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August 26, 2009 > Who else knew? Insights from Madoff book author

Who else knew? Insights from Madoff book author

By Trevor Delaney, AP Personal Finance Editor

NEW YORK (AP), Aug 21 _ The headline sounded an alarm. ``Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even asks investors to keep mum.''

What's surprising is that the headline appeared in 2001. Based on a tip that Madoff was operating a hedge fund that produced unusually consistent returns, Erin Arvedlund started investigating for Barron's.

``Madoff had engendered such loyalty among investors,'' said Arvedlund. ``He paid for their kids college educations, he was funding their retirements _ or so they thought _ that they were willing to put up with all kinds of terms that they wouldn't agree to in another kind of investment, like a mutual fund or a money market fund.'' Indeed Madoff's investors agreed not to tell anyone that he was managing their money.

After initially being rebuffed, Arvedlund told Madoff's firm that her article was going to run with or without Bernie Madoff's comments. Soon thereafter he was on the phone from Switzerland.

``He was very affable, he didn't tell me much of anything. He just said it's a proprietary trading strategy and 'I don't want to go into it','' she said. ``For hedge funds that's not unusual, but given all the other red flags that there were surrounding his fund, it just didn't make any sense.''

Drawn back to the story after Madoff's confession, Arvedlund just released ``Too Good to Be True.'' The author recently shared her thoughts about the ongoing scandal.

Q: After your Barron's article hit newsstands, was there much of a reaction?

A: I expected an angry phone call from him, or his firm ... something. His lawyers? There was nothing. I found out later that his sons got up that following Monday and gave a big speech to the trading floor at Madoff Securities and said ``There's nothing to this, there's no funny business going on. Let's just forget this ever happened.''

Q: So when did Madoff next hit your radar?

A: I worked in the hedge fund industry for a couple of years. Like many other people I got laid off in December of 2008 and a week later I was watching CNBC. The headlines came over that Madoff had been arrested and I thought, ``Oh, my god they finally got him.'' However, I didn't know that it was a $65 billion Ponzi scheme. I had no idea.

Q: You mention $65 billion. Is that really an accurate number?

A: The $65 billion loss isn't a real number. If you assume that Bernie Madoff was reporting false profits every year of 10 percent, and the fraud went back to the 1960s, then the real number is probably closer to $12 to $20 billion. A good portion of that, probably half, was invested by the feeder funds. They farm out money to different hedge fund managers and the rest was individuals. But the number _ it's a fraction of $65 billion.

Q: You make the point in your book that Madoff didn't need to be a crook. Explain why that is.

A: Probably the most stunning part about of the Madoff scandal for Wall Street professionals is that he had a legitimate business. It was a very large broker-dealer. He had helped to found the Nasdaq. He wasn't the founder, but he helped to popularize computerized trading. He also helped the Securities and Exchange Commission further their agenda, which was to break the monopoly of the New York Stock Exchange and some of the other longtime stock exchanges. He was an innovator, he was trading stocks electronically a decade or more before E-Trade and all these other electronic and online trading companies. He was really considered an adviser, if not a formal one, to the regulatory agencies.

So it made no sense that he had this side operation which was essentially a phony hedge fund. On the one side he was doing very well, he was making a lot of money. ...There was really no reason for him to run this side operation.

Q: So, why do you think he did it?

A: I think we're going to find out more, now that his right hand man Frank DiPascali has been prosecuted and plead guilty. Just the fact that Madoff's lieutenant has confirmed that there were other people involved. That casts what Madoff said _ that he said he did it by himself _ as a lie.

Q: So what, if anything, do we know about the other people who were on site to run the scheme?

A: Frank DiPascali, who plead guilty to conspiring to run this phony hedge fund, outlined in his confession that he was essentially Madoff's right-hand man in keeping this fraud going. They used an old IBM AS/400 computer that wasn't connected to any of the other networks in the business. That is how they produced all the phony documentation, that was really the engine for the fraud. So either Madoff or DiPascali, or perhaps some other who DiPascali may name in the future would punch in these stock prices.

With the benefit of hindsight they would see which ones had gone up and which ones had gone down _ and they would create a fictional profit. From that they would run tens of thousands of phony statements and they would mail them to investors. They did the same thing when the SEC came to visit. ...DiPascali has said there were co-conspirators and I believe in the next few months we'll find out who those people were.

Q: People want to know about the family's knowledge, what's your take?

A: I have a theory about Ruth Madoff. Of course, I don't have any proof. But she is a very smart lady. Her father was one of Bernie Madoff's original fundraisers. She and Bernie Madoff were married at a young age, and they initially worked out of her father's accounting practice. Her father referred a lot of clients to them to get the business going.

Ruth has a head for numbers, she kept all of the books for the legitimate business. And Madoff himself was quoted as saying ``Nothing gets by Ruth.'' So it's very hard to believe that she didn't know what was going on. However, there's no proof. And even the trustee overseeing the Madoff case has said there's not enough evidence to indict her.

As far as his brother, Peter Madoff, he also worked at the legitimate broker dealer since 1970 full time. He was signing SEC filings with false information and I believe, just on that basis alone, he might be indicted.

The sons are really a toss-up at this point. They are the main reason that Madoff plead guilty and decided to try and take the fall for this entire thing _ to protect the sons.

Q: The SEC has been criticized for dropping the ball on this. How much of that do you think is fair?

A: The SEC was duped, just like investors who walked in and were shown phony statements,and phony employees, and phony counter-parties. Madoff was a master illusionist. However there were red flags brought up by articles, and then there was Harry Markopolos who was banging on the door of the SEC. So I think the SEC was duped in the same way that everyone else claims to have been duped. But they had the benefit of an inside view and they had the benefit of a whistle blower in the form of Harry Markopolos.

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