Madoff Scheme 'Too Good To Be True' Erin Arvedlund was among the first to report on the many suspicions about financier Bernie Madoff, in 2001. In her book, Too Good To Be True, she reports on how Madoff managed to fool investors, and the SEC, for so long.
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Madoff Scheme 'Too Good To Be True'

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Madoff Scheme 'Too Good To Be True'

Madoff Scheme 'Too Good To Be True'

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This is TALK OF THE NATION. I'm Rebecca Roberts in Washington. Neal Conan is away.

Back in 2001, a young reporter named Erin Arvedlund was looking around for a good financial story. She had heard the name Bernie Madoff a couple of times, always coupled with astonishing statistics about how much money he was able to make for his investors. So, Arvedlund set out to try to understand how Madoff did it. She talked to Madoff investors and to her financial sources and to Madoff himself, patched through a fuzzy phone line from a boat in Switzerland. But what no one could make sense of was how he made his billions.

Arvedlund published her article in Barron's and though she raised a number of questions, few people paid that much attention. Fast forward to 2008, and we were all paying attention. Madoff's billions were gone. His investments were fiction. His elaborate fraud had wreaked havoc on people's lives, from the very rich to charitable institutions to the not so rich, all now downright devastated. Erin Arvedlund has now pieced together the complicated picture.

Her new book is called "Too Good to Be True: The Rise and Fall of Bernie Madoff". And she is with us to help make sense of the story. Later in the hour, we are making sense of health care co-ops. But first, what don't you understand about the Bernie Madoff story? If you have questions, our number here in Washington 800-989-8255. Our Email address is And you can join the conversation at our Web site. Go to and click on TALK OF THE NATION.

Erin Arvedlund is an investigative reporter. Her book is called "Too Good to Be True" and she is with us from the studios of Audio Post in Philadelphia. Welcome to the program.

Ms ERIN ARVEDLUND (Investigative Reporter; Author, "Too Good to Be True"): Hi. Thanks, Rebecca.

ROBERTS: So, when you wrote this initial article for Barron's, you sort of asked this basic question: how do you make your money? And what did you find out?

Ms. ARVEDLUND: I had no idea that it was a Ponzi scheme back in 2001. I just knew that this was a big Wall Street figure. He was - had been the chairman of NASDAQ and he was making these incredibly consistent returns, never had a losing year. And he just wasn't doing what he said he was doing.

ROBERTS: Is that what made you want to write about him?

Ms. ARVEDLUND: Initially, I just - I had heard that he ran a billion dollar hedge fund. Yet his name never appeared in any of the usual places. He wasn't profiled on CNBC or in the Wall Street Journal, at least not for the hedge fund. And I took a look at some of the returns that he was said to be producing and was actually tipped off by a source at Deutsche Bank, worked there at the time, his name was Ken Nakayama. And he gave me the name of one of these feeder funds he called it, which I didn't know what they were at the time. And he said this fund gives money to Madoff to manage. The returns seem so good, they almost seem manufactured. They almost seem engineered. You should dig into this. And that was the genesis of the story.

ROBERTS: And as you interviewed people for the story, did you get any sense of Madoff as a man?

Ms. ARVEDLUND: Not really. He was very affable on the phone for the brief period that I talked to him. It was only about 10 minutes. And he succeeded in really telling me very little.

(Soundbite of laughter)

Ms. ARVEDLUND: So, his investors however were rabidly loyal. One told me he put his kids through college on his investment in Madoff. And then finally, another told me, he, you know, Bernie Madoff had requested he never tell anyone that he was managing the portfolio, which on Wall Street is - that's just anathema to the whole culture. If you do well, you want people to know about it. It didn't make any sense.

ROBERTS: So there were a lot of things that didn't add up.

Ms. ARVEDLUND: Mm-hmm.

ROBERTS: Did you have any sense when you wrote that article of the size and scope of it?

Ms. ARVEDLUND: No idea. I expected after the story ran to get lots of angry phone calls, especially from Madoff himself. And I heard nothing.

ROBERTS: Really? Crickets…

Ms. ARVEDLUND: Total silence. Nothing…

(Soundbite of laughter)

Ms. ARVEDLUND: I found out years later, in fact after Madoff was arrested, that his two sons got up on the trading floor at Madoff's offices in Manhattan and gave a big speech saying there was nothing to the Barron story. There was no funny business going on and the story wasn't to be mentioned anymore. Years went by. I thought I was either wrong or crazy. And I kept telling people, whoever I could think of in the industry, you know, you should really look at this. And sometimes I even regret I didn't follow it up myself.

ROBERTS: And we should clarify that Bernie Madoff's two sons, Mark and Andrew, worked for him and ultimately were the people who turned him in at his direction.

Ms. ARVEDLUND: Exactly.

ROBERTS: What was your reaction when you found out that he'd been arrested?

Ms. ARVEDLUND: Well, I had actually left journalism. I had been a reporter for many years, but I left journalism, was working on Wall Street myself. And I had just gotten laid off in December of '08. And I was watching TV in my living room and saw - heard the headlines that he'd been arrested and I thought, oh my God, they finally got him. However, I had no idea that it was a Ponzi scheme. I had no idea that it was a $65 billion Ponzi scheme or that Madoff and his cronies were, you know, printing all these phony statements. All I knew back in 2001 was that he couldn't have been making the returns he said he was.

ROBERTS: Let's take a call from Frieda(ph) in Rawlings, Wyoming. Frieda, welcome to TALK OF THE NATION.

FRIEDA (Caller): Hi. Thank you.

ROBERTS: Sure. Do you have a question?

FRIEDA: Well, yes, I do. I don't know if I'm the only ignorant one out here, but I would like to know exactly what a Ponzi scheme is and what it entails.

ROBERTS: Oh, that's a great question. Thanks so much.



Ms. ARVEDLUND: A Ponzi scheme is essentially cash-in, cash-out. So it's kind of - some people call it a pyramid scam. In other words, I raise money from you and then I give it to the next investor as their pay-out for their profits in the fund. And you basically just keep the money coming in and coming out. As long as you have more coming in than is going out, you're golden. Ponzi schemes were named after Charles Ponzi. He was also a financial swindler in Boston in the 1920s. However, I think he might actually be eclipsed by Bernie Madoff.

(Soundbite of laughter)

Ms. ARVEDLUND: So - anyway, that's it.

ROBERTS: Yeah, it's - so the money is never being invested. You're paying off…

Ms. ARVEDLUND: Exactly.

ROBERTS: …early investors with the money from the late investors.

Ms. ARVEDLUND: Exactly.

ROBERTS: And at some point, you don't have enough money.

Ms. ARVEDLUND: Mm-hmm.

ROBERTS: Although we should say that Bernie Madoff elevated the Ponzi scheme…

(Soundbite of laughter)

ROBERTS: …to not just a new scope in terms of the amount of money, but the sources of the money and the way they were paying off each other and the interrelated nature of all of these different…


ROBERTS: …sources of money. It was way beyond what Charles Ponzi did.

Ms. ARVEDLUND: Yeah. And the length time, too. Most Ponzi schemes don't last. For instance, in Charles Ponzi's case, I think his lasted a few years. In Bernie Madoff's case, his scam lasted, in some estimates, several decades. And part of that was because the stock markets were going up, people were happy with his returns. They thought it was a very low risk investment. I mean, he wasn't promising sky-high returns. He was promising 10 or 12 percent a year. That didn't sound like a scam. And then he was able in the - I believe, in my book, I talk about when the scam began. I think it began in the 1960s when he started the business out of his father-in-law's office.

ROBERTS: You think it was never legitimate.

Ms. ARVEDLUND: No. Madoff did have a legitimate business. He had a real broker term on Wall Street and he was a wealthy man as a result of that. He was considered an innovator with computerized trading. He had helped to found NASDAQ. He wasn't the founder, but he had helped to found it. And there was really no reason for him to carry on this phony hedge fund, but he did.

ROBERTS: Well, that was one of the things that was most stark in your book was this idea that he didn't need to steal to be a rich man. He would have been very successful legitimately.

Ms. ARVEDLUND: Absolutely.

ROBERTS: So why do you think he stole?

Ms. ARVEDLUND: You know, I think the scam began so long ago, his father-in-law - Ruth Madoff was his wife, and Ruth's father helped recruit some of his early clients from his accounting firm, and I think that it became such a family affair that it was too difficult to end. And by the time, say, the early 1990s rolled around, there was really no reason to stop it. Madoff had recruited - started to recruit billions of dollars from these, you know, feeder funds or fund of hedge funds, which basically just feed hedge-fund money managers, and it started to get bigger and bigger. This is the mystery that I believe his - Madoff's right-hand man will clear up for us, Frank DiPascali, who was pleading guilty last week.

ROBERTS: Let's take a call from Jeff(ph) in White Owl, South Dakota. Jeff, welcome to TALK OF THE NATION.

JEFF (Caller): Yeah, hi. How could the federal government not have caught this at some point, especially when it went on for years?

ROBERTS: Erin Arvedlund?

Ms. ARVEDLUND: Great question - two reasons. One is that the SEC does not actually regulate hedge funds. They regulated Bernie Madoff's brokerage firm on the two floors of his office building, but they had no clue that he had this big hedge fund, billion-dollar hedge fund, on a completely different floor of the building. It sounds almost Keystone Cops, and it is, sadly.

The second reason was that Bernie Madoff and his brother, Peter Madoff, in the 1970s went to the SEC's aid. The agency at the time had a mandate to help break the monopoly of the New York Stock Exchange and really help the average investor so they wouldn't be robbed by commissions. The SEC had no idea how to do that, and Bernie and Peter Madoff came to them and said we're going to help you. We're going to help you create this new, third market. They made the SEC's agenda their own, and I believe as a result, the agency really overlooked or didn't care to look at his - the red flags that were out there.

ROBERTS: Have there been any repercussions within the SEC since?

Ms. ARVEDLUND: There's a very important internal investigation going on right now at the SEC. The Inspector General Report is due out at the end of August, and I am really looking forward to reading it.

ROBERTS: We'll talk more with Erin Arvedlund in a moment. Her book is called "Too Good to Be True: The Rise and Fall of Bernie Madoff." We're taking your calls at 800-989-8255, or send us email. The address is I'm Rebecca Roberts. It's TALK OF THE NATION from NPR News.

(Soundbite of music)

ROBERTS: This is TALK OF THE NATION. I'm Rebecca Roberts in Washington. We're talking to Erin Arvedlund. She's one of those reporters who raised the alarm on Bernie Madoff early, and she's got a new book out about Madoff. It's called "Too Good to be True." You can see the original article she wrote back in 2001, as well as one by another skeptical reporter, over at our blog, that's And tell us what you don't understand about the Madoff case. Give us a call at 800-989-8255, or send us email, You can also join the conversation on our Web site,, and click on TALK OF THE NATION.

We have an email from Sabrina(ph) in Westminster, Colorado, who says: How was Bernie Madoff able to trick so many people into investing with him? Surely mine couldn't have been the only mother to warn me that if it seems too good to be true, it probably is. Were investors really that gullible, or do you think their vision was somewhat clouded by greed?

Ms. ARVEDLUND: Let's see. I think people don't like to - people don't like to be judged on how they manage their money. It's a very personal decision. So for those investors who knew that Bernie Madoff was investing their money and knew that they could have investigated some of the red flags that were out there, I think they were motivated in part by greed because they had the opportunity, at least, to investigate, and many of them didn't.

Bernie Madoff used a very old trick, which was, many times, he would turn people down the first time they wanted to get into his fund. And he didn't have a sales force, per se. He relied almost exclusively on referrals, so every investor was converted into a sales person. And so if your father or your mother or your uncle or your aunt is saying I can get you into this fund, they're a trusted party. You're really going to take their word for it.

Now, for those who didn't know that Madoff was investing their money - and there are a lot of them. For instance, many of these feeder funds turned around, like Fairfield Greenwich and Tremont and some of the others that have been named by - in suits from the Madoff trustee, they turned around and sold these funds to pensions and 401(k)s and retirees who had no idea that Bernie Madoff was running their money. So he infected a lot of different people across America. So in those cases, those people weren't greedy. They just had no idea, and I think the feeder funds are really going to have to answer for that.

ROBERTS: Well, there's also a sort of third group of people who were suspicious, and so they limited their investment with Madoff…

Ms. ARVEDLUND: That's right.

ROBERTS: …sort of I'm willing to take a little bit of a risk that this guy isn't all that he is looking like, but his returns are so good that maybe I'll take a small risk.

Ms. ARVEDLUND: Exactly, exactly. And the other thing that was so appealing about Madoff was that if you wanted your money out, he'd give it right back to you. It was almost like having a money market account or an ATM. It's very hard to get your money out of, say, a mutual fund. Sometimes it takes several days or even weeks. Madoff…

ROBERTS: Because it's actually invested in something.

Ms. ARVEDLUND: Yes, because you're actually buying securities and stocks and bonds. But in Madoff's case, he would give the money back…

(Soundbite of snapping fingers)

Ms. ARVEDLUND: …just like that.

ROBERTS: Let's hear from Patricia(ph) in Charlotte, North Carolina. Patricia, welcome to TALK OF THE NATION.

PATRICIA (Caller): Yes, hi. My question is, I think, a really simple one. I don't know, I always wondered: Where is all the money?

Ms. ARVEDLUND: Great question. So let's start with the $65 billion. That is actually not a real number because that number includes all the phony profits, all the false profits that Madoff claimed to have at the end of 2008. Now, if you assume that, say, this is going on for 20 or even 30 years, and he was promising 10 percent a year, the quick math means that if you take out all those false profits, that real number is probably closer to, say, $12 to $20 billion of real money, real dollars.

We know about half of that money came from feeder funds. So that leaves anywhere from $6 to $10 billion, and the question is where is that money? So, Madoff spent a lot of it. He and his family went on an enormous spending spree. In 2008, they were buying real estate, apartments, cars. Madoff's brother, Peter Madoff, bought an Aston Martin for over $100,000. And the rest of it has gone out to some of Madoff's favored investors who were taking out more money from the Ponzi scheme than they were actually putting in over the years, and two of those guys are actually under investigation right now.

ROBERTS: We have a similar email from Katie(ph) in Royal Oak, Michigan, who says: Did Bernie Madoff not invest any of the money at all? Or did he invest some of it and use the rest to pay people off?

Ms. ARVEDLUND: As far as we can tell, he never invested in a single security on his phony hedge-fund side. In other words, he had a storefront. He had his real brokerage firm on two floors of his office, and they really were trading. They were doing a very legitimate business. And then there was this other, secret floor where money went to disappear, and they weren't doing any trading at all. They were just manufacturing phony statements for years.

ROBERTS: Let's hear from Chuck(ph) in San Francisco. Chuck, welcome to TALK OF THE NATION.

CHUCK (Caller): Thanks very much. I just want to say, I think it's a bit unfair to characterize a lot of people as greedy or gullible because it seems to me - well, first of all, as you said, it wasn't so much the rate of return as the consistency of the returns that were really extraordinary in this case.

Ms. ARVEDLUND: Mm-hmm.

CHUCK: But more than that, I don't think - not everybody in the world can be a forensic accountant or a financial expert who is really going to be in a position to be able to say, well, what's reasonable to expect, and what's unreasonable to expect?

And you know, when you've got a society where more and more people are having to invest in order to support their retirements, and you had talk of privatizing Social Security and so forth, it seems to me that this was really a failure of regulation

Ms. ARVEDLUND: Mm-hmm.

CHUCK: Because, you know, I think it's too much to expect to say that people should've been able to - a lot of people should've been able to know that this was not on the up and up.

Ms. ARVEDLUND: Mm-hmm.

ROBERTS: Chuck, thanks for your call.

Ms. ARVEDLUND: I would say Madoff had - there was one red flag that I could point to, and I would disagree with the caller on this one point, which was that his fund never had a losing year. And if you're investing in the stock market, there will be down years. And this is exactly how the whole Ponzi scheme unraveled, which was that in 2008, as most of your listeners know, we had a record-setting correction in the stock market. We hadn't seen a year like that since the Great Depression, and yet Bernie Madoff's returns were up for the year. And you don't have to be a financial whiz to see that that just doesn't make any sense. So that's exactly how his end came, which was that everyone else was - while everyone was losing money in their other investments, they all ran back to Bernie Madoff and said okay, we really need our money back, and it just wasn't there.

ROBERTS: We have an email from Ken(ph), also in the Bay Area. He says: My elderly mother lost a third of her life savings to Madoff. When my father died six years ago, I reviewed her several investment accounts. Yours was the only article I found that cast doubt on Madoff's integrity. There were several other puff pieces that made him look respectable.

Since December, I've wondered what more I could've done. Even a Freedom of Information Act request to the SEC in Washington would have been fruitless, ditto for a FOIA request to the New York SEC. I never would've thought of contacting the Boston office at the SEC, which we now know had the dirt on Madoff from Harry Markopolos.

Ms. ARVEDLUND: Yeah. I hate hearing stories like this because, you know, this is a guy who - or a woman, perhaps - who tried to do the right thing. And you know, I think in this case, the SEC really fell down on the job because they had an opportunity and many red flags from Harry Markopolos, who had been sending letters to the agency for almost 10 years by December of 2008. And it was only maybe two or three years prior that the SEC finally opened an investigation, and yet they found nothing. So in any case, I think that's part of the reason why hedge funds will now fall under government purview, either SEC or FINRA. The question is: Will they do any better of a job on the rest of the hedge funds as they did on Bernie Madoff?

ROBERTS: Let's hear from Joe(ph) in Cedar Rapids, Iowa. Joe, welcome to TALK OF THE NATION.

JOE (Caller): Hi, how's it going?


JOE: I used to be an IT guy for - up until Madoff - the largest Ponzi scheme in the history of the United States, the Bennett Funding Group out of Syracuse, New York. They were, I think, in the tune of $500 million or something like that when all was said and done. I don't understand how Madoff's staff, IT folks, regular folks, whatever, didn't at least have a clue that something weird was going on.

ROBERTS: Did you have a clue? Joe, did you have a clue when you were working there?

JOE: I did. We thought something was a little weird because information would leave the one part of the computer system completely out of the system, and then to reentered into the investor finance system. Then it was doing multiple securitization, basically selling the same piece of paper over and over and over. So it would have been, you know, easier to catch, I think, maybe in some ways.

But we had a clue as we were, you know, writing the software to manage this stuff and we'd asked, well, how do we get information from, you know, the regular system, you know, the accounting system into the finance system and back and forth? And, oh, don't worry about that. So-and-so takes care of that. It was all a manual process. And anytime you've got a manual process and two automatic processes, you should be able to communicate smoothly and know something.

Ms. ARVEDLUND: Right. That's a very good catch. Madoff had an old IBM AS/400 computer, which he used completely separately from his space-age brokerage firm, the legitimate operation. He had an old computer that they would use to punch in stock prices manually. And that was how they were able to create the template for all the phony statements. So the caller is exactly right. That was not connected to any of the other systems, so it was perfect. It was a dinosaur. And they couldn't get rid of it because that's how they created all the false profits.

ROBERTS: We have an email from Dale who says one person has committed suicide. What other fallout has there been? Who else is being arrested and who should?

Ms. ARVEDLUND: Yes. There were two actually - two suicides as a result of the Madoff scam. One was a retired military officer in the U.K. and Rene-Thierry de la Villehuchet, who was an investor, a billion-dollar investor in Madoff, a Frenchman who committed suicide not long after Madoff's arrest.

The fallout personally is that the Madoff investors are going back to SIPC, which is the Securities Investor Protection Corporation, which is kind of like the insurance company for investors. It turns out SIPC's out of money. So that's going to be kind of a problem.

And I think also the fallout is for - personally, is that it's caused a lot of people to go back to their portfolio managers and say: Who's in charge of my money? Who actually touches the money in my portfolio? Because a real good money manager always has your money in third-party custody. So, you know, if you have a Schwab Accounting or TD Ameritrade, then somebody else actually controls the flow of money besides the portfolio manager. So a lot of people have gone back and asked these questions, and as a result, other Ponzi schemes have been uncovered, like Allen Stanford in Texas and Tom Petters in the Midwest. So, that's one good thing.

ROBERTS: Do you expect more arrests to be made…

Ms. ARVEDLUND: I sure do.

ROBERTS: …within the Madoff scandal?

Ms. ARVEDLUND: Yes. Last week, a man by the name of Frank DiPascali pled guilty to acting as Madoff's right-hand man. I think of him as sort of consigliare to Madoff's Godfather. And Frank DiPascali worked for him for 30-plus years on the phony hedge fund side and helped oversee a team of people who produced these phony statements. Now, I think Frank DiPascali's been cooperating with prosecutors from day one. He's facing 125 years. But I think he's going to name another 10 to 12 people. I personally think that Madoff's brother, Peter Madoff, could be indicted just merely for sending in false filings to the SEC. But Frank DiPascali knows where all the bodies are buried. He knows who cooperated, which family members, for how long and which investors also may have been complicit in the fraud.

ROBERTS: You're listening to TALK OF THE NATION from NPR News.

Let's take a call from Max in Phoenix, Arizona. Max, welcome to TALK OF THE NATION.

MAX (Caller): Hello. What I am confused about here with the entire Madoff thing is not how much money he took away, the ability for Madoff to do is. It's that we have a market in which there are economists and theorists who didn't catch this. If this article was written in 2001 and there were others who, at least, there was a murmur of something funny going on with Madoff, why wasn't it caught by the system? You know, the market capitalist system of an economist saying, this should not happen. No one should have consistent returns like this all the time. There should have been alarm bells going off constantly within academia or someone on Wall Street saying this doesn't ever happen. We need to say something with regards to Madoff that he's not legitimate, that this doesn't happen.

Ms. ARVEDLUND: I totally agree with the caller. In fact, the surprising part about Madoff is that so many people on Wall Street figured something was wrong. And they knew that he was crooked. There were many of the big investment banks who - which wouldn't do business with Madoff. Among them were Goldman Sachs, Merrill Lynch, Credit Suisse and some others.

Within the industry, which is not a very large industry, there were a lot of rumors about Madoff, and that was the genesis from my original story. Again, it wasn't mainstream media. Barron's is a very business-oriented magazine. However, it was out there. And Harry Markopolos, who I didn't know at the time and had no idea that he'd been following Madoff for years already, he had gone directly to the SEC. And due to a couple of - bureaucratic infighting and the fact that the SEC rarely made big cases, it really went nowhere until 2005. So people on Wall Street knew, and it - there were consequences, however, for putting your hand up and saying this guy is a crook. It was easier just to not say anything.

ROBERTS: Erin Arvedlund, thank you so much for joining us.

Ms. ARVEDLUND: Thank you, Rebecca.

ROBERTS: Erin Arvedlund's book is called "Too Good to Be True: The Rise and Fall of Bernie Madoff." You can find an excerpt from her book, as well as a link to her 2001 article "Raising the Alarm about Madoff" at the new

Coming up, we're hearing that a government insurance plan or public option may be dropped from the health care debate. So what would replace it? I'm Rebecca Roberts. It's TALK OF THE NATION from NPR News.

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