Money Crimes with Nicole Lapin - GREED: Bernie Madoff Pt. 2

Episode Date: January 16, 2025

In the early 2000s, word of Bernie Madoff's secret investment advisory firm finally started to get out. But even when the SEC investigated his shady business tactics, Bernie came out ahead. But Bernie's magic touch could only take him so far. There were some economic forces even he couldn't control... and when the damage was done, Bernie Madoff's crimes were finally exposed. 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. When I think about obscene amounts of wealth, an image that comes to mind is a swimming pool full of money, like the classic cartoon of Scrooge McDuck doing the backstroke through a bunch of coins. And that's basically the life Bernie Madoff was living. Although he didn't have a literal pool of money, he certainly had a figurative one. And it was full to the brim with funds he was supposed to be investing for his clients. But instead of actually managing his clients' money,

Bernie was taking most of it for himself. After escaping scrutiny time and again, it seemed like Bernie could keep splashing around in his money pool for the rest of his life. But eventually, the drain got pulled and Bernie was left all alone at the bottom. got pulled. And Bernie was left all alone at the bottom. 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 Lapin. 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. At Crime House, we want to express our gratitude to each and every one of you, our community, for making this possible. Please support us by rating, reviewing, and following Money Crimes wherever you get your podcasts. Your feedback truly matters.

And for ad-free and early access to Money Crimes plus exciting bonus content, subscribe to CrimeHouse Plus on Apple Podcasts. This is the second of two episodes on Bernie Madoff, the financial world's most infamous criminal. For over four decades, Bernie seemed invincible. Even when Wall Street was down, Bernie made money for his clients, and even more, for himself. But when everything fell apart in 2008, Bernie's crimes were finally revealed. Once it was all said and done, his clients lost an estimated $64 billion.

Last time I took you through Bernie's early career and his rise to the top of Wall Street, but behind the massive gains and genius trades, it was all a lie. The real source of Bernie's wealth was one of the world's biggest Ponzi schemes. Today, I'll tell you how a Boston-based portfolio manager realized the truth about Bernie and his quest to convince the SEC that Wall Street's Golden Boy was actually a criminal. Get groceries delivered across the D from real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum

Points. Visit superstore.ca to get started. Hey, it's Carter Roy from Crime House Studios., and if you love money crimes with Nicole Lappin, then I want to tell you about a brand new podcast I think you'll enjoy. Mantra with Gemma Spagg. Every Monday, Gemma brings you a new mantra, a simple yet powerful phrase to help clear your mind and stay grounded amidst the chaos of life. She'll also share personal stories, journal prompts, and a weekly challenge to bring each mantra to life.

Mantra is an open mind original powered by Pave Studios. New episodes drop every Monday. Search mantra wherever you listen to podcasts. ["The Last Supper"] By the late 1990s, Bernie Madoff had built himself a sprawling financial empire. It included his legitimate brokerage firm, Bernard L. Madoff Investment Securities, or BLM, which Bernie relied on to cultivate a reputation as a trusted investor. People with accounts and BLM paid a commission anytime Bernie made a trade for them.

And by all accounts, he was very successful at that. But he had a side hustle hiding in plain sight. And this one was very much off the books. Bernie had been running an unnamed and unregistered advisory firm for over 30 years. Bernie's advisory clients paid him a flat fee to manage their assets. He told his staff that they needed to operate under the radar because the advisory firm wasn't registered with the SEC, and therefore they got to avoid a lot of rules and regulations.

But the real reason was much darker. It turns out, Bernie wasn't investing any of his advisory clients' money. In reality, he was collecting their funds into one massive pooled account. If his clients told him they wanted to sell off their stocks and withdraw their funds, Bernie either dipped into the pooled fund or found new investors with fresh cash to pay them back. The rest he kept for himself. It was a textbook Ponzi scheme, and it worked for a very long time. Even when the SEC came sniffing around in 1992,

Bernie still managed to throw them off scent. In the aftermath, his shadowy advisory firm kept growing with clients like Steven Spielberg and Mets owner Fred Wilpon jumping at the chance to have Bernie manage their money. But although Bernie was good at covering his tracks, he wasn't perfect. In 1999, a guy named Frank Casey went to Europe for a meeting with the CEO of a major hedge fund.

Frank was a sales executive for a trading firm out of Boston called Rampart Investment Management and was hoping to get this CEO to do business with them. During their meeting the CEO pulled out some files and mentioned that he was working with an investment advisory firm. According to Frank's later testimony the firm always got 1 to 2 percent returns every month with no losses which is pretty unheard of. When Frank asked for the firm's name, the CEO wouldn't say. But at some point, he stepped away and left Frank alone in his office.

Frank used the opportunity to take a peek at the CEO's files, and that's when he saw the name Bernard L. Madoff. Somehow Frank was able to get a copy of those files, which outlined a series of returns from Bernie's firm. Frank brought the documents back to Boston and gave them to a portfolio manager at Rampart named Harry Markopoulos. Frank wanted Harry to figure out how Bernie's advisory firm

managed to generate such consistent returns and how to replicate it. But when Harry took a look at the files, he knew that was impossible to do, at least not legally. So, what tipped him off? Well when you look at a graph of the stock market, you'll notice something about the lines. They vary.

A lot. Stocks go up, stocks go down, and the graph fluctuates like a mountain range. But when Harry looked at Bernie's files, he didn't see any of that. Instead, he saw a clean 45-degree angle going up at a steady rate. That meant that Bernie's clients were getting constant and consistent returns on their investments. The issue is, that's not what the stock market was doing at the time.

In fact, the market's never that consistent and Harry knew it. Harry was a smart guy and he'd probably seen graphs like these before. When he looked at Bernie's returns, he told Frank this reeked of a Ponzi scheme. And he was determined to prove it. For the rest of 1999 and into 2000, Harry obsessed over Bernie's financial data. Despite all the secrecy around Bernie's advisory firm, Harry was able to dig up years of information on the company.

And what he found was shocking to say the least. Based on the information he'd collected, Harry calculated that Bernie's trades through the advisory firm were profitable a staggering 96.6 percent of the time. The more evidence Harry found, the more certain he became that Bernie's returns were BS. And Harry wanted him to face the consequences. In March of 2000, Harry filed a report with the SEC outlining the discrepancies in Bernie's advisory firm. For whatever reason, the SEC was not interested and they basically told Harry to get lost. Harry couldn't believe it.

The proof was right there in front of them. It's still not clear exactly why the SEC was so resistant to Harry's requests, but my guess is that they just couldn't fathom that Bernie Madoff, the one-time chairman of NASDAQ, would be doing anything that wasn't above board. Still, Harry refused to give up. He continued gathering evidence against Bernie and bided his time until the SEC was ready to take off their blinders.

And by this point, Harry wasn't the only one zeroing in on Bernie. In early 2000, two financial journalists, Michael Okrent and Aaron Arvland, received tips about Bernie's secret investment firm. They spent the next year or so gathering evidence, and in May of 2001, both journalists published articles about Bernie's shady business tactics. Now, it doesn't seem like they outright accused Bernie of running a Ponzi scheme.

And when these articles dropped, most people ignored them. But they still caught the attention of some of Bernie's biggest clients. Like Jeffrey Tucker, one of the founders of the Fairfield Greenwich hedge fund. After Michael and Aaron's articles dropped, Jeffrey immediately went to Bernie and basically asked, what gives? But Bernie was ready for him. He showed Jeffrey a paper document of the trades

he'd made on his behalf. Bernie also pulled up Jeffrey's online account which showed those same numbers. Jeffrey walked away from the meeting feeling relieved. He had no idea it was all fake. That's right, both documents had been forged by Bernie's right-hand man, Frank DiPascali. The last time Bernie needed him to fudge some numbers for him was back when the SEC sniffed around in 1992. But this was 2001, and the digital era was in full swing. That meant they also needed to adjust the numbers on the computer screen. Here's a simplified version of how Frank DiPascali did it. Basically, he took the information

from Bernie's legitimate brokerage firm and repurposed it to create a sham account for the secret advisory firm. So when Jeffrey looked at his account on Bernie's computer, everything looked normal. Jeffrey had no idea he didn't even have an account in the first place. But the truth was out there, and if people kept looking into him, Bernie would have probably been caught. But before they could, a major world event understandably dominated everyone's attention.

Following the September 11, 2001 attacks on the World Trade Center, the entire nation focused its energy on fighting terrorism. As the FBI's resources were diverted toward the war on terror, things like white-collar crime took a backseat. All of a sudden, no one was paying attention to Bernie Madoff, let alone investigating him. And by the end of the year, the total investment in his Ponzi scheme had grown to a whopping

$36.8 billion, which was $6 billion more than the year before. But while his fake advisory firm was skyrocketing, Bernie's actual brokerage firm, BLM, wasn't doing too hot. By the early 2000s, the market was just too saturated with brokerage firms like Bernie's. And all that competition meant Bernie and his employees weren't getting as much commission money as before. What's worse, BLM was spending more than it was making. Journalist Diana Enriquez suggests that BLM had lost around $160 million between

2001 and 2003. So how did Bernie keep BLM running? The Ponzi scheme, of course. Bernie had his crony, Frank DiPascali, use a bank in London to transfer money from his advisory firm to BLM. No one suspected a thing. And why would they? Bernie was living as lavishly as ever, using his clients' money to buy up yachts and houses all over the place. Despite a few hiccups, the 2000s were looking really good for Bernie. But back in Boston, Harry Markopolous was still waiting to make his move.

And once he did, he was certain that Bernie wouldn't be able to stop him. Hey, it's Carter Roy from CrimeHouse Studios, and if you love money crimes with Nicole Lappin, then I want to tell you about a brand new podcast I think you'll enjoy. Mantra with Gemma Spagg. Each Monday, Gemma shares personal stories, practical tips, and empowering mantras designed to help you stay grounded amidst the chaos of work, school, family, or whatever life throws your way. Think of mantra as your mental reset button, a simple powerful phrase to clear your mind, lift your mood, and root you in the present. Every episode comes with reflective journal prompts and a weekly challenge,

so you can put these mantras into action in your own life. Whether you're navigating big transitions or just trying to find more calm in your day-to-day life, mantra is here to inspire growth and unlock your true potential. Mantra is an open mind original powered by Pave Studios. New episodes drop every Monday. Search Mantra wherever you listen to podcasts. By 2003, Bernie Madoff's Ponzi scheme had grown so large, it was actually saving his legitimate brokerage firm. At 65 years old, Bernie was still firing on all cylinders, and it seemed like no one could stop him.

And for the next two years, no one did. But in 2005, he came under the microscope again when someone at the SEC came across some concerning emails. At some point in the past, a group of hedge fund executives had written to the SEC. They were suspicious about Bernie's business, though it's not exactly clear which business they were talking about. It's also not clear why the SEC didn't look into those emails when they first received them.

But this time, the staffer passed the emails on to their boss, who did launch an investigation. And because BLM was Bernie's only official company, that's where they started. On April 20, 2005, two junior SEC examiners were sent to Bernie's office to make sure he was compliant with all their regulations. But they didn't really know what they were looking for. Remember, Bernie's advisory firm was very hush-hush, so all they had to go on was his legitimate business. And it seems like he did enough to show them

everything was above board. The investigation ended in June of 2005, and Bernie got away scot-free. Once again, he dodged a bullet. But more trouble was coming his way. A couple months later, around August of 2005, an investor with a company called the Bayou Group went to cash an earnings check. And it bounced.

Figuring there had to be some kind of mistake, the investor went to the Bayou Group's office which was completely empty. Investigators got involved and on September 1st, 2005, the Bayou Group was officially accused of being a Ponzi scheme that stole over $400 million that stole over $400 million from investors. By the end of the month, Bayou's CFO and CEO were arrested and charged with fraud. Eventually, they were sent to prison and Bayou filed for bankruptcy. Up to this point, Wall Street hadn't seen many Ponzi schemes,

especially not ones from such a big firm. Investors started wondering if their money was tied up in a Ponzi too. Although Bernie had no connection with the Bayou Group, some of his investors had accounts with them. In the wake of the scandal, they started withdrawing hundreds of millions of dollars from BLM and the secret advisory firm. By the start of November of 2005, Bernie's two companies only had a combined $13 million in the bank, which was a problem because Bernie owed $105 million in withdrawal requests.

If he didn't find some money soon, the whole thing would collapse. But Bernie had a few tricks up his sleeve. In late 2005 and early 2006, he convinced two of his big-time American investors, Carl Shapiro and Jeffrey Pickauer, to invest over $200 million into BLM. Bernie immediately transferred that money to the Ponzi. Although he still wasn't totally out of the woods, he was safe… for the moment. Which made his nemesis out of Boston, Harry Markopolous, livid. When the Bayou group scandal broke, Harry thought it would wake people up to what Bernie was doing.

And yet, Bernie had gotten away with it. Again. Unsure of what else to do, Harry tried sending the SEC another email. This time, he made sure they couldn't look away. Harry titled the email, quote, the world's largest hedge fund is a fraud. In his message, Harry highlighted 29 reasons why Bernie's firm was a Ponzi scheme. There's been some debate over whether Harry's email

really got the SEC's attention, but something did. In 2006, the SEC decided to investigate Bernie much more thoroughly. Their investigators knocked on the door of anyone who did business with Bernie, but especially the hedge funds he supposedly invested for. The SEC wasn't exactly subtle, though, and Bernie realized they were snooping around. In the past, Bernie had forged documents and fudged numbers to get the SEC off his back. This time, he tried to get ahead of the issue. He called the SEC and offered to come in for an interview.

On May 19, 2006, Bernie met with their investigators. When they asked for a list of financial institutions he traded with, Bernie gave it to them. And he gave them his account number for the DTCC Clearinghouse, the institution that verifies financial information for regulators. And these were real, legitimate documents. This was a major gamble for Bernie. If the SEC called those numbers or checked that account, they would see that Bernie had completely lied about everything. But at this stage, there was no more faking it. Bernie had to just cross his fingers and hope that somehow,

it all worked out. Miraculously, it did. The SEC's investigators never called the DTCC. Journalist Diana Enriquez says they figured that it would take a while to check in on everything, so they just didn't do it. And after a few months, the SEC once again cleared Bernie of any wrongdoing. The only consequence Bernie faced was that he finally had to register as a financial advisor.

After decades of flying under the radar, his secret advisory firm was now out in the open. Since this opened Bernie up to more scrutiny from federal regulators, you might think that he would pump the brakes on his Ponzi scheme. But he'd gotten away with everything so far, so why stop now? For the next two years, he'd kept running with it.

But in 2008, Bernie came up against an obstacle even he couldn't overcome when the Dow Jones suffered its biggest one-day drop in history. It was one of the biggest stock market crashes since the Great Depression, and when the dust in the open. By the start of 2008, 69-year-old Bernie Madoff had ballooned his Ponzi scheme to a whopping $64.8 billion, double what it was in 2000. But later that year, it would all be wiped out thanks to a devastating housing crisis. Five years earlier in 2003, the Federal Reserve slashed interest rates to boost the economy after the dot-com bubble burst. This created an opening for homebuyers to scoop up properties

at insanely low mortgage rates. And while it might sound like a good thing, it also led to something very dangerous, predatory mortgage lending. In general, predatory lending happens when financial institutions use deceptive techniques to get people to sign unfavorable loan agreements. Usually, these lenders are vague about the fees associated with their loans. By the time their clients realize how bad the deal is, it's too late for them to

get out of their contract. In a lot of these situations the client simply can't afford the payments and they default on the loan. Meanwhile the lender can write off the debt as a loss or repossess the collateral by taking the borrower's assets like their car or their home. During this early 2000s housing bubble, predatory mortgage lenders sought out sub-prime borrowers, that is, people with low or bad credit. These borrowers were approved for loans that they actually couldn't afford. And over the next few years, sub-prime lending boomed as more and more people took out loans

to buy houses that were out of their price range. But then, in 2006, mortgage rates started to rise again. And because the sub-prime loans weren't at a fixed rate, that meant those interest payments went way up. All of a sudden, tons of borrowers weren't able to afford their mortgages. They were forced to foreclose on their homes, and many subprime lenders went bankrupt. This set off a domino effect, and in the fall of 2008, a few major financial institutions went belly up,

the most notable being Lehman Brothers. Investors took that as their cue to pull money out of the stock market. From there, indexes like the Dow Jones started to free fall. By September of 2008, it truly felt like the economy was in total collapse. It was the worst financial crisis since the Great Depression, and no one could escape. Not even Bernie Madoff.

The day that Lehman Brothers filed for bankruptcy, 70-year-old Bernie and his wife Ruth were vacationing in the south of France. When Bernie saw what was happening on Wall Street, they cut their trip short and rushed back home. Bernie needed to stem the bleeding, and fast, because his clients, the ones caught up in his Ponzi scheme, wanted to withdraw their money. Bernie tried to use the same playbook as before. He called up his most loyal investors and tried

to convince them to put more money into their accounts. That way he could honor all the withdrawal requests and the Ponzi scheme would still survive. But this time no one bought what Bernie was selling. Throughout October and November of 2008, Bernie scrambled to find other ways to save himself. But nothing worked. By the start of December, his clients were asking for around $1.5 billion back from his fund. There was just one teeny problem with that. Bernie was about $1.2 billion short.

That's when Bernie finally realized the jig was up. There were no other investors to shake down, no SEC to fool. There was nothing left to do except confess. to his family at least. On December 10th, 2008, Bernie sat down with Ruth and their two adult sons, Mark and Andrew. With the family all together in their Manhattan penthouse apartment, Bernie came clean. He told them that his advisory firm was actually a Ponzi scheme.

Mark was in complete shock while Andrew fell to the floor and started crying. Not only was their dad a criminal, but by confessing to them, he had made them accessories to his crimes. The brothers knew they only had one option. They had to turn their dad in.

The next morning, December 11th, Bernie was getting dressed when his doorman called and informed him that the FBI was downstairs. When the agents arrived at the apartment, he told them whatever his sons had said was true. Bernie finished getting dressed, then headed down to the FBI's office where he was arrested. But the story wasn't over yet.

Before Bernie went to trial, the government had to get hard proof of his Ponzi scheme. And it wasn't hard to find. When investigators went to the office for his fake advisory firm, they found boxes full of forged documents and records. All the evidence of the Ponzi was just sitting there in plain sight. With everything out in the open, the fallout was devastating. While well-known people like Steven Spielberg and New York Mets owner Fred Wilpon had fallen prey to Bernie's lies, most of his victims were everyday people.

Teachers, salesmen, doctors, and elderly members of the Jewish community had trusted Bernie to manage their money in hopes of retiring with a safety net. Even charities and foundations had invested with Bernie. Now, all of their hard-earned money was gone and the government was determined to hold Bernie responsible.

On March 12, 2009, Bernie went on trial for his crimes. He pleaded guilty to 11 counts of securities fraud, money laundering, and perjury. He was later sentenced to 150 years in prison and sent to Butler Federal Correction Institution in North Carolina. He never left. He wasn't the only one who faced punishment. Bernie's right-hand man, Frank DiPascali, was also arrested in 2009 and pleaded guilty to 10 counts of securities fraud. Like Bernie, Frank was cooperative with investigators,

which ultimately delayed his case. He died of lung cancer in 2015 before he could receive a prison sentence. A few of Bernie's other employees were also arrested and faced jail time. For the most part, these were the people who helped him forge documents. As for Bernie's family, his sons, Mark and Andrew, had worked for the legitimate brokerage

firm BLM. But in the wake of Bernie's arrest, the public was wondering if they were in on the Ponzi scheme too. According to federal investigators, they weren't. The authorities ruled that Ruth, Mark, and Andrew weren't involved in any way and none of them were ever formally charged with any wrongdoing. But the public didn't quite buy that.

People continued to speculate and cast blame on Bernie's family. For Mark, the shame was too much. On December 11, 2010, he took his own life. It was a tragedy, but it didn't erase the pain that Bernie's victims felt. They were still out millions, even billions of dollars. In addition to his prison sentence, Bernie was forced to forfeit his assets, including various investments, property, real estate, and anything else of value to start paying back his victims.

In total, Bernie defrauded his clients of an estimated $64 billion. His assets definitely weren't enough to cover that. So the Justice Department established the Madoff Victim Fund to recover all the money he'd lost. As of 2023, the fund has recovered over 90% of the victims' total fraud losses. Meanwhile, 82-year-old Bernie Madoff died in prison on April 14, 2021, alone and disgraced. and disgraced. In the end, one reason this story is so memorable is for the sheer amount of money involved. It's also because none of this had to happen. Bernie Madoff didn't need to defraud anyone in order to make money. Judging

by his legitimate firm, he was a pretty good investor. He could have done very well for himself if he just laid by the rules. But that just wasn't good enough for him. Bernie's endless greed led to one of the most damaging financial crimes of all time. He was the ultimate fox in the hen house, preying on anyone who came too close to him.

And for anyone who wasn't paying close enough attention, he swallowed them up. Thank you so much for listening. I'm your host Nicole Lapin. Come back next time as I take you through another wild story and offer you some advice along the way. Money Crimes is a Crime House original powered by PAVE Studios. Join me every Thursday for a brand new episode. Here at Crime House, 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 CrimeHouse 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 Tardiff, sound designed by Russell Nash, and included production assistance from Sarah Carroll.