WEBVTT 00:00:00.000 --> 00:00:02.500 Welcome back to the Deep Dive. You know, usually 00:00:02.500 --> 00:00:04.519 when we grab a stack of reports and articles 00:00:04.519 --> 00:00:06.980 for an episode, I have a pretty clear picture 00:00:06.980 --> 00:00:09.019 of what we're walking into. Sure. If it's a tech 00:00:09.019 --> 00:00:11.179 topic, we're talking innovation. If it's true 00:00:11.179 --> 00:00:15.519 crime, we're talking motive. But today? Well, 00:00:15.660 --> 00:00:18.660 today feels different. It is different. I mean, 00:00:18.679 --> 00:00:20.980 we aren't just looking at a crime today. We are 00:00:20.980 --> 00:00:24.219 looking at a... a glitch in the human operating 00:00:24.219 --> 00:00:26.920 system. That is exactly what it felt like reading 00:00:26.920 --> 00:00:28.620 this. We were, of course, talking about Bernie 00:00:28.620 --> 00:00:31.640 Madoff. And for years, I think I just filed him 00:00:31.640 --> 00:00:34.079 away in my brain as the Ponzi scheme guy. Right. 00:00:34.179 --> 00:00:37.600 Just a generic villain in a suit. Exactly. But 00:00:37.600 --> 00:00:39.960 when you actually read the court documents, the 00:00:39.960 --> 00:00:42.479 psychological profiles, the sheer mechanics of 00:00:42.479 --> 00:00:45.039 what he built. Yeah. It's not just a financial 00:00:45.039 --> 00:00:48.009 crime. It's a psychological masterpiece. It really 00:00:48.009 --> 00:00:50.490 is. It's a story that challenges the very concept 00:00:50.490 --> 00:00:53.030 of trust. I mean, we're talking about a fraud 00:00:53.030 --> 00:00:56.130 that prosecutors estimated at $64 .8 billion. 00:00:57.009 --> 00:00:59.170 Which is a number so big it just becomes abstract. 00:00:59.350 --> 00:01:01.909 It's almost meaningless. It is. But think of 00:01:01.909 --> 00:01:05.829 it this way. That is the GDP of a small country. 00:01:06.200 --> 00:01:10.000 Like a real country. And it wasn't run by some 00:01:10.000 --> 00:01:12.640 shady guy in a basement printing fake bills. 00:01:12.780 --> 00:01:15.719 No. It was run by a man who was, for all intents 00:01:15.719 --> 00:01:18.439 and purposes, financial royalty. That's the core 00:01:18.439 --> 00:01:20.980 paradox I just can't get over. This guy wasn't 00:01:20.980 --> 00:01:22.920 some outsider trying to break in. He was the 00:01:22.920 --> 00:01:25.040 inside. He was the former chairman of the NASDAQ. 00:01:25.159 --> 00:01:27.400 He was the guy regulators would literally call 00:01:27.400 --> 00:01:29.859 when they needed advice on how to regulate the 00:01:29.859 --> 00:01:32.560 market. The fox wasn't just in the hen house. 00:01:32.700 --> 00:01:35.439 He designed the hen house. Which is exactly. 00:01:35.560 --> 00:01:37.420 why he got away with it for so long. He was the 00:01:37.420 --> 00:01:39.540 establishment. And I think that's our mission 00:01:39.540 --> 00:01:42.200 for this deep dive. We need to move past the 00:01:42.200 --> 00:01:43.959 headlines and really understand the mechanics. 00:01:44.299 --> 00:01:47.239 How did he actually do it? Yes. How did the engine 00:01:47.239 --> 00:01:49.700 work? Right. And I really want to unpack this 00:01:49.700 --> 00:01:52.120 split strike conversion strategy he kept talking 00:01:52.120 --> 00:01:54.579 about because half the time it sounds like complete 00:01:54.579 --> 00:01:56.500 gibberish and the other half it sounds like some 00:01:56.500 --> 00:01:58.420 kind of secret genius. And we will break that 00:01:58.420 --> 00:02:01.519 down. It's actually less complicated than he 00:02:01.519 --> 00:02:03.379 wanted people to believe, which was part of the 00:02:03.379 --> 00:02:05.140 trick. And we have to talk about this. psychology 00:02:05.140 --> 00:02:08.460 you know why did the smartest people in the room 00:02:08.460 --> 00:02:12.180 ceos celebrities seasoned hedge fund managers 00:02:12.180 --> 00:02:16.139 hand him their life savings without asking the 00:02:16.139 --> 00:02:18.659 most basic questions that's the willful blindness 00:02:18.659 --> 00:02:20.460 we mentioned and then there's the other side 00:02:20.460 --> 00:02:23.580 of it the aftermath the recovery yeah which is 00:02:23.580 --> 00:02:26.180 a twist ending most people don't know about yeah 00:02:26.180 --> 00:02:28.080 usually in these cases the money is just gone 00:02:28.080 --> 00:02:31.330 poof pennies on the dollar if you're lucky In 00:02:31.330 --> 00:02:33.530 this case, the aftermath is almost as fascinating 00:02:33.530 --> 00:02:36.389 as the crime itself. But let's rewind. Let's 00:02:36.389 --> 00:02:38.590 go all the way back to the beginning. Because 00:02:38.590 --> 00:02:40.169 the thing that shocked me the most in the research 00:02:40.169 --> 00:02:42.530 wasn't the billions. It was the lifeguarding. 00:02:42.729 --> 00:02:45.729 It's a very humble start, isn't it? It is. You 00:02:45.729 --> 00:02:48.569 picture Madoff as this titan born on Wall Street. 00:02:48.810 --> 00:02:51.990 But no, in 1960, he's just a 22 -year -old kid 00:02:51.990 --> 00:02:54.889 from Queens. He takes $5 ,000 money he earned. 00:02:55.340 --> 00:02:57.159 lifeguarding at Rockaway Beach, and installing 00:02:57.159 --> 00:02:59.780 sprinkler systems. $5 ,000? I mean, today that 00:02:59.780 --> 00:03:01.620 wouldn't even pay for the ergonomic chairs in 00:03:01.620 --> 00:03:04.240 a hedge fund office. Not even close. And he didn't 00:03:04.240 --> 00:03:05.639 do it alone, right? There was a family connection 00:03:05.639 --> 00:03:08.120 right from the start. Absolutely. His father 00:03:08.120 --> 00:03:11.259 -in -law, Saul Alpern, This is a crucial piece 00:03:11.259 --> 00:03:14.400 of the puzzle. Saul was an accountant and he 00:03:14.400 --> 00:03:17.719 loaned Bernie $50 ,000 to get the firm started. 00:03:17.900 --> 00:03:20.740 A pretty significant sum back then. It was. But 00:03:20.740 --> 00:03:23.240 more importantly, Saul had a circle of friends 00:03:23.240 --> 00:03:26.120 and clients he was trusted. And he started referring 00:03:26.120 --> 00:03:29.340 them to his son -in -law, Bernie. So the affinity 00:03:29.340 --> 00:03:32.860 aspect. relying on a close -knit community, was 00:03:32.860 --> 00:03:35.319 baked in from day one. It was in the DNA of the 00:03:35.319 --> 00:03:37.879 firm. It was. But we have to be really careful 00:03:37.879 --> 00:03:40.780 here not to paint Madoff as a fraudster from 00:03:40.780 --> 00:03:42.860 the very first second. Because the real tragedy 00:03:42.860 --> 00:03:44.860 of this story is that he was actually brilliant. 00:03:45.159 --> 00:03:48.060 This is the part that gets lost. He built a real 00:03:48.060 --> 00:03:51.379 business first. A legitimate, powerful business. 00:03:51.620 --> 00:03:53.759 A revolutionary business, Ethan. You have to 00:03:53.759 --> 00:03:56.020 remember, in the 1960s and 70s, if you wanted 00:03:56.020 --> 00:03:59.400 to buy a stock, it was a manual nightmare. Right. 00:03:59.500 --> 00:04:01.569 You'd call your broker. who would call a clerk 00:04:01.569 --> 00:04:03.270 on the floor of the New York Stock Exchange, 00:04:03.569 --> 00:04:05.610 who would then run a little piece of paper to 00:04:05.610 --> 00:04:08.069 a specialist. It was slow, it was inefficient, 00:04:08.349 --> 00:04:10.669 and it was incredibly expensive. The spread, 00:04:10.770 --> 00:04:12.330 the difference between the buy and sell price 00:04:12.330 --> 00:04:15.409 was huge. The old boys club taking their cut 00:04:15.409 --> 00:04:18.269 at every step. Exactly. Madoff looked at this 00:04:18.269 --> 00:04:20.910 whole archaic system and said, computers can 00:04:20.910 --> 00:04:23.899 do this better. He was a true pioneer in electronic 00:04:23.899 --> 00:04:27.019 trading. He used technology to automate the matching 00:04:27.019 --> 00:04:30.100 of buyers and sellers. His firm helped develop 00:04:30.100 --> 00:04:32.680 the very technology that eventually became the 00:04:32.680 --> 00:04:35.000 Nasdaq. So when people called him a Wall Street 00:04:35.000 --> 00:04:38.060 legend. That wasn't just PR fluff. He actually 00:04:38.060 --> 00:04:40.579 built the plumbing of the modern market. He really 00:04:40.579 --> 00:04:44.439 did. By the 1980s, Madoff Securities was an absolute 00:04:44.439 --> 00:04:46.980 powerhouse. They were a massive market maker. 00:04:47.240 --> 00:04:49.699 Can we just pause on market maker? I see that 00:04:49.699 --> 00:04:51.839 term everywhere, but what does it actually mean 00:04:51.839 --> 00:04:54.819 in practice for a firm like his? Think of a market 00:04:54.819 --> 00:04:57.339 maker like a wholesaler for stocks. If you, a 00:04:57.339 --> 00:04:59.800 regular person, want to buy a share of, say, 00:04:59.920 --> 00:05:02.899 IBM, you don't necessarily buy it directly from 00:05:02.899 --> 00:05:05.279 another investor who happens to be selling at 00:05:05.279 --> 00:05:07.680 that exact second. You buy from a market maker 00:05:07.680 --> 00:05:10.740 who holds a big inventory of IBM stock. They 00:05:10.740 --> 00:05:13.379 stand ready to buy or sell at any moment, which 00:05:13.379 --> 00:05:15.540 keeps the market moving smoothly. They provide 00:05:15.540 --> 00:05:17.500 the liquidity. So they're the ones who grease 00:05:17.500 --> 00:05:20.589 the gears of the whole machine. Precisely. And 00:05:20.589 --> 00:05:23.269 Madoff was the biggest grease trap in New York. 00:05:23.290 --> 00:05:25.589 At one point, his firm was processing something 00:05:25.589 --> 00:05:28.829 like 5 % of the total daily volume of the New 00:05:28.829 --> 00:05:32.310 York Stock Exchange. 5 % of the entire NYSE. 00:05:32.490 --> 00:05:35.089 That is an immense amount of power and information. 00:05:35.449 --> 00:05:38.430 It is. And this brings us to a concept called 00:05:38.430 --> 00:05:41.810 payment for order flow. This is a bit technical, 00:05:41.850 --> 00:05:44.490 but it's absolutely key to understanding his 00:05:44.490 --> 00:05:48.100 good guy image. Madoff would actually pay other 00:05:48.100 --> 00:05:50.420 brokerage firms like the Charles Schwab's of 00:05:50.420 --> 00:05:52.800 the world a penny a share to route their customers 00:05:52.800 --> 00:05:56.199 orders through his firm. Wait, hold on. He paid 00:05:56.199 --> 00:05:58.240 them to let him execute the trades. Why would 00:05:58.240 --> 00:06:01.100 he do that? Well, critics called it a legal kickback. 00:06:01.240 --> 00:06:03.720 But Madoff's argument was that he was so efficient 00:06:03.720 --> 00:06:06.199 he could still make a profit on the tiny spread 00:06:06.199 --> 00:06:08.660 while giving the customer a better price. He 00:06:08.660 --> 00:06:10.500 framed it as being on the side of the little 00:06:10.500 --> 00:06:13.470 guy. That is a masterstroke of camouflage. He 00:06:13.470 --> 00:06:15.730 wraps himself in the flag of democratizing finance. 00:06:15.949 --> 00:06:18.009 All while planning the biggest theft in history. 00:06:18.149 --> 00:06:20.769 And this duality, this split personality, it 00:06:20.769 --> 00:06:22.569 was physical, it was architectural. You're talking 00:06:22.569 --> 00:06:24.990 about the Lipstick Building. The infamous Lipstick 00:06:24.990 --> 00:06:27.750 Building in Manhattan. If you were a client or 00:06:27.750 --> 00:06:29.949 a business partner visiting Madoff Securities, 00:06:30.189 --> 00:06:33.189 you'd go to the 19th floor. OK. And that was 00:06:33.189 --> 00:06:35.449 the legitimate market making business. It was 00:06:35.449 --> 00:06:38.829 run by his sons, Mark and Andrew. It was high 00:06:38.829 --> 00:06:42.850 tech, frantic, dozens of traders shouting, screens 00:06:42.850 --> 00:06:46.410 everywhere, a real beehive of capitalism. And 00:06:46.410 --> 00:06:49.170 the fraud. That was on the 17th floor. Just two 00:06:49.170 --> 00:06:51.029 floors down. But it was a different universe. 00:06:51.230 --> 00:06:55.050 It was quiet. The blinds were always drawn. There 00:06:55.050 --> 00:06:58.810 were fewer than 24 employees to manage tens of 00:06:58.810 --> 00:07:01.290 billions of dollars. That alone should be a red 00:07:01.290 --> 00:07:03.709 flag the size of a bus. It should be. And the 00:07:03.709 --> 00:07:06.230 technology was ancient. They were using old IBM 00:07:06.230 --> 00:07:09.370 AS400 computers from the 80s that printed out 00:07:09.370 --> 00:07:11.550 fake trade confirmations on dot matrix paper. 00:07:11.750 --> 00:07:13.839 Dot matrix. The kind with the holes on the side. 00:07:13.920 --> 00:07:16.240 The very same. So they'd look authentically old. 00:07:16.399 --> 00:07:19.319 And the sons, Mark and Andrew, they ran the 19th 00:07:19.319 --> 00:07:21.480 floor. Did they ever go down to the 17th? I'm 00:07:21.480 --> 00:07:24.019 guessing no. They don't have key cards. Madoff 00:07:24.019 --> 00:07:26.079 kept the asset management arm, the so -called 00:07:26.079 --> 00:07:29.439 hedge fund side, completely siloed. He told his 00:07:29.439 --> 00:07:31.819 sons, his own family, I handle the investments. 00:07:31.899 --> 00:07:34.360 That's my secret sauce. You handle the market 00:07:34.360 --> 00:07:37.240 making. That is compartmentalization on a sociopathic 00:07:37.240 --> 00:07:39.470 level. I mean, usually in a family business, 00:07:39.709 --> 00:07:41.850 you want your family involved in the core of 00:07:41.850 --> 00:07:44.230 it. He literally locked them out of the engine 00:07:44.230 --> 00:07:46.529 room. And that secrecy should have been the biggest 00:07:46.529 --> 00:07:49.790 red flag of all. But because he was Bernie Madoff, 00:07:49.790 --> 00:07:53.350 the legend, people just accepted it as well as 00:07:53.350 --> 00:07:55.730 eccentricity. Oh, that's just Bernie being Bernie. 00:07:55.910 --> 00:07:58.670 OK, so let's talk about that secret sauce, because 00:07:58.670 --> 00:08:01.529 he had to tell investors he was doing something 00:08:01.529 --> 00:08:04.339 to generate these returns. He called it the split 00:08:04.339 --> 00:08:06.839 strike conversion strategy. Or the caller. Same 00:08:06.839 --> 00:08:09.160 thing. It sounds so technical and oppressive. 00:08:09.240 --> 00:08:11.240 But in plain English, what was he claiming to 00:08:11.240 --> 00:08:13.360 do? OK, let's visualize this because the strategy 00:08:13.360 --> 00:08:15.779 itself is actually legitimate. It's a real conservative 00:08:15.779 --> 00:08:19.459 option strategy. Step one, you buy a basket of 00:08:19.459 --> 00:08:22.899 blue chip stocks, the big, boring, stable companies 00:08:22.899 --> 00:08:27.220 in the S &P 100. Think GE, Coca -Cola, Procter 00:08:27.220 --> 00:08:29.399 & Gamble. Right, so I actually own the stock. 00:08:29.560 --> 00:08:32.440 Step two, you are worried the market might crash, 00:08:32.620 --> 00:08:36.240 which would hurt your portfolio. So you buy put 00:08:36.240 --> 00:08:39.080 options on the index. A put option is basically 00:08:39.080 --> 00:08:41.440 an insurance policy. It gives you the right to 00:08:41.440 --> 00:08:44.379 sell your stock at a specific predetermined price, 00:08:44.600 --> 00:08:47.519 even if the market drops to zero. So I'm protected 00:08:47.519 --> 00:08:50.679 on the downside. I can sleep at night. But insurance 00:08:50.679 --> 00:08:53.340 costs money. Buying all those puts is expensive. 00:08:53.659 --> 00:08:57.600 It eats into your returns. So, step three. To 00:08:57.600 --> 00:08:59.919 pay for that insurance, you sell call options. 00:09:00.360 --> 00:09:02.840 Selling a call. Okay, that means I'm giving someone 00:09:02.840 --> 00:09:04.779 else the right to buy my stock from me if the 00:09:04.779 --> 00:09:06.919 price goes up to a certain level. Exactly. You 00:09:06.919 --> 00:09:10.190 are capping your own upside. If the market skyrockets, 00:09:10.250 --> 00:09:12.690 you don't get those huge explosive gains because 00:09:12.690 --> 00:09:14.629 you're obligated to sell at that agreed upon 00:09:14.629 --> 00:09:16.789 price. But the money you get from selling that 00:09:16.789 --> 00:09:19.590 call option pays for your put option, your insurance. 00:09:19.850 --> 00:09:22.690 So you've created a collar around your returns. 00:09:22.850 --> 00:09:25.529 You can't lose much, but you can't win big either. 00:09:25.610 --> 00:09:28.049 It smooths everything out. Precisely. In theory, 00:09:28.149 --> 00:09:30.049 this strategy should produce steady, moderate 00:09:30.049 --> 00:09:33.409 returns with very low volatility. And that matches 00:09:33.409 --> 00:09:35.370 the story Madoff was telling with his returns, 00:09:35.470 --> 00:09:37.940 right? It matches the character of the returns 00:09:37.940 --> 00:09:40.720 perfectly, but not the actual numbers or the 00:09:40.720 --> 00:09:43.840 consistency. Madoff was reporting returns of 00:09:43.840 --> 00:09:47.320 roughly 10 to 12 percent year in, year out, like 00:09:47.320 --> 00:09:50.139 a metronome. Which is good, but it's not, I just 00:09:50.139 --> 00:09:52.220 won the lottery good. And I think that's where 00:09:52.220 --> 00:09:54.820 people get confused. Usually Ponzi schemes are 00:09:54.820 --> 00:09:57.240 promising 50 percent returns in a month, something 00:09:57.240 --> 00:10:00.019 obviously ridiculous. That's the absolute genius 00:10:00.019 --> 00:10:02.559 of it. The typical Ponzi scheme appeals to naked 00:10:02.559 --> 00:10:04.820 greed. Give me your money and I'll double it 00:10:04.820 --> 00:10:08.700 by Tuesday. Madoff appealed to fear. He appealed 00:10:08.700 --> 00:10:11.179 to the desire for safety and security. He wasn't 00:10:11.179 --> 00:10:12.919 selling a rocket ship. He was selling a bunker. 00:10:13.080 --> 00:10:15.600 Exactly. Investors looked at his performance 00:10:15.600 --> 00:10:18.399 chart and it was a beautiful, smooth line going 00:10:18.399 --> 00:10:22.039 up at a near perfect 45 degree angle. It barely 00:10:22.039 --> 00:10:25.200 wiggled ever. In November 2008, when the global 00:10:25.200 --> 00:10:27.899 economy was in complete meltdown, the S &P 500 00:10:27.899 --> 00:10:31.279 was down 38 percent for the year. Madoff's statements 00:10:31.279 --> 00:10:34.659 reported that he was up 5 .6 percent. That consistency. 00:10:34.820 --> 00:10:37.240 I mean, looking back, it's so obviously impossible. 00:10:37.919 --> 00:10:39.679 Markets just don't move in straight lines. But 00:10:39.679 --> 00:10:42.919 at the time, why didn't that set off more alarms? 00:10:43.080 --> 00:10:45.820 For some people, it did. We'll get to that. But 00:10:45.820 --> 00:10:48.340 for his victims, they viewed it as the perfect 00:10:48.340 --> 00:10:50.820 investment. It was like a bond that paid equity 00:10:50.820 --> 00:10:53.580 like returns. It was the sleeping pill investment. 00:10:53.779 --> 00:10:56.000 You put your money with Bernie and you didn't 00:10:56.000 --> 00:10:58.000 have to worry about the next market crash. So 00:10:58.000 --> 00:11:00.399 that was the pitch. But how did he get them in 00:11:00.399 --> 00:11:02.379 the door in the first place? You mentioned the 00:11:02.379 --> 00:11:04.639 Jewish circuit. This is the affinity tribe part 00:11:04.639 --> 00:11:07.679 of the story. This is where Madoff played a psychological 00:11:07.679 --> 00:11:11.259 game that was miles ahead of any other con artist 00:11:11.259 --> 00:11:14.980 I've ever studied. He utilized rejection marketing. 00:11:15.259 --> 00:11:17.559 Rejection marketing. What's that? He played hard 00:11:17.559 --> 00:11:19.879 to get. He worked the exclusive country clubs 00:11:19.879 --> 00:11:22.919 in Long Island and Palm Beach. If a wealthy CEO 00:11:22.919 --> 00:11:25.419 or a doctor came up to him at the golf course 00:11:25.419 --> 00:11:27.879 and said, Bernie, I'd love to invest a million 00:11:27.879 --> 00:11:30.700 dollars with you. Madoff wouldn't say, great, 00:11:30.840 --> 00:11:32.980 where's the check? What would he say? He'd say, 00:11:33.100 --> 00:11:35.120 you know, I'm not really taking on new capital 00:11:35.120 --> 00:11:37.879 right now. Or, I don't know, I don't think you're 00:11:37.879 --> 00:11:40.600 the right fit for what we're doing. Or sometimes 00:11:40.600 --> 00:11:45.659 just a simple no. That is incredibly bold. It's 00:11:45.659 --> 00:11:49.049 seductive. If you tell a master of the universe, 00:11:49.169 --> 00:11:51.230 a person used to getting whatever they want, 00:11:51.330 --> 00:11:53.529 that they can't have something, what do they 00:11:53.529 --> 00:11:56.230 immediately want more than anything else? They 00:11:56.230 --> 00:11:58.730 want in. It becomes a velvet rope. It's a club 00:11:58.730 --> 00:12:01.230 they have to join. It became the ultimate status 00:12:01.230 --> 00:12:03.649 symbol in those circles. I invest with Bernie. 00:12:03.870 --> 00:12:05.970 It meant you were in the inner circle. It meant 00:12:05.970 --> 00:12:08.350 you were sophisticated and connected. And because 00:12:08.350 --> 00:12:11.139 he was one of us. a prominent member of the Jewish 00:12:11.139 --> 00:12:13.879 community, a major philanthropist, a family man. 00:12:14.320 --> 00:12:16.919 The critical thinking part of the brain just 00:12:16.919 --> 00:12:19.539 shut off. The trust replaced the need for verification. 00:12:19.879 --> 00:12:21.940 The thinking was, Bernie wouldn't screw me. I 00:12:21.940 --> 00:12:24.200 see him at the club every Saturday. Our wives 00:12:24.200 --> 00:12:26.820 play bridge together. He's on the board of Yeshiva 00:12:26.820 --> 00:12:29.139 University. But it wasn't just individuals, right? 00:12:29.279 --> 00:12:32.580 I mean, $64 billion didn't just come from dentists 00:12:32.580 --> 00:12:35.019 and retirees in Palm Beach. There had to be an 00:12:35.019 --> 00:12:37.799 industrial pipeline. The feeder funds. This is 00:12:37.799 --> 00:12:40.080 the mechanism that allowed the fraud to scale 00:12:40.080 --> 00:12:42.779 from a regional scam into a global catastrophe. 00:12:43.419 --> 00:12:46.820 You had these massive hedge funds, Fairfield 00:12:46.820 --> 00:12:49.500 Greenwich Group, Tremont Group. Bank Medici in 00:12:49.500 --> 00:12:52.539 Austria that were essentially set up to be giant 00:12:52.539 --> 00:12:56.100 funnels for Madoff. So I give my money to, say, 00:12:56.200 --> 00:12:58.200 Fairfield Greenwich, thinking they are these 00:12:58.200 --> 00:13:00.500 brilliant managers doing their own research. 00:13:00.759 --> 00:13:02.639 And they take a massive management fee, usually 00:13:02.639 --> 00:13:05.000 2 % of assets and 20 % of the profits, and then 00:13:05.000 --> 00:13:07.059 they just turn around and hand all the cash to 00:13:07.059 --> 00:13:08.919 Bernie. They were just middlemen. That's all 00:13:08.919 --> 00:13:12.059 they did. Highly, highly paid middlemen. Fairfield 00:13:12.059 --> 00:13:15.600 Greenwich alone had a $7 .5 billion exposure 00:13:15.600 --> 00:13:18.080 to Madoff when it collapsed. They were making 00:13:18.080 --> 00:13:20.399 hundreds of millions of dollars in fees for doing 00:13:20.399 --> 00:13:23.159 absolutely nothing but passing along Madoff's 00:13:23.159 --> 00:13:25.740 fake statements. So they had a massive financial 00:13:25.740 --> 00:13:28.220 incentive to just shut up and not ask any questions. 00:13:28.399 --> 00:13:30.759 It's the definition of willful blindness. If 00:13:30.759 --> 00:13:32.879 you start digging into how Bernie gets these 00:13:32.879 --> 00:13:35.659 amazing returns, the gravy train might start. 00:13:36.110 --> 00:13:38.710 So you don't dig. You accept the one -page statements. 00:13:38.809 --> 00:13:41.029 You accept the secrecy. You cash the checks. 00:13:41.330 --> 00:13:43.490 But not everyone accepted it. This is my favorite 00:13:43.490 --> 00:13:45.909 part of the story. The one guy who actually sat 00:13:45.909 --> 00:13:48.929 down and did the math, Harry Markopoulos. Harry 00:13:48.929 --> 00:13:51.649 Markopoulos is the Cassandra of this whole Greek 00:13:51.649 --> 00:13:55.090 tragedy. He was a quantitative analyst, a math 00:13:55.090 --> 00:13:57.929 guy, at a rival firm called Rampart Investment 00:13:57.929 --> 00:14:02.240 Management. Okay. In the year 2000, a full eight 00:14:02.240 --> 00:14:05.059 years before the collapse, his boss throws a 00:14:05.059 --> 00:14:07.179 Madoff performance chart on his desk and says, 00:14:07.299 --> 00:14:10.259 replicate this. Make us a product that does what 00:14:10.259 --> 00:14:13.360 Madoff does. Our clients are asking for it. Copy 00:14:13.360 --> 00:14:15.500 the masker. So Harry sits down. He looks at the 00:14:15.500 --> 00:14:17.700 strategy, the split strike conversion. He looks 00:14:17.700 --> 00:14:20.120 at the returns. And he said later that within 00:14:20.120 --> 00:14:23.679 five minutes, he knew it was a fraud. Five minutes. 00:14:23.740 --> 00:14:26.200 How could he possibly know that fast? It was 00:14:26.200 --> 00:14:28.299 the math. It was just the basic math. Specifically, 00:14:28.600 --> 00:14:30.720 it was the volume of options traded. Remember, 00:14:30.980 --> 00:14:33.679 Madoff's strategy required buying puts and selling 00:14:33.679 --> 00:14:37.059 calls on the S &P 100 index. Right. Markopoulos 00:14:37.059 --> 00:14:38.980 looked at how much money Madoff was supposedly 00:14:38.980 --> 00:14:41.659 managing at the time. Then he looked at the public 00:14:41.659 --> 00:14:44.279 data for the total number of S &P 100 options 00:14:44.279 --> 00:14:47.299 that existed and were traded on the entire Chicago 00:14:47.299 --> 00:14:49.919 Board Options Exchange. The numbers didn't just 00:14:49.919 --> 00:14:52.059 not match up. They were on different planets. 00:14:52.699 --> 00:14:55.700 For Madoff to execute that strategy for that 00:14:55.700 --> 00:14:57.379 amount of money, he would have needed to buy 00:14:57.379 --> 00:15:00.019 more options than existed in the entire world. 00:15:00.220 --> 00:15:02.379 Wait, let me get this straight. So even if Madoff 00:15:02.379 --> 00:15:04.960 bought every single option on the market, he 00:15:04.960 --> 00:15:06.940 still wouldn't have had enough to run his strategy? 00:15:07.220 --> 00:15:10.179 Not even close. At times, his supposed positions 00:15:10.179 --> 00:15:12.399 would have been seven or eight times the size 00:15:12.399 --> 00:15:14.559 of the entire global market for those options. 00:15:14.940 --> 00:15:17.460 It's like saying I own 10 houses on a street 00:15:17.460 --> 00:15:20.360 that only has one house. It's not just unlikely, 00:15:20.600 --> 00:15:23.820 it's a logical and physical impossibility. So 00:15:23.820 --> 00:15:26.500 Markopoulos realizes, okay, this guy is lying 00:15:26.500 --> 00:15:28.840 about what he's doing. He concluded it could 00:15:28.840 --> 00:15:31.340 only be one of two things. Either Madoff was 00:15:31.340 --> 00:15:34.059 front -running, using his legitimate market -making 00:15:34.059 --> 00:15:36.019 business to peek at client orders and cheat, 00:15:36.179 --> 00:15:39.509 or it was a giant Ponzi scheme. He bet heavily 00:15:39.509 --> 00:15:41.289 on it being a Ponzi. And he didn't keep this 00:15:41.289 --> 00:15:42.990 to himself. He wrote a memo, right? He wrote 00:15:42.990 --> 00:15:45.389 several. He was relentless. The most famous one 00:15:45.389 --> 00:15:48.629 was in 2005, which he sent to the SEC. The title 00:15:48.629 --> 00:15:50.870 was, and I love this, the world's largest hedge 00:15:50.870 --> 00:15:54.110 fund is a fraud. Subtle. No room for misinterpretation 00:15:54.110 --> 00:15:56.669 there. None. He sent it to the SEC. It was 17 00:15:56.669 --> 00:15:59.909 pages long. He listed 30 specific red flags. 00:16:00.759 --> 00:16:02.919 Another one was the equity curve itself, that 00:16:02.919 --> 00:16:06.159 smooth 45 -degree line. He compared it to a baseball 00:16:06.159 --> 00:16:09.399 player batting .966 for a whole season when batting 00:16:09.399 --> 00:16:13.100 .300 makes you an elite all -star. He practically 00:16:13.100 --> 00:16:15.500 drew them a map to the body. And this brings 00:16:15.500 --> 00:16:17.580 us to the most infuriating part of this whole 00:16:17.580 --> 00:16:20.720 story, the regulatory failure. Because you have 00:16:20.720 --> 00:16:23.159 a credible whistleblower waving a giant red flag, 00:16:23.399 --> 00:16:26.740 you have impossible math. And the SEC does what? 00:16:26.960 --> 00:16:28.899 They didn't just do nothing. They investigated 00:16:28.899 --> 00:16:31.789 him and cleared him. The SEC looked into Madoff 00:16:31.789 --> 00:16:34.509 at least eight times over a period of 16 years. 00:16:34.710 --> 00:16:37.169 Eight times. Eight separate investigations and 00:16:37.169 --> 00:16:38.750 they never found the smoking gun. They never 00:16:38.750 --> 00:16:40.929 even looked for the gun. This is a story of, 00:16:40.929 --> 00:16:43.289 frankly, incompetence and regulatory capture. 00:16:43.929 --> 00:16:46.509 First, the incompetence. Markopoulos testified 00:16:46.509 --> 00:16:49.250 later that the SEC staff he met with simply didn't 00:16:49.250 --> 00:16:51.409 have the financial literacy to understand what 00:16:51.409 --> 00:16:53.929 he was telling them. They were lawyers, not derivatives 00:16:53.929 --> 00:16:56.149 traders. Exactly. They were looking for legal 00:16:56.149 --> 00:16:59.220 technicalities. Is he registered properly? Are 00:16:59.220 --> 00:17:01.620 the disclosure documents filed correctly? They 00:17:01.620 --> 00:17:03.879 weren't equipped to check the actual trading 00:17:03.879 --> 00:17:06.700 data. Markopoulos said it was like trying to 00:17:06.700 --> 00:17:08.980 explain nuclear physics to a toddler. They just 00:17:08.980 --> 00:17:11.039 they didn't get it. And then there's the capture 00:17:11.039 --> 00:17:13.660 part, because the relationship between Madoff 00:17:13.660 --> 00:17:16.519 and the SEC wasn't exactly adversarial, was it? 00:17:16.579 --> 00:17:20.220 It was incredibly cozy. Madoff had served on 00:17:20.220 --> 00:17:23.000 advisory committees for the SEC. He was seen 00:17:23.000 --> 00:17:26.200 as a peer, an industry statesman, and then, well, 00:17:26.240 --> 00:17:28.720 then there's the romance. The romance. Chana 00:17:28.720 --> 00:17:32.519 Madoff, Bernie's niece, and, get this, the firm's 00:17:32.519 --> 00:17:34.859 compliance officer, married a man named Eric 00:17:34.859 --> 00:17:37.359 Swanson. And who was Eric Swanson? He was a high 00:17:37.359 --> 00:17:39.640 -level assistant director at the SEC's Office 00:17:39.640 --> 00:17:42.220 of Compliance Inspections and Examinations, the 00:17:42.220 --> 00:17:43.960 very office that would have been investigating 00:17:43.960 --> 00:17:47.099 his future uncle -in -law. You have to be kidding 00:17:47.099 --> 00:17:48.819 me. The guy in charge of inspecting the firm 00:17:48.819 --> 00:17:50.819 marries the compliance officer of that same firm. 00:17:51.130 --> 00:17:53.869 Now, to be fair, Swanson claimed he recused himself 00:17:53.869 --> 00:17:56.130 from any Madoff -related matters once the relationship 00:17:56.130 --> 00:17:59.109 began. But the optics are just catastrophic. 00:17:59.470 --> 00:18:02.710 The social mixing, the family ties, it creates 00:18:02.710 --> 00:18:05.950 a halo of protection. A junior investigator is 00:18:05.950 --> 00:18:08.190 not going to want to go hard after the uncle 00:18:08.190 --> 00:18:10.309 of their boss's wife. It's human nature. You 00:18:10.309 --> 00:18:12.390 assume the people in your social circle and your 00:18:12.390 --> 00:18:15.099 family are the good guys. But the single biggest 00:18:15.099 --> 00:18:17.799 failure, the one that made the entire fraud possible, 00:18:17.940 --> 00:18:21.480 was a really boring procedural loophole. And 00:18:21.480 --> 00:18:23.240 this is the detail that actually matters most. 00:18:23.839 --> 00:18:26.839 Madoff acted as his own custodian. OK, unpack 00:18:26.839 --> 00:18:29.299 custodian for us. Why is that so important? In 00:18:29.299 --> 00:18:31.819 a normal, legitimate hedge fund, there is a strict 00:18:31.819 --> 00:18:34.720 separation of powers. The fund manager, the person 00:18:34.720 --> 00:18:37.359 making the decisions, decides what to buy. But 00:18:37.359 --> 00:18:39.940 a large, independent third -party bank like a 00:18:39.940 --> 00:18:42.700 J .P. Morgan or a State Street is the one that 00:18:42.700 --> 00:18:44.559 actually holds the... assets and executes the 00:18:44.559 --> 00:18:47.240 trades. They are the custodian. So if I'm a fund 00:18:47.240 --> 00:18:49.119 manager and I say I bought a million shares of 00:18:49.119 --> 00:18:52.259 Apple stock, the bank is there to confirm. Yes, 00:18:52.319 --> 00:18:54.359 we are holding a million shares of Apple stock 00:18:54.359 --> 00:18:57.259 for him. Exactly. It's an independent third party 00:18:57.259 --> 00:19:00.619 check on reality. But Madoff told the SEC, look, 00:19:00.720 --> 00:19:02.519 I'm a big broker dealer, too. I'll just keep 00:19:02.519 --> 00:19:04.660 the assets myself. I'll be my own custodian. 00:19:04.660 --> 00:19:06.599 He was grading his own homework. For decades. 00:19:06.700 --> 00:19:09.420 He was the manager, the broker and the custodian 00:19:09.420 --> 00:19:13.539 all in one. And the SEC just let him do it. They 00:19:13.539 --> 00:19:16.039 never once in all those investigations simply 00:19:16.039 --> 00:19:18.740 picked up the phone and called one of the supposed 00:19:18.740 --> 00:19:21.539 counterparties to say, hey, did Madoff actually 00:19:21.539 --> 00:19:24.079 buy a billion dollars of Treasury bills from 00:19:24.079 --> 00:19:26.789 you yet? And if they had made that one phone 00:19:26.789 --> 00:19:28.509 call. The whole thing would have collapsed in 00:19:28.509 --> 00:19:29.869 five minutes because the answer would have been, 00:19:29.890 --> 00:19:32.809 who? We have no record of that trade. But nobody 00:19:32.809 --> 00:19:35.109 ever made the call. And so Madoff kept spinning 00:19:35.109 --> 00:19:39.049 the plates until 2008. The Great Recession. Gravity 00:19:39.049 --> 00:19:42.009 always, always wins in the end. A Ponzi scheme 00:19:42.009 --> 00:19:44.349 is like a shark. It has to keep moving forward 00:19:44.349 --> 00:19:47.109 or it dies. You need a constant stream of new 00:19:47.109 --> 00:19:49.069 money coming in to pay off the old investors 00:19:49.069 --> 00:19:51.589 who are leaving. But in 2008, the music just 00:19:51.589 --> 00:19:54.579 stopped. Everyone stopped investing. Not only 00:19:54.579 --> 00:19:56.500 did they stop investing, the market crashed. 00:19:56.940 --> 00:19:58.920 Investors were panicked. They were losing money 00:19:58.920 --> 00:20:01.319 everywhere else, so they needed cash. And they 00:20:01.319 --> 00:20:03.299 started sending redemption requests to their 00:20:03.299 --> 00:20:05.839 safest investment. Bernie Madoff, give me my 00:20:05.839 --> 00:20:08.700 money back. A classic bank run. A massive, massive 00:20:08.700 --> 00:20:11.599 run on the bank. In late 2008, clients tried 00:20:11.599 --> 00:20:14.740 to withdraw about $7 billion from the fund. $7 00:20:14.740 --> 00:20:17.339 billion. And how much did Bernie actually have 00:20:17.339 --> 00:20:19.720 in the bank account? In the Chase Manhattan bank 00:20:19.720 --> 00:20:22.539 account where all the client money sat. Maybe 00:20:22.539 --> 00:20:24.869 a few hundred million. Two or three hundred million 00:20:24.869 --> 00:20:27.329 on a good day. Seven billion in withdrawal requests, 00:20:27.569 --> 00:20:30.569 a few hundred million in the bank. The math is 00:20:30.569 --> 00:20:33.710 finally, undeniably catching up to him. He was 00:20:33.710 --> 00:20:36.680 completely and utterly finished. He tried to 00:20:36.680 --> 00:20:38.900 scramble. He tapped his 95 -year -old friend, 00:20:38.980 --> 00:20:41.599 a man named Carl Shapiro, for a last -minute 00:20:41.599 --> 00:20:45.380 infusion of $250 million. He took $250 million 00:20:45.380 --> 00:20:47.720 from a 95 -year -old friend knowing it was just 00:20:47.720 --> 00:20:49.940 going into an incinerator. Knowing it was gone 00:20:49.940 --> 00:20:52.079 the second it hit the account, it bought him 00:20:52.079 --> 00:20:54.220 a few more days of breathing room. And this leads 00:20:54.220 --> 00:20:57.200 to the endgame, December 10, 2008. The bonus 00:20:57.200 --> 00:21:00.809 checks. Right. Madoff, knowing the end is near, 00:21:00.990 --> 00:21:03.630 decides he wants to pay out about $170 million 00:21:03.630 --> 00:21:06.750 in bonuses to his key employees and family two 00:21:06.750 --> 00:21:09.150 months early. He wanted to distribute the last 00:21:09.150 --> 00:21:11.210 of the cash before the whole ship went down. 00:21:11.369 --> 00:21:14.589 And his sons, Mark and Andrew, who run the legitimate 00:21:14.589 --> 00:21:17.730 side of the business, they saw this and finally 00:21:17.730 --> 00:21:19.589 asked the question they should have asked years 00:21:19.589 --> 00:21:21.829 ago. They came to him and said essentially... 00:21:22.009 --> 00:21:24.609 Dad, we're sharing. We can't pay investors. We're 00:21:24.609 --> 00:21:27.170 scrambling for cash. How on earth can we be paying 00:21:27.170 --> 00:21:30.589 out $170 million in bonuses? They demanded a 00:21:30.589 --> 00:21:32.849 real explanation. And he couldn't spin it anymore. 00:21:33.069 --> 00:21:35.650 The lies had run out. He took them to his apartment. 00:21:35.750 --> 00:21:38.410 He sat them down and he said the words that ended 00:21:38.410 --> 00:21:41.829 in Mara. It's all just one big lie. One big lie. 00:21:41.970 --> 00:21:44.470 Just like that. He called it a giant Ponzi scheme. 00:21:44.710 --> 00:21:46.569 He said he was finished, that he had nothing 00:21:46.569 --> 00:21:49.609 left. I just try to imagine that moment for Mark 00:21:49.609 --> 00:21:51.880 and Andrew Madoff. They spent their entire lives 00:21:51.880 --> 00:21:54.119 idolizing this man. They work for him. Their 00:21:54.119 --> 00:21:57.180 name, their entire identity is tied to this firm. 00:21:57.299 --> 00:22:00.099 And in one single sentence, their entire reality 00:22:00.099 --> 00:22:03.559 just dissolves. And this is a major point of 00:22:03.559 --> 00:22:05.859 contention. Some people still believe the Sons 00:22:05.859 --> 00:22:08.680 must have known something. But the FBI and the 00:22:08.680 --> 00:22:11.380 prosecutors, after years of investigation, eventually 00:22:11.380 --> 00:22:13.599 concluded they didn't. And their reaction that 00:22:13.599 --> 00:22:15.779 night supports that theory. What did they do? 00:22:16.190 --> 00:22:18.190 They didn't help him hide the money. They didn't 00:22:18.190 --> 00:22:20.789 flee the country. They left the apartment, went 00:22:20.789 --> 00:22:22.890 straight to their lawyers, and the lawyers immediately 00:22:22.890 --> 00:22:25.130 called the feds. They turned in their own father 00:22:25.130 --> 00:22:27.910 that night. The very next morning, December 11th, 00:22:27.910 --> 00:22:31.009 the FBI knocks on the apartment door. Bernie 00:22:31.009 --> 00:22:33.509 answers in his bathrobe. According to the agents, 00:22:33.609 --> 00:22:36.630 he was calm, resigned. He knew it was over. He 00:22:36.630 --> 00:22:38.730 admitted there is no innocent explanation. And 00:22:38.730 --> 00:22:41.230 just like that, the illusion shatters. And the 00:22:41.230 --> 00:22:44.549 real world devastation begins. We have to spend 00:22:44.549 --> 00:22:47.029 some time on the human cost. Because when we 00:22:47.029 --> 00:22:50.089 say $64 billion, it's just a statistic. It's 00:22:50.089 --> 00:22:53.869 too big. But the list of victims, it's just heartbreaking. 00:22:54.410 --> 00:22:56.890 It is. You had like, you know, the little guys, 00:22:57.069 --> 00:22:59.309 the grandmothers, the teachers, the mechanics 00:22:59.309 --> 00:23:01.809 who had trusted their entire life savings to 00:23:01.809 --> 00:23:04.329 Uncle Bernie because a friend or a cousin vouched 00:23:04.329 --> 00:23:06.650 for him. They were wiped out completely. Some 00:23:06.650 --> 00:23:08.509 lost their homes. And then there were the charities. 00:23:08.589 --> 00:23:12.430 The ripple effect was enormous. The Eli Weisel 00:23:12.430 --> 00:23:15.509 Foundation for Humanity. Eli Weisel, the Nobel 00:23:15.509 --> 00:23:18.230 laureate and Holocaust survivor. His foundation 00:23:18.230 --> 00:23:23.029 lost $15 .2 million. He and his wife lost their 00:23:23.029 --> 00:23:25.859 personal savings. as well. He called Madoff a 00:23:25.859 --> 00:23:28.960 scoundrel, which for Elie Wiesel is pretty strong 00:23:28.960 --> 00:23:31.619 language. Steven Spielberg's Wunderkinder Foundation 00:23:31.619 --> 00:23:35.039 was hit. Yeshiva University lost over $100 million. 00:23:35.380 --> 00:23:37.940 The money he stole wasn't just funding yachts. 00:23:37.940 --> 00:23:39.880 It was supposed to be funding cancer research, 00:23:40.180 --> 00:23:43.259 education, and aid for the poor. But the darkest 00:23:43.259 --> 00:23:45.839 toll, of course, was the suicides. Yeah, this 00:23:45.839 --> 00:23:47.599 is the part that is just hard to talk about. 00:23:50.079 --> 00:23:53.000 He was a French aristocrat, a respected and brilliant 00:23:53.000 --> 00:23:55.579 fund manager. He had invested his own money, 00:23:55.720 --> 00:23:57.980 his family's money, and all of his clients' money, 00:23:58.119 --> 00:24:00.759 virtually everything with Madoff. He believed 00:24:00.759 --> 00:24:03.279 in him completely. He'd staked his entire reputation 00:24:03.279 --> 00:24:05.839 on him. And he felt personally responsible for 00:24:05.839 --> 00:24:08.200 the ruin of his friends and his family. A few 00:24:08.200 --> 00:24:10.420 weeks after the scandal broke, he locked himself 00:24:10.420 --> 00:24:12.519 in his office in New York, and he took his own 00:24:12.519 --> 00:24:14.859 life. And William Foxton, a decorated British 00:24:14.859 --> 00:24:18.099 soldier? Lost his entire family savings, shot 00:24:18.099 --> 00:24:21.140 himself. And then the final tragedy of the story, 00:24:21.400 --> 00:24:24.819 Mark Madoff, Bernie's son, the one who turned 00:24:24.819 --> 00:24:27.480 him in. He was never charged with a crime, but 00:24:27.480 --> 00:24:29.920 the public hatred was intense. The lawsuits were 00:24:29.920 --> 00:24:32.059 endless. He couldn't escape the taint of his 00:24:32.059 --> 00:24:34.980 father's name. He was a pariah. Completely. And 00:24:34.980 --> 00:24:36.900 two years to the day after his father's arrest, 00:24:37.220 --> 00:24:40.460 December 11, 2010, Mark hanged himself in his 00:24:40.460 --> 00:24:42.759 Soho apartment. His two -year -old son was sleeping 00:24:42.759 --> 00:24:45.180 in the next room. It's just biblical, the sins 00:24:45.180 --> 00:24:47.000 of the father. It destroyed the entire family. 00:24:47.039 --> 00:24:49.539 It's a complete wasteland. Madoff from prison 00:24:49.539 --> 00:24:52.559 said he cried for weeks when he heard, but Judge 00:24:52.559 --> 00:24:55.099 Denny Chin at the sentencing didn't show much 00:24:55.099 --> 00:24:58.539 mercy. He called the crimes extraordinarily evil. 00:24:58.660 --> 00:25:01.299 And he gave him the maximum sentence, 150 years, 00:25:01.460 --> 00:25:04.539 which was symbolic, obviously. He wanted to ensure 00:25:04.539 --> 00:25:06.460 that Bernie Madoff would die in prison, and he 00:25:06.460 --> 00:25:10.599 did in April of 2021. Now, usually in a story 00:25:10.599 --> 00:25:13.339 like this. That's the end. The bad guy goes to 00:25:13.339 --> 00:25:15.460 jail, the money is gone, the victims are left 00:25:15.460 --> 00:25:18.700 destitute. Roll credits. But the Madoff story 00:25:18.700 --> 00:25:21.319 has this twist in the final act that is honestly 00:25:21.319 --> 00:25:23.700 surprising and not widely known. The recovery. 00:25:23.940 --> 00:25:26.299 Enter a man named Irving Picard. The trustee. 00:25:26.759 --> 00:25:29.339 Irving Picard was the lawyer appointed by the 00:25:29.339 --> 00:25:32.059 court to liquidate the firm and try to get some 00:25:32.059 --> 00:25:34.640 money back for the victims. Now, in a typical 00:25:34.640 --> 00:25:37.299 Ponzi scheme, victims get pennies on the dollar, 00:25:37.440 --> 00:25:39.839 maybe five cents, 10 cents if they are incredibly 00:25:39.839 --> 00:25:42.619 lucky. The money has been spent on yachts and 00:25:42.619 --> 00:25:45.480 mansions and just disappears. And Madoff did 00:25:45.480 --> 00:25:47.539 spend money, but he couldn't possibly have spent 00:25:47.539 --> 00:25:50.200 64 billion. Exactly. But Picard did something 00:25:50.200 --> 00:25:53.549 very aggressive and very controversial. He went 00:25:53.549 --> 00:25:55.890 after the net winners. Okay, this is a concept 00:25:55.890 --> 00:25:57.730 we really need to explain carefully because it 00:25:57.730 --> 00:25:59.130 would make a lot of people absolutely furious. 00:25:59.609 --> 00:26:03.130 What is a net winner? Okay, let's say you invested 00:26:03.130 --> 00:26:07.289 $1 million with Madoff back in 1995. Over the 00:26:07.289 --> 00:26:09.930 next 10 years, Madoff sends you these wonderful 00:26:09.930 --> 00:26:12.750 statements saying you made great profits. So 00:26:12.750 --> 00:26:15.529 you withdraw $2 million to fund your retirement, 00:26:15.750 --> 00:26:18.750 buy a beach house, pay for your grandkids' college 00:26:18.750 --> 00:26:21.069 education. So I put in $1 million, I took out 00:26:21.069 --> 00:26:24.140 $2 million. As far as I know, I'm a successful 00:26:24.140 --> 00:26:27.119 investor. Then the crash happens. Irving Picard's 00:26:27.119 --> 00:26:29.220 office knocks on your door and says, that $1 00:26:29.220 --> 00:26:32.079 million in profit you took out and spent, it 00:26:32.079 --> 00:26:34.160 wasn't real profit. It was stolen money. It was 00:26:34.160 --> 00:26:36.359 the principal investment of the person who put 00:26:36.359 --> 00:26:39.400 their money in in 2007. You have to give it back. 00:26:39.579 --> 00:26:42.079 Wow. So even though I had no idea it was a fraud, 00:26:42.259 --> 00:26:45.079 I am legally obligated to repay money I may have 00:26:45.079 --> 00:26:47.359 already spent years ago. That's the clawback. 00:26:47.519 --> 00:26:49.799 The legal theory is called unjust enrichment. 00:26:50.490 --> 00:26:52.470 You cannot be allowed to profit from a crime, 00:26:52.589 --> 00:26:55.029 even if you were an innocent beneficiary of that 00:26:55.029 --> 00:26:57.490 crime. I can only imagine the anger. People must 00:26:57.490 --> 00:26:59.490 have screamed, I'm a victim, too. I thought that 00:26:59.490 --> 00:27:01.650 was my money. I lost my initial investment, too. 00:27:01.789 --> 00:27:05.369 It was a brutal, brutal legal battle for years. 00:27:05.769 --> 00:27:08.230 But the courts ultimately sided with Picard. 00:27:08.369 --> 00:27:10.690 And he didn't just go after the little net winners. 00:27:11.500 --> 00:27:13.779 He went whale hunting. The estate of Jeffrey 00:27:13.779 --> 00:27:15.859 Pickhauer. Jeffrey Pickhauer was a billionaire 00:27:15.859 --> 00:27:18.119 investor from Florida who had been with Madoff 00:27:18.119 --> 00:27:21.539 for decades. He had withdrawn billions more than 00:27:21.539 --> 00:27:23.960 he put in. We're talking about statements that 00:27:23.960 --> 00:27:28.180 showed returns of up to 950 percent in some years. 00:27:28.619 --> 00:27:31.720 950 percent. And he didn't ask questions. That's 00:27:31.720 --> 00:27:33.819 not just a red flag. That's a whole fireworks 00:27:33.819 --> 00:27:37.000 display. Picard's team argued that he must have 00:27:37.000 --> 00:27:39.000 known or at the very least should have known 00:27:39.000 --> 00:27:42.039 that these returns were impossible. After Picarra 00:27:42.039 --> 00:27:44.220 died, his estate settled with the trustee for 00:27:44.220 --> 00:27:47.960 $7 .2 billion. $7 .2 billion. That is the largest 00:27:47.960 --> 00:27:50.819 single forfeiture in United States history. It 00:27:50.819 --> 00:27:53.240 is absolutely staggering. Picard also went after 00:27:53.240 --> 00:27:56.039 the banks. He got roughly $2 billion from JPMorgan 00:27:56.039 --> 00:27:58.200 Chase for failing to file suspicious activity 00:27:58.200 --> 00:28:01.119 reports. He argued that the bank saw the bizarre 00:28:01.119 --> 00:28:03.759 cash flows, saw all the red flags, and just looked 00:28:03.759 --> 00:28:05.640 the other way because Madoff was a profitable 00:28:05.640 --> 00:28:08.319 client. So when all the dust settled from all 00:28:08.319 --> 00:28:11.440 these lawsuits and clawbacks, how much did they 00:28:11.440 --> 00:28:14.019 actually get back for the victims? As of late 00:28:14.019 --> 00:28:17.700 2020, they had recovered over $14 billion in 00:28:17.700 --> 00:28:20.869 cash. Which sounds small compared to the 64 billion 00:28:20.869 --> 00:28:23.670 number, but... You have to remember, the 64 billion 00:28:23.670 --> 00:28:26.829 figure included all the fake profits on the statements. 00:28:27.069 --> 00:28:29.809 The actual cash that people invested, the principal, 00:28:30.049 --> 00:28:33.710 was estimated to be about 17 to 19 billion dollars. 00:28:34.109 --> 00:28:37.470 Picard recovered roughly 76 % of the approved 00:28:37.470 --> 00:28:41.750 claims. 76 % recovery. That is practically a 00:28:41.750 --> 00:28:44.009 miracle in the world of financial fraud. It is 00:28:44.009 --> 00:28:46.470 completely unheard of. If you were a net loser, 00:28:46.750 --> 00:28:49.759 someone who lost your principal investment, You 00:28:49.759 --> 00:28:51.259 got almost three quarters of your money back. 00:28:51.460 --> 00:28:54.059 It took a decade, but it happened. It's a testament 00:28:54.059 --> 00:28:57.160 to the power of a relentless trustee. But it 00:28:57.160 --> 00:28:59.720 doesn't erase the trauma or the lost time. No, 00:28:59.880 --> 00:29:02.319 money doesn't bring back the years of stress, 00:29:02.579 --> 00:29:04.700 the sleepless nights, or the lives that were 00:29:04.700 --> 00:29:07.799 lost. So bringing this all home, why does the 00:29:07.799 --> 00:29:09.779 Madoff story still matter so much? It's been 00:29:09.779 --> 00:29:11.619 well over a decade. Why are we still obsessed 00:29:11.619 --> 00:29:14.180 with it? Because the vulnerabilities he exploited 00:29:14.180 --> 00:29:16.559 are timeless, there are fundamental glitches 00:29:16.559 --> 00:29:18.960 in human nature. The first and most important 00:29:18.960 --> 00:29:22.920 lesson is about affinity. We trust people who 00:29:22.920 --> 00:29:25.220 are like us. We lower our guard when we are in 00:29:25.220 --> 00:29:27.819 our club. And that club could be a religious 00:29:27.819 --> 00:29:31.259 group, a social circle, an alumni network, or 00:29:31.259 --> 00:29:34.339 even an internet forum. Madoff proved that your 00:29:34.339 --> 00:29:36.559 shared background is not a substitute for due 00:29:36.559 --> 00:29:39.259 diligence. In fact, that's exactly where the 00:29:39.259 --> 00:29:42.109 wolves hide in sheep's clothing. And the lesson 00:29:42.109 --> 00:29:44.069 about the too good to be true rule. It's the 00:29:44.069 --> 00:29:47.170 straight line, the 45 degree angle. Listeners, 00:29:47.170 --> 00:29:48.769 if you look at your investment statement, your 00:29:48.769 --> 00:29:50.710 performance chart, and it looks like a smooth, 00:29:50.710 --> 00:29:53.029 perfect line going up while the rest of the world 00:29:53.029 --> 00:29:56.650 is jagged and chaotic, run. Volatility is the 00:29:56.650 --> 00:29:58.630 price you pay for performance in real markets. 00:29:58.849 --> 00:30:01.029 Exactly. If someone claims to give you stock 00:30:01.029 --> 00:30:03.390 market returns with bond market safety, they 00:30:03.390 --> 00:30:06.319 are lying. Period. That financial product does 00:30:06.319 --> 00:30:09.819 not exist. And finally, the failure of the gatekeepers. 00:30:09.960 --> 00:30:12.660 We can't just assume the SEC or the big banks 00:30:12.660 --> 00:30:15.720 are protecting us. It's systemic blindness. The 00:30:15.720 --> 00:30:19.039 experts, the banks, the regulators, they all 00:30:19.039 --> 00:30:21.539 missed it or looked the other way because they 00:30:21.539 --> 00:30:23.880 were looking at the man's reputation, not at 00:30:23.880 --> 00:30:26.339 the math. You have to be your own advocate. You 00:30:26.339 --> 00:30:28.559 have to ask the hard questions. Here is a final 00:30:28.559 --> 00:30:31.970 provocative thought to leave you with. Madoff 00:30:31.970 --> 00:30:34.049 confessed that the Ponzi scheme started in the 00:30:34.049 --> 00:30:37.309 early 1990s. But investigators who looked at 00:30:37.309 --> 00:30:40.130 the very old paper records think it might have 00:30:40.130 --> 00:30:44.170 started way, way back, maybe even in the 1970s. 00:30:44.190 --> 00:30:46.869 Which raises this really haunting question. Was 00:30:46.869 --> 00:30:50.190 any of it ever real? Did he ever execute a single 00:30:50.190 --> 00:30:52.880 legitimate trade for an investment client? Or 00:30:52.880 --> 00:30:56.200 was the entire 40 -year career, the Nasdaq chairmanship, 00:30:56.339 --> 00:30:58.779 the tech innovation, the legend, was it all just 00:30:58.779 --> 00:31:01.380 one massive, long con to build the credibility 00:31:01.380 --> 00:31:03.660 he needed to pull off the final theft? And if 00:31:03.660 --> 00:31:05.839 the 2008 crisis hadn't happened, if the market 00:31:05.839 --> 00:31:08.519 hadn't crashed and triggered that bank run, how 00:31:08.519 --> 00:31:10.380 much longer could he have kept it going? He might 00:31:10.380 --> 00:31:12.380 have died a hero. His sons would have inherited 00:31:12.380 --> 00:31:14.440 a lie, and the fraud might have outlived him. 00:31:14.559 --> 00:31:16.880 That is a terrifying thought. Check your statements, 00:31:16.980 --> 00:31:20.140 people. Don't trust. Verify. Thanks for listening 00:31:20.140 --> 00:31:21.059 to The Deep Dive.