suggests Markopolos contact the SEC's New York office, which would have jurisdiction over Madoff's firm.
Frank Casey meets Michael Ocrant, an investigative reporter who covers hedge funds, at a conference and suggests he look into "the biggest hedge fund in the world" -- Madoff Securities. Ocrant's resulting article (PDF),"Madoff Tops Charts, Skeptics Ask How," questions Madoff's consistent returns and why other money managers can't duplicate them. Ocrant interviews Madoff for the article and tells FRONTLINE that Madoff was "cool as a cucumber" and spent several hours answering questions.
Ocrant writes: "Madoff, who believes that he deserves 'some credibility as a trader for 40 years,' says: 'The strategy is the strategy and the returns are the returns.' He suggests that those who believe there is something more to it and are seeking an answer beyond that are wasting their time." Ocrant also writes that Madoff had received "numerous buyout offers" but that he refused because "he and the many members of his immediate and extended family who work there continue to enjoy what they do and the independence it allows and have no desire to work for someone else."
Six days later Barron's, a prominent Wall Street weekly, picks up the thread and publishes "Don't Ask, Don't Tell." It raises similar questions and examines Madoff's penchant for secrecy.
After the Barron's article appears, Madoff meets Fairfield Greenwich partner Jeffrey Tucker at his offices in Manhattan's Lipstick Building. Tucker wants to verify Fairfield's holdings -- now worth about $3 billion.
Tucker meets with Madoff and his chief lieutenant, Frank DiPascali. He later tells investigators the two men showed him records of trades and named a third party who had cleared them. Tucker doesn't ask for verification and doesn't visit the firm's offices on the 17th floor, where the trades were largely conducted.
Despite no action from the SEC since he first began writing them memos in 2000, this one (PDF) details more than two-dozen red flags about Madoff and is titled, "The World's Biggest Hedge Fund is a Fraud."
"When he wrote that letter and I read it, I said: 'Oh my God, they're going to be on this. ... You're giving them everything," recalls Markopolos'former colleague Frank Casey.
And by now, the fall of 2005, there were other letters being sent to the SEC about Madoff.
After learning SEC investigators are about to contact Fairfield Greenwich's due diligence officer, a phone conversation (PDF) takes place between Madoff, FG General Counsel Mark McKeefrey and FG Chief Risk Officer Amit Vijayvergiya. Madoff opens the conversation saying, "Obviously, first of all, this conversation never took place."
He goes on to coach them on how to handle SEC investigators. "You don't have to be exact on this stuff because … no one pays attention to these types of things. … It's basically, you know, more casual. I mean, the idea is that we're not the one … that's operating the fund."
Later he says, "Your position is to say, listen, Madoff has been in business for 45 years, you know, he executes, you know, a huge percentage of the industry's orders, he's a well-known broker. You know, we make the assumption that he's doing everything properly."
It's prompted by Markopolos' 21-page memo eight weeks earlier. In its case-opening narrative (PDF) it notes that a preliminary investigation found that neither Madoff nor Fairfield Greenwich disclosed that Madoff was making investment decisions, and that evidence suggested that Madoff was acting as an undisclosed investment adviser to several other hedge funds.
In May 2006, Madoff is interviewed by the SEC. Insiders have told FRONTLINE that when SEC lawyers visited Madoff's office, he was visibly nervous and irritable. In his March 2009 confession (PDF) Madoff admits that he lied to the SEC during this interview.
In its case-closing recommendation (PDF) the SEC said it "found no evidence of fraud" after Madoff's interview and his voluntary production of documents. It did find that Fairfield Greenwich needed to revise its disclosures to include Madoff's role and that Madoff needed to register as an investment adviser.
In a Form ADV filed with the SEC, Madoff claims that his investment advisory business has 23 clients and more than $17 billion under management. The firm claims 51-250 employees but only 1-5 employees performing "investment advisory functions." Its clients consist of:
- pooled investment vehicles (51-75 percent)
- charitable organizations (up to 10 percent)
- banking or thrift institutions (up to 10 percent)
- pension and profit-sharing plans (up to 10 percent)
- other corporations or businesses (11-25 percent)
Immediately the stock market nosedives; credit markets freeze. By November, the markets are down 40 percent, and hundreds of hedge funds shut down or stop allowing withdrawals. But Madoff funds are still up. Some large hedge fund clients, including Sandra Manzke and Thierry de la Villehuchet, place even more money -- including their personal accounts -- with Madoff.
But according to investigators, there are signs in the fall of 2008 of Madoff's weakness. In October, November and December, he reverses his longstanding policy of limiting the amount of money Fairfield Greenwich could invest with him and begins to react angrily when the firm tells him about a "significant amount of redemptions" from its Sentry fund.
Sometime the first week of December, Madoff tells one of his sons that he's facing $7 billion in redemptions and is having a hard time meeting those obligations.
According to Fortune, Madoff asks his wife Ruth to make two wire transfers from a brokerage account to her personal bank account -- one on Nov. 25 and one on Dec. 10 -- totaling $15.5 million, so they would have cash on hand.
He continues to push hard on Fairfield Greenwich to raise money; the firm starts a massive fundraising campaign for a new fund they name Fairfield Emerald. On Dec. 10, Tucker sends a letter (PDF) to Madoff in which he apologizes for the continued redemptions. "Our firm is very dependent on its relationship with your firm," he writes. "… Our mission is to remain in business with you and keep your trust."
He tells Andrew and Mark, who were senior employees at his trading operation, that he would like to pay out several million dollars in company bonuses in December -- several months before they are normally paid out. When his sons challenge him on the idea, Madoff insists they move to his apartment because he "wasn't sure he'd be able to hold it together" if the conversation continued at the office.
According to investigators, at his apartment Madoff confesses to his sons that the investment advisory business is a fraud, that he is "finished," that he has "absolutely nothing," and that the operation was "basically, a giant Ponzi scheme." He estimates the fraud to be approximately $50 billion.
Madoff also tells his sons that he plans to surrender to authorities in a week but he wants to use the $200-300 million he has left to make payments to selected employees, family and friends.
After speaking to his sons, the FBI knocks on Madoff's door on the morning of Dec. 11 and asks if there is an innocent explanation. Madoff says no, it was "one big lie."
Thierry de la Villehuchet
The French aristocrat was trying to recover about $1.5 billion in funds he'd invested with Madoff on behalf of wealthy Europeans, including L'Oreal owner Liliane Bettencourt, the world's wealthiest woman. His friend Frank Casey suggests that de la Villehuchet's slitting his wrists was "an act of atonement. ... Watch himself bleed to death slowly."
Madoff on the street outside his home.
In his statement he insists that his trading operation was legitimate and that the fraud occurred solely on the investment advisory side of his business. He admits his guilt and apologizes to his victims, but doesn't shed much light on how the fraud occurred:
"The essence of my scheme was that I represented to clients and prospective clients who wished to open investment advisory and investment trading accounts with me that I would invest their money in shares of common stock, options and other securities of large well-known corporations, and upon request, would return to them their profits and principal. … [F]or many years up until I was arrested … I never invested those funds in the securities, as I had promised. Instead, those funds were deposited in a bank account at Chase Manhattan Bank. When clients wished to receive the profits they believed they had earned with me or to redeem their principal, I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds."
In the wake of Madoff's arrest and confession, lawsuits are flying against the feeder funds. Sandra Manzke is facing a lawsuit from a pension fund and other investors who allege she failed in her obligation to do due diligence. She, in turn, has sued her accountants. Ezra Merkin is being sued for allegedly concealing where his clients' money is being placed. Frank Avellino, lawyers say, misled investors. Michael Bienes has hired a lawyer though no lawsuits have yet been filed. Fairfield Greenwich has seen multiple lawsuits filed with charges ranging from gross negligence to fraud.
Meanwhile, investigators are talking to Madoff lieutenant Frank DiPascali and others, trying to get to the bottom of the operation on the 17th floor and who was in on the fraud with Madoff.
Bernard L. Madoff is scheduled to be sentenced in June 2009.