Wall Street Crimes | 60 Minutes Full Episodes
In a Nutshell
Three former Wall Street figures exploited the system’s trust and lax oversight: Dennis Lavine, after serving prison for insider trading, recommended convicted conmen and fraudulent companies to clients without due diligence; Daniel Taibbo ran a billion-dollar “free-ride” treasury scam by forging documents and using fake identities to trade with major brokerages; and 16-year-old Jonathan Leed executed a classic “pump-and-dump” scheme by hyping penny stocks on the internet. Meanwhile, Harry Markopolos repeatedly warned the SEC about Bernard Madoff’s $50 billion Ponzi scheme years before its collapse, but the agency failed to act. The core takeaway is that post-conviction recidivism, technological loopholes, and regulatory inaction allow sophisticated fraud to persist until the damage is done.
These notes were generated by AI and may contain inaccuracies.
The secret life of Dennis Lavine is about to become an open secret. No, not what he did that sent him to Lewisburg Penitentiary for insider trading on Wall Street. Everybody knows about that. He's even written a book about it. But what he's been up to since he got out of Lewisburg. This man who told us he'd never do anything illegal or unethical again.
First, let's go back to Lavine's high living days when he was making millions illegally sharing inside information and trading on it. Sometimes using a private phone line in his office at Drexel Burnham Lambert.
What was it like when that phone rang? It was like a cash register going off.
Like the day in 1985, Lavine traded on inside information in Nabisco stock. No sooner did the stock open than my phone lit up like a Christmas tree and each of the people involved called to say, "How do we do?" It was this incredible feeling of invulnerability of a rush that in pushing a button and making two phone calls, I made close to $3 million. And that's what drove it. That was the insanity of it all. It wasn't that hard. It was so easy that in just 5 years, Lavine stashed away $12.6 million in a secret Bahamian bank account.
You get bolder and bolder and bolder and it gets easier and you make more money and more money and it feeds upon itself. And looking back, looking back, I realized that that I was sick, that it became an addiction, that I lived for the high of making those trades, of doing the next deal, making the bigger deal.
Sometimes when you would come home, did you ever look at your wife and say, "I'm risking all of this?"
I didn't think I was, Ed. Foolishly, I thought I could outsmart the system, but I was wrong. I never thought I'd get caught. I never thought I'd get caught.
MR. LAVINE, ANY COMMENT?
But on May 12th, 1986, he did get caught. Mr. Lavine pleaded guilty to securities fraud, tax evasion, and perjury. And he cooperated with the government. He turned in the members of his ring and arbitrage Ivan Boesky. Lavine served 15 months at the federal penitentiary in Lewisburg, Pennsylvania and was released in 1988.
He says he's turned his life around.
Lavine now runs his own financial consulting firm. And lectures students around the country on the lessons he's learned from his mistakes.
I think I have a higher standard. I think I think one of the standards that we should all have is whenever whenever we're about to do something, step back and ask yourself, is this something I'd like to read about on the cover of the Wall Street Journal tomorrow? If the answer is yes, then you're probably doing something right. If the answer is no, then don't do it.
Do you think that you would ever do anything clearly illegal again? Not only wouldn't I do something clearly illegal, I wouldn't even get close. Once burned, Ed, you don't go near the fire. I've learned a lesson.
What about something that's unethical? Would you draw the line there? Yes.
Don't tell Randy Yokum and Tom Bretell, two small businessmen, that Lavine hasn't done anything unethical. They hired him as their financial adviser about a year and a half after Lavine got out of prison. They wanted to develop this oceanfront property at Laguna Niguel in California. They paid Lavine $10,000 in upfront fees. In return, he was to help them find financing to build luxury homes from which they all expected to share in a profit of $14 million.
Part of Lavine's job was to check out the legitimacy of the people and companies he recommended, that's called due diligence, and make sure they could do the deal.
So, Lavine took Yokum and Bretell to Panama where he introduced them to two companies, Morgan Gundy and Pang Global. Pang Global agreed to lend them $32 million as long as Yokum and Bretell paid upfront fees of about 150,000. Yokum and Bretell paid the money after Lavine told them he'd pulled off a great deal.
He worked miracles out there. He danced. He was a miracle worker.
He danced. Yeah. And he jumps up and down and says, "This is great, guys. You don't know how your lives have changed."
Dennis says this. Dennis says, and I mean, you know, it sent, you know, goosebumps up and down my spine, you know, and it felt good. You know, I thought great.
What made you think that these were substantial companies? That these were companies that would do funding.
I had a client that verified unequivocally that somebody else received funding as a result of that operation.
And you did no investigation beyond that?
No, I didn't.
Are you aware that Pan Global and Morgan Gundy, the two companies that you recommended, have never sold any stock in Panama to anybody?
Based on the information I had, they had done deals in the past. Do you know that they're both under investigation by the FBI?
I have no specific knowledge of an investigation.
Our investigation showed many companies paid upfront fees to Pang Global. We found none that got any money in return. We also found that the US embassy in Panama and the Commerce Department warned businesses to stay away from Pang Global.
Not surprisingly, the Pang Global deal fell through on a technicality, but Lavine came up with another lender. This time out of Florida. And this time it would be costly. $25,000 to Lavine for the introduction and another $300,000 upfront to the lender to do the $23 million deal. After losing about $150,000 in Panama, Yokum and Bretell didn't have the money.
So Lavine introduced them to Bob Amira, a Las Vegas businessman who Lavine said could find a venture partner, someone who could come up with the upfront fees in exchange for a piece of the deal.
How does Dennis Lavine characterize me?
Just an associate, somebody that he knew during his days at Drexel.
Did you check him out before recommending him?
No. No. But isn't that part of what you do? Check out companies. Check out individuals. All I did was make an introduction.
Were you aware that he's a convicted thief?
No.
That he has ties to the New York Mafia?
I had no idea. No idea.
We checked him out and found that Amira had been convicted of theft for his part in a credit scheme that netted over $700,000 from two Atlantic City casinos. State investigators said the scheme was engineered by New York mobsters.
So, you didn't check him out. You didn't do due diligence as far as he was concerned.
He contacted me uh indicated that he has capabilities in lending loans. He could do real estate transactions. That's what his expertise is. And I thought perhaps because he had contacts I don't have or capabilities I don't have, he could help Tom and Randy.
But he couldn't. And eventually Lavine came up with yet another possibility. Jim Misaro Lavine said could help them with the Florida lender.
Characterized him as a friend that uh he's done business with before from his days at Drexel.
How did you know Jim Misaro?
I knew Jim from the time I was at uh Lewisburg.
Lewisburg Penitentiary where Misaro and Lavine spent almost nine months together.
Did you tell them that?
I'm not sure. I'm not sure they knew that. Did you tell them that he had been convicted of business fraud?
I don't recall telling them that. Now, should you have told them that?
Why?
You're their financial advisor. I mean, if somebody's going to do business with somebody who's been convicted, I think they have the right to know. Then they can make their own decision.
I'm not saying that that Well, I would be a hypocrite. They clearly knew what my background was. I don't hide it. Um, you know, I mean, I'm very upfront about it, Ed. Right. But did they have the right to know about Jim Misaro's background that he had been convicted of business fraud and that the two of you met in the Lewisburg penitentiary?
Perhaps. Why didn't you?
I wanted to help Tom and Randy. That's what this is all about.
Eventually, Randy and Tom met the second lender who Lavine said could fund the deal. It was a Florida company, Ernscliffe Trust, headed by Robert Wilson, shown here at a business function in American Samoa.
How did Dennis Lavine describe Robert Wilson?
Supposedly a big wheel in the lending business and at the high level.
Lee Lieberger. He was a heavy hitter.
And you're relying on Dennis Lavine's judgment here at during this past year and a half two years we have relied totally on Dennis Lavine's judgment. If he brings you to a guy the guy's okay.
That's right.
What specifically did you tell him about those two guys?
I said it's a new operation they're expanding. They've developed a novel concept. They've provided very good references that have been checked out.
Checked out by other clients.
Had you checked him out?
Yes. You checked him out. So then you were aware that Lieberger is a convicted thief?
No, we didn't. I didn't do a background check on that. No. But we did a background check on Lieberger and found not only this mug shot, but that he had defrauded at least four people of over $120,000 in a business scam in the early 80s. Last December, he was arrested on charges of running an upfront fee scam out of New Orleans.
You were aware that Wilson had outstanding legal judgments against him?
I had no idea of that.
You were aware that he'd made promises to other businessmen to fund deals that he'd never funded?
At the time, I was not aware of that either. But you checked them out.
They were checked out. They had lawyers. They had people representing them. They had bank references.
Based on the information that we have, our background check. Ernscliffe has taken in at least $2.5 million in advance fees, but never paid any client any money. It has no assets. Its banking and credit references are phony. It's not licensed to operate in Florida or anywhere else in the United States. Is not registered as a dealer of securities in Florida. That's what our background check shows. Your background check shows something different.
When we discussed this situation with the clients, we told them it was new. They had just opened up an office. It was a I mean, there was we never ever told a client anything that wasn't true.
In March of 91, the Florida Controller's Office shut down Ernscliffe Trust, alleging the company was billing consumers out of upfront fees for loans that were never made. Bretell and Yokum received no money from Robert Wilson.
What does all of this look like? What?
You know, I hate to say it, Dennis, but it just doesn't on the surface look good.
Then let's look beyond the surface. Let's get right down to the specifics and the documents.
But each time I get down to the specifics of the people involved, I don't see due diligence on your part. I'm trying to give you the benefit of the doubt, right? To tell me how you came up with these people who are a group of convicted conmen thieves.
The story as you tell it based on the documents that you've reviewed is imbalanced. Again, I'll go back to what I said. I'd like an opportunity to provide you with my information, my background, and I think you'll see a totally different version.
Lavine gave us more than 800 pages of documents, and after looking at each of them, we didn't find a different version. We found no evidence that Lavine did due diligence, that he checked out the people or the companies he introduced to Bretell and Yokum. We also found nothing in all of this that showed Pang Global or Ernscliffe Trust had ever funded a deal.
We did uncover this on one document. Lavine had whited out the name of a company he had advised. We scratched off the white out and called that company. Its president told us for upfront fees of $20,000 to Lavine, he too had been introduced to Pang Global and Ernscliffe. But unlike Bretell and Yokum who say they're out over $200,000, he pulled out of the deals because of suspicions about the companies. He's still waiting to get his money back from Lavine.
What would you say to people who would accuse you of being a con man?
It's absolutely false. I never conned anybody in my life. I never conned anybody in my life. Know what I I mean some people have described you as a consummate con man that even to the point that sometimes you con yourself. What would you say to them? People are entitled to their opinions, but it's not true. I have to live with myself. I don't think I've done anything wrong.
Because traders in the brokerage industry commit to multi-million dollar deals on phones, through faxes, and over computer terminals, almost always with people they never see. One of the cardinal rules of the business is know your customer. Well, Daniel Taibbo is one customer they didn't know. And yet more than a dozen of Wall Street's largest brokerage houses did deals with him. Taibbo is now accused of running possibly the largest freewriting scam in the history of the treasuries market.
85 million up 4 plus you buy 12 plus you sell.
Why would you do 35 million on the language, the phones, the chaos, the speed, the flashing computer screens, the waves of information all make the world of bond traders inaccessible. Only those who are members of the club understand the cryptic language and practices of the business.
I'm a seller right now. I'm long. Don't hate 29 bit. I'll buy them at 29. That's fine.
According to the Securities and Exchange Commission, Daniel Taibbo used his understanding of bond trading to lure about 25 Wall Street firms into making multi-million dollar deals, trading a total of 165 million with Goldman Sachs and more than 250 million with just three smaller brokerage houses.
I would say conservatively speaking, he put a billion dollars at risk on the street. A billion with a B. That's correct.
Tom Piro and McKay White of Compliance Data Center are in essence financial gum shoes. When brokerage firms call them, they track the con artists and deadbeats working Wall Street.
How much could he have made from that? Well, sky's the limit, I suppose, if things went his way.
Somehow, Taibbo would get the direct number of the trading desk and just call the brokerage firms claiming to be a big player. Robert McDaniel who works in the corporate credit department of Merrill Lynch was one of the first people to catch Taibbo and report him. He said that the first time Taibbo called he wanted to buy a huge quantity of treasury.
We're talking about 500 million.
So he wanted to do a deal involving $500 million.
Yes. $500 million.
How did Taibbo get what they call on Wall Street a free ride? Trading securities without paying for them. He was hoping that the market would go in his favor for one day and he would close out the trade by the end of the day and just have the proceeds.
So the free ride is basically you're taking a gamble that it's going to go up. You don't put any money up for these millions of dollars of securities.
If you close the transaction out by the end of the day, you do not have to put up any money.
And if it goes up by the end of the day or the next day, you can then turn around and sell it and you keep the difference.
You keep the difference. That's correct.
The government estimates that in just 17 months, Taibbo made about $200,000. But when his trades went bad, a number of the brokerage houses lost hundreds of thousands of dollars.
See, that's the flying ointment as far as the brokerage houses are concerned is if things didn't go his way, they were stuck with losses.
I mean, it has to be pretty embarrassing for them to have been taken by Taibbo.
Sure. I'm sure they are embarrassed, but more than embarrassed, I would suspect that they might be pretty pissed off.
You're talking about a gentleman who spoke a very good Wall Street. He spoke a perfect Wall Street. Okay.
Willie Daniels is the founder of United Daniels, a small brokerage house.
He was up to date on everything. He knew exactly what he wanted to do. He described the security he wanted perfectly. He described how he wanted his orders perfect. If though I was doing business with a trader from one of the major New York City banks. Okay.
Daniels was one of the few traders Taibbo was unable to con.
How do you figure these people at other firms did business multi-million dollar business with a total stranger?
It's done every day in our business. Okay. You get your respect in this industry based on your numbers, your production. Okay. Here's an opportunity to do this trade. Okay. And I'm going to gross X number of dollars which X goes in my pocket. Okay. Uh, the greed was there in terms of the dollar.
Until recently, Daniel Taibbo had had only a brief conversation at his door with Eric Pooley of New York Magazine, and it looked like we weren't going to get much further when we stopped by his home one Sunday afternoon. But after a while, Taibbo decided to change into his Wall Street garb and talk to us.
For example, I brought you a copy of my my transaction with Goldman Sachs. Okay. And Goldman Sachs said you took them for a lot of money.
No, no. My account statements are here. These are all the repo transaction. 9 million. Yes. 4,950,000. Yes. These are 4 million million 9 5 million 3, right? 5,31, right? You're dealing in big books.
Well, it's a leverage market. I mean, it's it the whole thing is leverage.
Taibbo explained how he did his deals. For example, this repo transaction that I I I bought a security. I don't have the money to pay for it and I went to the repo market and borrow the money to cover the security.
Is that legal that you can buy it?
Yes, that is what all of them are doing. Look at the affidavit statement.
The repo market allows traders to buy bonds and then get a loan to pay for them using those same bonds as collateral. Goldman Sachs, Salomon Brothers, Harris Bank, they all have collateral.
So when you go to borrow this money, what do you use for collateral?
What do you mean by they all have collateral? I don't understand.
Well, I mean Goldman Sachs has got capital.
Yes, they they have. What do you use for capital? What do you use to say, okay, you're dealing with $10 million here. You have to have something to back it up. Suppose the market goes down and you lose and you got to pay the money. What do you use for collateral? Okay, here you are. You can see for example, I borrowed $9 million or whatever it is. And the cost of borrowing that $9 million is $799. You have that.
You can borrow $9 million and it only cost you $799.
Yes. On the repo market.
Tom Piro says Taibbo couldn't have done that without forging stacks of false financial statements. He was trying to give the impression he was worth 25 mil, 30 mil, whatever the case may be. So, a firm would say, "Well, he's got the money. This is fine. Let's go ahead and do this transaction with him." If he said he would he had a possibly a Pontiac Lemans in his driveway and $2,000 in Rockford State Bank, they're not going to do that type of trade with him. Simple as that. Too much at risk.
Where's your office, by the way?
Uh, I work from my basement, too.
Taibbo took us downstairs to his basement office, a dark room with unfinished walls, and showed us the equipment he used to make his multi-million dollar deals with the biggest brokerage houses in the world.
So basically with this setup here with this these two computers, you've got another computer back over here. This is a connection with the satellite system. Your telephone, the modem. What's this? It's a typewriter. So with this you can be in touch with anyone in the world in the world. You can get any financial information anywhere in the world. Anyone.
But when Taibbo got in touch with people all over the world, he wouldn't always tell them who he really was. Court documents say he used many fake names. Names like Jack Renfro, Paul Palmer, and Richard Gant. And that he created a number of fake companies to make his deals. For instance, in February 1992, a man who said he was Jack Renfro called Dean Witter's office in New York, claiming to be a Dean Witter trader from their office in Chevy Chase, Maryland. He wanted to do a $5 million trade for a client.
He said go to the desk and tell them right now that he would take it at 6 56. Can you do that for him?
He wants to buy 5 million long bonds at 1026.
Yes, right now. Tell get it. Get it for him.
Hold on. You are done on 5 million long bonds at 1026.
After doing the deal, when the trader couldn't find any Jack Renfro in the Chevy Chase office, he became suspicious.
How come when I called the Chevy Chase office, they said that there's no one by your name in that office?
Because I just started there. I told you I mean I don't understand the matter because why? I just started there. I'm a newcomer there. So they don't have me in their system yet.
When Dean Witter refused to continue trading with Jack Renfro, a Mr. Richard Gant called using a speaker phone.
Mr. Gant. Yeah. You You worked with Jack Renfro?
He works for me.
He works for you. Yes.
Taibbo even succeeded in getting some of the brokerage firms that caught him to pay him any trading profits he made. He wasn't so lucky with Dean Witter.
What's the problem? This is Bob Ferrari. I'm the head of the department.
Yes. What's there? No problem. I My my stop bought the security and he told you you owe me money.
I owe you nothing. I owe you nothing and I've got you on tape. You misrepresented yourself, pal. And if you don't want a major case, you better get out of here right now.
What are you talking about, sir?
I have spoken with the branch manager. He does not know Jack Renfro. You're not authorized to execute a trade against me. You're out.
They alleged that you called used a number of different voices, a number of different accents.
True, not true.
No, I don't I have only one single accent. I I don't know how to I don't change my accent. When I call and I want to do a trade, I would identify who I am.
So all of these what they call them pseudonyms and aliases, which they say were used by you.
Right. Now, Richard Gant, uh, Richard Gant is also a partner in RK Gant and Associates.
See, what I would like to see, Mr. Taibbo show up in court. Mr. Gant show up in court, shake hands. Surely Gant's going to stand by Taibbo. But I think the only way that's going to happen is if Taibbo goes in a men's room, puts on a different suit and tie, and comes out. I can't see.
We had the Dean Witter tape of Gant and Renfro analyzed and compared to our interview with Taibbo. The conclusion, all the voices are almost definitely the same man. After they were analyzed, Taibbo admitted that he had passed himself off as both Richard Gant and Jack Renfro. His explanation, Richard Gant had told him to. But if Gant is Taibbo and Taibbo is Renfro, they weren't the only names used by Taibbo. Paul Palmer.
Paul Palmer is a partner of mine uh that uh we joined together to form the the JFM government securities. That's sir Paul Palmer.
Well, Paul Palmer, he used to go by the name Sir Paul Palmer, but his real name is Paul Palmer.
But he's a he's been knighted. That's why they call him Sir.
No, no, he just used the name.
Is honorific?
No, it doesn't have any anything to He just uses it. He just uses it. Uhhuh. Where does he live?
It's in Africa.
We asked Taibbo about one of the companies the SEC says he created called Stein and Stein.
Who is Stein?
There's nobody. You mean Stein? There's a gentleman that that I met whose name is Samuel Stein that says that we could you know join together and form a um um a firm a partnership. But I was going to be the managing partner who's going to be running.
So Mr. Stein is your partner?
Yes. What's his first name?
Samuel Stein. Samuel Stein, right?
He's here in Washington.
No, he's not here in Washington.
Where is he located?
Well, they are all back. All of them are back in Africa right now.
So, Mr. Stein's in Africa, right? So, Stein and Stein, is there another Stein or just the one?
Just one, just a name.
Although we have repeatedly asked, Taibbo has been unable to put us or for that matter the Nigerian Securities and Exchange Commission in touch with Sir Paul Palmer, either of the two Steins or any of his alleged business associates or partners either here or in Africa. When the Nigerian SEC was asked about a few of the companies, they were blunt. The companies don't exist and the names are fake.
I'm not a crook. I'm just a very knowledgeable investor. Someone that you can call a sophisticated investor that
Four days after proclaiming himself an honest businessman and sophisticated investor, Daniel Taibbo was charged with 17 counts of securities fraud. He is currently in jail awaiting his day in court.
At 16 years old, Jonathan Leed of Cedar Grove, New Jersey became the youngest person and first minor ever accused of securities fraud. Federal authorities accused him of engineering a sophisticated stock manipulation scheme that netted him hundreds of thousands of dollars in illegal profits. His strategy involved buying stocks, hyping them relentlessly on the internet, and selling when prices soared.
Leed's Background and Early Trading
Until fall 1999, Leed appeared to be a typical high school junior. He was an avid fan of the New York Mets and professional wrestling, but distinguished himself through his fascination with the stock market. With his parents' permission, he had been trading stocks from his bedroom computer since age 13. His parents, Connie and Greg Leed, initially encouraged his trading after he and classmates placed fourth in a CNBC-sponsored nationwide contest, turning hypothetical $10,000 into $240,000 on paper.
Leed started with a few thousand dollars from cashed-in bonds. His first real investment was America Online, bought at $25 and sold at $30. He became particularly interested in the volatile penny stock market, where shares ranged from a few cents to a few dollars.
Leed's Investment Strategy
Leed described his approach as finding extremely undervalued companies that would be worth more if people knew about them. He conducted research by scouring SEC filings, reviewing press releases, and inspecting companies firsthand. One notable example involved his mother driving him to check out a bagel chain in Teaneck, New Jersey, after which he bought stock at 3 cents per share and sold at 3.5 cents.
His largest single investment was approximately $200,000. He promoted his holdings through hundreds of messages posted to internet chat rooms under various names, always presenting bullish recommendations accompanied by what he claimed was legitimate financial data.
The Pump and Dump Operation
Leed's method exemplified the classic "pump and dump" scheme. In one documented case, he bought a large block of Firetector shares at $2.45 each, then posted messages predicting the stock would reach $20. When other investors bought in, he sold at $3.38 per share, pocketing $19,000 profit.
Leed claimed he was not posting false information and that his recommendations were based on accurate information and sound financial analysis. He maintained he was not doing anything wrong despite admitting to manipulating stock prices.
SEC Investigation and Legal Proceedings
The Securities and Exchange Commission had been monitoring Leed's trades since 1998. SEC Chairman Arthur Levitt described the case as a "calculated ongoing effort to defraud innocent investors" and characterized it as "buy, lie, and sell high." The SEC accused Leed of making predictions without foundation and using fictitious names.
Leed's attorney, Kevin Marino, argued that while there was some manipulation involved, Leed had not committed a crime. Marino drew parallels between Leed's activities and standard Wall Street practices, noting that the only distinction was that Wall Street analysts are not supposed to profit personally from their own predictions.
Settlement and Aftermath
Rather than go to court, Leed negotiated a settlement with the SEC, agreeing to turn over $285,000 earned from 11 trades without acknowledging wrongdoing. His lawyer called it a "business decision," noting that Leed had made approximately $800,000 total and was allowed to keep roughly $500,000 after legal fees, taxes, and the settlement.
Leed's parents remained supportive, with his mother expressing pride in his intelligence and work ethic. The family purchased a $42,000 Mercedes SUV with proceeds from his trading. Leed promised the SEC he would not hype stocks on the internet going forward, but returned to trading in early June 2000, investing several thousand dollars in a small video game manufacturer.
Two and a half months after Bernard Madoff's arrest for what was believed to be the largest financial fraud in history, federal prosecutors were still unraveling the alleged $50 billion scam. No indictments had been filed as authorities worked to determine exactly what happened and who was involved.
Harry Markopolos - The Whistleblower
Harry Markopolos, a Boston-based financial analyst and fraud investigator, was the first person to identify Madoff's scheme. He provided his only television interview, describing himself as a "$50 billion failure" despite his attempts to alert authorities.
Markopolos submitted evidence to the SEC on five separate occasions: May 2000, October 2001, October/November/December 2005, June 2007, and April 2008. Despite these submissions, the fraud continued until Madoff's arrest.
Discovery of the Fraud
Markopolos was asked by his Boston investment firm to reverse-engineer Madoff's trading strategy. Within five minutes, he suspected fraud, and after four hours of mathematical modeling, he proved it. The key red flag was Madoff's performance record - his fund showed returns going only up with very few down months (only 4% of months were down), which Markopolos compared to a baseball player batting .960 for a year.
Markopolos identified only two possible explanations: either Madoff was using insider information or running a giant Ponzi scheme. He concluded that either way, Madoff would go to prison.
Evidence of Fraud
Markopolos demonstrated that for Madoff to execute his claimed trading strategy, he would have needed to buy more options on the Chicago Options Exchange than actually existed. Additionally, none of the major equity derivatives firms Markopolos contacted had ever traded with Madoff's fund, despite his claims of executing massive trades.
Markopolos noted that hundreds of people on Wall Street suspected something was wrong with Madoff's operation. Major Wall Street firms had no money invested with Madoff, suggesting they knew something was amiss.
SEC Failures
The New York office of the SEC opened a case file on Madoff in January 2006 but closed it 11 months later without a formal investigation, despite evidence that Madoff had misled them about his investment activities. Markopolos criticized the SEC staff as "totally untrained in finance" and "unschooled," consisting mostly of lawyers without financial industry experience.
The Victims and Affinity Scam
Madoff's customer list spanned 162 pages and included victims ranging from Hollywood celebrities to a carpenters' pension fund in Syracuse, New York. Many victims lost their entire life savings.
Markopolos identified Madoff's scheme as a classic "affinity scam," targeting the Jewish community through country clubs in New York and Palm Beach. The scheme expanded internationally through "feeder funds" like Fairfield Greenwich Group, which earned hundreds of millions of dollars annually in fees for directing client money to Madoff without proper due diligence.
Feeder Fund Role
Fairfield Greenwich investors lost nearly $7 billion when Madoff's scheme collapsed. Attorney David Boies represented these investors in lawsuits claiming gross negligence, arguing that Fairfield failed to investigate Madoff thoroughly or monitor his activities as promised in marketing materials that claimed to conduct portfolio analysis, stress testing, risk management, and asset verification.
Walter Null, one of the founding partners of Fairfield Greenwich, declined to talk to the interviewers and has reportedly been lying low with his wife at their compound on the private island of Mystique. In a statement to 60 Minutes, his firm said that it too was a victim of Bernie Madoff, that it had placed too much trust in his then impeccable reputation and in the fact that there had been multiple reviews of Madoff by the SEC.
Mr. WHAT DO YOU HAVE TO SAY FOR YOURSELF? In the end, Harry Markopolos had been right about Bernie Madoff. He will be going to prison, but not because of anything that Harry or the SEC did. In a bad economy, Madoff's lies simply collapsed under their own weight.
No one was investigating Mr. Madoff at the end. So, he turned himself in before anybody in a position of authority began a serious investigation. That's typically how the SEC does it. They come in after the crime has been committed. They count the victims, count the bodies, and try to figure out who the crooks were after the fact, which does none of us any good.
The SEC's pattern involves arriving after crimes have been committed, tallying victims and losses, then attempting to identify perpetrators after the damage has occurred, which provides no preventive value to investors or the financial system.
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