Money Crimes with Nicole Lapin - GREED: Bernie Madoff Pt. 1

Episode Date: January 9, 2025

For decades, Bernie Madoff was regarded as a Wall Street titan. Even when the economy slumped, his investments seemed to come out ahead. But behind the flashy returns, it was all a mirage. And it was only a matter of time until somebody realized it. Money Crimes is a Crime House Original. For more content, follow us on Instagram and TikTok @crimehouse. To learn more about listener data and our privacy practices visit: https://www.audacyinc.com/privacy-policy Learn more about your ad choices. Visit https://podcastchoices.com/adchoices

This is Crime House. For centuries, people have come to the United States to build a better life for themselves and for their families. The idea is that anyone, no matter where they come from, can find success in America. All it takes is a little grit and a whole lot of determination. But not everyone wants to achieve the American dream through honest, hard work. Some people will do anything to strike it rich. When Bertie Madoff first cut his teeth on Wall Street, he seemed like any other

successful stockbroker. He was smart, worked hard, and of course made his clients a whole lot of money. Little did they know, Bernie's entire business was based on smoke and mirrors. And when his house of cards finally came crashing down, it left a path of death and destruction in its wake. As the saying goes, those who don't understand history are doomed to repeat it. That's especially true when it comes to money. If you want to make the right decisions when it comes to managing your assets, you need to know what mistakes to avoid and how

to spot a trap. This is Money Crimes, a Crime House original. I'm your host Nicole Lappin. Every Thursday I'll be telling you the story of a famous financial crime and giving you advice on how to avoid becoming a victim yourself. Normally we cover topics in a single episode, but this story is so huge that I'm dedicating two episodes to it. It's the rise and the fall of the financial world's most infamous criminal,

Bernie Madoff. On the surface, Bernie was one of the most successful stockbrokers on Wall Street. But he had a second, more nefarious business. A secret investment advisory firm that doubled as a massive Ponzi scheme. When it all fell apart in 2008, Bernie lost his clients an estimated $64 billion. And his financial crimes changed Wall Street forever. In today's episode, I'll tell you about Bernie's early life and career. I'll explore what inspired him to become a successful legitimate stockbroker while secretly

running an illegal advisory firm. Next week, I'll tell you how Bernie's crimes were finally exposed and why he's gone down as one of the world's most notorious financial criminals. With TD Direct Investing, you can get live support. So whether you need help buying a partial share from your favorite tech company, opening a TFSA, or learning about investing tools, we're here to help. But keeping your cat off your keyboard? That's up to you.

Reach out to TD Direct Investing today and make your investing steps count. Plus, enjoy 1% cash back. Conditions apply. Offer ends January 31, 2025. Visit td.com slash DI Offer to learn more. making it on Wall Street isn't easy. It's one of the most high pressure environments in the world with billions of dollars at stake and people desperate to make a name for themselves. In this ocean of bloodthirsty sharks, Bernie Madoff was at the top of the food chain. He was the king of Wall Street, managing investments for some of the world's wealthiest people.

But when the economy came crashing down in 2008, even Bernie couldn't avoid the fallout. Millions of people lost their homes, their jobs, and their savings. It was brutal. And when the dust settled, Bernie was at the center of all of it. In the blink of an eye, he became the face of financial greed and misconduct. But was he always that corrupt? Did Bernie come onto the scene knowing that he wanted to lie, cheat, and steal his way to the top?

Maybe. After all, he lived his life by one rule. Failure isn't an option. Bernie's all-or-nothing attitude started when he was little. He was born on April 29, 1938, as the second of three children. His family lived in Queens, New York, and like many people during this time, the Madoffs struggled to get by. From a young age, Bernie appreciated the power of money. Allegedly, when he was little, he couldn't get a girl to play with him, so he offered her a quarter to change her mind.

he couldn't get a girl to play with him, so he offered her a quarter to change her mind. And it worked. That was all the proof Bernie needed. He believed that you could get just about anyone to do what you wanted if you greased their palms. As Bernie entered high school, he found that he would never worry about finances again. He studied hard and got good grades, although he still had time for typical high school shenanigans like going to parties and flirting with girls. At some point, he started dating a girl named Ruth Alpern. They stayed together throughout college and got married in November of 1959 when 21-year-old Bernie was a senior in college. Bernie was determined to make as much money as possible when he graduated, and he knew

that there was only one place to build the kind of fortune he wanted. Wall Street. On January 19, 1960, 21-year-old Bernie Madoff opened up Bernard L. Madoff Investment Securities, LLC. Of course, unless you have a huge pile of money, you can't just start an investment firm without actual investors. Luckily for Bernie, his father-in-law, Saul, was a successful Manhattan accountant. He wanted Ruth to be taken care of and he decided to take

a risk on Bernie's new venture. To get the firm off the ground, Saul let Bernie work out of his office and gave him a $50,000 loan. That would be over a half a million dollars today. Talk about a nice wedding gift. According to Bernie, at this point in his career, he saw himself as a legitimate businessman with good intentions. He wanted to be the David in a world of Goliaths and prove that his little firm could go the distance. But before he could walk amongst giants, Bernie had to start small.

And that meant trading in something called over-the-counter stocks. Broadly speaking, the stock market is broken up into individual stock exchanges like the New York Stock Exchange or the NASDAQ. All major publicly traded companies or businesses are part of these exchanges. But what if your entity doesn't belong to one of these exchanges but still trades in securities? Well now you're part of the over-the-counter market. OTC markets generally consist of smaller companies that don't qualify for the bigger exchanges yet. For a young investor like Bernie Madoff, OTC stocks would be attractive because the prices

are pretty cheap. If you choose wisely, you could be looking at some hefty returns. The downside is, investing in OTC markets is a lot riskier than investing in one of the bigger exchanges. OTC markets are much less regulated, which means they aren't required to provide a ton of info about their financial health to the public. And their stock prices typically aren't based on market movements, but on negotiations between the buyer and the seller.

Another major difference is that the OTC market doesn't have a physical place to exchange securities. Today, you can open an app or check online to see how your OTC stocks are doing. But in the 1960s, you had to rely on a broker, a broker like Bernie Madoff. And it turned out Bernie was really good at trading OTC stocks.

His two major tools were his phone and a thing called pink sheets, which is slang for the catalog of daily stock prices. Back then, clerks had to manually collect prices and collect them into a physical book every single day. Bernie would check the pink sheets, then start making calls looking for buyers. Anyone who agreed to invest through him paid Bernie a fee, which is standard practice for a brokerage firm. But there was one caveat to how Bernie worked. He couldn't afford to subscribe to the most recent catalogs, so he reportedly used the ones from the day before to quote his clients. That should definitely raise some red flags.

This wasn't necessarily illegal, but it was certainly not accurate, especially since OTC stock prices could plummet or surge overnight. So from the beginning, Bernie wasn't exactly operating an honest business, but he did well enough over the first few months to move out of his father-in-law's office and into his own. However, Bernie's early success didn't rely solely on his new trading firm.

Because as it turned out, Bernie had another side business he was running at the same time. And this one definitely wasn't a buff board. After finding some success trading over-the-counter stocks, Bernie Madoff decided to start a second business, an investment advisory firm. An investment advisor is pretty much what it sounds like, a person who gives advice on which stocks, bonds, or other securities people should invest in. They can also directly manage their clients'

portfolios and make investments for them. In exchange for all this, they usually take a fee as opposed to the trade-based commissions at brokerage firms. It's not exactly clear when Bernie started his advisory firm, but it seems like it was sometime in 1960, shortly after he opened his first business, the brokerage firm. And just like he did with BLM Investment Securities,

Bernie got a little startup capital from his father-in-law, Saul Alpern. Thanks to his successful accounting firm, Saul had quite the Rolodex of wealthy clients. He was happy to refer them to Bernie in exchange for a finder's fee. And he did more than just help Bernie get his business off the ground. He also helped Bernie run things. It's standard practice that each client has their own individual account with their advisor. In this case, that would be Bernie.

But Saul decided that he would pool all of the money from his referrals together into a single account. Then when Bernie told Saul that an investment had made a profit, Saul would be the one to divvy it out to the clients. Basically he was making a secret feeder fund, which is a collection of money from different clients that's then sent to a larger fund for investment. The arrangement was unusual to say the least, but it wasn't even the sketchiest thing

about Bernie's advisory firm. According to the US Securities and Exchange Commission, financial advisors have to register with them if they're managing over 15 clients. But even though Bernie had more than that, he still didn't register with the SEC. It's not clear why Bernie didn't register, but he obviously didn't like to do things by the book, and registering with the SEC would have opened him up to a lot of regulatory oversight. Instead, Bernie kept his advisory firm on the down-low, as in there was no record keeping,

no cold-calling potential clients, the firm didn't even have a name. Without anyone looking over his shoulder, Bernie was free to manage his clients' money however he wanted. And he chose to invest in what's known as the New Issue Market. The New Issue Market refers to companies that have recently gone from private to public. This newly available stock is called an IPO or Initial Public Offering. Like over-the-counter stocks, the new issue market comes with some serious risks. For starters, these companies have zero public history, which inherently makes the stock prices volatile.

A hyped up new issue might open big, but then immediately plummet when investors realize that there isn't actually a lot of value in it. In other words, a new issue stock is anything but a sure thing and can be extremely risky. And when you've got an advisor or a manager who deals almost exclusively in these types of investments and isn't diversifying, it can be extremely risky. Bernie learned that the hard way. At the beginning of the 1960s, new issue stocks and the market in general saw a massive boom. By 1962, Bernie's secret advisory business had pulled about $30,000.

But throughout the early months of the year, the market started to drop. Then on May 28, 1962, the bottom fell out when the Dow Jones dropped nearly 6% in a single day. The first ones to panic were those who dealt in the volatile world of penny and new issue stocks. Guys like 24-year-old Bernie Madoff. Bernie ended up losing all $30,000 of his advisory clients' money. But he didn't want to admit failure. Instead of coming clean to his clients,

Bernie decided to cover the whole thing up. Bernie ran to his father-in-law, Saul, and asked for a $30,000 loan, which he used to hide his losses. During a time when everyone else was losing money, Bernie looked like a financial genius. In reality, he was lying to his clients and skirting around regulations left and right to cover up his mistakes. But Bernie used that reputation to his advantage and continued to build both his businesses

throughout the rest of the decade. By the time the 1970s rolled around, BLM Investment Securities, his legit firm, had become one of Wall Street's most profitable companies. And part of its growth came from Bernie's forward-thinking approach. At the start of the 70s, brokers on Wall Street were starting to incorporate computers

into their businesses, which made trading exponentially faster. Bernie saw the advantage and didn't look back. While navigating the new financial landscape with BLM, Bernie's side gig was also going strong. In fact, by the 1970s, the advisory firm had grown to somewhere between 50 and 75 clients, and yet, Bernie still hadn't registered with the SEC. Whether they didn't notice or didn't care, it's hard to say, but Bernie benefited all

the same. Throughout it all, Saul continued to help the advisory firm through referrals and some light record-keeping, But in 1974, he was ready to retire. He left his accounting firm to two of his associates, Frank Avellino and Michael Biannis. He also offered to bring them into Bernie's unregulated advisory firm. They were eager to say yes. It was an easy way to make some extra cash. Find a client, send them to Bernie, collect a fee. And once they got a little taste of what the advisory firm could offer them, Frank and

Michael started thinking even bigger. Instead of working with a small group of select clients, Frank and Michael reached out to family, friends, clients, corporations, anyone who'd listen really, and got them to pool their money together. That money was sent to Bernie to invest. And of course, Frank and Michael collected a finder's fee, just like Saul did. Now I should point out that none of the clients knew who was managing their money. Frank and Michael never disclosed who was actually managing the larger fund. As crazy as it might sound, no one batted an

eye. As long as the money was rolling in, there was no need to question it. Frank and Michael weren't the only ones finding new clients either. During this period, Bernie was also chasing new opportunities with much bigger fish. Bernie had managed to enter the orbit of several major New York investors. He convinced them to join his secret advisory firm, and unlike the smaller investors Frank and Michael were chasing, these guys knew that Bernie was the one managing their money.

Although it doesn't seem like they were asking too many questions about how he was investing it. By the start of the 1980s, the advisory firm was in overdrive. It was doing so well that 42-year-old Bernie was able to move his family to a mansion out on Long Island and take a seaplane to work. And things only got better when Ronald Reagan took office in 1981.

As president, Reagan deregulated lots of things, including Wall Street. This encouraged a lot of investment in the market, and stock prices went through the roof. It was a godsend for both of Bernie's businesses, including the legit one, Bernard L. Madoff Investment Securities. By around 1985, BLM's cash reserves and stock positions were worth around $18 million. For reference, that would be about $50 million today. And his $6 million salary made him one of the 100 highest paid executives on Wall Street without factoring in whatever profits he was making off his secret advisory firm.

As business boomed, Bernie hired more traders at BLM. They included his brother Pete, along with Bernie's two sons, Mark and Andy. Around this time, BLM also expanded offices, moving to the 19th floor of the iconic Lipstick Building on New York City's Third Avenue. By the start of 1987, 48-year-old Bernie had truly made something of himself. It seemed like nothing could get in his way. Except the

stock market itself. On October 19th 1987 the stock market crashed around the globe on what became known as Black Monday. The crash came on the heels of a high US trade deficit, a declining dollar and overvalued stock prices. In the United States, the Dow Jones fell over 22%, making it the worst day on Wall Street since the Great Depression. Trillions of dollars were wiped away almost instantaneously. Miraculously, Bernie's brokerage firm avoided the worst of it, because while everyone else was selling, Bernie was one of the few people who were buying. Now when the dust settled, BLM did lose money, although it's not clear how much. However, Bernie came out on the other side of the crash a winner.

The fact that his firm remained open and trading earned him a reputation as someone you could trust. Bernie was seen as a financial guardian. In the wake of the crash, he was even honored by various organizations like the New York Stock Exchange and the SEC. Even the U.S. Congress approached Bernie to get his take on dealing with future financial crises. To top it all off, he was elected chairman of NASDAQ. If there was ever a winner of Black Monday, it was Bernie.

But behind closed doors, things were a little less glamorous. After the crash, Bernie's bigwig clients at the secret advisory firm were starting to get nervous. It wasn't so much Bernie that they were worried about, but the ripple effects of Black Monday. In the years following the crash, a few of his major investors started withdrawing some of the money that they had with Bernie. It's not exactly clear how Bernie was able to temper their fears or how much he may have paid out to his major clients, but despite their anxieties,

those clients still stayed with the advisory firm into the 1990s. It seemed like the money was just too good to pass up. While the average yearly return for the S&P 500 is between seven and 10%, Bernie's clients were getting between 15 and 19%. And while Bernie was weathering the storm, he had no idea his hush-hush advisory firm was about to get some unwanted attention.

And it was going to put the entire operation in jeopardy. At the start of 1992, 53-year-old Bernie Madoff was the king of Wall Street. As one of the few traders to emerge from Black Monday relatively intact, Bernie had cemented his reputation as someone you could trust with your finances. His legitimate brokerage firm, BLM Securities, was thriving. And so was his secret, not so legitimate, advisory firm. While the main business operated above board and was subject to regulatory oversight, Bernie had never registered the advisory firm with the SEC.

This allowed him to manage his clients' money without having to follow the government's rules. There was definitely a lot of risk in doing that, but for Bernie and his clients, the rewards were huge. As such, Bernie had one rule for his partners, Frank Avellino and Michael Biennis. Never put anything in writing. But in the summer of 1992, someone broke that promise. In June, a few investors heard about the company that promised extremely attractive profits with virtually no risk. The numbers they were seeing had been printed on a brochure called a fact sheet that broke

everything down. Exactly who these investors were or how they got this document is unknown. But when they read it, they were skeptical. No matter how solid a company seems, an investment always carries potential risk. So those investors decided to send the fact sheet to the SEC just to be safe. The SEC agreed with them. The numbers were definitely too good to be true. The SEC launched an investigation, and it didn't take them long to track the fact sheet back to two men, Frank Avellino and Michael Biennis.

And because Frank and Michael had handed out the brochures, the SEC thought they were the secret investors running this mysterious advisory firm. About a month later, in July of 1992, Frank and Michael met with the SEC's investigators to prove that they weren't doing anything illegal. During questioning, Frank and Michael were asked how much money the firm had made for their clients. They said it was around $444 million. If the advisory firm had been a well-known company like Merrill or Charles Schwab, that

wouldn't be too surprising. But coming from an unknown firm? That was definitely suspicious. The SEC pressed Frank and Michael on how they were able to make that much cash. But they weren't going to take the fall for Bernie's operation. Frank and Michael told investigators they had it all wrong. They weren't the investors. They just found clients. If they wanted to talk to the investor, his name was Bernie Madoff. Their betrayal didn't take Bernie by surprise, though. He had gotten wind

that the SEC was looking into his advisory firm, he knew he could face charges for not registering with them. But that was the least of his worries, because while the SEC wanted to know how Bernie was able to make all these low-risk investments, the truth was he hadn't made any investments at all. At some point, Bernie's advisory investment firm had become a massive Ponzi scheme. Now I've covered Ponzi schemes on this show before, but just in case you're not totally familiar with how they work, here's the basic rundown.

Let's say you've got a big pool of money from a lot of different people. You've told them you're investing that money on their behalf, but in reality, you're just keeping it for yourself. But to make it look like you're doing something with the money, you send a bit of it out disguised as investment returns.

These so-called profits are so good, it motivates them to send you more money in a never-ending cycle. Bernie's secret advisory firm was a textbook Ponzi scheme. In his case, he was collecting all of his clients' money into a pooled fund, then pretending to invest in different stocks. If they told him they wanted to sell off their stocks and withdraw their money,

Bernie either dipped into that pooled fund or found new investors with fresh cash. Now, it's not clear when Bernie's advisory firm actually became a Ponzi scheme. If you asked Bernie, he'd say it was sometime in the 1990s. Others believe it was in the 1990s. Others believe it was in the 1980s. And some investigators even think he had been doing it since the very beginning, all the

way back in the early 1960s. Regardless of how long he'd been doing it, the SEC was on the verge of exposing Bernie's secret. And he wasn't about to let that happen. So Bernie turned to his right-hand man, a guy named Frank DiPascali. DiPascali had known Bernie since the mid-1970s. According to him, he was the CFO of the secret advisory firm. Now, in 1992, Bernie allegedly told DiPascali to create a massive log of fake trades.

He meticulously forged all the documents they needed to show that Bernie's non-existent trades were real. Bernie handed over the documents to the SEC and somehow they bought it. But it seems like that didn't protect Frank Avellino and Michael Bienes because the SEC ruled that they were running an illegal investment firm. On top of all that, the SEC still hadn't caught on to the fact that Bernie wasn't a registered

advisor. Frank and Michael were forced to pay back the Bernie wasn't a registered advisor. Frank and Michael were forced to pay back the clients they'd referred to Bernie. But the thing is, Frank and Michael didn't have the money. Bernie did. Eventually, a few dots got connected and a judge ruled that Bernie had to pay back those investors. But that was the only consequence he faced. So Bernie started cutting checks.

But the crazy thing is, Frank and Michael's clients didn't even want their money back. They wanted Bernie to invest it for them without Frank and Michael acting as middlemen. Bernie was more than happy to oblige. The SEC thought that they had snuffed out the whole operation when they kicked Frank and Michael to the curb. But in truth, it only left the door wide open for Bernie to make his Ponzi scheme bigger and better than ever. His clients ranged from small business owners to bigwigs like Fred Wilpon, the owner of

the New York Metsets and Steven Spielberg. He also brought in European investors and massive hedge funds like Fairfield Greenwich. As the Ponzi grew, Bernie was forced to rent out a whole new set of offices to keep the machine running. He looked to the lipstick building where his legit firm BLM already had offices.

Now the 19th floor housed BLM and the 17th floor housed the Ponzi scheme. Because of the secretive nature of Bernie's scheme, it's difficult to know just how big the Ponzi was at this time. But in 1992, there were at least 3,200 clients. This also makes it hard to say what Bernie's net worth was. Safe to say, it was a lot, and it was still growing. With the SEC none the wiser, Bernie felt free to do whatever he wanted. But when you're working with the kind of money Bernie was, it can only go unnoticed for so long. Out in Boston, there was a portfolio manager named Harry Markopoulos who found out about

Bernie's secret advisory firm. Something about it didn't seem right, so he started sniffing around a bit. Pretty soon he realized Bernie's returns were too good to be true. The question was, would anyone believe him? Thank you so much for listening. I'm your host, Nicole Lappin. Come back next time as I wrap up the story of Bernie Madoff and offer you some advice along the way. Money Crimes is a CrimeHouse original powered by PAVE Studios. Join me every Thursday for a new episode. Here at CrimeHouse, we want to thank each and every one of you for your support. If you like what you heard today, reach out on social media at CrimeHouse, on TikTok,

and on Instagram. And don't forget to rate, review, and follow Money Crimes wherever you get your favorite podcasts. Your feedback truly makes all the difference. And for ad-free and early access to Money Crimes, plus exciting bonus content, subscribe to Crime House Plus on Apple podcasts. Money Crimes is hosted by me, Nicole Lapin, and is a Crime House original powered by Pave Studios.

It is executive produced by Max Cutler. This episode of Money Crimes was produced and directed by Ron Shapiro, written by Joe Guerra, edited by Natalie Persovsky, fact-checked by Sarah Tardif, sound designed by Russell Nash, and included production assistance from Sarah Carroll.