September 2008. The global economic crisis snowball, which began with the subprime crisis in the US, begins to gain momentum. Bernie Madoff - up until then "The King of Wall Street" - starts to feel the rope tightening around his neck. On September 16, investment bank Lehman Brothers collapses, followed by giant financial entities - Merrill Lynch, AIG and JP Morgan Chase - that also threaten to collapse and are bailed out by the government. Madoff 's investors from all over the world - Frankfurt, London, Madrid, and Abu Dhabi - flood his office with calls saying, "We want our money." The withdrawal requests add up to $1.5 billion, but Madoff 's account only has $300 million left. "I knew the game was over," he admitted years later, when he was already in prison.
Madoff was on the verge of a nervous breakdown. He decided to gather his family members together at a penthouse in New York - his wife Ruth, and sons Mark and Andrew - and reveal to them the secret, which only he and a handful of his close associates had known about until that day. His investment activity was nothing more than a pyramid scheme. The money was never invested. The phenomenal returns, 11% per year, were fictitious and obtained through more and more investor cash. So, he created, over 45 years, what became the largest Ponzi scheme in history. "I could no longer go on with this show," Madoff said in a videotaped deposition from prison, given in 2016. While Mark and Andrew reacted with astonishment and anger, Ruth looked at her husband in bewilderment and asked: "What’s a Ponzi scheme?." His sons hurried to hand him over to the FBI.
Ruth talked about her unbelievable "What’s a Ponzi scheme?" reaction with Jim Campbell, an American radio broadcaster and author of the book Madoff Talks. The book also became the basis for the successful series on Netflix, Madoff - The Monster of Wall Street, which aired at the beginning of this year.
"We were in the room together and I asked Ruth what were the first words she said after Bernie confessed to the fraud," says Campbell in a recent Zoom interview from his home in Greenwich, Connecticut. In addition to Ruth and Bernie Madoff, Campbell also interviewed his son Andrew (who died of cancer in 2014), Andrew’s fiancée Catherine Hooper, Madoff's personal secretary for 25 years Eleanor Squillari, and many other experts.
Campbell worked on the book for almost a decade, and it was finally published in 2021. With Bernie Madoff himself, he conducted a correspondence spanning 400 pages, over five years. "Bernie expressed there a deep desire to be understood," says Campbell. "He had a brilliant mind that was sometimes in denial, sometimes delusional. My attempts to have personal meetings with him in prison were rejected on the grounds that I was a security risk."
What surprised you the most about Bernie?
"His mind. He had no remorse. Narcissists turn themselves into victims. He would write, for example: 'My lawyer tells me I need to show remorse,' and then continued by writing ‘These guys [the investors] were greedy. They demanded I show results.' He was open about the scam, saying, ‘Yeah, I messed up, it was illegal and so on, but everything else was unfair.’"
The mysteries of the 17th floor
Apparently, everything has already been said and written about the man behind the largest Ponzi scheme in history, amounting to $65 billion, which destroyed the lives of small investors alongside huge entities, many of them from Jewish institutions such as Hadassah and Yeshiva University. Over five decades, 37,000 clients from 136 countries invested with Madoff. Celebrities, aristocratic European families, universities, charities, banks, hedge funds and investment houses. Some didn't even know they were invested with him.
But the book and the series succeeded in arousing a renewed interest in the case because they cast a spotlight on many issues that were not known in depth. They revealed, for example, that Madoff ran two completely different businesses from Manhattan’s Lipstick Building. On the 19th floor there was a normal, even thriving, financial business. His sons, Mark and Andrew, were involved in his management, as well as Madoff 's brother, Peter, whose role was - ironically - in charge of regulation. But just two floors below, on the 17th floor, was the shady business. While the 19th floor was technological and sophisticated ("Even the picture frames had to be approved"), the 17th floor was the complete opposite, "with technology from the 1980s. How does one person manage two such different places in the same time? It's crazy," says Campbell.
No one was allowed to enter the 17th floor, except for a small group of employees, who were bribed with huge salaries and allowed the operation to operate in the dark for years. Madoff 's right-hand man in the management of the scam was Frank DiPascali Jr., nicknamed "Chief Fraud Officer" by his own lawyer. DiPascali began working for Madoff in 1975, aged just 19, and eventually died of lung cancer in 2015 while awaiting sentencing.
There were four other people without whom the fraud would not have grown to the huge proportions it reached, a group called "The Big Four." These were the main investors in the fund, led by Jeffry Picower, whom Madoff called "both a devil and an angel". He was the largest investor, who also withdrew amounts from the fund as he pleased, but Madoff was dependent on the funds he put into it. When the fraud was revealed, Picower had $7 billion, seven times Madoff 's own net worth, but according to Campbell, "I don't think Picower knew it was a Ponzi scheme, though he did know Madoff was involved in illegal matters." Some of the funds were returned to the trustee who was entrusted with returning the funds to the victims. "I had to keep Picower happy. Yes, a bribe, if you will," Madoff wrote to Campbell. "You must have heard the saying, ‘Keep your friends close and your enemies closer.’"
The series and the book also reveal how extreme the negligence of the US Securities and Exchange Commission (SEC) was in its treatment of Madoff's business, as well as revealing the roots of his motivation: he grew up in the shadow of a father who failed in business and was haunted by fears he would be a failure like him. Chiefly, these controlled the narrative according to which Madoff 's immediate family, Ruth and his sons, knew nothing of the father's actions.
"Everyone thinks they know the story, and then people are amazed by what they don't know," says Campbell. "Bernie arranged everything so that it would appear that he did everything alone. He wanted to protect his partners and his family. That's why people only knew Bernie's side of the story."
Many thought, and still do think, that the immediate family knew about the Ponzi scheme.
"The Department of Justice thought they knew, the FBI thought they knew, the bankruptcy trustee thought so, and naturally public opinion was also influenced by this. I did my own investigation and came to the conclusion that no; they did not know."
In the book, Madoff explains himself in his own words. This is an unusual glimpse into the mind of one of the most sophisticated and ruthless financial criminals that history has ever known. "At the end, I was so desperate and delusional that I was hoping there would be a nuclear attack on Wall Street or a global catastrophe that would erase all financial records so I could escape," Madoff described the last few days before revealing the fraud to his family. "How's that for crazy? I was tired of the scam. I wanted to be done with it."
Madoff 's handwritten note, whose photo appears in the book, there are nine words in total addressed to Andrew and his fiancée Catherine Hooper: "Dear Andy and Catherine, I'm so sorry for everything. Dad." "At the same time Madoff wrote the short apology note to Andy and Catherine," Campbell writes, "he sent me pages upon pages of handwritten letters justifying the Ponzi scheme. He couldn't really feel empathy for them."
The brothers turned their father over to the FBI and turned their backs on him immediately. "He died for me," Andrew told Campbell. In the end, Bernie Sr. outlasted his sons. Mark committed suicide at the age of 46, in December 2010, exactly two years after his father's imprisonment. Andrew died of cancer at the age of 48, in 2014. "My father killed my brother quickly and me slowly," Andrew told Campbell.
Madoff pleaded guilty to 11 felonies and was sentenced to 150 years in prison. 12 years later, at the age of 82, he died in prison. A few months later, Bernie's sister and her husband were found shot to death in their home in Florida, under circumstances that have not yet been fully clarified. The affair claimed more victims, such as the French aristocrat and financial manager René-Thierry Magon de la Villehuchet, who committed suicide in his office in New York less than two weeks after Madoff 's arrest. His clients lost $1.8 billion with Madoff. Madoff 's biggest investor, Jeffry Picower, was found dead in the swimming pool of his home in Palm Beach in 2009, from an apparent heart attack.
"When I die, the business will close"
How did Campbell (67) - a radio broadcaster with a background in finance - come to establish such a deep trusting relationship with members of the Madoff family, including Bernie himself, which became a best-selling book and the basis for the Netflix series that he co-produced? Everything happened completely by accident.
In 2011, Campbell was going to interview the writer Laurie Sandell for his radio program - <i. Sandell had written a book about the Madoff family and was therefore in contact with the son, Andrew. "She suggested that I talk to Andrew in the background, and I started attacking him on the phone from the first moment. I told him: Your father gave you $3 million to buy a property months before everything collapsed, it was from customer money and you have to return the money. He said: 'You're right.' He said he would listen to the program and maybe be in touch with me afterwards. What also happened is that Ruth, his mother, had just moved to the town where I live, Greenwich, Connecticut, he set us up, and we met for lunch."
Campbell remembers that meal in great detail. "It was in December, and we were alone in a restaurant. Ruth kept her sunglasses on throughout the conversation, until she finally took them off. We had good chemistry, and I asked her to take a picture in the parking lot afterwards. She said to me: 'You have recording devices, right'? Of course, I didn't. Afterwards, I said to Andy: Tell your mother that I would never do that."
The relationship between Campbell and Ruth Madoff strengthened. She trusted him and eventually also set up a meeting with Bernie Madoff. "We received permission to correspond through the prison's mail system. I told Bernie: This is your chance to put the record straight, but I intend to check and verify every word you say. And he said: I accept. Ruth and Andy vouched for you."
Why do you think Ruth agreed to this deal, to this type of cooperation with a journalist?
"We met at a time when she was very close to Andrew, and Andrew was on my side. It started with me offering to spend time with her as a friend, because she had just moved and didn't know many people. She used to do walks around Greenwich and I used to do runs in the summer, so we talked about it. She was crushed by the destruction of the Madoff name, and she fought for her integrity."
Campbell recounts an example of Ruth not knowing about the scam, but he also has slight reservations. "Before moving to Greenwich, Ruth lived in Florida with her sister and her husband. They lost every penny they had in Bernie's scam, and started a new airport limousine business. They wouldn't have let her live with them if she knew. Did she know a few days before Bernie's confession or a few weeks before? It could be. And if that's true, then she lied to me a little."
In one of the conversations Andrew had with Campbell, he admitted he had told Bernie he should know what was happening on the 17th floor, "in case you get run over by a bus." The answer he received was: "You don't need to know. When I die, the business will close."
According to Campbell, this was exactly the exit strategy Madoff envisioned: the scam would die when he died. Or perhaps better put, "Après moi, le déluge" because a Ponzi collapse means - inevitably - catastrophe.
It's a bit naive to think that the father would tell his sons, ‘That's the way it is, there's no entering the 17th floor’ and they just accept it, no? They could have insisted on going in.
"Ostensibly, that’s true, until you understand how strong Madoff's ability to control those around him was. He was a bully and it was psychological bullying as well. He controlled his brother, Peter [his business partner who was convicted and imprisoned for ten years and he also controlled his sons [as Campbell puts it, ‘He cut the boys off at the knees]. He also did the same with the SEC. The SEC investigators were scared of him. He did not let the hedge funds that invested with him - Fairfield, Greenwich - do due diligence.
"Look, the guys he hired on the 17th floor were high school graduates. Unsophisticated people. The women he hired tended to come from abusive backgrounds, including his personal secretary [in the legitimate business], Eleanor. On the other hand, he really wanted to give the employees a sense of family. He paid for honeymoons and medical expenses. He also paid cash bribes. The guys on the 17th floor earned huge amounts. I call it 'golden handcuffs.'"
Better to be a liar than a failure
The legitimate business located on the 19th floor was a thriving business worth $3 billion. Why didn't Madoff settle for that?
"The reason is psychological. Bernie got into investments in the 1960s. At first, he invested money for 20 people, lost it, and using money from his father-in-law, he allegedly paid them the returns. The loss devastated him. This is how the Ponzi started, in 1962. Bernie had to be perfect. He had to be the person who delivers the goods. It was hubris. That was his mindset. He couldn't handle losing. Therefore, the money wasn’t invested at all. From the moment the train left the station, it was impossible to stop it.
"The way I see it, it wasn’t greed at all that motivated Bernie. It was the compulsive need for control, to be the King of Wall Street. The obsessive need for control finally got out of control. Then he lost everything."
Despite his intense need for control, Madoff did not have complete control over the fraud. "Madoff was the mastermind, but he was still controlled and manipulated by the Big Four. They were the ones who enjoyed the better returns, in what I call 'Robin Hood in reverse' - taking from the modest investors and giving to the richest."
Journalist Diana Henriques - who was also interviewed for the series as the author of the 2011 book The Wizard of Lies, stated definitively: Bernie preferred being a liar rather than a failure. That's how much he didn't want to be like his father."
"That's 100% true. You know, the show also presents a story about Bernie's childhood that always amazes me. He was kind of a nerd, and he couldn't get a girl he liked to play with him. So, he gave her a quarter. That's what he did too, later in life. He used money to control people."
Madoff behaved similarly to Seinfeld’s famous "Soup Nazi" episode about a chef who didn’t want to sell his soup to just anyone. People had to beg Madoff for him to agree to accept their money to invest. Was this a deliberate strategy?
"I asked Madoff if he considered himself a criminal, and he said, ‘Maybe that's true, but I don't see it that way.’ He considered himself a brilliant man who built a business. I said to him, ‘Bernie, the reason you're such a good criminal is that you're an anti-criminal. You hide, like the Wizard of Oz. You tell all these people: I don't need your money. I don't want your money.’ 14 European banks were invested in the Ponzi, and each thought they had exclusivity. When you think about it, it's brilliant".
"Hubris like Bankman-Fried’s"
Most of all, in my eyes, it was amazing to find out how negligent the SEC was in relation to Madoff. In 2006, Madoff gave them all the details of the scam, and they didn't even pick up the phone. At the same time, more or less, Harry Markopolos, a competitor of Madoff's, conducted his own investigation, and provided the SEC with a wealth of evidence of fraud, but nothing happened. How do you explain that?
"The most important part of the book is the total failure of the regulatory system. It's not even ordinary negligence, in my eyes it's criminal negligence, total incompetence. The story Bernie told me is this: They're sitting in his office on Friday, he gives them a phone number for the DTCC [the Depository Trust Company], through which you can monitor every action on Wall Street. If they had looked, they could also have seen what was happening in the Ponzi account. He told me: 'I was sure I was going to be arrested that weekend because there were no transactions in this account at all. They didn't even call this number.' This is criminal negligence, and what happened at JP Morgan is also criminal negligence."
Madoff's Ponzi account was managed by JP Morgan. Between 2003 and 2008 Madoff deposited between $3 billion to $6 billion dollars. According to US law, if a transfer of more than $10,000 is made and the bank does not have a clear understanding of why the transfer occurred, it creates a suspicious activity report, which is then sent to the authorities. This step was probably not taken with Madoff. As part of the settlement with the authorities, the bank paid roughly $2 billion for its involvement in the case. "The bank had sole review of this account, Account #703. Bernie told them it was an operating expense account, for paying rent, let’s say. But it was JP Morgan’s job, as account manager, to make sure that it wasn’t an account used for drug trafficking or money laundering. This was an account through which $170 billion passed over the years, a huge amount. Simply huge. They should have realized that something was wrong here within three minutes."
How did it happen? Not least because of the close ties Madoff cultivated with the authorities over the years and his honorable status on Wall Street. He served as chairman of the Nasdaq in 1990, 1991 and 1993. The regulators knew him and respected him. That's why it was so easy for him to manipulate them.
Can a scam like this happen again? Has regulation improved since then?
"On the Ponzi side, yes, they’ve improved. That whistleblower Markopolos - he warned them and warned them, and they didn't listen to him at first. But then, the SEC asked for his help. He taught them how to look for Ponzi schemes and, in his opinion, there is now a 90% chance they will know how to catch the next Ponzi scheme, if it happens in the US. Has regulation in general improved? No. Near the release of my book, in 2021, I warned against [investment app] Robin Hood, SPACs and crypto - that all these would crash. Did the regulation get there early enough? No".
To what extent do you see similarities between the story of Sam Bankman-Fried and the collapse of crypto exchange FTX, and Madoff? In the case of FTX it probably wasn’t a classic Ponzi, maybe a version of a Ponzi, in the sense that the pyramid could last as long as you could bring in someone to invest after you. Both Bankman-Fried and Madoff branded themselves as pro-regulation "Good guys."
"Very true, Bankman-Fried said, 'Yes, we need regulation, I'm a good guy, and I give all my money to good people'. That's how he built trust, right? What did Bernie do? Same thing. Bernie built trust. I recognize a similar hubris".
In both cases there were indicators that signaled to investors these were reliable investments. Leading entities like Sequoia and Softbank invested in FTX. Madoff was chairman of the Nasdaq, approved by the SEC, and endorsed by senior members of the Jewish community. How could the public have identified a potential fraud?
"Bernie, in the end, gave a return of 11% per year [90% of his trading operations ended in profit - an impossible result]. On the face of it, this is not implausible, and is also close to what the stock market gives, 9% on average, over 100 years. But notice the difference: 9% on average. This means that last year the indices fell by 40% and the following year they rose by 30%. What can we conclude? Never invest in something you don't understand. Never invest in something that promises a market return, but isn’t in the market, for example some savings account. Don't believe it. You know, the SEC cleared Bernie. They said he was fine. That's why I say: don't invest in something just because your dentist told you to. The guys who invested with him didn't know what he was doing. They said, ‘I trust him. He’s okay.’ If someone utters a sentence like the one they said about Bernie, 'I don't know how he does it' - run away. Bernie's returns were always at a 45-degree angle, that is. always moving up. It's simply impossible."
After interviewing Campbell a few months ago, we continued to correspond regarding judicial reform and fears that Israel’s democratic infrastructure was being undermined. Campbell wrote that he was following these events and was concerned about the threat to democracy. He even added that, were Bernie Madoff alive today, and despite the fact that he betrayed his Jewish brethren by bringing many into a pyramid scheme, "He would be very concerned about what is happening in Israel today."
What do you think is the main message of the Madoff story?
"You know what the biggest message is? Forget the financial garbage, the complexity, the investments. In the end, it's a fable with a moral. It's a Shakespearean story, right? It's a tragedy. You know, I dedicated the book to my father because Bernie grew up in the shadow of his father's failure. He didn't develop a moral compass. My father is the most moral person I know and he was a successful businessman. I got those basics from him. For me, that's the bottom line."
"Nobody knew who I was, but I refused to give Netflix rights to the script "
A few days before his book on Madoff was published, Jim Campbell was interviewed on the CBS morning show. "I had a dream that within two years from that day, maybe someone would make a documentary film based on the book," he says, "I got an agent and she said, ‘We are going straight to Netflix. We will get you the best director and the best deal.’"
The deal moved ahead, and Netflix asked for the rights to the film or series. "And I said - and remember, no one knew who I was - I'm not giving away the rights. They got back to me and said that's unacceptable. I told my agent, Katie, tell them we're out. She talked to the famous docu-crime director Joe Berlinger [producer of, among other things, the Netflix series about Jeffrey Epstein, and director of the series about serial killer Jeffrey Dahmer] who was interested in the project and convinced Netflix to back down.
"Netflix wanted to go for it because Joe wanted to go for it. He had never done a financial crime docu-series and no one on the team knew the field, so for three months I just taught them the material. Not that the whole series was based on my book. There were additional sources, but overall, they were very faithful to the source."
According to Campbell, Berlinger wanted to include a scene where they surprise Ruth Madoff with cameras outside her house, but "I said I'm not doing it. Ruth and I are no longer in contact, but I had no intention of pressuring her to appear in the film, or making her feel guilty. Definitely not".
The connection between Madoff's pyramid crash and Silicon Valley Bank’s collapse
"If it weren't for the 2008 crisis, Madoff might still be in business," Jim Campbell believes. In other words, economic crises are exactly the time when frauds such as Madoff 's Ponzi scheme come crashing down. This was seen recently in the crypto sector, with failures such as Celsius Network and Sam Bankman-Fried's FTX crypto exchange, where alleged frauds were discovered. Warren Buffett, for example, used to say: ‘You only learn who has been swimming naked when the tide goes out.’"
We may even now be on the brink of a crisis, and we received a signal last week with the collapse of US banks Silicon Valley Bank (SVB) and Signature Bank. Underlying SVB's collapse was the accelerated wave of interest rate hikes in the US that occurred throughout 2022 and continued this year. The rate hikes hit startups who began withdrawing funds from the bank. This, in turn, placed SVB in financial difficulty, and it therefore released a statement. The result was the phenomenon known as a "run on the bank," in which many companies asked to withdraw the money in a short time until the bank finally collapsed.
Campbell clarifies that SVB's case is obviously not a Ponzi, but notes that, "Banks are legal Ponzi schemes, because they are only allowed to hold a fraction of the savings that all customers have. This means that when there is a sudden loss of trust in the bank and everyone tries to get the money out quickly, the bank suddenly become insolvent, even though it may be profitable. In illegal Ponzi scams [where investor deposits fund the returns], more new money must come in than existing investor money going out, or the pyramid collapses, as happened with Madoff."
He also adds that the bank collapse, "is another example of the regulators’ late awakening. They only come to clean up the mess. It could have been predicted in advance." At this point, the US government's promise is to return the money in full to all depositors, through an intermediary banking institution, and not at the taxpayer’s expense.
Published by Globes, Israel business news - en.globes.co.il - on March 21, 2023.
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