When I heard the news of Bernard Madoff’s arrest, I breathed a sigh of relief. “Thank God, I dodged that bullet” was my first thought. For sure, there was no gloating on my part. Anyone, who has been in the brokerage business for a long time, has been preyed on by con artists more than once. As a broker, you try your best to avoid them, but there is always one that slips through where your guard is down.
Madoff and my paths crossed in Palm Beach over 10 years ago. We were both scouring for clients there, albeit on different rungs of the social and economic ladder. My office was the lunch counter at Green’s Pharmacy while Bernard’s was the much grander Palm Beach Country Club.
Hearing whispers of his investment prowess, I approached “Uncle Bernie” one day and asked to meet him to discuss referring clients to him. Madoff’s clients bragged that he showed consistent returns of 10-18% each year and rarely had a down month.
At the meeting, Bernie, known as the Jewish T-bill, was very charming and low key. Bernard, the former chairman of the NASDAQ stock exchange, did not want to answer questions about his investment business and strategy. He only grudgingly admitted that he employed a split conversion strategy that used both put and call options. I did not know what to make of his opacity. I was discomfited by his saying how lucky that I was that he allowed me to invest with him.
The structure of Madoff’s investment also concerned me. Similar investments would have been established as a hedge fund with a separate custodian of the assets. The general partner of a hedge fund takes a management fee and a percent of the profits. Mr. Madoff insisted on keeping the assets in house at his own brokerage firm, but only charged commissions, which meant a lower payout for him. Madoff, always the salesman, assuaged my doubts about the investment structure. “I make up for the lower fees with the additional volume of investments that my fee structure attracts.”
The consistency in returns, the small size of the auditing firm, and the structure of the investment were troubling, but they were not the deal breaker for me. Since my office had previously been in the same building as the Philadelphia Stock and Options Exchange, I knew many of the employees of the exchange and leading market makers. When I called them, all of them said that they knew Bernie but did not trade with him. Even though he said that he traded his options over the counter, it still seemed strange to me that none of the giants in the tight-knit options world traded with him. After 45 minutes of detective work, I passed on the investment.
Even with the red flags raised on the investment, I struggled with turning down the investment opportunity. I was worried that my cautiousness was causing me to miss a great opportunity to earn lots of money. The product that Bernie Madoff had “created” would have been as easy to sell as ice water on a hot summer day.
After turning down the opportunity, I frequently encountered clients of Bernard Madoff. Most had the lion’s share of their assets invested with him. My suggestions to diversify their assets fell on deaf ears. Sadly, many Jews believed in Bernie Madoff more than they believed in God and were just as unlikely to forsake him.
Even though the drumbeat of rumors about Bernie’s business eventually grew louder in the financial community, there was nothing that I could do about it. I could not take on someone with the stature of Bernie without proof in black and white.
I wasn’t the only one with doubts. In 2001, Barrons and MAR Hedge Fund Report wrote scathing reviews of Bernie’s investment business. The title of the MAR article did not pull any punches — “Madoff tops the charts; Skeptics ask how.” Barron’s was also hard-hitting. “The recent MAR Hedge report, for example, cited more than a dozen hedge fund professionals, including current and former Madoff traders, who questioned why no one had been able to duplicate Madoff’s returns using this strategy.
Likewise, three option strategists at major investment banks told Barron’s they couldn’t understand how Madoff churns out such numbers. Adds a former Madoff investor: “Anybody who’s a seasoned hedge-fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit naïve.”
These articles gave me an excuse to contact Madoff’s clients again. Instead of being thanked for sending them the articles, I was attacked. “How dare you say anything bad about Bernie.” Some dismissed the attacks on Bernie as anti-Semitism.
Several of those who received my mailing asked me questions. Still, even though I planted the seeds of suspicion, they did not grow. Most decided to continue investing with Bernie. They told me that they did not want to give up a good thing. They did not believe that the music would stop and they would be left without a chair.
Now that the music has stopped, many of Madoff’s clients are finally singing my name. Unfortunately, there is nothing that I can do for them now.
I wish that I could say that this type of fraud would not happen again, but unfortunately I can’t.
Now that Bernie has proved how easy is to do, one can be sure that con artists will be falling over themselves to imitate him.