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From wandering, I'm Lindsey Graham and this is Americans, Carl. Today, we're wrapping up our series on Bernie Madoff. For decades, Madoff was considered a titan of Wall Street. He managed tens of billions of dollars in investments and was even chairman of the Nasdaq. A few others in the world of finance commanded as much respect and influence as Bernie Madoff. That's partly why in late 2008, the public was shocked to learn that Madoff was a con man.

For years, he'd been running a massive Ponzi scheme and after he was arrested in the scheme, unraveled. Madoff's investors learned an even more shocking truth. Billions of dollars of their money were gone. The story of Bernie Madoff raised concerns about regulators and their relationship to the finance industry. But it also raised profound questions about con men like Madoff. Investors and the public were left to wonder how Madoff managed to dupe so many for so long. Today, I'll speak with Diana Henriques, who covered Wall Street and the Madoff case for The New York Times.

Henriques is also the author of the book The Wizard of Lies, Bernie Madoff and the Death of Trust. While researching that book, she had the chance to interview Madoff in person. We'll talk about what Madoff was like and how he was able to exploit the trust of so many people will also discuss the steps that officials are taking to protect us from the next Bernie Madoff. Our conversation is next.

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Diana Henriques, welcome to American Scandal. I'm delighted to be here, thanks so for a lot of people, the news coverage of Bernie Madoff was the first time they heard the phrase Ponzi scheme. The concept for some can be hard to follow because it's perhaps a bit outrageous. So could you perhaps just walk us through what a Ponzi scheme is and how it operates?

Of course, it's easier to understand how it works if you call it by its old name. It's been called a Ponzi scheme since 1920 in honor of one of its great practitioners, Charles Ponzi, who was a con artist in Boston who ran a nine month fraud in that city that year. But prior to that, the fraud had been around for decades and decades when it was called a Peter Topolsky after the old proverb, robbing Peter to pay Paul. And that's exactly what a Ponzi scheme is.

The Ponzi schemer robs his later investors to pay the promised returns to his earlier investors and then robs the investors who come in next to pay the returns to the second investors. So it's a constant robbing Peter to pay Paul. And that is the essence of a Ponzi scheme. No real investing takes place. It is simply a transfer of money from later investors to early investors. And that's how you make your promises to them.

And presumably you're taking a cut all along the way. Yes, in the and the cut varies. It's always a bit of a risk to be greedy if you're a Ponzi schemer, because the cash flow that you're getting from new investors is all the money you have to pay off old investors who might someday want to withdraw their money. And if you don't instantly cover that withdrawal, your fraud falls apart. That's ultimately what brought Bernie Madoff down. So you have to make very smart decisions about how much cash to keep in reserve to cover withdrawals from your investors and how much you can slip into your own pocket or spend on Rolls Royces or vintage Rolex as the Ponzi schemes that have collapsed fast and furiously are those where the Ponzi schemer got too greedy and simply burned through the money people were giving him instead of using it to keep his promises to his earlier investors.

And speaking about Bernie Madoff's scheme in particular, what were the mechanics of it? How did it differ, if at all, from the mechanics you just described?

It was what I think of as the modern Ponzi scheme. He really reinvented the Ponzi scheme in ways that we didn't fully understand until it was over. A classic indicia of a Ponzi scheme is the sky high returns, get rich quick, make money overnight. Those were the red flags that not only investors, but also regulators tended to look for to warn them that something might be a Ponzi scheme. Well, Bernie avoided that pitfall completely. His returns were always plausibly within the kinds of investments that affluent investors could expect from hedge funds or from other investments.

So he was careful never to wave that red flag. He never gave these outrageously high returns that would have alerted people that something was wrong, that enabled him to solicit money from far more sophisticated and far wealthier investors. The typical Ponzi scheme worked for the typical Ponzi schemer with his sky high return promises is really left with the gullible investor, the unsophisticated investor, unless he's a sports figure sometimes, or a celebrity or someone who just won the lottery, who can be very unsophisticated about how to manage their money, they're not going to have a lot of money.

So Ponzi schemes. Before Bernie Madoff tended to be relatively small, they tended to be constrained to the circle of people the Ponzi schemer knew and could persuade to invest with him or her. But Bernie reinvented the game. He kept the returns low enough to seem plausible to very wealthy investors, to hedge fund managers, pension fund managers, people own companies to retire. Chairman for Merrill Lynch, one of the best known Wall Street economists in the business, very sophisticated people.

And the simple fact that they were his investors gave comfort to the less sophisticated investors that they must know what was going on. So that was one of the big things that Bernie did differently. He kept the returns plausible. He also managed to keep the explanation for how he was getting those returns complex enough to befuddle even fairly sophisticated people. That wasn't. As unusual, but it was certainly something that became increasingly useful as our marketplaces became more complex. The advent of derivatives of options trading, the things that changed so dramatically in the early 90s for average investors like me, you'd look at Wall Street and say, I just don't understand this.

Madoff would say, that's OK. I do. I'll sort it out for you. So he was able to reassure people that he understood complex investments, that they may not have understood completely themselves at a time when that world was changing very quickly. And just simply from a personality standpoint, Madoff was the anti Ponzi. He didn't show any of the personal characteristics or the behaviors that we have long associated with Ponzi schemers in history who were typically flamboyant, larger than life characters telling jokes in the corner, buying drinks for everybody in the room, people who who were certain to stand out and grab your attention.

And Bernie did not strike anybody that way. He didn't seem to anybody to be a stereotypic Ponzi schemer. They could not believe that he could be a crook because he didn't fit their stereotype of what a Ponzi schemer would look like. And then, of course, in more recent years, as you point out, plenty Ponzi schemes themselves fell out of attention. They were smaller, less visible in the news business. Those of us in the business press have much bigger stories to cover in the nineties and two thousands and certainly since the great meltdown in two thousand eight.

So a whole new generation of investors came along for whom Ponzi schemes were, as you said, ancient history, if they'd heard it at all. So that gave Madoff access to a whole bunch of new people who didn't even know to be suspicious of and even ask themselves, could this be a Ponzi scheme?

So Ponzi schemes as we know them require a constant influx of new clients. If they don't show up, the game's over.

You hinted at this, that Madoff was the opposite of flashy, the opposite of what people peg as a con man. What else may Bernie Madoff so good at getting new clients?

Well, bottom line, I think it would have to be his reputation on Wall Street. Now, I want to just quickly say that some shifty guy in a cheap suit with a terrible reputation can never run a Ponzi scheme. I mean, that's just impossible. Every Ponzi schemer has to be able to cultivate the trust of other people or they need to go into another line of crime, frankly. But Bernie had a reputation that really, prior to his arrest, was darn near impeccable.

In a world where any brokerage firm is going to have a few blocks on its ledger, it's going to have a few difficult run ins with regulators. Bernie didn't there was a huge price fixing scandal in Nasdaq stocks that hit Wall Street in nineteen ninety eight and more than two dozen major Wall Street firms. Household names were caught up in that litigation. The Justice Department sued twenty eight of them. They collectively paid nearly a billion dollars for fixing the prices on Nasdaq stocks.

Bernie was one of the largest Nasdaq traders at the time and was one of the few who was not sued.

So if you're a regulator in nineteen ninety eight, you could be forgiven for thinking that Bernie Madoff is one of the only honest Nasdaq traders on the street.

So we can't dismiss the degree to which that reputation that he had with regulators, with everybody on Wall Street, enabled him to open doors, to meet people, to be exposed to people who would be inclined to trust him. And that gave him access to this emerging community of hedge fund managers who began to collect around him in the early 90s, who themselves had credibility on the line. These were hedge funds connected with major banks, Banco Santander, with major brokerage firms, with major European investment funds.

And when he started doing business with them, it exponentially increased the number of investors he could reach. I have said frequently that Burnie's was the first global Ponzi scheme, and it was not because he was able to reach around the world, but because he was able to connect with people who could reach all around the world.

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That's zip recruiter dotcom. Com a zip recruiter. The smartest way to hire a unicorn. Now, this character of Bernie Madoff, you know firsthand, because you were one of the first writers who was able to visit Madoff after he went to prison. How was the man like in prison as as a person?

Well, I had actually known Bernie for 20 years before he was arrested. I knew Bernie from my days as a Barens reporter in the mid nineteen eighties. Some of the strategies that his brokerage firm pioneered were very useful to reporters. He was one of the first brokers on Wall Street to trade New York Stock Exchange stocks after the stock exchange closed. So back in those days, trading was at twenty four hours. It stopped when the bell rang on Wall Street, but trading continued after hours around the time zones through small firms like Bernie.

So if you needed to know what had happened to Exxon when some oil refinery caught fire in Los Angeles, you'd call Bernie. So he was a source of mine for 20 years. I had known him very faintly, seen him at conferences, talk with him and his brother Peter about issues of market structure as those were changing in the nineteen nineties. And so he was in my Rolodex. And that's really the only reason I think that I was first to jump on the story when he was arrested.

I recognized the name he'd really been out of the headlines for at least a half dozen years, but I remembered him from those earlier stories. And if you had an acquaintance with him and a much deeper acquaintance with his attorney, who was a former federal regulator, well-known white collar defense lawyer whom I worked with in many other cases, he represented many other people that I had helped send to prison. So I knew him as a white collar crime reporter.

He was already in my phone book. So when he was arrested, I immediately started contacting his attorney to see if I could organize an interview that was out of the question until after he was sentenced. But once he arrived at prison, I continued to pursue the interview request and he finally agreed in the summer of twenty ten and I went through to the Bureau of Prison ropes to get through to see him. And so I was seeing him there in prison in contrast to what he had been like in the wild.

You know, I, I knew that the Bernie Madoff as a free man. And so then I met the Bernie Madoff as an inmate serving a life sentence. And what I think would strike most people was how incredibly normal he is. He seemed like someone's low key grandfather. But his prison garb was crisply pressed, is a brass belt buckle with beautifully polished, his leather sneakers were shined and he was still a dandy, as he'd always been when he was in his normal environment.

And as he always had, he worked at winning your confidence from the first syllable out of his mouth. He very deftly used these little small compliments to show you that he thought you were like the smartest person he'd ever met. He was so impressed with you. And I saw that little magic trick happening during the interview and didn't really quite take in how important it was until after I'd done the second interview with him. And then I began to see how he would have been able to use that gift of making the people he was talking to feel special and that he was so lucky to have met them and that he thought they were so smart and so talented.

I could see how that would have given him such immense power in terms of winning their trust.

So he was still a dandy. He was still charming, but he was also still a charlatan. He he pulled a fast one on you to tell us that story.

Yes, he did. And, you know, I can't blame him for it.

I can only blame me for one of the terms that we had negotiated for this interview, because Bernie was very concerned that talking with me in prison not reignite the storm of tabloid coverage around his family did finally by the summer of 2010, started to calm down. It gotten to the point where his wife, Ruth, and his sons could leave their apartments without being absolutely assaulted by paparazzi. And he didn't want to reignite that by giving a public interview. So his condition of talking to me was that I could only use the interview material for the book I was writing.

He believed in context that that would be less difficult for his family to deal with. I had discussed this demand with my editors at the Times and they had agreed that I could do the interview under those circumstances. But when we talked about it, I, I put to him, I said, Bernie, you're leaving me a little exposed here. I'm barred by this agreement from printing anything out of this interview until my book comes out. But there's nothing to bar you from talking to other authors or reporters in the interval, which would allow them to scoop me in effect on this interview.

And I'm sure you can understand what a problem that would be for me, Bernie. Oh, of course, he understood completely sympathetic, understood completely. He wanted to be sure that my book would be the one where he would be heard speaking and telling his story. So, of course, he would not talk to any other authors or reporters until my book came out. He even put it in writing. Lynsey, put it in an email to me that this was our agreement.

I would not use any of the material from the interviews until the book came out. He would not speak with any other reporters until then. And I said, great, you know. Don't ask me why I believed him. Do not ask me why I trusted him, except he was such an exceptional con man and I couldn't figure out why he would not keep that agreement. It seemed to me to be in his best interest to keep it. So I believed it and went about my business.

Did the interview continued working on the book, was about to go down for my second interview with him. When I started hearing whispers that there were there was a made up interview coming out that 60 Minutes was being offered a reporter who had made off interview. Well, I you know, I go crazy. I call a few contacts close to Bernie and say, have you heard anything about this? And they said, no, but would it surprise you that he would betray you?

And to say, well, I guess not, actually, you know, I knew he was a liar when I made the agreement. So I confronted him when I got down to the prison. And he admitted that, yes, he had, in fact, done a telephone interview with the reporter. And I'm holding the e mail in my hand spluttering. I can barely speak to Bernie. You promised. He said, well, maybe he gave all kinds of explanations to try to exonerate himself, but the damage was done.

I was able to engineer sort of a scoop saving device. We ran that interview the very next day in The New York Times. And the interview he'd given by telephone to another reporter didn't surface for years. So I managed to save myself. But I have to tell you, I felt so foolish for having trusted this man.

I already knew he was a con man. I already knew he was a fraud and a liar, but I still trusted him. So, yes, he never lost that skill.

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Well, one group in particular that didn't know already that he was a con man was the SEC, the Securities and Exchange Commission, they're the large federal agency that regulates financial markets. It's their job to be a watchdog for this kind of fraud. So how did they miss Bernie Madoff and his billions of dollars for so many years?

Well, I'm I'm not as harsh on the S.E.C. as some people were at the time because I had as an amateur financial historian, I had been aware of the arc of the SEC's effectiveness over time and since the Reagan years, in the early 80s, it had really been squeezed for resources, really almost put on starvation rations. The whole Washington obsession with deregulation meant that regulatory agencies were last in line for every bit of money that you could get out of the government.

Morale had sunk. They were losing experienced personnel, just hemorrhaging personnel who couldn't get raises at the SEC and could go to work at white collar all firms for twice or three times the money. So I was aware that the S.E.C. at the time the Madoff scandal broke had been shortchanged for years in terms of having resources and improved training and understanding of how to assess risks and so forth. That having been said, it is also true that this was the worst failure in the SEC's 70 plus year history at that time.

And the best explanation for it besides the shortage of resources was a failure of imagination. They simply could not imagine these young lawyers trying to handle these investigations simply could not imagine that a man like Bernie Madoff could be a crook. He didn't fit any of their stereotypes of a crook. He always seemed to have a plausible explanation for any questions that were raised about him. He was helpful to them on a on a dozen different issues where they were relying for advice from the street about how to handle problems.

And he had this sterling track record. And as it happened, a whistle blower who was trying to raise their suspicions about Madoff was just the opposite. He he seemed squirrelly and obsessive and paranoid and comparing him to Bernie Madoff. The SEC just couldn't stretch far enough to imagine that this squirrelly whistleblower could be right and Bernie Madoff could be a crook. There was an extensive investigation after Madoff was arrested into how the agency failed in this in this regard. And it's heartbreaking to read, really.

There were occasions where they just failed to make one phone call. And if they had just made that phone call, he would have been exposed. I have often said it was like watching the Titanic steer towards the iceberg. And you keep wanting to say, no, make the call.

But they didn't. And they always had good explanations for why they hadn't pressed that step further. But in the end, it was a devastating failure for them and obviously for the investors that they should have protected. In part, one of their problems was just the one that you so wisely cited at the beginning of this conversation, which was people forgotten about Ponzi schemes, not one of the investigators, the S.E.C. Marshall, to look at Bernie Madoff had ever investigated a Ponzi scheme.

And as it happened, the whistleblower was telling the SEC that Bernie was running an extremely complex fraud. He was citing all of these derivatives Bernie was allegedly using. And all of these strategies burning was allegedly using that to say I'm the only one who can explain this to you because it's so complex. Well, he was completely wrong about that, too. A Ponzi scheme is the simplest crime possible. You know, it's a liar with a bank account.

All you have to do is check to see if the assets are there. And that is the one thing the SEC never did.

So this whistleblower, he has some disadvantages. Then he's up against the sterling reputation of Bernie Madoff. He's a bit of an odd duck himself and then has a theory of the crime that doesn't actually match up to the real crime. Eventually, his whistle blowing gets heard and Madoff is investigated. But whistleblowers in general seem to get ignored at the beginning of their whistleblowing. Why do our federal agencies that are entrusted with the duty to investigate potential fraud like this, why are they so suspicious of all of these claims up front?

Well, it must be said that some whistleblowing can be malicious on Wall Street in particular. Simple word that a federal agency is investigating. You can cause your stock price to plummet in minutes and people can make money from that. So there is a pernicious incentive in the world of money to use false accusations to profit from someone else's reputation. So it's not wrong for regulators to be initially suspicious of whistleblowers motives, but that isn't what really happened here. In large part, there were some investigators at the SEC who did suspect that this whistleblower was just jealous of Bernie success and that he had been unable to replicate it.

And so he was trying to tarnish Bernie. But fundamentally, the problem that federal agencies confront is they receive more tips that they can possibly process. One of the salutary consequences of the Madoff scandal was that the SEC really pulled up its socks about dealing with whistleblowers. They launched a complete office of the whistleblower that was designed solely to receive, assess, analyze and reach out to these tipsters to guide their investigations in return for which they paid the tipster, Abadie, a bonus for any penalties that they were able to collect as a result of the tipster's work.

And that that, I think, was a very promising consequence. But it tells you how bad things were in the beginning. Lindsy that of whistleblowers. Warnings could fall to the bottom of the inbox. They could never be taken seriously. They could be ascribed to malicious motives and just did not get taken this seriously. They should have been so this whistle blower, Harry Markopolos, he caught on to Bernie Madoff when he was unable to replicate Madoff's gains in the markets, his performance and you've mentioned that Bernie was smart to keep those gains small, but still they were renowned for being good and consistent.

Why didn't this give more people other than Markopolos? Why didn't others grow suspicious or were there others that were suspicious?

You know, two great points there. Why didn't others grow suspicious? Well, the key answer there is they were blinded by trust, but Bernie always had the right answers. If people would question him about the consistency of his returns, you would point out that that was the beauty of the strategy he was using. He was designing the returns to be consistent. He was giving up some profits on the upside to avoid losses on the downside. And the result was a much more consistent, albeit not as profitable, rate of return.

So he would dismiss the consistency argument right away, saying, yes, that's the point. To be consistent, if you want volatile returns, go to the Magellan Fund. They're volatile enough. So he was able to deflect those accusations about his consistency. But as to whether they should have been suspicious, there were some people who were suspicious. And this is where the whistle blower question becomes so poignant. Really? Yes. Harry Markopolos didn't make a great impression on the S.E.C. He he raised people's hackles.

He didn't explain things very clearly. He was obviously suspicious of everybody.

But if he had two people to back him up, if it hadn't been just Harry saying, you know, you should take a look at Bernie, if it had been others, it might have gone through. And there were others. There was a an analyst with investment manager in Westchester County outside New York who had his suspicions. But he didn't say anything. He didn't report it to anybody. That fun just quietly got its investors money out of Madoff funds before the crash came.

There was a very well known investment manager out on Long Island who had some money invested with some funds that were invested with Madoff. They started to get a little antsy about it, a little worried about it, and they started sending some emails around to the left asking questions. Well, as luck would have it, the SEC did an email sweep of hedge funds that month and call these warnings. And an S.E.C. staffer went up to this big investment manager on Long Island and said, what's this about Bernie Madoff?

It says here in these emails that you have some questions about my. Oh, no, no. They said, no, no, no. That was just like cocktail party chatter. We didn't really mean anything by that. No, no, no. We we were just making a strategic decision to shift our money in a different direction. We didn't pull it out because we had any suspicions about Madoff. So they actually denied that they had any doubts about it.

So it was partly the fundamental plausibility of Bernie Madoff being able to come up with answers to everybody's doubts and questions. But it was also the unwillingness of the handful and less than a handful of other people who talked to early to report him. They just didn't want to get involved in somebody else's job to stop him. We'll get our money safe and then who cares? And so that failure of morality, there's no other word for it to not be your brother's keeper on Wall Street.

That failure was part of what went wrong from a whistle blowing standpoint, because if they had stepped forward, if their voices had been added to Henry's voice, I'm certain the outcome would have been different.

You mentioned the fallout for the S.E.C. was that they took a good, long, hard look at themselves. I'm wondering, what was the fallout for Wall Street? It's been over 12 years since Madoff was arrested. How is how is the street changed due to this fraud?

Not enough, in my opinion. Frankly, there have been some procedural changes. Hedge funds that were under very light regulatory touch in the pre Madoff years are now subject to greater disclosure and greater regulatory oversight. And that's a good thing. A plus on the SEC side as they brought in people who were skilled at using computer modeling to identify investment returns that are out of the norm. So that will kick out a fund manager whose returns don't make sense in the larger context, and that's allowed them to stop a few frauds prophylactically.

But what hasn't changed on Wall Street is its attitude towards whistleblowers. It is still just as fiercely hostile towards whistleblowers as it was in the pre off days, and so I think that's been the biggest disappointment. I still don't see Wall Street that is anything but a hostile environment for those who try to blow the whistle on bad behavior. We know that Ponzi schemes are a chronic part of the investor fraud landscape, and the SEC does have some useful investor alert items on its website.

If you just go to SEC govt and look for Ponzi schemes, you'll also be able to come up with some helpful things. I mean, the key thing really is to not expect regulators to catch these guys. There's a website called Ponzi Tracker Dotcom that's one of my favorites. And it keeps track of all the Ponzi schemes that surface in terms of size and scale and location. And its data show that a new Ponzi scheme surfaces in the United States roughly every five to six days.

So it's a chronic problem. I can guarantee you that we will have more Ponzi schemes. Whether they will be able to rise to the size and scale of Bernie I think is less likely because of some changes that have occurred in how money managers have to keep track of the assets they hold. But Ponzi schemes are going to be with us forever because trust is with us forever. And that's the only weapon a Ponzi scheme needs to go into operation, is to be able to get people to trust him.

So, yes, we're going to have new Ponzi schemes. We're going to have five new ones by the end of this month. So that awareness means that people need to be vigilant about protecting themselves from this chronic source of fraud. As I said, these are easy frauds to run. All you need is a sterling reputation and a bank account. And you can run a Ponzi scheme, which means you or I probably qualify. But that is only possible because people are inclined to trust one another.

Their default position is this incredibly successful, smart, charitable person. Must be a good guy, must be trustworthy. And that's what we really need to address when we try to address Ponzi schemes. You have to say to yourself, I look, look, I know I'm inclined to trust this person and therefore I'm not going to watch for the red flags that might show that this is a fraud. And so I need to take steps to protect myself from my own trusting nature.

And that's what I advise to investors everywhere, is there's some simple steps you can insist that whoever manages your money uses a third party to hold the assets. These are called third party custodians in the Wall Street world. But it simply means a bank or a trust company that holds the certificates, that holds the stocks and bonds that are supposedly being bought with your money. If you're dealing with a money manager who uses a third party custodian, it's almost impossible for him to steal from you.

It's almost impossible for him to be running a Ponzi scheme. So that's a simple thing that investors can do. But I think it should go a step further to. None of us wants to live in a world without trust, you know, it's it's one of the most beautiful characteristics that humans are capable of. It's essential to modern commerce. It's essential to healthy communities, healthy relationships. So we don't want to live with a world without trust. But here's here's the thing.

Don't invest your money with people you blindly trust. So don't invest your money with friends. Don't invest your money with family. Invest your money with people who are enough of a remove from you that you are not going to automatically trust what they do. That's the best way to protect yourself. And no one really wants to hear that. But it's true. Don't make money managers of your friends and don't make friends of your money managers. Keep them at a remove so that you'll remind yourself that you need to watch what they're doing.

You need to understand what's going on, and that's really the best way to protect yourself.

Diana Henriques, thank you so much for talking with me today. I was delighted to be here. Thanks so much.

That was my conversation with Diana Henriques, author of The Wizard of Lies, as well as the upcoming book about the birth of Wall Street regulations. Next on American scandal. In the 1950s, America was gripped by a deep fear of communism. One U.S. senator found that by taking advantage of this fear, he could gain prominence and political power. Joseph McCarthy led a campaign to convince Americans that their government was under attack. But as he grew more famous, he would also make enemies across the government, including those who were determined to bring him down.

From Andre, this is Episode four, Bernie Madoff for American Scandal. If you like a show, please give us a five star rating level review. Be sure to tell your friends subscribe on Apple podcast, Amazon Music or wherever you're listening right now. Join 100 plus in the one area to listen to episodes one week early and add free. You'll also find some links and offers from our sponsors in the episode notes supporting them helps us keep offering our shows for free.

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This episode was produced by Susan Valot. Our senior producer is Gabe Rhymin. Executive producers are Stephanie Gen's, Jenny Lour Beckman and Hernan Lopez for Wonderings. In July 20, 12, youth soccer players and their coach found themselves trapped six miles deep in a cave with no food or water and depleting oxygen, the rock for became almost completely submerged as the water rose to levels nearly impossible for survival. There was no light and no way to communicate with the outside world.

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