60 Minutes Archive: The man who figured out Madoff's Ponzi scheme - YouTube

60 minutes rewind

it's been two and a half months since bernard  al-madoff was picked up and charged with what's  

believed to be the largest financial fraud in  history yet we still don't know much more about  

the alleged 50 billion scam than what madoff  initially told the fbi agents who arrested him  

there are still no indictments as federal  prosecutors continue to unravel the case  

and to try and figure out exactly  what happened and who all was involved  

but the proof that it happened can be found  in the ruined lives of thousands of victims  

the one person who knows the most and is willing  to talk is harry marco polis the man who figured  

out made off scheme before anyone else he sat  down with us for his only television interview  

until a few months ago harry marco polis was an  obscure financial analyst and mildly eccentric  

fraud investigator from boston who most people  would never notice on the street my modern greek  

hero how you doing but today he enjoys an almost  heroic status pursued by journalists and movie  

producers and honored by colleagues as the  man who went to the securities and exchange  

commission and blew the whistle on bernie  madoff in his 50 billion dollar fraud

thank you thank you please take your seats but  he seems uncomfortable with all the attention  

and knows that he is no hero i stand  before you a 50 billion dollar failure

how many times did you send material to the  sec may 2000 october 2001 october november and  

december 2005 then again june 2007 and finally  april 2008 so five separate sec submissions  

and in spite of all of the things that you did  it still ended up in disaster there's nothing to  

be proud about in this case i feel horrible  about the result it's been a total disaster  

for the victims it began a decade ago when marco  polos was working for a boston investment firm  

his boss told him that bernard madoff a  former chairman of the nasdaq stock exchange  

was running a huge unregistered hedge  fund that was producing incredible returns  

he wanted harry to reverse engineer its  trading strategy and revenue streams  

so that the firm could duplicate madoff's results  he had the patina of her being a respected citizen  

one of the most successful businessmen in new york  and certainly one of the most powerful men on wall  

street you would never suspect him a fraud unless  you knew the math so i mean you're like a math guy  

right i've taken all the calculus courses from  integral calculus through differential calculus  

as well as linear algebra and statistics both  normal and non-normal how long did it take you  

to figure out that there was something wrong it  took me five minutes to know that it was a fraud  

it took me another almost four hours of  mathematical modeling to prove that it was a fraud  

what were the things that caught your  attention it was the performance line  

as we know that markets go up and down and his  only went up he had very few down months only  

four percent of the months were down months and  that would be equivalent to a baseball player in  

the major leagues batting 960 for a year clearly  impossible you would suspect cheating immediately  

maybe he was just good no one's that good harry  said there were only two plausible explanations  

either madoff was using insider information  to rack up huge profits or he was running a  

giant ponzi scheme so either way he was doing  something illegal either way i knew he was going  

to go to prison in may of 2000 marco polos  took his suspicions about bernie madoff to  

the boston office of the securities and exchange  commission did you have any financial motive yes  

he was a competitor of mine in 2000 to 2004 while  i was still in the industry and when someone's  

competing on your playing field who's a dirty  player you want him tossed off the field he also  

thought he might be eligible for a sizable reward  if the fraud involved insider trading but that  

turned out not to be the case in your first letter  to the sec back in 2000 you're a little tentative  

you say look i have no smoking gun in 2000 it  was more theoretical in 2001 it was a little bit  

more real by 2005 i had 29 red flags that you  just couldn't miss on but by 2005 the degree  

of certainty was approaching 100 percent over  time and with some simple math calculations  

marco polos concluded that for madoff to execute  the trading strategy he said he was using  

he would have had to buy more options on the  chicago options exchange than actually existed  

yet he says no one he spoke to there remembered  making a single trade with bernie madoff's fund  

i would talk to the people i had trading  relationships with and asked did you have a  

trading relationship with mr bernard manoff and  they all said no we don't think he's for real  

could you find anybody i found no one that  ever traded with mr manoff and i traded with  

the largest equity derivative service in the  world and that's because madoff's investment  

fund never actually made any trades at least going  back to 1993 and probably further a fact confirmed  

last week at a meeting of madoff investors by  the trustee charged with liquidating his assets  

no one knew the depth of the fraud  but a lot of people had questions  

who else figured this out besides you i would say  that hundreds of people suspected something was  

amiss with the madoff operation if you look at  who the victims were not you'll notice that the  

major firms on wall street had no money with mr  manoff i mean you write in the this is the letter  

i'm quoting from the letter to the securities  and exchange commission red flag number 20.  

madoff is suspected of being a fraud by some of  the world's largest most sophisticated financial  

services firms and then you list some of the  firms yes i do the biggest firms on wall street  

in conversations with people high up in those  firms that is correct and the sec ignored that  

did they call any of these people all the sec  had to do was pick up the phone they never did  

if you had executives at the biggest investment  houses on wall street that knew something was  

wrong why do you think they didn't go to the sec  because people in glass houses don't throw stones  

and self-regulation on wall street doesn't work in  january 2006 the new york office of the securities  

and exchange commission finally opened a case  file to look into harry's allegations about bernie  

madoff despite uncovering evidence that madoff  had misled them about his investment activities  

the sec closed the case 11 months later without  ever opening a formal investigation the staff said  

there was no evidence of fraud what i found out  from my dealings with the sec over eight and a  

half years is that their people are totally  untrained in finance they're unschooled  

most of them are just merely lawyers  without any financial industry experience  

well if the people there aren't trained in  securities work what are they trained in  

how to look at pieces of paper that the securities  laws require they can check every piece of paper  

perfectly and find misdemeanors and they'll miss  all the financial felonies that are occurring  

because they never look there even when pointed  to fraud they're incapable of finding fraud  

no one at the sec would talk to us on the record  about harry marcopolis allegations but one person  

who seemed to have had a high opinion of the  agency was bernie madoff i'm very close with  

the regulator so i'm not trying to say that they  can't you know that what they do is bad as a  

matter of fact my niece just married one besides  his niece's husband who no longer works at the sec  

madoff has had long-standing ties to the agency  and has been called upon to give advice at this  

2007 meeting of a non-profit group called the  phil octady center madoff seemed to think the  

sec was doing a great job you know in today's  regulatory environment it's virtually impossible  

to violate rules when this is something  that the public really doesn't understand  

but you it's impossible for you to go under for  a violation to go undetected certainly not for  

a considerable period of time but don't try  and tell that to the phil octadies center today  

its main benefactor the betty and norman levy  foundation was fully invested in madoff one  

of dozens of charitable organizations  that have been devastated or wiped out  

madoff's customer list single spaced with  small type is 162 pages long with victims  

running the gamut from hollywood royalty to a  carpenter's pension fund in syracuse new york  

shelley ludlow has been forced to put her  mother in a medicaid assisted living facility  

while she packed up their apartment to move  in with a friend all because of bernie madoff  

their whole lives were turned upside down by  this man that sits in his penthouse and smirks

the same day last week 70 miles away len and marge  forest were leaving their house that they just  

sold in setup at long island and were preparing  to drive to south florida to sell their home there  

they had their money with bernie madoff for 30  years and lost an eight-figure family fortune  

two days before his 80th birthday  do you have any money to live on  

enough i would say for 60 days do you know other  people who are in the same situation oh yes  

we have a lot unfortunately and i think probably  the thing that tears me up more than anything  

is the fact that i recommended made off to  a number of people and they lost their money  

and i i'll never stop feeling responsible for  that they were all close family and friends  

len forrest and his friends thought they were  part of a small exclusive group of investors lucky  

enough to have a connection with bernie madoff and  because they thought they were making 12 percent  

a year they weren't inclined to ask a lot of  questions harry marcopolis called it the classic  

affinity scam an affinity scam is where you prey  on groups that are similar in nature to yourself  

so i'm greek if i was going to run an affinity  scam i would run it on the greek american  

community here bernie was jewish so he ran  into the jewish community in the united states  

but that didn't that wouldn't get  him enough customers because he  

always needed new money to keep the scheme  going the story will continue after this

over time madoff extended his reach from new  york to palm beach where he enlisted hundreds  

of wealthy clients many of them recruited  from his own country clubs and he also  

made connections that gave him entree to europe  and the hedge fund capital of america greenwich  

connecticut it was here that bernie madoff made  some of his biggest deals with large investment  

firms that were willing to feed him billions  of dollars of their clients money to manage  

and in return bernie madoff agreed to pay these  so-called feeder funds a fortune in annual fees  

the largest of the feeder funds was the fairfield  greenwich group how much money did fairfield make  

off bernie madoff every year hundreds of millions  of dollars if you're a feeder fund what are you  

supposed to do for those hundreds of millions of  dollars you're supposed to identify the world's  

best hedge fund managers and invest only in  them and you're supposed to make sure they're  

not running ponzi schemes the real steroids  here were the feeder funds that's what made it  

an international ponzi scheme attorney david  boyes is one of the most prominent lawyers in the  

country and is representing fairfield greenwich  investors who lost nearly seven billion dollars  

when madoff went under they're suing the firm for  gross negligence claiming it failed to investigate  

madoff thoroughly or monitor his activities as  it promised to do in its marketing materials  

analysis of portfolio composition portfolio  stress testing risk management asset verification  

do you think that really happened  no we know it didn't happen  

because we know all they did was turn the money  over to bernie madoff and they did that for 20  

years they did nothing they essentially did  nothing except lose their investors money  

and enjoy very luxurious lifestyles from the money  they took out walter noel one of the founding  

partners of fairfield greenwich declined to talk  to us and has reportedly been lying low with his  

wife at their compound on the private island  of mystique but 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 made off by the  

second in the end harry marcopolis 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  manoff 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 toe tagged the victims count the bodies  

and try to figure out who the crooks were  after the fact which does none of us any

good

you