WEBVTT 00:00:00.000 --> 00:00:02.080 Okay, let's unpack this. We talk about scandals 00:00:02.080 --> 00:00:04.120 on this show all the time. We talk about corporate 00:00:04.120 --> 00:00:05.879 fraud. We talk about people cooking the books. 00:00:05.960 --> 00:00:08.519 We talk about the little lies that spiral out 00:00:08.519 --> 00:00:10.640 of control. Sure. Usually there's a ceiling, 00:00:10.759 --> 00:00:13.699 right? There is a limit to how big a lie can 00:00:13.699 --> 00:00:16.379 actually get before gravity takes over and the 00:00:16.379 --> 00:00:17.899 whole thing just comes crashing down on top of 00:00:17.899 --> 00:00:19.620 you. Right. There's a point of no return where 00:00:19.620 --> 00:00:23.440 it just becomes unsustainable. But today, today 00:00:23.440 --> 00:00:26.920 we are looking at a story that completely defies 00:00:26.920 --> 00:00:30.250 gravity. We are talking about a number that is 00:00:30.250 --> 00:00:32.990 honestly almost impossible to wrap your head 00:00:32.990 --> 00:00:38.250 around. $65 billion. It is a staggering figure. 00:00:38.329 --> 00:00:40.490 It really is. I mean, to put that in perspective, 00:00:40.750 --> 00:00:43.810 $65 billion is larger than the GDP of a mid -sized 00:00:43.810 --> 00:00:47.409 country. Wow. It's more wealth than entire industries 00:00:47.409 --> 00:00:50.109 generate in a year. And the terrifying thing 00:00:50.109 --> 00:00:53.280 is that it wasn't generated by, you know. a massive 00:00:53.280 --> 00:00:55.359 corporation with thousands of employees or a 00:00:55.359 --> 00:00:58.079 government printing press, it was effectively 00:00:58.079 --> 00:01:02.060 a lie told by one man. Exactly. We are, of course, 00:01:02.100 --> 00:01:05.640 doing a deep dive today into Bernard Bernie Madoff, 00:01:05.659 --> 00:01:08.359 the architect of the largest Ponzi scheme in 00:01:08.359 --> 00:01:10.599 history. The largest ever recorded. And what 00:01:10.599 --> 00:01:12.700 drives me crazy about this story, what I really 00:01:12.700 --> 00:01:15.079 want to get into today, isn't just the money. 00:01:15.239 --> 00:01:19.530 I mean... Sure, $65 billion in paper wealth without 00:01:19.530 --> 00:01:23.349 $18 billion in actual hard cash lost? That is 00:01:23.349 --> 00:01:26.230 mind -blowing. But it's the who. Yes. We aren't 00:01:26.230 --> 00:01:28.530 talking about some shady guy in a trench coat 00:01:28.530 --> 00:01:31.409 selling fake Rolexes on a street corner. We are 00:01:31.409 --> 00:01:33.959 talking about a pillar of Wall Street. We are 00:01:33.959 --> 00:01:36.340 talking about the chairman of the Nasdaq. That 00:01:36.340 --> 00:01:39.120 is the central tension of this entire story. 00:01:39.260 --> 00:01:41.680 It's the paradox that allowed the fraud to last 00:01:41.680 --> 00:01:44.200 as long as it did. How does a man who started 00:01:44.200 --> 00:01:46.659 out as a lifeguard in Queens. A lifeguard. A 00:01:46.659 --> 00:01:48.939 man who literally helped build the modern electronic 00:01:48.939 --> 00:01:51.599 stock market. The plumbing of our financial system. 00:01:51.900 --> 00:01:54.120 How does he manage to run an industrial scale 00:01:54.120 --> 00:01:56.780 fraud for decades right under the nose of the 00:01:56.780 --> 00:01:58.599 regulators? And that's the question we're going 00:01:58.599 --> 00:02:00.819 to answer. Because the headlines, and we all 00:02:00.819 --> 00:02:03.439 remember the headlines from 2008. focused on 00:02:03.439 --> 00:02:05.760 the fall. They focused on the angry victims in 00:02:05.760 --> 00:02:08.960 the perp walk. Of course. That's the dramatic 00:02:08.960 --> 00:02:11.680 part. But the rise, the mechanics, that's where 00:02:11.680 --> 00:02:15.039 it gets really interesting. Precisely. Our mission 00:02:15.039 --> 00:02:18.520 today is to move past the caricature of the monster 00:02:18.520 --> 00:02:21.860 and really look at the machine he built. We have 00:02:21.860 --> 00:02:24.919 a massive stack of source material here. I mean, 00:02:24.979 --> 00:02:28.659 biographical details, internal SEC emails, court 00:02:28.659 --> 00:02:31.080 transcripts, the investigation reports. Everything 00:02:31.080 --> 00:02:33.199 you need. We need to understand the mechanics 00:02:33.199 --> 00:02:35.740 of the fraud, the psychology of what we call 00:02:35.740 --> 00:02:38.919 affinity fraud, and the absolute catastrophic 00:02:38.919 --> 00:02:41.560 systemic failure that allowed this to happen. 00:02:41.719 --> 00:02:43.659 So let's start at the very beginning. Because 00:02:43.659 --> 00:02:45.460 if you were casting a movie about the biggest 00:02:45.460 --> 00:02:47.439 financial criminal of all time, you'd probably 00:02:47.439 --> 00:02:48.819 write him as a blue blood. Oh, you're right. 00:02:48.919 --> 00:02:51.199 You'd think so. Someone born into a banking dynasty. 00:02:51.520 --> 00:02:54.699 But Madoff... He was a Queens kid through and 00:02:54.699 --> 00:02:57.259 through. He was. Born in Brooklyn in 1938. Grew 00:02:57.259 --> 00:02:59.939 up in Laurelton, Queens. It was a very middle 00:02:59.939 --> 00:03:02.520 class upbringing. Right. And his start in finance 00:03:02.520 --> 00:03:05.500 was incredibly humble. He founded his firm, Bernard 00:03:05.500 --> 00:03:08.800 L. Madoff Investment Securities, LLC, in 1960. 00:03:09.199 --> 00:03:12.159 He was just 22 years old. Just a kid. And the 00:03:12.159 --> 00:03:14.800 capital he used to start this future Wall Street 00:03:14.800 --> 00:03:19.159 empire, $5 ,000. Five grand. Which, to be fair. 00:03:19.900 --> 00:03:22.039 was worth a bit more back then, inflation and 00:03:22.039 --> 00:03:24.439 all that. But we're still talking about the price 00:03:24.439 --> 00:03:27.199 of a decent used car today. Oh, absolutely. That 00:03:27.199 --> 00:03:29.280 is not exactly master of the universe money. 00:03:29.460 --> 00:03:32.139 No, it's not. And where he got that money is 00:03:32.139 --> 00:03:34.280 important for the narrative. He didn't get a 00:03:34.280 --> 00:03:36.900 trust fund payout. He earned that money working 00:03:36.900 --> 00:03:39.780 as a lifeguard at Rockaway Beach. I just can't 00:03:39.780 --> 00:03:42.439 get over that. And installing underground irrigation 00:03:42.439 --> 00:03:45.639 sprinklers. Wait, really? The guy who stole billions? 00:03:45.740 --> 00:03:49.620 The guy who destroyed thousands of lives? started 00:03:49.620 --> 00:03:52.199 by installing sprinklers. He did. It's the classic 00:03:52.199 --> 00:03:54.659 American bootstrap story initially. It creates 00:03:54.659 --> 00:03:57.120 this narrative of this self -made man that he 00:03:57.120 --> 00:03:59.139 leveraged for the rest of his life. Sure, it's 00:03:59.139 --> 00:04:00.840 a great story to tell at dinner parties. Now, 00:04:00.860 --> 00:04:04.259 he also got a $50 ,000 loan from his father -in 00:04:04.259 --> 00:04:07.300 -law, Saul Alpern, which was crucial. That gave 00:04:07.300 --> 00:04:09.500 him the liquidity to actually trade. Okay, that 00:04:09.500 --> 00:04:11.719 helps a little more than five grand. But the 00:04:11.719 --> 00:04:14.580 trajectory is fascinating because he didn't start 00:04:14.580 --> 00:04:16.459 on the floor of the New York Stock Exchange. 00:04:16.639 --> 00:04:18.819 He wasn't one of the elite guys in the color 00:04:18.819 --> 00:04:21.639 jackets. He started in what was called the pink 00:04:21.639 --> 00:04:24.439 sheets. The pink sheets. That sounds, well, it 00:04:24.439 --> 00:04:26.519 sounds less than prestigious. It was the Wild 00:04:26.519 --> 00:04:29.660 West. It was the penny stock market. High risk, 00:04:29.740 --> 00:04:32.959 low regulation. Companies that weren't big enough 00:04:32.959 --> 00:04:35.439 to be listed on the NYSE ended up on the pink 00:04:35.439 --> 00:04:38.949 sheets. Okay. But this is where Madoff showed 00:04:38.949 --> 00:04:40.870 his brilliance. And I think we have to acknowledge 00:04:40.870 --> 00:04:42.930 that he was brilliant, at least in terms of market 00:04:42.930 --> 00:04:46.329 structure. In a certain way. In the 1960s, trading 00:04:46.329 --> 00:04:49.670 was manual. It was inefficient. It was guys shouting 00:04:49.670 --> 00:04:51.889 at each other or trading slips of paper. Right. 00:04:51.949 --> 00:04:54.189 The classic image of the trading floor, chaos, 00:04:54.350 --> 00:04:57.529 shouting, paper flying everywhere. Exactly. Madoff 00:04:57.529 --> 00:04:59.990 looked at that and saw an opportunity. He realized 00:04:59.990 --> 00:05:02.689 that computers could do it faster, cheaper and 00:05:02.689 --> 00:05:05.689 more efficiently. His firm became a pioneer in 00:05:05.689 --> 00:05:08.269 using computer technology to disseminate quotes. 00:05:08.550 --> 00:05:11.050 So he was a tech guy before tech was really a 00:05:11.050 --> 00:05:13.329 thing on Wall Street. He basically digitized 00:05:13.329 --> 00:05:15.930 the process of matching buyers and sellers. So 00:05:15.930 --> 00:05:18.670 before he was a crook, he was a genuine innovator. 00:05:18.750 --> 00:05:21.509 He was bringing the market into the digital age. 00:05:21.689 --> 00:05:24.670 He was a revolutionary. That technology his firm 00:05:24.670 --> 00:05:27.529 helped develop, it eventually became the NASDAQ 00:05:27.529 --> 00:05:29.970 stock market. Oh, wait. And Madoff wasn't just 00:05:29.970 --> 00:05:32.209 a participant. He served as the chairman of the 00:05:32.209 --> 00:05:34.269 NASDAQ. He was on the board of governors for 00:05:34.269 --> 00:05:36.949 the FSD. He was the establishment. He was the 00:05:36.949 --> 00:05:38.550 guy writing the rules. He was the guy writing 00:05:38.550 --> 00:05:40.550 the rules. This is what makes it so scary to 00:05:40.550 --> 00:05:43.709 me. He wasn't an outsider throwing rocks at the 00:05:43.709 --> 00:05:46.689 castle walls. He was the guy sitting on the throne 00:05:46.689 --> 00:05:51.500 inside the castle. He had this veneer of absolute 00:05:51.500 --> 00:05:54.100 legitimacy. Absolutely. But there was this one 00:05:54.100 --> 00:05:56.500 practice you highlighted in the notes, payment 00:05:56.500 --> 00:05:59.819 for order flow. This seems like a pivotal moment 00:05:59.819 --> 00:06:02.000 where he started bending the rules, or at least 00:06:02.000 --> 00:06:03.980 the ethics of the game. It's a controversial 00:06:03.980 --> 00:06:06.879 practice, and Madoff was one of the first prominent 00:06:06.879 --> 00:06:08.560 practitioners of it. It's still around today, 00:06:08.639 --> 00:06:11.759 by the way. Apps like Robinhood use it. But Madoff 00:06:11.759 --> 00:06:15.240 pioneered it. Essentially, Madoff would pay brokers, 00:06:15.579 --> 00:06:17.980 the people you or I might call to buy a stock. 00:06:18.490 --> 00:06:20.610 he would pay them a penny a share to route that 00:06:20.610 --> 00:06:22.870 order through his firm. Hold on, let me get this 00:06:22.870 --> 00:06:26.670 straight. If I'm a broker, my job is to get my 00:06:26.670 --> 00:06:29.350 client the best price right. Supposedly, yes. 00:06:29.529 --> 00:06:32.850 Best execution. But Madoff is saying, hey, send 00:06:32.850 --> 00:06:34.910 that order to me and I'll slip you a penny for 00:06:34.910 --> 00:06:37.009 every share. That sounds a lot like a kickback. 00:06:37.490 --> 00:06:40.089 Critics at the time called it exactly that, a 00:06:40.089 --> 00:06:43.389 legal kickback. Academics questioned the ethics 00:06:43.389 --> 00:06:45.389 immediately. They said it created a conflict 00:06:45.389 --> 00:06:47.730 of interest. Of course it does. Why are you sending 00:06:47.730 --> 00:06:49.810 the order to Bernie? Is it because he has the 00:06:49.810 --> 00:06:52.149 best price or because he's paying you? But Madoff 00:06:52.149 --> 00:06:54.490 defended it. Vigorously. And this is where you 00:06:54.490 --> 00:06:57.670 see his ability to manipulate a narrative. He 00:06:57.670 --> 00:06:59.730 had this quote that perfectly encapsulates his 00:06:59.730 --> 00:07:02.850 ability to rationalize the unjustifiable. He 00:07:02.850 --> 00:07:05.350 compared the complex machinery of the stock market 00:07:05.350 --> 00:07:09.819 to... A supermarket. A supermarket. How? He said, 00:07:09.959 --> 00:07:12.100 and I'm quoting here, if your girlfriend goes 00:07:12.100 --> 00:07:14.680 to buy stockings at a supermarket, the racks 00:07:14.680 --> 00:07:16.800 that display those stockings are usually paid 00:07:16.800 --> 00:07:19.339 for by the company that manufactured the stockings. 00:07:19.480 --> 00:07:23.060 Wow. OK, so he's comparing complex financial 00:07:23.060 --> 00:07:27.040 derivatives and market making to pantyhose racks. 00:07:27.240 --> 00:07:29.959 He had a gift for making the complex sound simple 00:07:29.959 --> 00:07:32.540 and harmless. He argued that the customer didn't 00:07:32.540 --> 00:07:34.680 lose money because he was so efficient. He could 00:07:34.680 --> 00:07:36.839 still give them a good price. So what's the problem? 00:07:37.019 --> 00:07:39.779 So his argument was no harm, no foul. I'm just 00:07:39.779 --> 00:07:42.480 paying for the shelf space, basically. And people 00:07:42.480 --> 00:07:45.540 bought that. They did. And this practice made 00:07:45.540 --> 00:07:49.339 his firm incredibly powerful. By 2008, his... 00:07:49.769 --> 00:07:52.310 firm the legitimate side of it was the sixth 00:07:52.310 --> 00:07:56.129 largest market maker in s p 500 stocks so just 00:07:56.129 --> 00:07:57.730 to clarify for everyone listening because this 00:07:57.730 --> 00:08:00.589 is crucial he had a legitimate business yeah 00:08:00.589 --> 00:08:03.689 a massive successful market making business that 00:08:03.689 --> 00:08:05.970 was making millions of dollars a year legitimately 00:08:05.970 --> 00:08:08.689 yes And that is the perfect cover. Right. If 00:08:08.689 --> 00:08:10.490 you're running a Ponzi scheme out of a garage 00:08:10.490 --> 00:08:12.769 or a P .O. box, people ask questions. But if 00:08:12.769 --> 00:08:14.329 you're running it out of the lipstick building 00:08:14.329 --> 00:08:16.589 in Manhattan while serving as the former chairman 00:08:16.589 --> 00:08:19.230 of the Nasdaq, running a legitimate trading arm 00:08:19.230 --> 00:08:22.069 that processes a huge chunk of the American economy. 00:08:22.310 --> 00:08:25.310 Nobody questions you. Nobody questions you. The 00:08:25.310 --> 00:08:28.250 legitimate business was the shield for the illegitimate 00:08:28.250 --> 00:08:31.569 one. So let's talk about that building, the lipstick 00:08:31.569 --> 00:08:34.379 building. It's that iconic oval -shaped red building 00:08:34.379 --> 00:08:37.220 in Midtown. Because this split between the real 00:08:37.220 --> 00:08:40.220 business and the fake business was physical, 00:08:40.340 --> 00:08:43.100 wasn't it? It wasn't just on paper. It was starkly 00:08:43.100 --> 00:08:45.960 physical. The operation was separated by floors. 00:08:46.320 --> 00:08:49.279 The 19th floor of the lipstick building was the 00:08:49.279 --> 00:08:52.139 legitimate brokerage. It was bright, modern, 00:08:52.320 --> 00:08:54.960 filled with state -of -the -art computers, traders 00:08:54.960 --> 00:08:57.860 shouting, Bloomberg terminals everywhere. That 00:08:57.860 --> 00:08:59.679 was the public face. That's where he took the 00:08:59.679 --> 00:09:02.519 tours. And the fraud. Where did the billions 00:09:02.519 --> 00:09:05.399 of dollars of fake money live? That was down 00:09:05.399 --> 00:09:08.399 on the 17th floor. The 17th floor. It sounds 00:09:08.399 --> 00:09:10.440 like something out of a spy novel. It was known 00:09:10.440 --> 00:09:13.440 internally as the cage. The atmosphere was completely 00:09:13.440 --> 00:09:15.960 different. While the 19th floor was cutting edge, 00:09:16.139 --> 00:09:18.659 the 17th floor was stuck in the past. How so? 00:09:18.919 --> 00:09:21.019 It was filled with stacks of paper, old thought 00:09:21.019 --> 00:09:23.580 matrix printers, and a small team of employees 00:09:23.580 --> 00:09:25.919 who had very little financial training. Who was 00:09:25.919 --> 00:09:29.120 running this show? It was overseen by Frank DiPascali, 00:09:29.340 --> 00:09:32.250 Madoff's right -hand man. He was a guy from the 00:09:32.250 --> 00:09:34.450 neighborhood, didn't have a college degree, but 00:09:34.450 --> 00:09:37.590 he was fiercely loyal to Bernie. Okay. He and 00:09:37.590 --> 00:09:39.710 this small team, mostly high school graduates 00:09:39.710 --> 00:09:43.029 people Madoff had hired years ago, facilitated 00:09:43.029 --> 00:09:46.009 the entire fraud. So let's get into the strategy. 00:09:46.230 --> 00:09:48.830 I mean, when Madoff was pitching this to investors 00:09:48.830 --> 00:09:50.809 or when people were begging to give him money, 00:09:50.970 --> 00:09:53.149 what did he tell them he was actually doing? 00:09:53.269 --> 00:09:55.129 He wasn't telling them, I'm putting it in a checking 00:09:55.129 --> 00:09:57.190 account. No, no, of course not. He claimed to 00:09:57.190 --> 00:09:59.190 be using a split -strike conversion strategy. 00:09:59.769 --> 00:10:02.350 OK, let's unpack this split strike conversion. 00:10:02.590 --> 00:10:04.769 It sounds incredibly technical, which I assume 00:10:04.769 --> 00:10:06.549 is the point. That is absolutely the point. But 00:10:06.549 --> 00:10:08.269 in plain English, what is it supposed to be? 00:10:08.370 --> 00:10:11.049 So picture a collar. That's what traders often 00:10:11.049 --> 00:10:13.570 call this type of setup. The goal is to participate 00:10:13.570 --> 00:10:16.570 in the market, but protect yourself. Step one, 00:10:16.590 --> 00:10:20.889 you buy a basket of blue chip stocks, big, stable 00:10:20.889 --> 00:10:24.940 companies in the S &P 100 like IBM. Or Coca -Cola. 00:10:25.039 --> 00:10:27.820 Okay, so you own the stock. If the stock goes 00:10:27.820 --> 00:10:30.259 up, you make money. If it goes down, you lose 00:10:30.259 --> 00:10:33.559 money. Standard stuff. Right. But Madoff told 00:10:33.559 --> 00:10:36.279 clients he was hedging that risk. This is step 00:10:36.279 --> 00:10:40.210 two. You buy put options. A put option is basically 00:10:40.210 --> 00:10:42.990 an insurance policy. Insurance, okay. It gives 00:10:42.990 --> 00:10:44.669 you the right to sell the stock at a certain 00:10:44.669 --> 00:10:47.610 price even if the market crashes. So if the market 00:10:47.610 --> 00:10:50.210 tanks, the put option gains value and offsets 00:10:50.210 --> 00:10:52.570 your losses on the stock. You've created a floor. 00:10:52.710 --> 00:10:55.610 You can't lose more than X. But insurance isn't 00:10:55.610 --> 00:10:58.509 free. If I buy car insurance, I have to pay a 00:10:58.509 --> 00:11:01.490 premium. If I buy put options, that costs money, 00:11:01.649 --> 00:11:04.210 which eats into my profits. Exactly. And this 00:11:04.210 --> 00:11:06.990 is the genius or the alleged genius of the strategy. 00:11:07.549 --> 00:11:10.710 To pay for that insurance, step three, you sell 00:11:10.710 --> 00:11:13.230 call options. And what's that? You sell someone 00:11:13.230 --> 00:11:15.210 else the right to buy your stock if it shoots 00:11:15.210 --> 00:11:17.690 up to the moon. By selling that option, you collect 00:11:17.690 --> 00:11:20.710 a premium. You use that cash to pay for the put 00:11:20.710 --> 00:11:23.129 options. So you're funding the protection by 00:11:23.129 --> 00:11:25.090 capping your upside. You're saying, I won't make 00:11:25.090 --> 00:11:27.149 a home run, but I'll never strike out. Precisely. 00:11:27.149 --> 00:11:29.470 You are clipping the wings of the trade to build 00:11:29.470 --> 00:11:32.190 a safety net. And here's the key takeaway. This 00:11:32.190 --> 00:11:34.789 strategy is mathematically designed to be boring. 00:11:34.950 --> 00:11:37.710 It chops off the highs and the lows. It should 00:11:37.710 --> 00:11:42.480 produce flat, mediocre returns. But Madoff? He 00:11:42.480 --> 00:11:45.919 was reporting 10, 12, 15 % returns every single 00:11:45.919 --> 00:11:48.379 year, regardless of what the market did. Like 00:11:48.379 --> 00:11:51.759 clockwork. No down years. Never. He took a strategy 00:11:51.759 --> 00:11:54.019 designed for safety and pretended it was a magic 00:11:54.019 --> 00:11:56.220 money printer. And just to be absolutely clear, 00:11:56.399 --> 00:11:58.840 was he making these trades? Was he buying the 00:11:58.840 --> 00:12:01.340 stocks and the options? He never made the trades 00:12:01.340 --> 00:12:03.659 not for the asset management clients? Never. 00:12:04.169 --> 00:12:07.110 Like not even once to keep up appearances? The 00:12:07.110 --> 00:12:09.230 investigation showed that for decades he simply 00:12:09.230 --> 00:12:11.710 took the client's money and deposited it into 00:12:11.710 --> 00:12:13.909 a corporate checking account at Chase Manhattan 00:12:13.909 --> 00:12:15.909 Bank. It was just sitting in a checking account. 00:12:16.289 --> 00:12:18.970 Billions of dollars. Yes. It was a slush fund. 00:12:19.210 --> 00:12:21.389 Unbelievable. When a client wanted to withdraw 00:12:21.389 --> 00:12:24.009 money or redemption, he just wired them money 00:12:24.009 --> 00:12:27.049 from that Chase account. It is the textbook definition 00:12:27.049 --> 00:12:30.350 of a Ponzi scheme. New investors' money is used 00:12:30.350 --> 00:12:33.179 to pay the old investors. So wait. These clients 00:12:33.179 --> 00:12:34.919 were receiving monthly statements, right? I mean, 00:12:34.919 --> 00:12:37.200 very detailed statements saying, bought IBM at 00:12:37.200 --> 00:12:40.600 100, sold at 105. How did he generate those if 00:12:40.600 --> 00:12:43.360 he wasn't trading? That was the job of the 17th 00:12:43.360 --> 00:12:46.460 floor. It was a factory of fiction. Employees 00:12:46.460 --> 00:12:49.059 like Annette Bongiorno and Joanne Krupe spent 00:12:49.059 --> 00:12:52.039 their days creating false trading reports. And 00:12:52.039 --> 00:12:54.580 how did they do it? The method was almost comically 00:12:54.580 --> 00:12:57.490 simple. It was called backdating. How does that 00:12:57.490 --> 00:12:59.769 work in practice? Imagine you have yesterday's 00:12:59.769 --> 00:13:01.809 newspaper. You can look at the sports section 00:13:01.809 --> 00:13:04.070 and see exactly who won the horse race. Right. 00:13:04.149 --> 00:13:06.190 If you could place a bet on yesterday's race 00:13:06.190 --> 00:13:09.110 today, you'd never lose. Right. I'd bet the house 00:13:09.110 --> 00:13:11.330 on the winner every time. That's what they did 00:13:11.330 --> 00:13:13.789 with stocks. They would look at the historical 00:13:13.789 --> 00:13:17.309 prices of the S &P 100 over the past month. They 00:13:17.309 --> 00:13:20.370 would see that, say, Microsoft hit a low on Tuesday 00:13:20.370 --> 00:13:24.450 and a high on Friday. Okay. Then they would retroactively 00:13:24.450 --> 00:13:27.730 generate a trade slip saying, We bought Microsoft 00:13:27.730 --> 00:13:30.210 for you on Tuesday at the low and we sold it 00:13:30.210 --> 00:13:32.610 on Friday at the high. So they were rigging the 00:13:32.610 --> 00:13:34.529 game after the game was already played. They 00:13:34.529 --> 00:13:37.350 were rewriting history. Exactly. They were picking 00:13:37.350 --> 00:13:40.009 winners after the race was run. Bongiorno actually 00:13:40.009 --> 00:13:43.450 wrote in a note to a manager in the early 90s. 00:13:43.450 --> 00:13:45.990 It was recovered later. And she said, I need 00:13:45.990 --> 00:13:48.750 the ability to give any settlement date I want. 00:13:48.889 --> 00:13:52.039 Wow. She was explicitly asking for the tools 00:13:52.039 --> 00:13:54.000 to fabricate the timeline. That's what she was 00:13:54.000 --> 00:13:56.240 doing. But didn't they make mistakes? I mean, 00:13:56.240 --> 00:13:59.039 if you're faking thousands of trades for thousands 00:13:59.039 --> 00:14:01.539 of clients, surely you slip up. You can't be 00:14:01.539 --> 00:14:04.940 perfect. They weren't perfect. They lacked sophistication. 00:14:05.039 --> 00:14:07.320 Sometimes they would accidentally record a trade 00:14:07.320 --> 00:14:09.679 as happening on a weekend or a federal holiday 00:14:09.679 --> 00:14:11.460 when the markets were closed. You're kidding. 00:14:11.580 --> 00:14:14.399 A trade on a Sunday. Or a trade on Christmas 00:14:14.399 --> 00:14:18.100 Day. And yet nobody caught it. How? The auditors 00:14:18.100 --> 00:14:21.879 were a tiny storefront firm, one active accountant 00:14:21.879 --> 00:14:24.320 who basically rubber stamped the books without 00:14:24.320 --> 00:14:27.000 looking. But the clients, they didn't look too 00:14:27.000 --> 00:14:29.580 closely either. Why? The returns were too good. 00:14:29.659 --> 00:14:31.840 The returns were too good. This brings us to 00:14:31.840 --> 00:14:35.559 the why. Why did people trust him so blindly? 00:14:35.779 --> 00:14:38.259 It wasn't just the returns, was it? There was 00:14:38.259 --> 00:14:40.440 a psychological game being played here. Oh, absolutely. 00:14:40.580 --> 00:14:43.440 This is what we call affinity fraud. OK. It is 00:14:43.440 --> 00:14:46.799 a predator exploiting the trust within a specific 00:14:46.799 --> 00:14:50.620 group. Madoff was Jewish and he targeted the 00:14:50.620 --> 00:14:53.639 wealthy Jewish community. He operated within 00:14:53.639 --> 00:14:56.000 the in -group. Right, the country clubs, the 00:14:56.000 --> 00:14:58.000 Palm Beach Country Club specifically. That seems 00:14:58.000 --> 00:15:00.379 to be ground zero for a lot of this. That was 00:15:00.379 --> 00:15:03.740 his hunting ground. But get this, he didn't run 00:15:03.740 --> 00:15:06.259 around handing out business cards like a desperate 00:15:06.259 --> 00:15:10.340 salesman. He used a velvet rope tactic. A velvet 00:15:10.340 --> 00:15:12.720 rope. He made it seem like a privilege to invest 00:15:12.720 --> 00:15:15.059 with him. He would turn people away. He would 00:15:15.059 --> 00:15:17.679 tell investors, I'm closed to new capital or 00:15:17.679 --> 00:15:20.620 don't talk about this. This is exclusive. That 00:15:20.620 --> 00:15:23.960 is genius in a twisted, manipulative way. If 00:15:23.960 --> 00:15:25.779 you tell someone, I can't take your money right 00:15:25.779 --> 00:15:28.379 now. They want to give it to you even more. It 00:15:28.379 --> 00:15:30.159 creates scarcity. It creates scarcity, right? 00:15:30.200 --> 00:15:32.399 Exactly. It created a fear of missing out, but 00:15:32.399 --> 00:15:35.440 also a fear of asking questions. Investors were 00:15:35.440 --> 00:15:37.559 terrified that if they asked too many questions 00:15:37.559 --> 00:15:40.100 about the strategy, if they said, hey, Bernie, 00:15:40.220 --> 00:15:42.500 how does this option hedge work? He'd kick them 00:15:42.500 --> 00:15:44.820 out. He would just get offended, cash them out 00:15:44.820 --> 00:15:46.279 and kick them out of the fund. And nobody wanted 00:15:46.279 --> 00:15:48.340 to be kicked out of the golden goose. So they 00:15:48.340 --> 00:15:51.100 stayed silent. And the victims. This wasn't just 00:15:51.100 --> 00:15:53.220 nameless hedge funds or faceless banks. These 00:15:53.220 --> 00:15:56.340 were charities. These were foundations. The devastation 00:15:56.340 --> 00:15:59.240 in the charitable world was profound. Hadassah, 00:15:59.340 --> 00:16:01.519 the Women's Zionist Organization of America. 00:16:01.679 --> 00:16:04.220 Huge organization. The Eli Wiesel Foundation. 00:16:04.379 --> 00:16:07.519 Eli Wiesel, the Holocaust survivor and Nobel 00:16:07.519 --> 00:16:11.440 laureate, lost nearly everything. Steven Spielberg's 00:16:11.440 --> 00:16:13.779 Wunderkinder Foundation. It's heartbreaking. 00:16:14.080 --> 00:16:16.440 These organizations rely on that money to do 00:16:16.440 --> 00:16:19.600 good work, to save lives, to educate, and it 00:16:19.600 --> 00:16:22.320 just... evaporated into thin air. And for some, 00:16:22.360 --> 00:16:24.600 the betrayal was deeply personal. It wasn't just 00:16:24.600 --> 00:16:26.960 business. Take Cheryl Weinstein. She was the 00:16:26.960 --> 00:16:29.740 chief financial officer of Hadassah. Okay. She 00:16:29.740 --> 00:16:32.080 revealed in a memoir later that she had an affair 00:16:32.080 --> 00:16:34.759 with Madoff more than 20 years earlier. Whoa. 00:16:35.230 --> 00:16:37.210 She had a romantic relationship with him. Yes. 00:16:37.309 --> 00:16:39.710 And despite that intimacy, despite that connection, 00:16:40.070 --> 00:16:42.789 he still defrauded her. He defrauded the organization 00:16:42.789 --> 00:16:45.850 she helped run. At his sentencing, she stood 00:16:45.850 --> 00:16:48.690 up and called him a beast. It shows the absolute 00:16:48.690 --> 00:16:51.830 lack of empathy. To Madoff, everyone, lovers, 00:16:52.029 --> 00:16:54.610 friends, family, was just a source of liquidity. 00:16:55.090 --> 00:16:58.629 It really paints a picture of a sociopath. Someone 00:16:58.629 --> 00:17:01.210 who can compartmentalize to a frightening degree. 00:17:01.889 --> 00:17:04.369 But here's the thing that drives me crazy. With 00:17:04.369 --> 00:17:07.150 a fraud this big, operating for this long, we're 00:17:07.150 --> 00:17:10.269 talking decades, surely someone noticed the math 00:17:10.269 --> 00:17:12.690 couldn't possibly work forever. And someone did 00:17:12.690 --> 00:17:14.890 notice this is where the story introduces its 00:17:14.890 --> 00:17:17.289 antagonist or hero, depending on how you look 00:17:17.289 --> 00:17:20.569 at it. Harry Markopoulos. The math whiz. I love 00:17:20.569 --> 00:17:22.329 this part of the story because it feels like 00:17:22.329 --> 00:17:24.250 a thriller. You have this one guy shouting from 00:17:24.250 --> 00:17:26.569 the rooftops and nobody listening. Harry Markopoulos 00:17:26.569 --> 00:17:29.509 was a financial analyst working for a rival firm 00:17:29.509 --> 00:17:32.329 called Rampart Investment Management. In 1999, 00:17:32.690 --> 00:17:35.990 his bond came to him and said, hey, this Madoff 00:17:35.990 --> 00:17:38.759 guy is killing it. Deconstruct his strategy so 00:17:38.759 --> 00:17:41.059 we can replicate the returns. A reasonable request. 00:17:41.500 --> 00:17:43.819 Reverse engineer the competition. Exactly. So 00:17:43.819 --> 00:17:46.240 Markopoulos gets the data. He looks at the split 00:17:46.240 --> 00:17:48.359 strike strategy. He looks at the returns. And 00:17:48.359 --> 00:17:50.140 he later said it took him four minutes to suspect 00:17:50.140 --> 00:17:52.819 it was a fraud. Four minutes. And four hours 00:17:52.819 --> 00:17:55.680 to mathematically prove it. Four minutes. It 00:17:55.680 --> 00:17:59.220 took the SEC decades. And this guy figures it 00:17:59.220 --> 00:18:01.619 out in the time it takes to brew a pot of coffee. 00:18:01.740 --> 00:18:04.640 The math simply didn't add up. The returns were 00:18:04.640 --> 00:18:07.700 a straight line moving upward at a 45 -degree 00:18:07.700 --> 00:18:10.460 angle. Real markets don't do that. No, they go 00:18:10.460 --> 00:18:12.500 up and down. They're messy. Markets are volatile. 00:18:12.720 --> 00:18:15.599 They wiggle. Madoff's chart looked like a ruler. 00:18:15.880 --> 00:18:18.480 But the smoking gun, the thing that Markopoulos 00:18:18.480 --> 00:18:21.299 really latched onto was the options volume. Right. 00:18:21.359 --> 00:18:23.299 Let's go back to the strategy. To make it work, 00:18:23.519 --> 00:18:25.980 Madoff had to buy and sell thousands of options 00:18:25.980 --> 00:18:28.180 contracts. Markopoulos looked at the volume. 00:18:28.480 --> 00:18:31.460 Madoff is managing, let's say, $10 or $15 billion 00:18:31.460 --> 00:18:34.259 at this point. To hedge that much money using 00:18:34.259 --> 00:18:36.279 the split strike strategy, you need to buy a 00:18:36.279 --> 00:18:38.940 specific number of options contracts on the Chicago 00:18:38.940 --> 00:18:41.839 Board Options Exchange, CBOE. It's a supply and 00:18:41.839 --> 00:18:44.220 demand issue. Right. Markopoulos checked the 00:18:44.220 --> 00:18:47.019 daily volume of the entire exchange. He realized 00:18:47.019 --> 00:18:49.279 that if Madoff was actually doing what he said 00:18:49.279 --> 00:18:51.220 he was doing, he wouldn't just be a big player. 00:18:51.359 --> 00:18:53.480 He would have needed to buy more options contracts 00:18:53.480 --> 00:18:56.460 than actually existed in the entire world. So 00:18:56.460 --> 00:18:58.500 he would have had to buy the entire market and 00:18:58.500 --> 00:19:00.930 then some. It's impossible. Exactly. It was a 00:19:00.930 --> 00:19:03.089 physical impossibility. It's like saying you 00:19:03.089 --> 00:19:05.210 ate a thousand burgers for lunch, but the McDonald's 00:19:05.210 --> 00:19:07.670 only sold 50 all day. The inventory wasn't there. 00:19:07.829 --> 00:19:12.109 Right. Marco Polo saw this and realized the trades 00:19:12.109 --> 00:19:14.829 aren't happening. None of them. So he takes this 00:19:14.829 --> 00:19:17.609 to the SEC. He hands it to them on a silver platter. 00:19:18.069 --> 00:19:20.430 Here's the fraud, guys. He didn't just send a 00:19:20.430 --> 00:19:23.640 tip. he sent detailed mathematical reports he 00:19:23.640 --> 00:19:27.319 contacted them in 2000 then again in 2001 then 00:19:27.319 --> 00:19:31.420 2005 then 2007 four times he titled one of his 00:19:31.420 --> 00:19:34.140 submissions the world's largest hedge fund is 00:19:34.140 --> 00:19:37.180 a fraud that is not ambiguous the world's largest 00:19:37.180 --> 00:19:40.440 hedge fund is a fraud and they ignored him They 00:19:40.440 --> 00:19:42.680 ignored him. They opened investigations, but 00:19:42.680 --> 00:19:44.279 they never did the one thing that would have 00:19:44.279 --> 00:19:46.700 cracked the case. Yeah. Madoff actually mocked 00:19:46.700 --> 00:19:48.779 the investigators later. I bet he did. He said 00:19:48.779 --> 00:19:51.180 they acted like LT Colombo. He said they never 00:19:51.180 --> 00:19:53.180 asked the right questions. They would come to 00:19:53.180 --> 00:19:55.420 his office, check his trade blotter, the list 00:19:55.420 --> 00:19:57.359 of trades he printed out from the 17th floor, 00:19:57.460 --> 00:20:00.380 and say, looks good. But they never checked if 00:20:00.380 --> 00:20:02.359 the trades were real. They never picked up the 00:20:02.359 --> 00:20:05.500 phone and called the central clearinghouse. If 00:20:05.500 --> 00:20:07.819 they had called the Depository Trust and Clearing 00:20:07.819 --> 00:20:11.559 Corporation, DTCC, and said, hey, did Madoff 00:20:11.559 --> 00:20:14.880 buy a million shares of IBM yesterday? The DCCC 00:20:14.880 --> 00:20:18.160 would have said, no, he bought zero. That seems 00:20:18.160 --> 00:20:21.660 like step one of auditing 101. Check if the money 00:20:21.660 --> 00:20:24.279 is real. It is. Madoff said, if you're looking 00:20:24.279 --> 00:20:26.160 at a Ponzi scheme, it's the first thing you do. 00:20:26.420 --> 00:20:28.650 But they didn't. And we have to talk about the 00:20:28.650 --> 00:20:30.589 conflicts of interest here because it gets murkier. 00:20:30.750 --> 00:20:34.190 Oh, this part makes my blood boil. The family 00:20:34.190 --> 00:20:37.410 connections. It's deeply problematic. Madoff's 00:20:37.410 --> 00:20:39.849 niece, Shanna Madoff, was the firm's compliance 00:20:39.849 --> 00:20:41.910 attorney. The compliance attorney. Okay. She 00:20:41.910 --> 00:20:44.049 eventually married Eric Swanson. And who was 00:20:44.049 --> 00:20:46.349 Eric Swanson? He was an assistant director at 00:20:46.349 --> 00:20:48.789 the SEC's Office of Compliance Inspections and 00:20:48.789 --> 00:20:51.509 Examinations. You cannot make this stuff up. 00:20:51.789 --> 00:20:54.490 The guy supposed to be policing the fraud marries 00:20:54.490 --> 00:20:56.890 the niece of the fraudster. Now, to be fair to 00:20:56.890 --> 00:21:00.009 the record, Swanson denied any impropriety, and 00:21:00.009 --> 00:21:02.269 he recused himself from Madoff -related matters 00:21:02.269 --> 00:21:04.670 after the relationship started. Okay, but still. 00:21:04.869 --> 00:21:08.309 But the optics. The optics are terrible. And 00:21:08.309 --> 00:21:10.349 it speaks to a deeper psychological issue called 00:21:10.349 --> 00:21:13.740 authority bias. Explain that. The regulators 00:21:13.740 --> 00:21:16.359 looked at Bernie Madoff and saw the former chairman 00:21:16.359 --> 00:21:18.640 of the Nasdaq. They saw a philanthropist. They 00:21:18.640 --> 00:21:21.099 saw a pillar of the community. Their brains simply 00:21:21.099 --> 00:21:23.359 couldn't compute that a man of his stature would 00:21:23.359 --> 00:21:25.500 be running a scam. They were starstruck. They 00:21:25.500 --> 00:21:28.059 assumed there must be some complex explanation. 00:21:28.119 --> 00:21:30.079 They just didn't understand. They were intimidated 00:21:30.079 --> 00:21:34.799 by him. So he skates by year after year, decade 00:21:34.799 --> 00:21:38.589 after decade. The lie keeps growing. But then 00:21:38.589 --> 00:21:41.410 comes 2008. The great financial crisis. The moment 00:21:41.410 --> 00:21:44.390 the music stopped. A Ponzi scheme relies on one 00:21:44.390 --> 00:21:48.190 thing to survive. Flow. New money coming in must 00:21:48.190 --> 00:21:50.210 exceed the money going out. As long as you can 00:21:50.210 --> 00:21:51.849 pay the people leaving with the money from the 00:21:51.849 --> 00:21:53.730 people arriving, the party continues. Right. 00:21:53.849 --> 00:21:57.210 But in 2008, the entire financial world seized 00:21:57.210 --> 00:21:59.859 up. It wasn't just Madoff. Everyone was panic 00:21:59.859 --> 00:22:02.920 selling. Exactly. Liquidity dried up. Investors 00:22:02.920 --> 00:22:04.799 were panicking. They needed cash to cover their 00:22:04.799 --> 00:22:06.859 own losses elsewhere. So they called Bernie. 00:22:06.960 --> 00:22:08.519 They said, hey, you've done great, but I need 00:22:08.519 --> 00:22:11.400 my money back. They requested redemptions. How 00:22:11.400 --> 00:22:14.720 much? In December 2008, clients asked to withdraw 00:22:14.720 --> 00:22:19.799 $7 billion. $7 billion with a B. And how much 00:22:19.799 --> 00:22:21.420 was actually in that Chase checking account? 00:22:21.700 --> 00:22:24.819 In mid -2008, there had been about $5 .5 billion. 00:22:25.039 --> 00:22:28.099 But by December... After paying out some early 00:22:28.099 --> 00:22:32.319 redeemers, it was down to $234 million. That 00:22:32.319 --> 00:22:35.240 is a math problem. You owe $7 billion, you have 00:22:35.240 --> 00:22:37.819 $200 million. It was over. The math finally won. 00:22:38.059 --> 00:22:39.740 So take us through those final days. The timeline 00:22:39.740 --> 00:22:42.519 here is incredibly compressed. It's swift and 00:22:42.519 --> 00:22:45.619 dramatic. On December 9th, Madoff confesses to 00:22:45.619 --> 00:22:48.180 his brother, Peter. Peter was the chief compliance 00:22:48.180 --> 00:22:51.160 officer of the firm. Bernie tells him he's finished. 00:22:51.420 --> 00:22:54.500 And did Peter know? The whole time. Peter claimed 00:22:54.500 --> 00:22:56.799 ignorance of the Ponzi scheme itself, though 00:22:56.799 --> 00:22:58.720 he later went to prison for falsifying records. 00:22:58.940 --> 00:23:01.839 So he knew something was wrong. But then on December 00:23:01.839 --> 00:23:04.220 10th, the day of the company holiday party, Bernie 00:23:04.220 --> 00:23:06.500 calls his sons, Mark and Andrew, into his office. 00:23:06.680 --> 00:23:08.720 Now, the sons work there. They ran the legitimate 00:23:08.720 --> 00:23:12.119 trading desk on the 19th floor. Right. And Bernie 00:23:12.119 --> 00:23:14.099 tells them he wants to pay out bonuses early. 00:23:14.279 --> 00:23:17.859 He wants to distribute $173 million in bonuses 00:23:17.859 --> 00:23:20.400 immediately. Which makes no sense if the firm 00:23:20.400 --> 00:23:22.579 is collapsing. That's just trying to get money 00:23:22.579 --> 00:23:24.400 out to friends and family before the ship sinks. 00:23:24.660 --> 00:23:27.000 The sons were suspicious. They asked him, Dad, 00:23:27.279 --> 00:23:29.420 how can we pay bonuses if we're having trouble 00:23:29.420 --> 00:23:32.420 paying clients? They demanded an explanation. 00:23:32.740 --> 00:23:35.420 They went to his apartment later that day. And 00:23:35.420 --> 00:23:37.440 that's when he dropped the bomb. What did he 00:23:37.440 --> 00:23:39.579 say? He told them the asset management business 00:23:39.579 --> 00:23:43.559 was one big lie. He said, it's basically a giant 00:23:43.559 --> 00:23:46.799 Ponzi scheme. Can you imagine that moment? Your 00:23:46.799 --> 00:23:49.720 father, your hero, the legend of Wall Street 00:23:49.720 --> 00:23:52.539 tells you everything you know is a lie. The son's 00:23:52.539 --> 00:23:55.019 reaction is the subject of much debate, but their 00:23:55.019 --> 00:23:57.119 actions were decisive. They didn't help him pack 00:23:57.119 --> 00:23:59.079 a bag. They didn't help him shred documents. 00:23:59.259 --> 00:24:01.279 They didn't try to cover for him. They went straight 00:24:01.279 --> 00:24:03.880 to a lawyer and the lawyer said, you have to 00:24:03.880 --> 00:24:06.160 call the feds. And they did. They turned their 00:24:06.160 --> 00:24:09.240 own father in. They did. And the next day, December 00:24:09.240 --> 00:24:13.119 11th, the FBI shows up at the apartment in their 00:24:13.119 --> 00:24:15.960 windbreakers. And Bernie Madoff is arrested. 00:24:16.799 --> 00:24:20.460 The $65 billion lie is exposed. And the world 00:24:20.460 --> 00:24:22.740 goes into shock. It's fascinating that the sons 00:24:22.740 --> 00:24:25.019 turned him in. I mean, we'll get to the tragedy 00:24:25.019 --> 00:24:27.000 of the family in a bit, but it really highlights 00:24:27.000 --> 00:24:29.839 that this wasn't a family business in the sense 00:24:29.839 --> 00:24:32.180 that everyone was in on the secret. Wow. The 00:24:32.180 --> 00:24:35.859 secret was the 17th floor. The 19th floor, the 00:24:35.859 --> 00:24:39.380 sons were kept in the dark, effectively. Legally, 00:24:39.400 --> 00:24:42.150 yes. Though we should note the trustee later 00:24:42.150 --> 00:24:44.930 sued the family, alleging the firm was used as 00:24:44.930 --> 00:24:48.130 a family piggy bank. A piggy bank. They withdrew 00:24:48.130 --> 00:24:50.430 millions for homes, credit cards, vacations. 00:24:50.690 --> 00:24:52.809 Whether they knew it was stolen money or just 00:24:52.809 --> 00:24:54.829 thought dad was a financial genius is the legal 00:24:54.829 --> 00:24:57.069 distinction. But they certainly benefited from 00:24:57.069 --> 00:24:59.829 the fruit of the poisonous tree. So Madoff is 00:24:59.829 --> 00:25:02.789 arrested. The cameras are flashing. But the story 00:25:02.789 --> 00:25:06.019 doesn't end there. The aftermath is. Well, it's 00:25:06.019 --> 00:25:07.799 a Shakespearean tragedy. It's almost biblical 00:25:07.799 --> 00:25:10.140 in its destruction. It truly is. The destruction 00:25:10.140 --> 00:25:12.559 of the Madar family is total. Let's talk about 00:25:12.559 --> 00:25:15.720 the sons. Mark Madar. Mark bore the brunt of 00:25:15.720 --> 00:25:18.299 the public suspicion. He was the older son. He 00:25:18.299 --> 00:25:20.680 worked closely with his father. Even though he 00:25:20.680 --> 00:25:23.460 was never charged with the fraud itself, the 00:25:23.460 --> 00:25:25.779 public pressure was immense. I can't even imagine. 00:25:26.000 --> 00:25:28.400 The media was camped outside his house. He couldn't 00:25:28.400 --> 00:25:31.000 get a job. He was a pariah. And the date of his 00:25:31.000 --> 00:25:35.049 death. On December 11, 2010. Exactly two years 00:25:35.049 --> 00:25:38.190 to the day after his father's arrest, Mark Madoff 00:25:38.190 --> 00:25:41.009 hanged himself in his apartment. That date choice, 00:25:41.230 --> 00:25:44.930 that's a message. That is a final act of communication 00:25:44.930 --> 00:25:48.349 to his father. It's a devastating signal of unresolved 00:25:48.349 --> 00:25:50.630 anger and shame. It's just gut -wrenching. And 00:25:50.630 --> 00:25:53.289 then Andrew Madoff, the younger son, he had battled 00:25:53.289 --> 00:25:55.430 lymphoma before and beaten it, but after the 00:25:55.430 --> 00:25:58.279 scandal, the cancer returned. He died in 2014. 00:25:58.680 --> 00:26:01.140 And he blamed the stress. He explicitly blamed 00:26:01.140 --> 00:26:03.579 the stress of the scandal for his relapse. He 00:26:03.579 --> 00:26:05.960 told People magazine, the stress killed my brother 00:26:05.960 --> 00:26:08.420 and it's killing me. He viewed his father as 00:26:08.420 --> 00:26:11.680 his murderer. Well, yes. And Ruth, Madoff's wife. 00:26:11.819 --> 00:26:13.839 She was his high school sweetheart. She stood 00:26:13.839 --> 00:26:15.940 by him initially, which destroyed her relationship 00:26:15.940 --> 00:26:18.640 with her sons. Eventually, she was ostracized 00:26:18.640 --> 00:26:21.789 by society. And she lost all the money. She forfeited 00:26:21.789 --> 00:26:24.829 $85 million in assets, leaving her with just 00:26:24.829 --> 00:26:28.349 $2 .5 million. Which I know listeners might say 00:26:28.349 --> 00:26:31.410 $2 .5 million is a lot. When you're 70 years 00:26:31.410 --> 00:26:34.170 old, you're the most hated woman in New York. 00:26:34.250 --> 00:26:36.509 And you used to live on billions. That is a total 00:26:36.509 --> 00:26:39.109 collapse. She even claimed in an interview that 00:26:39.109 --> 00:26:42.329 she and Bernie attempted a suicide pact on Christmas 00:26:42.329 --> 00:26:45.470 Eve 2008. They took a handful of Ambien, but 00:26:45.470 --> 00:26:47.190 they just woke up the next morning. It's just 00:26:47.190 --> 00:26:49.579 grim. The whole thing is just... Darkin made 00:26:49.579 --> 00:26:52.220 off himself. He pleaded guilty. He didn't fight 00:26:52.220 --> 00:26:55.000 it. He pleaded guilty to 11 felonies in March 00:26:55.000 --> 00:26:58.599 2009. No plea bargain. He admitted to everything. 00:26:59.079 --> 00:27:01.099 And the judge, Denny Chin, didn't hold back. 00:27:01.319 --> 00:27:04.720 No. Judge Chin called the crimes extraordinarily 00:27:04.720 --> 00:27:08.640 evil. He noted something very telling. Usually 00:27:08.640 --> 00:27:10.619 when you sentence someone, you get letters of 00:27:10.619 --> 00:27:13.000 support. Right from friends, family. Friends, 00:27:13.000 --> 00:27:15.740 rabbis, neighbors writing to say he's a good 00:27:15.740 --> 00:27:18.339 guy who made a mistake. Judge Chin noted the 00:27:18.339 --> 00:27:20.779 complete absence of any letters of support for 00:27:20.779 --> 00:27:23.079 Madoff. No one stood up for him. So what was 00:27:23.079 --> 00:27:26.299 the sentence? 150 years. The maximum allowed. 00:27:26.519 --> 00:27:28.440 It was a symbolic sentence, obviously. He was 00:27:28.440 --> 00:27:31.299 71 years old. It guaranteed he would die in prison. 00:27:31.500 --> 00:27:34.079 And he did. But his time in prison is kind of 00:27:34.079 --> 00:27:36.339 interesting. You'd think he'd be a pariah there, 00:27:36.400 --> 00:27:38.720 too. But the notes say he was treated like a 00:27:38.720 --> 00:27:42.220 mafia don. It's a strange dynamic. In the federal 00:27:42.220 --> 00:27:44.839 prison system, money and notoriety still carry 00:27:44.839 --> 00:27:48.430 weight. He was a celebrity criminal. In a letter 00:27:48.430 --> 00:27:50.549 to his daughter -in -law, Madoff wrote, They 00:27:50.549 --> 00:27:53.549 call me either Uncle Bernie or Mr. Madoff. It's 00:27:53.549 --> 00:27:55.730 really quite sweet. Uncle Bernie. There were 00:27:55.730 --> 00:27:57.869 stories that he cornered the market on hot chocolate 00:27:57.869 --> 00:27:59.970 packets in the commissary and sold them for a 00:27:59.970 --> 00:28:02.130 profit. He's running a hot chocolate arbitrage 00:28:02.130 --> 00:28:04.809 in prison. Allegedly. Once a traitor, always 00:28:04.809 --> 00:28:06.970 a traitor. But it wasn't all sweet. He got beat 00:28:06.970 --> 00:28:09.349 up, right? Yeah, in 2009, he suffered a broken 00:28:09.349 --> 00:28:11.289 nose and broken ribs. He tried to claim it was 00:28:11.289 --> 00:28:13.569 dizziness and hypertension that he fell, but 00:28:13.569 --> 00:28:15.789 the rumor was heavily that another inmate assaulted 00:28:15.789 --> 00:28:18.630 him. And he eventually died in 2021. Yes, of 00:28:18.630 --> 00:28:21.230 kidney disease. He was 82. There is one silver 00:28:21.230 --> 00:28:23.329 lining in all this, though, and it's a surprising 00:28:23.329 --> 00:28:27.029 one. Usually in a Ponzi scheme, the money's just 00:28:27.029 --> 00:28:30.480 gone. Right. It's spent. It's been on yachts, 00:28:30.480 --> 00:28:34.240 champagne, private jets. Investors get pennies 00:28:34.240 --> 00:28:36.619 on the dollar, if anything. But the recovery 00:28:36.619 --> 00:28:39.059 here was different. This is where the story pivots 00:28:39.059 --> 00:28:42.440 to a legal procedural. We have to talk about 00:28:42.440 --> 00:28:45.319 the court -appointed trustee. Irving Picard. 00:28:45.480 --> 00:28:49.400 He is the unsung hero of this saga for the victims. 00:28:49.599 --> 00:28:51.539 What did he manage to do? You have to understand, 00:28:51.619 --> 00:28:55.099 the $65 billion figure was mostly fake profits. 00:28:55.160 --> 00:28:57.740 It was air. The actual real money that investors 00:28:57.740 --> 00:29:00.700 put in the principal was about $17 .3 billion. 00:29:00.779 --> 00:29:02.960 Okay, the real cash. Picard and his team have 00:29:02.960 --> 00:29:06.460 recovered over $14 billion of that. That is unheard 00:29:06.460 --> 00:29:09.599 of. That's like, what, 80 %? It's an incredibly 00:29:09.599 --> 00:29:12.099 high recovery rate for a fraud of this scale. 00:29:12.279 --> 00:29:13.960 How did he do it? Where did he find the money? 00:29:14.079 --> 00:29:16.420 Through a relentless pursuit of clawbacks. And 00:29:16.420 --> 00:29:19.019 this creates a new category of victim. The net 00:29:19.019 --> 00:29:20.960 winners. Right. Explain this concept because 00:29:20.960 --> 00:29:23.319 it sounds counterintuitive. If I invested with 00:29:23.319 --> 00:29:25.440 Madoff and I took my money out before the crash, 00:29:25.619 --> 00:29:27.720 why am I in trouble? I didn't steal anything. 00:29:28.099 --> 00:29:31.259 Here is the logic. Let's say you, listener A, 00:29:31.400 --> 00:29:35.400 invested $1 million in 1995. Over the years, 00:29:35.480 --> 00:29:37.660 Madoff sends you statements saying you made profit. 00:29:38.220 --> 00:29:42.339 In 2005, you cash out $2 million. Okay. You walk 00:29:42.339 --> 00:29:44.640 away thinking you made a million bucks. Okay. 00:29:44.700 --> 00:29:47.059 I'm happy. I bought a house in Florida. Life 00:29:47.059 --> 00:29:50.460 is good. But Listener B invested $1 million in 00:29:50.460 --> 00:29:54.220 2007. Madoff took Listener B's money and gave 00:29:54.220 --> 00:29:57.019 it to you to cover your withdrawal. That $1 million 00:29:57.019 --> 00:29:59.940 of profit you spent, it wasn't profit. It was 00:29:59.940 --> 00:30:02.240 Listener B's money. It was Listener B's life 00:30:02.240 --> 00:30:04.609 savings. Oof. Put that way, it's storing goods. 00:30:04.849 --> 00:30:07.829 Exactly. So the court ordered those people, the 00:30:07.829 --> 00:30:10.670 net winners, to return the fictitious profits 00:30:10.670 --> 00:30:13.250 to the pot so it could be distributed to the 00:30:13.250 --> 00:30:15.130 people who lost their principal. That must have 00:30:15.130 --> 00:30:17.009 been a bitter pill to swallow. You think you're 00:30:17.009 --> 00:30:19.250 retired. You think you're safe. And suddenly 00:30:19.250 --> 00:30:21.109 the government says, hey, that money you spent 00:30:21.109 --> 00:30:23.650 five years ago, you owe it back. It caused immense 00:30:23.650 --> 00:30:25.690 financial hardship for people who thought they 00:30:25.690 --> 00:30:28.529 were innocent bystanders. But legally and perhaps 00:30:28.529 --> 00:30:31.289 morally, it was the only way to create some equity 00:30:31.289 --> 00:30:34.079 among the victims. We've covered the rise, the 00:30:34.079 --> 00:30:36.940 mechanics, the fall and the aftermath. But let's 00:30:36.940 --> 00:30:39.400 zoom out. What does this all mean? Why are we 00:30:39.400 --> 00:30:42.319 still talking about Bernie Madoff almost 20 years 00:30:42.319 --> 00:30:44.640 later? Because Madoff isn't just a story about 00:30:44.640 --> 00:30:47.420 a crook. It's a story about us. It's about the 00:30:47.420 --> 00:30:50.059 vulnerability of trust. The trust builder. That's 00:30:50.059 --> 00:30:52.500 how we started. Exactly. Madoff excluded the 00:30:52.500 --> 00:30:56.039 very thing that makes markets work. Markets run 00:30:56.039 --> 00:30:58.920 on trust. You trust that the broker executes 00:30:58.920 --> 00:31:01.180 the trade. You trust the auditor checks the books. 00:31:01.220 --> 00:31:03.660 You trust the regulator is watching. Right. Madoff 00:31:03.660 --> 00:31:06.200 realized that if you mimic the signals of trustworthiness, 00:31:06.339 --> 00:31:09.680 the suits, the prestigious offices, the steady 00:31:09.680 --> 00:31:12.880 returns, people will stop verifying. And the 00:31:12.880 --> 00:31:15.759 exclusivity was the cherry on top. By making 00:31:15.759 --> 00:31:18.099 it hard to get in, he bypassed the scrutiny. 00:31:18.339 --> 00:31:20.779 It raises an important question for every listener. 00:31:21.180 --> 00:31:23.220 If an investment opportunity looks too good to 00:31:23.220 --> 00:31:25.880 be true, perfectly steady, no volatility, it 00:31:25.880 --> 00:31:28.920 almost certainly is. But more importantly, if 00:31:28.920 --> 00:31:32.599 the strategy is too secret to explain, that is 00:31:32.599 --> 00:31:35.460 the ultimate red flag. It's a black box. It's 00:31:35.460 --> 00:31:37.759 proprietary. You wouldn't understand. If you 00:31:37.759 --> 00:31:39.779 can't understand how your money is being made, 00:31:39.859 --> 00:31:42.019 you don't know if it's being made at all. It 00:31:42.019 --> 00:31:44.440 reminds me of the Markopoulos point. The math 00:31:44.440 --> 00:31:47.759 didn't work. The volume of options didn't exist. 00:31:48.019 --> 00:31:50.549 It was there in black and white. But nobody wanted 00:31:50.549 --> 00:31:52.529 to look because the check cleared every month. 00:31:52.710 --> 00:31:55.750 We call it willful blindness. The banks, the 00:31:55.750 --> 00:31:58.829 feeder funds, they made fees off Madoff. They 00:31:58.829 --> 00:32:01.430 had an incentive not to look too closely. So 00:32:01.430 --> 00:32:04.470 are we safe now? I mean, surely the SEC fixed 00:32:04.470 --> 00:32:06.990 the LT Colombo problem. They've made changes. 00:32:07.349 --> 00:32:09.849 But the complexity of financial instruments has 00:32:09.849 --> 00:32:13.329 only increased since 2008. Crypto, high -frequency 00:32:13.329 --> 00:32:16.369 trading, algorithmic derivatives, the capacity 00:32:16.369 --> 00:32:18.529 for concealment is still there. That's a comforting 00:32:18.529 --> 00:32:20.769 thought. Well, skepticism is a healthy survival 00:32:20.769 --> 00:32:23.789 trait in finance. So here is where it gets interesting 00:32:23.789 --> 00:32:26.309 for you, the listener, to think about. No. We 00:32:26.309 --> 00:32:28.750 usually blame the bad apple. We say Madoff was 00:32:28.750 --> 00:32:32.630 a monster. And he was. But he operated for decades. 00:32:32.690 --> 00:32:34.869 He was the chairman of the Nasdaq. He was the 00:32:34.869 --> 00:32:37.849 establishment. And that leads to the final provocative 00:32:37.849 --> 00:32:41.650 thought. We focus on Madoff the criminal. But 00:32:41.650 --> 00:32:44.609 we rarely ask. How many other Madoffs are operating 00:32:44.609 --> 00:32:47.089 right now? Not by hiding in the shadows, but 00:32:47.089 --> 00:32:49.519 by hiding in plain sight. protected by our own 00:32:49.519 --> 00:32:51.740 assumption that surely someone else is checking 00:32:51.740 --> 00:32:53.660 the math. Are we any better equipped to spot 00:32:53.660 --> 00:32:55.720 the next one? Or are we just waiting for the 00:32:55.720 --> 00:32:58.339 next crisis to reveal who's swimming naked? That 00:32:58.339 --> 00:33:00.619 is the question. A huge thank you to everyone 00:33:00.619 --> 00:33:02.859 for listening to this deep dive into the $65 00:33:02.859 --> 00:33:06.859 billion lie. It's a wild story, but the lessons 00:33:06.859 --> 00:33:09.279 are real. Keep your eyes open. And verify the 00:33:09.279 --> 00:33:10.259 math. See you next time.