the madoff affair


The Madoff Affair

Marcela Gaviria
Martin Smith

Chris Durrance

Marcela Gaviria & Martin Smith

ANNOUNCER: It was too good to be true.

MICHAEL BIENES, Avellino & Bienes: Would you believe it, how the money rolled in?

ANNOUNCER: But nobody wanted to ask questions-

BOB NORMAN, The Daily Pulp: You see a willful ignorance. Nobody wants to get in the way of all this money.

ANNOUNCER: -from small-time investors to sophisticated hedge fund managers.

ROSS INTELISANO, Rich & Intelisano, LLP: All these guys did was just dump money in, do no due diligence, and count their money. Amazing.

MARTIN SMITH, Correspondent: Did Madoff say to you, "Don't put me in your prospectus?"

SANDRA MANZKE, CEO, Maxam Capital: Yes. He did.

MARTIN SMITH: Do you think that's right?

ANNOUNCER: And where were the regulators?

Rep. GARY ACKERMAN (D-NY), Financial Services Cmte.: Why didn't you find him, is the question.

ARNOLD SINKIN, Madoff Investor: I blame the government. I really, truly do.

ANNOUNCER: Tonight on FRONTLINE, correspondent Martin Smith unravels The Madoff Affair.

MARTIN SMITH, Correspondent: [voice-over] The news broke on December 11, 2008, and within seconds, phones were ringing around the world. Michael Bienes was in London when he got a phone call from his business partner, Frank Avellino.

MICHAEL BIENES, Avellino & Bienes: And I said, "Frank, what's wrong?" Because I could hear it in his voice. "Michael, Bernie Madoff-" I said, "He died!" In a nanosecond, "He died." "Was arrested." I said, "Oh, no." And then in another nanosecond, "Sex crime or some [expletive deleted]," you know? "For stock fraud."

MARTIN SMITH: Phones were ringing in Palm Beach, too.

SANDRA MANZKE, CEO, Maxam Capital: I received a call from an investor in Aspen who said he had heard that Bernie was arrested. And I called Bernie's office and I called his secretary, and I said, "Gee, we just got this really strange call." And she said, "No, no, everything's fine."

MARTIN SMITH: Emails were flying.

BETTE GREENFIELD, Madoff Investor: 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."

MARTIN SMITH: It was the largest stock fraud in history.

LAWRENCE VELVEL, Madoff Investor: I said, "Oh, my." You know, in an instant, as with everybody else, you see everything just gone.

1st REPORTER: Mr. Madoff, what you have to say for yourself?

MARTIN SMITH: There are lots of questions.

1st REPORTER: What do you have to say to the public, to your investors?

BERNARD MADOFF: Don't push me.

MARTIN SMITH: How did he pull it off?

1st REPORTER: Mr. Madoff-

2nd REPORTER: How do you feel?

MARTIN SMITH: Who helped him?

3rd REPORTER: Are you sorry for what you did?

4th REPORTER: Mr. Madoff, what would you say to all those people that lost money, Mr. Madoff? What would you say to them?

MARTIN SMITH: And when did it all begin?

PHOTOGRAPHER: Bernie! Hey, Bernie! Give me one nice shot, buddy. Bernie! Turn around, buddy. Come on!

MARTIN SMITH: The year was 1960. Madoff had just graduated from Hofstra College and married his high school sweetheart, Ruth Alpern. He was working out of her father's accounting firm in midtown Manhattan. From there, he launched a career as a market-maker, matching buyers of stocks with sellers on Wall Street.

DIANA HENRIQUES, The New York Times: He started this little stock trading firm, one of many in Wall Street's outer fringes at that time, and slowly built it up, building up customers. It was kind of like a wholesale firm.

KATHERINE BURTON, Bloomberg: He would actually pay clients such as Fidelity, Charles Schwab. He'd pay them a penny a share to come and trade through him. So he saw lots of trading volume that way.

MARTIN SMITH: [on camera] In other words, he would pay for what they call, "order flow?"


MARTIN SMITH: [voice-over] What wasn't known on Wall Street was that Madoff had a side business as an investment advisor.

DIANA HENRIQUES: The investment advisory business 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 back the longest started with very small nest eggs.

MARTIN SMITH: Madoff's first clients were friends and associates recruited in places like Queens, Long Island and the Catskills. With promised returns of around 18 percent, 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 how Madoff brought him and Frank into the investment advisory business.

[on camera] Tell me how you got going with investing with Bernie, how that-

MICHAEL BIENES, Avellino & Bienes: Well, Saul, his father-in-law, had been doing it. He gave Frank a piece. And I got a piece when I became a partner. It was only about $2.5 million in the account. That was big money to me. We were only taking a small clip off the top. That's all it was. Couldn't take more, we thought that was the rule. And we never were pigs. That's the one thing that kept us going. We were never pigs. We were never pigs.

MARTIN SMITH: [voice-over] The arrangement was simple. With Madoff's guarantee of 20 percent or better, Avellino and Bienes could pocket a few percentage points while issuing promissory notes to their clients with set rates of return.

[on camera] You were promising people how much?

MICHAEL BIENES: All depends. Big amounts, 18 percent. Smaller amounts, 17, 16, even as low as 15.

MARTIN SMITH: What made you think that he could return 20 percent?

MICHAEL BIENES: 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.

MARTIN SMITH: Did you ask him?

MICHAEL BIENES: Never? Why would I ask him? I wouldn't understand it if he explained it. Something with arbitrage between bonds and stocks, and blah, blah, blah, blah, blah.

MARTIN SMITH: [voice-over] Among the first investors Bienes brought in were Arnold and Joan Sinkin. They started with $5,000.

JOAN SINKIN, Madoff Investor: Michael Bienes said to my uncle, "I know that you don't have much money and that I can really get you an investment that's going to do very well for you." And before long, there were probably about 18 to 20 people that were involved with Bienes.

MARTIN SMITH: [on camera] Did you know where that money was going?


MARTIN SMITH: Had you ever heard the name Bernard Madoff?

JOAN SINKIN: Not at that time. No.

ARNOLD SINKIN, Madoff Investor: Not at that time.

MARTIN SMITH: [voice-over] Madoff liked it that way. Unbeknownst to even his oldest associates, he was quietly taking on other so-called "feeders."

It didn't matter to Avellino and Bienes. By the mid-'80s, their cut was reaching upwards of $10 million a year just for passing along their clients' money.

[on camera] So is this easy money, would you say, that you're making with Madoff?

MICHAEL BIENES, CPA, Avellino & Bienes: Easy. Easy-peasy. Like a money machine. I always said I never lifted any heavy weights. People have said to me, even recently, "Oh, you must have worked very 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 mistake in your calculations, oh, boy, you do a John Denver. You run out of fuel.

MARTIN SMITH: Did you ever think to yourself, "This just is too easy, this is too good"?

MICHAEL BIENES: I said, "I'm a little too lucky. Why am I so fortunate?" And then I came up with the answer. My wife and I came up with the answer. God wanted us to have this. God gave us this.

MARTIN SMITH: [voice-over] In 1987, Avellino & Bienes opened a second office in Fort Lauderdale, Florida, and began looking for a new well of investors.

BOB NORMAN, The Daily Pulp: They start actually doing what they did in New York. They just pick up investors, people they met, an art dealer, friends that they picked up, doctors. You know, they would- they would get them involved in the investment scheme.

MARTIN SMITH: The problem was, they were getting too many clients. By the early '90s, they had amassed over 3,000, far too many clients to be operating as unregistered investment advisors. Avellino and Bienes worried they might get busted by the SEC.

MICHAEL BIENES: We had doubts, and we passed them on to Bernie in meetings. And he said, "Listen to me, OK? I know the biggest lawyers on Wall Street. And I've told them about this, and they say it's OK. You're just guys who work for my father-in-law. You- you're an- you're an- you're a client of my firm. That's all you are."

MARTIN SMITH: [voice-over] So you did have doubts? You wondered if you should be licensed with the SEC?

MICHAEL BIENES: I like to be licensed. I was a licensed CPA.

MARTIN SMITH: So why didn't you just get yourself licenses?

MICHAEL BIENES: Because you just can't do that because Bernie didn't want us to.

MARTIN SMITH: So Bernie's calling the shots here?

MICHAEL BIENES: Oh, of course he is! Always was. I was always- we were always captive to him. He owned us.

MARTIN SMITH: [voice-over] But then in 1992, there was trouble. An investment advisor in Seattle had called Avellino & Bienes to inquire about their steady returns. Those promissory notes didn't smell right. He was given the brush-off. The advisor called the SEC, and they launched an investigation. They suspected that Avellino and Bienes were running a Ponzi scheme.

MICHAEL BIENES: 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." And he says, "Yeah, you're right. Let me recommend an attorney, Ira Sorkin, who used to be with the SEC."

MARTIN SMITH: Ira Sorkin, the lawyer Madoff recommended, had experience handling fraud cases, and in the mid-'80s, he'd even run the SEC's New York office.

There was a lot of money at stake in the case. By 1992, Avellino & Bienes had $441 million dollars invested with Madoff. Sorkin tried to figure out a way to keep Avellino & Bienes in business, but before he could come up with a solution, the SEC ran out of patience.

MICHAEL BIENES: All of a sudden, in November, the SEC said, "Game over. We're closing you down. Sign the consent decree, or we'll run you into court."

MARTIN SMITH: [on camera] Did you understand why Michael Bienes was shut down?

JOAN SINKIN: Michael Bienes said he had too many people that he helped invest and the SEC said he didn't have a license. So he was just going to stop doing this because it wasn't good. And we could go with Madoff.

MARTIN SMITH: [voice-over] At first, the SEC was worried that the money wouldn't be there, but were relieved that the trail led back to Madoff. By then, he had a solid reputation on Wall Street. His market-making operation was handling trades equaling 9 percent of all trading on the New York Stock Exchange. And he had recently been named chairman of NASDAQ. The SEC never paid serious attention to Madoff.

HARVEY PITT, Chairman, SEC, 2001-'03: They had Madoff in their sights. And the SEC looked at Madoff, but it reached no adverse conclusions as to Madoff.

MARTIN SMITH: [on camera] But they knew that Madoff was servicing, as an investment advisor, 3,200 different clients.


MARTIN SMITH: Madoff was not registered as an investment advisor.

HARVEY PITT: That's correct.

MARTIN SMITH: Even after Avellino are Bienes are effectively shut down and the money is returned, Madoff goes forward and is not registered. Why?

HARVEY PITT: I can't explain why. On the face of it, if an investment advisor services more than 15 clients - 15 or more clients - he is supposed to register.

MARTIN SMITH: He had 3,200.

HARVEY PITT: Thirty-two hundred seems to me-

MARTIN SMITH: More than 15.

HARVEY PITT: -to be more than 15, yes.

MARTIN SMITH: [voice-over] Avellino and Bienes had to pay $350,000 in fines and return all their investors' money. And while Madoff paid back the lion's share, he didn't pay all of it. He shortchanged them $18 million dollars.

Avellino and Bienes asked for a meeting with Madoff at his new office in midtown Manhattan's "lipstick" building.

MICHAEL BIENES: "All right," I said, "you son of a bitch. It's over now. It cost us a lot of money and a lot of grief, and it's all your fault, Bernie. 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 pay any lawyer any fee. And you said, `No, no, no, no, no, no, no.' And you assured us, big shot, that we were fine, we were just investors, when you knew damn well we weren't."

After I got done, and he says, "Look, 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'm just a very scared person. And let's forget what I said and go on with this. I apologize."

MARTIN SMITH: In a 1992 interview with The Wall Street Journal, Madoff claimed he had no idea his two front men were operating illegally.

[on camera] Does the fact that Bernie Madoff returned $400 million to those accountants, who then returned it to their clients, mean that it was a legitimate operation at that time?

DIANA HENRIQUES, The New York Times: Not necessarily. Many people point to that and say that it must have been legitimate because he was able to raise that much money. But we don't know how he raised it. We don't know where he got it.

MARTIN SMITH: Did you ever think it was odd that you go through all these hearings, and all the paperwork is 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?

MICHAEL BIENES: No. We just wanted to get out of it. And I wanted to run away and hide in a cave. I didn't worry about Bernie or Ernie or Sid, the kid. I was not interested. I just didn't want my name in the paper again. One day, once, and that was enough for me.

[ Bienes's extended video interview]

MARTIN SMITH: What did you tell the clients that had left, that had gotten their money back?

MICHAEL BIENES: "Good-bye. Here's your- here's your"- they knew. It was in the papers. "Here's your money. Don't bother me."

MARTIN SMITH: [voice-over] But sources tell FRONTLINE that's not what happened. Avellino and Bienes continued to move money to Madoff through other front men, taking lucrative kickbacks on the referrals.

BOB NORMAN, The Daily Pulp: One case in point in Fort Lauderdale is Michael Sullivan, who was a friend of Avellino's. And he basically took these pools of investors that they- and they routed them right into Sullivan, and he's moving it to Madoff.

MARTIN SMITH: Avellino knew Sullivan through Bible group at this Fort Lauderdale church. After 1992, Sullivan took on around 30 of Avellino & Bienes's accounts.

BOB NORMAN: Avellino and Bienes kept their hands in the jar. The SEC action was simply a bump in the road. It was- it barely slowed them down.

MARTIN SMITH: Bienes denies routing clients through Sullivan or anyone else.

MICHAEL BIENES: If they called me, I said, "Listen, the only advice I can give you is call Bernie if you want to get in. I don't know if he'll take you."

MARTIN SMITH: [on camera] Or call Michael Sullivan.

MICHAEL BIENES: No. Absolutely not. Never!

MARTIN SMITH: Now, why does that push a button?

MICHAEL BIENES: Because it's not so. And that's what really bugs me.

MARTIN SMITH: But you've got people saying that they were advised-

MICHAEL BIENES: I don't care what people say. They're lying.

MARTIN SMITH: [voice-over] But documents show that after 1992, former Avellino & Bienes clients began moving their money into partnerships that were Michael Sullivan's conduits to Madoff. Avellino and Bienes also continued to invest their own personal money with Madoff and went on to amass fortunes. The Avellinos bought this $4.5 million dollar house in Palm Beach and stocked it with paintings by Degas, DeKooning, Hopper and Bacon, paintings worth tens of millions of dollars. The Bieneses became major donors to charities throughout Broward County. In 2002, Bienes accepted an award from a local business college.

COLLEGE ANNOUNCER: With wisdom and grace, this modern day renaissance man has left an indelible mark on our community, Michael Bienes.

MARTIN SMITH: In the '90s, Madoff didn't really need Avellino & Bienes anymore. He had moved on to bigger pools of money.

MITCHELL ZUCKOFF, Author, Ponzi's Scheme: There are two pieces to a Ponzi scheme. You always have to attract new investment, and you have to make sure that all- you don't have a sudden outflow. The key is stability.

MARTIN SMITH: By the '90s, Madoff had already formed alliances with financiers like Ezra Merkin, president of New York's prestigious Fifth Avenue Synagogue, Stanley Chais of Beverly Hills, who worked the Hollywood crowd, and Bob Jaffe of Boston and Palm Beach.

ROSS INTELISANO, Rich & Intelisano, LLP: People who had access to Madoff, whether they were advisors or accountants or attorneys or fund-to-funds, built sort of a cottage industry of just feeding money to Bernie, and it sort of mushroomed.

MARTIN SMITH: Madoff was also being courted by private bankers, mostly from Greenwich, Connecticut, the capital of the hedge fund business. One of the first to knock on his door was Jeffrey Tucker, a former SEC lawyer with a love for horse racing. He joined private banker Walter Noel to found Fairfield Greenwich Group.

DIANA HENRIQUES, The New York Times: Fairfield Greenwich started as a small-scale investment advisory business led by a gentleman, Walter Noel, who had a pretty good reputation on Wall Street, not just in U.S. money circles, but in foreign money circles, as well. He attracted a partner who also had a good track record, Jeffrey Tucker. They joined forces and got Fairfield Greenwich up and going.

MARTIN SMITH: Walter Noel's assistant remembers how at first they struggled, until they found Madoff.

SHERRY COHEN, Fairfield Greenwich, 1987-'98: Jeffrey just told Walter, "I've got this guy who's got really impressive returns." You know, "Come meet him. Let's look into it. Maybe there's a product we can develop." Once they created Fairfield Sentry to invest exclusively with Madoff, that's when things really started to accelerate.

MARTIN SMITH: And what attracted them was not just Madoff's steady returns but an unusual fee arrangement.

JOE WEISENTHAL, Clusterstock: Madoff didn't charge them any fees. He said, "I'm making all my money on trading through my market-making operation and commissions. And so I won't take any fees and you can keep it all."

MARTIN SMITH: For a feeder fund like Fairfield Sentry, those client fees added up to around $100 million a year.

ROSS INTELISANO: The feeder fund's taking, you know, 2 and 20, or 1 and 10- 1 percent of the assets and 10 percent of the returns- and all these guys did was just dump money in, do no due diligence, and count their money. Amazing.

MARTIN SMITH: And while Tucker handled Fairfield Sentry's account with Madoff, it was Noel's family that did the marketing.

DIANA HENRIQUES: Walter Noel's bevy of lovely daughters married into families that were well known in those moneyed circles. And the Fairfield Greenwich sales team, if you will, the Walter Noel extended family, began to market its services far and wide.

MARTIN SMITH: Noel's eldest daughter married a Colombian investment banker, Andres Piedrahita. Other sons-in-law marketed Sentry in Latin America and the Middle East. Their annual Christmas card chronicles their rise.

SHERRY COHEN: The unofficial motto was, "If we act rich, we will become rich." This was about being able to finance a lifestyle that people only- that some people only dream about. They read about these things in W and in Town and Country, and they wanted that sort of lifestyle. They wanted to be in society.

KATHERINE BURTON, Author, Hedge Hunters: Walter Noel was making an extraordinary amount of money, and all he had to do was market. And there were many people that just looked at what Fairfield Sentry was doing and said, "Hey, this is free money."

MARTIN SMITH: Fund managers everywhere wanted in on it - Latin America, Asia and Europe - and they went to major banks looking for clients, nowhere more than in the world's capital of discretion and secrecy, Geneva.

MYRET ZAKI, Le Temps, Geneva: These guys were going around to all the banks, really doing road shows and saying, "Here it is. We have a 2 percent management fee on this fund. Then we give you back 1 percent of it if you buy the fund."

MARTIN SMITH: [on camera] So "You bring the clients to us, and we'll give you a kickback"?

MYRET ZAKI: Exactly. It's a way, really, to attract, to catch, to be very aggressive in catching new clients, yeah.

MARTIN SMITH: [voice-over] By 2008, one third of all Geneva fund managers had invested with Madoff to the tune of $14 billion.

MICHEL DOMINICE, Dominice & Co.: It's extraordinary how the 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 in big fund with big names, famous people. You need to invest in that thing because it's a big name.

MARTIN SMITH: One of the biggest names in Europe was French aristocrat Thierry de la Villehuchet, an avid sailor, well connected with European royalty. He approached the world's biggest private wealth manager, UBS, to help him gather clients for his Madoff fund at his company, Access International. On his marketing team were Prince Michael of Yugoslavia and Philippe Junot, once married to Princess Caroline of Monaco. At lavish parties, they marketed to people like L'Oreal's Lilliane Bettancourt, the world's wealthiest woman.

JAMES MACKINTOSH, Financial Times: Thierry de la Villehuchet would say to them, "Look, come to dinner. We'll have your friends, a good time, good wine." And then here comes the hard sell. "I've got this great money manager in New York. He makes money whatever the weather. I can introduce you. Put money into my fund, I'll hand it on to Bernie Madoff."

BERTRAND DE LA VILLEHUCHET: [subtitles] He studied all the American techniques, notably the funds.

MARTIN SMITH: His brother, Bertrand, said Thierry believed completely in Madoff.

BERTRAND DE LA VILLEHUCHET: [subtitles] He had such high professional regard for Madoff that he invested the totality of his wealth, his assets, with him. You should know that my brother handed all of his personal investments to Madoff.

MARTIN SMITH: But Madoff had one condition he had to impose on everyone. Funds were forbidden from listing him as an investment advisor in any marketing material. That's because Madoff was unregistered with the SEC, even though he had thousands of clients and billions under management.

SANDRA MANZKE, CEO, Maxam Capital, '06-present: I met Bernie Madoff in the early '90s.

MARTIN SMITH: Sandra Manzke, the founder of hedge fund giant Tremont and later Maxam Capital, has publicly advocated for more transparency in the hedge fund industry. In an exclusive interview with FRONTLINE, she said she was unaware of how big Madoff had become.

SANDRA MANZKE: Did I know about all the feeder funds in Europe? Absolutely not.

MARTIN SMITH: [on camera] Access-

SANDRA MANZKE: Access. I did not know of Access.

MARTIN SMITH: Banco Santander had a big fund.

SANDRA MANZKE: Didn't know that.


SANDRA MANZKE: Didn't know that.

MARTIN SMITH: [voice-over] Manzke says everyone operated by Madoff's secrecy rules.

[on camera] Did Madoff say to you, "Don't put me in your prospectus"?


MARTIN SMITH: Do you think that's right? Do you think that's appropriate?

SANDRA MANZKE: I don't know. Every one of my clients knew that this was a Madoff feeder fund, and-

MARTIN SMITH: So why not put it in a prospectus, then?

SANDRA MANZKE: That was one of, always, Bernie's conditions of getting an account.

MARTIN SMITH: But you've publicly called for transparency. That's transparency.

SANDRA MANZKE: Yes. But many funds and investors were very secretive. They didn't mention that they had money with Madoff. It was something you didn't talk about.

MARTIN SMITH: [voice-over] And that's exactly how Bernie Madoff wanted it.

DIANA HENRIQUES, The New York Times: The question of when it became a fraud is fundamental to the Bernie Madoff mystery. This went on for an astonishingly long time for a Ponzi scheme.

LUCINDA FRANKS, The Daily Beast: Madoff was driven. He has the kind of personality that is extremely proud of the incredibly intricate and complex web that he's woven.

MARTIN SMITH: Madoff's firm used to advertise its "high ethical standards."

1st SECRETARY: Hey, Dave. It's Deb at Madoff. How are you, honey?

2nd SECRETARY: Good afternoon. Madoff. Elizabeth speaking.

MARTIN SMITH: Investors who asked were shown the operation on the 19th floor of the "lipstick building."

TRADER: R-Y-A-N is good at three eights and pending, Erickson, 26 and five teenies.

LAWRENCE VELVEL, Madoff Investor: It was very impressive, you know? Scores of people, basically younger people, sitting at these computers, looking away or watching the screen or whatever. And you know, and one thinks, "Lord, here are all these people in their 20s and 30s who are each making a million dollars a year." [laughs] And they probably were.

MARTIN SMITH: But this was Madoff's market-making operation, run by his two sons, Mark and Andrew, and his brother, Peter. His wife, Ruth, came in once a month. On the Street, it had a good reputation.

RICH CAPUTO, Madoff Securities,1993-'05: It was a great company to work for. A lot of people didn't leave that place. Usually with Madoff, you stayed there.

NADER IBRAHIM, Madoff Securities, 2000-'03: It was almost like you would work there, and you know, the only way that you would get fired is unless you did something incredibly wrong.

MARTIN SMITH: As is now well known, the heart of the fraud was two floors down, on 17. Here a dozen employees worked under the direction of a 33-year veteran of the firm, Frank DiPascali.

RICH CAPUTO: Nobody really knew his role. You know, I knew he was important because he would speak with Bernie often. And essentially, like, whatever Frank wanted, he would, for the most part, get.

MARTIN SMITH: But few staffers, even Caputo and Ibrahim and the rest of the IT team that had access to the floor, understood what he did.

RICH CAPUTO: We were spitting out statements constantly. The fact that all of these statements were just sort of made out of thin air is pretty shocking.

MARTIN SMITH: [on camera] Well, did people ever suspect that it wasn't legitimate?

NADER IBRAHIM: It was very rare that- since I was there, that anybody would ask questions about something in the- in the firm.

MARTIN SMITH: You didn't do that.

NADER IBRAHIM: You just didn't do it.

MARTIN SMITH: [voice-over] After the statements were printed, they were mailed to clients, providing them a paper record of trades in stocks, Treasuries and S&P 100 index options.

Most customers were focused on the bottom line. But for anyone who looked hard enough, there were a few clues. Some statements showed investments in Fidelity Spartan, a fund whose name had changed and was not open to new investors. And FRONTLINE's own investigation of a small sampling of statements found unusual accounting of cash balances.

[ Examine Madoff's statements]

Also, the fact that Madoff sent trading confirmations in the mail two to five days after a trade was reportedly made allowed him the benefit of hindsight, like betting on a horse race after it had begun.

[on camera] Did it ever raise red flags that all his confirmation tickets were sent to you in the mail, whereas all other broker dealers were providing electronic confirmations?

SANDRA MANZKE: They were sent to us in the mail and we never thought anything of it. But I get my confirmations, when I trade tickets, in the mail.

MARTIN SMITH: But you can also opt to get one electronically, which is something Bernie Madoff didn't offer.

SANDRA MANZKE: Well, Bernie also- again, it was part of his not having the world know when he went into the market.

MARTIN SMITH: But it never seemed odd that he didn't issue an electronic confirmation?


MARTIN SMITH: [voice-over] But if an investor complained about how Madoff did business, DiPascali would threaten them.

JOAN SINKIN, Madoff Investor: I remember one phone call I 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 know what was so terrible about the question I was asking.

MARTIN SMITH: [on camera] So he didn't really want to hear any questions.

JOAN SINKIN: No. Absolutely not. And we got intimidated by it.

MARTIN SMITH: [voice-over] There were many on the outside who suspected something was wrong. A persistent rumor dogged Madoff that he was involved in an illegal form of insider trading called front-running.

ROSS INTELISANO, Rich & Intelisano, LLP: The idea behind that was because you had this market-making business, and market making means you 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 Lynch buying a million shares of IBM, and buy your own. So that when Merrill buys the million shares, the stock goes up a little bit and you make some money.

KATHERINE BURTON, Bloomberg: People couldn't figure out any other way for him to make money except if he was front-running.

MARTIN SMITH: [on camera] People ran those sort of models and couldn't make money doing it.

KATHERINE BURTON: They couldn't make anywhere near the kind of returns that he did, especially when markets were falling. But he consistently made money every year, almost every month.

MARTIN SMITH: [voice-over] In Boston, a team of risk analysts was puzzled, wondering what Madoff was up to.

FRANK CASEY, Rampart Investments, 1998-'01: There's always that potential, that one little potential that you've got a rocket scientist, an Einstein here, and he's found some piece of information that's flowing to him proprietarily because of the nature of this business of executing big trades.

MARTIN SMITH: [voice-over] In the late '90s, Casey was working with Harry Markopolos, the now famous whistleblower. Casey and Markopolos first heard about Madoff's returns from the French aristocrat Thierry de la Villehuchet.

FRANK CASEY: Back in those days, I understand that Mr. Madoff didn't like his investors mentioning his name, let alone what he was doing. But Thierry, knowing that I was an options fellow, I guess, and the fact that he was a sailor and I was a sailor, established some common ground and trust, I guess. And he mentioned that it was this fellow by the name of Bernie Madoff.

I said, "Well, what's he doing?" And he said, "Split strike conversion work." I didn't say much about that. But I thought that, "Well, wait a minute. It is predominantly a bull market strategy, and how can you make money in bear markets or down markets?" So something's amiss.

MARTIN SMITH: Casey asked Markopolos, who understood esoteric tactics like "split strike conversion," to do some reverse engineering.

FRANK CASEY: 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, 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 said, "Look at this. The market goes down. He's not hurt at all. He produces 1 percent. Market goes up, he produces 1 percent."

MARTIN SMITH: [on camera] To be fair, he did report a few bad months here and there.

FRANK CASEY: Sure. Harry looked at that later on over the years and told me that, basically, a baseball player would have to be hitting .925 straight for 10 years in a row. Would you want to bet on a player like that, that he wasn't doing something illegal?

MARTIN SMITH: [voice-over] In May 2000, Harry Markopolos contacted the SEC for the first time, submitting an eight-page memo. Frank Casey, meanwhile, flew to meet with de la Villehuchet at his New York office.

FRANK CASEY: I said, "What happens if you'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's money with him. I've got- almost every royal family that I know has got money with him." So he says, "We really have done our work, Frank. You just don't have all the facts."

MARTIN SMITH: Casey decided to hand the story to an investigative reporter who covered hedge funds, Michael Ocrant.

MICHAEL OCRANT, MAR/Hedge newsletter: When he said "Bernie Madoff," my ears immediately picked up. And I said, "What are you talking about? Bernie's a market maker."

MARTIN SMITH: Casey told Ocrant that Madoff had billions under management.

MICHAEL OCRANT: I immediately knew it was a great story, no matter what, because just the fact that Bernie Madoff was managing this much money was a story in itself.

MARTIN SMITH: [on camera] That came as a surprise to you?

MICHAEL OCRANT: That was a shock. I mean, nobody knew that.

[ Read Ocrant's article]

MARTIN SMITH: [voice-over] In his reporting, Ocrant questioned Madoff's consistent returns and why other money managers were unable to duplicate them. He then arranged for an interview with Madoff.

MICHAEL OCRANT: This guy was just as calm as a cucumber. You know, I didn't see any sign, and usually- I mean, that should have been sort of a sign to me, in retrospect, too, you know? Any CEO that can spend two hours with you- they just don't do that. Literally, at one point, just kind of chuckled and said, "Give me some respect for," you know, "being in business for 40 years, having this great infrastructure we've built up, having this- this access to market information that we have as a result of being market makers."

MARTIN SMITH: [on camera] He said to you, "Give me some respect"?

MICHAEL OCRANT: Yeah. Oh, yeah.

MARTIN SMITH: [voice-over] Six days after Ocrant's article, Barron's, a prominent Wall Street weekly, picked up the thread. The Barron's article raised similar questions.

[on camera] This article comes out and causes a stir in the office?

NADER IBRAHIM: Yeah. A lot of people knew about the Barron's article, and people were- were, you know, having side conversations about it. But at the time, you know, he was a supposedly very respected person on Wall Street.

MARTIN SMITH: [voice-over] Casey and Markopolos hoped the articles would prompt the SEC to act. It had been more than a year since Markopolos had submitted his memo.

FRANK CASEY: 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.

MARTIN SMITH: But over at Fairfield Greenwich, now headquartered in New York, the articles did get some attention. Jeffrey Tucker, the senior partner who'd first begun their business with Bernie Madoff, went over to the lipstick building. He wanted to verify Fairfield's holdings, at that point worth around $3 billion. He met with Bernie and Frank DiPascali. According to investigators, Madoff showed him records of trades and named a third party who had cleared them.

Tucker never asked for any verification, and he never went down to the 17th floor to see where Fairfield's accounts were allegedly being traded.

STUART SINGER, Boies, Schiller & Flexner LLP: They told their investors they were conducting extraordinary levels of due diligence into their investment managers.

MARTIN SMITH: Stuart Singer has filed suit against Fairfield Greenwich on behalf of investors who say that the company failed to conduct due diligence.

STUART SINGER: Fairfield's focus was on marketing and selling the product, which was Madoff, rather than on kicking the tires and checking to see that Madoff was real. If they had spent as much time on due diligence as they did on marketing, we wouldn't be here today.

MARTIN SMITH: Even though Fairfield Greenwich was in New York, their risk management operation, headed by Amit Vijayvergiya, was located a stone's throw away from this beach in Bermuda.

[on camera] Why would you have a due diligence officer in Bermuda?

STUART SINGER: That's a good question, considering that Fairfield has offices in New York and Madoff is in New York. Madoff is not in Bermuda.

MARTIN SMITH: [voice-over] Fairfield's partners refused to speak to FRONTLINE, but their attorneys insist that their due diligence surpassed industry standards. Sherry Cohen remembers differently.

SHERRY COHEN, Fairfield Greenwich, 1987-'98: I know that there was absolutely no due diligence done when I worked for them, certainly no deep questions. I mean, they didn't need to know the details. It's, like, "Too much information. Don't bore me with the details." And they wouldn't have gotten it anyway.

MARTIN SMITH: And as for due diligence, no one seemed to question the fact that Madoff's accountant was a one-man operation in this strip mall an hour's drive north of New York.

[on camera] Did you ask him why he had such a small accounting firm?

SANDRA MANZKE, Founder, Tremont Capital, 1984-'05: Yeah. I mean, that was his- it was his family, you know, business, that it was an accounting firm that his father-in-law had used for years and he continued to use it.

MARTIN SMITH: And it didn't bother you that it was this small thing.

SANDRA MANZKE: Of course, it bothered you. I mean, every- you know, those are the kind of things that it would bother you. But that was one of the conditions of doing business, that you accepted that. And part of that was his, you know, proprietary trading model, the black box that he used, that he wasn't going to disclose what was in it.

MARTIN SMITH: I talked to one big hedge fund manager who told me that Madoff says that he didn't want to expose his proprietary trading techniques to competitors, and so therefore, he went to a relatively obscure little accounting firm to keep his operation a little bit off the radar.

STUART SINGER: Well, that's hogwash, and anyone with any sophistication should know that. No one could have credibly believed that Bernard Madoff had to use a couple people in a little accounting firm because he was concerned that his secret sauce, his secret investment philosophy, was going to get out.

MARTIN SMITH: [voice-over] By 2005, Markopolos, determined to get through to the SEC, submitted a 21-page memo detailing more than two dozen red flags.

FRANK CASEY: When he wrote that letter and I read it, I said, "Oh, my God, they're going to be on this. This is- you're giving it to them. You're giving them everything."

MARTIN SMITH: Markopolos wasn't the only person complaining to the SEC.

[on camera] There were other letters that have surfaced that were sent to the SEC. In October 2005, someone writes, "I'm deeply concerned that Madoff is running a very sophisticated fraudulent pyramid scheme." There was another- "No down months and low volatility all the time just doesn't add up." So there was a steady flow of letters. It wasn't just Markopolos.

HARVEY PITT, Chairman, SEC, 2001-'03: Yes. I think- I think that it is clear that there were letters and it is also clear that the SEC did look at him. What is not clear is why the SEC was unable to conclude that he was conducting the Ponzi scheme we now know he was conducting.

[ Read Pitt's extended interview]

MARTIN SMITH: [voice-over] In late 2005, Madoff learned that SEC investigators were about to interview Fairfield's due diligence officer in that office in Bermuda. Madoff got on the phone. He began by saying, "This conversation never took place."

In this 65-page transcript of a single conversation, Madoff coached him on how to handle SEC investigators. "You don't want them to think you're concerned about anything," he said. "You should be casual." Madoff then instructed, "Your position is to say, `Listen, Madoff has been in business for 45 years. He executes 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.' "

Finally, in January 2006, prompted by Markopolos, the SEC launched an official investigation. FRONTLINE has been told by insiders that when SEC lawyers visited the offices, Madoff personally answered questions and was visibly nervous and irritable. It took two years before the SEC issued a verdict: Madoff was cleared.

HARRY MARKOPOLOS: I gave them a road map and a flashlight to find the fraud, and they didn't go where I told them to go.

MARTIN SMITH: In early 2009, Harry Markopolos finally got to tell his story.

Rep. ED PERLMUTTER (D-CO), Financial Services Committee: My questions are, you have supposedly sophisticated investment fund managers who are investing into this. What happened with them? Why didn't they see this?

HARRY MARKOPOLOS: They were paid so much to look the other way. Those feeder funds were incentivized not to ask the questions, to be willfully blind, if you will, and not get too intrusive into the Madoff scheme.

MARTIN SMITH: Later that day, the SEC was called to account.

Rep. GARY ACKERMAN (D-NY), Financial Services Committee: What the heck went on? With all of your investigators and all of your agency and everything that you all describe, one guy with a few friends discovered this thing nearly a decade ago, led you to this pile of dung that is Bernie Madoff and stuck your nose in it, and you couldn't figure it out!

LINDA THOMSEN, Enforcement Director, SEC: We have a pending action pending in the southern district of New York -

Rep. GARY ACKERMAN: You took action after the guy confessed! He turned himself in. Don't give yourself any pat on the back for that.

LINDA THOMSEN: Congressman, every time -

Rep. GARY ACKERMAN: Why didn't you find him, is the question.

LINDA THOMSEN: I understand your question, and we cannot answer as to the specifics. I can talk generally-

MARTIN SMITH: SEC officials refused to answer questions because they said they didn't want to compromise an ongoing investigation. But privately, officials told FRONTLINE the agency had for years been severely understaffed and overwhelmed.

Rep. GARY ACKERMAN: You know, if anybody made the case better than Mr. Markopolos - and I don't think anybody could - about you people being completely inept, you have made the case better than him.

MARTIN SMITH: Linda Thomsen, the SEC's chief of enforcement, and one other on this panel were forced out.

When the housing bubble burst in the spring of '07 and markets collapsed, hedge funds were hurting.

HENRY PAULSON, Treasury Secretary: Our economy and our markets will not recover until the bulk of this housing correction is behind us.

MARTIN SMITH: As the markets continued to tank - down 40 percent by November - hundreds of hedge funds stopped allowing clients to withdraw money, or simply shut down.

ROSS INTELISANO, Rich & Intelisano LLP: In October, it's the worst market we've seen in, you know, maybe 70 years. But Bernie's still making money. And why would you invest in the equities markets when you could put a substantial portion of your monies into this fund that's generating very consistent returns even in this down market? So it was very appealing to the investors. If anything, people wanted to get money out of the equities markets and move them more into Bernie because he's the only one making money, consistent money, in this marketplace.

SANDRA MANZKE: He stopped buying AIG and he 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 avoided all these financials."

MARTIN SMITH: [on camera] What did he say?

SANDRA MANZKE: He said that he thought that the investment bankers and the major banks were destroying the United States.

[ Watch this program on line]

MARTIN SMITH: [voice-over] Manzke and de la Villehuchet placed even more money, including their personal accounts, with Madoff. The problem was that by December, even Madoff started getting more requests for withdrawals than deposits.

ROSS INTELISANO: People are losing money. Everyone's got margin calls. There are- everyone- there's a lot of movement of money. So I think a lot of the large institutions needed money, even if it was parked in Bernie's funds, to help pay back other investors or to run their own businesses, whatever it was. So I think anytime there's a down market, that's when a lot of these Ponzi schemes blow up because there's often lots of redemptions even if the investment's doing well.

BURT ROSS, Madoff Investor: The fact is, he easily could have gone through his life without this being found out. The only reason that this ended was because at one given point in time, the economy did so badly that people wanted- needed to get money out of Madoff's investments.

MARTIN SMITH: In the final days, Madoff called his biggest feeder, Fairfield Sentry, and demanded they stem the bleeding. Eager to help, Noel, Piedrahita and Tucker began a massive fund-raising campaign, launching a new Madoff fund called Fairfield Emerald. It didn't attract enough new capital, and withdrawals from Sentry continued.

A desperate Tucker then wrote Madoff, "Dear Bernie: We apologize. These redemptions are panic-driven. Our firm is very dependent on its relationship with your firm. Our mission is to remain in business with you."

But it was too late. The scheme was up. On December 11th, the morning after Madoff had allegedly confessed to his sons, the FBI knocked on his door and asked if there was an innocent explanation. Madoff said no. It was, quote, "one big lie."

LUCINDA FRANKS, The Daily Beast: He confessed with pride, like, "Look what I did. I mean, you're not going to believe what I did when you get to the bottom of this."

ROSS INTELISANO: Here's a guy who thinks he got over on the world for the last 30 years and doesn't have a bit of remorse. And too bad.

BURT ROSS, Madoff Investor: I have no interest in psychoanalyzing Madoff. The man- the man is a monster. He's evil. I cannot fathom hurting every single person I met, every dear friend. It just doesn't get worse than that.

LAWRENCE VELVEL, Madoff Investor: There's nothing that I would like to say to Bernie Madoff that I could say on television. But this may be the only huge fraud in history where the government has extreme complicity. So that's what I would have to say.

ARNOLD SINKIN, Madoff Investor: I blame the government- I really, truly do- that red flags went up over the years and nothing was done about it. It's just- it's mind-boggling. What can I tell you?

SANDRA MANZKE: How do you do something like that? And how do you do that to your employees, to your family?

MARTIN SMITH: 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. Other Madoff feeders are being sued- Ezra Merkin, for concealing where his clients' money was placed, and Frank Avellino for misleading investors. Stanley Chais made so much money from the scheme, a court-appointed trustee claims he must have known of the fraud.

Michael Bienes and his wife, Dianne, are selling their 16,000-square-foot home and have moved into a small apartment.

[on camera] Did you have any warning that anything was amiss?

MICHAEL BIENES: As God is my only judge, on my mother's grave, not an inkling. May he strike me dead!

MARTIN SMITH: [voice-over] Bienes has hired a lawyer, though no lawsuits have been filed. His old attorney, Ira Sorkin, is now representing Madoff.

Fairfield Greenwich has seen multiple lawsuits filed. They range from gross negligence to fraud. In late December, planned year-end multi-million-dollar bonuses for Jeffrey Tucker, Walter Noel and Andres Piedrahita were canceled.

One more postscript. A few blocks from where Madoff began his investment advisory business nearly 50 years ago, Thierry de la Villehuchet took his own life.

FRANK CASEY: Thierry was a sailor and he was a hunter. He could have taken himself out any way he wanted to, if he wanted to just remove himself from the pressure. The man chose the method he did, in my mind only, as an act of atonement.

MARTIN SMITH: [on camera] Slitting his wrists.

FRANK CASEY: Watch himself bleed to death slowly.

BERTRAND DE LA VILLEHUCHET, Brother: [subtitles] He was wrong, and that's why he couldn't forgive himself. It was an honorable suicide. It's perhaps a little outmoded these days, but that is the heritage of our family.

MARTIN SMITH: Meanwhile, investigators are talking to Madoff lieutenant Frank DiPascali and others, still trying to figure out what happened on the 17th floor.

1st REPORTER: Mr. Madoff, do you have anything to say?

2nd REPORTER: Mr. Madoff, say something to your victims!

MARTIN SMITH: Bernard L. Madoff will be sentenced next month.

The Madoff Affair

Marcela Gaviria
& Martin Smith

Martin Smith

Jordan Montminy

Chris Durrance

Ben McCoy

Jon Sayers
Timothy Grucza
Mark Rublee
Colin Clarke
Aaron Ernst
Jason Longo
Erich Roland

Drew Levinson
Ian MacLagan
Carl Fransen
Len Schmidtz

Aaron Ernst

Ben Howard

Jim Ferguson

Jim Sullivan

Justin Samaha

Stef Gordon

Hagit Bacharach
Jessica Xanthe Cran
Mariano Castillo
Sam Smith

Robin Bowman
Ruby Washington/New York Times/Redux
ABCNews VideoSource
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The Four Seasons Project/The Wenglin Family
Anthony Weiss/Forward Association Inc.
New York Social Diary
Splash News
Stella Johnson
Patrick McMullan
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Jonathan Saunders
AP Archives
Thomson Reuters


Tim Mangini

Chris Fournelle

Missy Frederick

Jim Ferguson
John MacGibbon
Michael H. Amundson

Tyrra Turner
Matthew Kovach

Megan McGough

Mason Daring
Martin Brody

Jessica Smith

Diane Buxton

Alissa Rooney

Sandy St. Louis

Peter Lyons

Elizabeth Lowell

Christopher Kelleher

Carla Borras

Lisa Palone

Eric Brass
Jay Fialkov
Janice Flood
Scott Kardel

Lisa Sullivan

Tobee Phipps

Maya Carmel

Bill Rockwood

Gretchen Gavett
David Kieley

Richard Parr

Sarah Moughty

Sam Bailey

Robin Parmelee

Catherine Wright

Sharon Tiller

Ken Dornstein

Marrie Campbell

Michael Sullivan

Jim Bracciale

Raney Aronson-Rath

Louis Wiley Jr.

David Fanning

A FRONTLINE Co-Production with RAINmedia, Inc.

© 2009 WGBH Educational Foundation


FRONTLINE is a production of WGBH Boston, which is solely responsible for its content.

ANNOUNCER: This report continues on our Web site, where you can watch the program again on line, explore the interviews, including much more of that exclusive interview with Michael Bienes, examine some of Madoff's monthly statements and what they reveal, read more about Madoff's life and career, and download a podcast including a conversation with the producers. And then join the discussion at

Next time on FRONTLINE: On September 16, 2008, all around the world, money stopped.

PAUL KRUGMAN, Economist, Princeton University: My God, we may be presiding over the second Great Depression.

ANNOUNCER: How did it happen? And what happens next?

Sen. CHRISTOPHER DODD (D-CT), Banking Committee Chairman: It's the economic equivalent of 9/11.

ANNOUNCER: Inside the Meltdown. Watch FRONTLINE.

FRONTLINE's The Madoff Affair available on DVD. To order on line, visit, or call 1-800-PLAY-PBS. [$24.99 & s/h]

FRONTLINE is made possible by contributions to your PBS station from viewers like you. Thank you.

With major funding from the John D. and Catherine T. MacArthur Foundation, committed to building a more just, verdant and peaceful world. And additional funding from the Park Foundation.

Additional funding for this program is provided by the Corporation for Public Broadcasting.

posted may 12, 2009

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