The Bernie Madoff I Knew

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."