We all know about Bernie Madoff. The man that exemplified greed admitting a Ponzi Scheme of $65 billion back in December 2008, when the rest of world financial markets were also in turmoil. Recently I read a book about what life was like for those working for his firm, Bernard L. Madoff Securities, LLC (or BLM).
The firm at the time of the fraud exposure employed 150 people, situated on three floors of one of Manhattan's most known towers. A newcomer to the firm would have found a very bizarre, convoluted world. There was not one written rule or policy. However, there was a plethora of strange unwritten rules employees were expected to follow. No use of pens other than black. Only one piece of paper could be out on an employee's desk. The carpets were required to be vacuumed several times a day, with Madoff often doing the honors. All window shades had to be drawn to the same exact length. Employees could only wear solid, dark colors. Employees were prohibited from having family or friends meet them at work.
Even more strange was communication within the firm. Employees yelled across the room. Rarely there was the use of email. Employees on a regular basis would cuss each other out. Employees were allowed if not encouraged to be rude to clients on the telephone. Madoff's wife visited the offices once a week to complete Madoff's expense report (only she was allowed to do it). On each visit an argument between husband and wife would ensue with Ruth telling Bernie in a very loud voice to "F" himself. Employees were often verbally dressed down in front of co-workers, often by Madoff himself. He would loudly call out employees, particularly the female employees telling them they were stupid, lazy and fat. Yet, at other times he acted like the caring grandfather type.
The firm occupied three floors and the 17th is where the fraud took place. Only a couple of employees had access. Madoff's sons did not. Official visitors were never shown the floor. IT techs were guarded if they went to the 17th floor to work on computers. The unspoken rule was that employees were never to speculate about that floor.
Although Madoff was considered the father of technology on Wall Street, his firm used software from the 1960s and 1970s. Systems were difficult and very expensive to maintain. An IT worker recommending upgrading systems was snubbed and ignored. An IT worker that insisted on getting rid of 40 to 50 year old technology was fired. Years before other firms had began to provide investors with colored reports with graphs and charts. BLM investor reports were simple black and white single line items.
One thing that made up for the difficult and weird work environment was the pay. Clerical workers made six figures. Other higher level employees made well into the millions. If an employee ran into a financial emergency Madoff took care of it, no questions asked, no strings attached. Madoff threw all expenses paid lavish events throughout the year for the staff. Some employees were freely allowed to charge huge personal expenses to company credit cards. Others given copious amounts of paid time off.
Madoff was investigated several times by the Securities and Exchange Commission, one a formal review in 2005. Madoff personally attended to investigators claiming his proprietary model made sure investors made money even in a down market. He always refused any more information other than double speak, which investigators accepted. Investigators were often young, in their 20s, and would instead listen to Madoff talk about the market and great places to eat lunch and dinner.
In the 2005 formal investigation the most basic questions were never asked. Madoff was never asked to show written confirmation of trades (there was none). Trading required an individual to have an account number to access a universal trading platform. Madoff was never asked for an account number he should have but did not possess.
By Thanksgiving 2008 Madoff had less than $500 million in cash but redemption requests of over $2 billion as the financial sector was in freefall. He was suppose to have $65 billion in investor assets. Facing ruin he first went to his younger brother Roger, who had worked at the firm for over 40 years. He confessed his crimes but asked for a week to distribute the rest of the cash to family members and a few friends (the ones he screwed for billions). A few days later he confessed his sins to his sons but the sons refused to give him a week. Instead they ended up at FBI headquarters that day and never spoke to or saw their father again. (A few years later one son committed suicide then a couple years after that the other son died of cancer).
The night of his confessions to his son was the Madoff Christmas Bash. Madoff and his wife appeared, all smiles. Noticeably absent were the two sons. Gossip ensued but both sons were well liked by the staff. While they may have had a typical tiff with their father it would be unlike them to snub the employees.
The next day Madoff was due to take several early morning calls. Throughout the decades Madoff had never missed one call or meeting and always let his secretary know of his whereabouts. That morning frantic calls from his secretary to his cellphone and home phone went to voicemail. Ditto for the sons absence that morning and efforts to reach them. Shortly before noon FBI agents busted in and began to demand documents and order employees around. They would not answer questions but by early afternoon the story broke in the press. Employees sat crying, shaking or just sitting silently stunned.
While Madoff claimed to have carried out the charade alone several employees were convicted of being accomplices. Investigators thought more employees were involved but could not prove it. They also believe the fraud could have started as early as the 1960s when the firm was founded but again couldn't prove due to lack of documentation from much earlier days. However, most employees just simply thought they were working a in very tough place but very respected and making a hell of a living doing so.
A side note is the ultimate enabler Chase Bank. Chase was listed on prospectus as the transfer agent for trades yet never executed one trade in decades. Even more troubling is that Madoff (unwisely) had all of his ill gotten money on deposit with Chase. There should have been a flow of funds in then disbursements to trading accounts. Instead the money came in and was clearly withdrawn to cover the outrageous costs of the firm and Madoff's ultra lavish lifestyle (he was the .001%). Banks are required to have KYC (Know Your Customer) policies in place to monitor particularly large accounts for any suspicious activity. Investigators wanted to bring charges against Chase but were stopped by the Obama DOJ. Obama and Chase CEO Jamie Dimon had been friends for years. Need I say more.
Finally, investigators narrowed in on the two sons and wife. The belief was that they knew or should have known something was wrong. The sons ran the legit trading operation that was carried out on the 18th and 19th floors. As traders they would have had visibility into the trades being executed for the advisor end (the fraud part). The sons claimed every time they approached their father about what was occurring on the 17th floor he became enraged and told them to mind their own business. As noted above one son facing possible charges took his own life.
Ruth the wife was ultimately cleared as investigators could not definitely prove she knew something. She was given $2.5 million to live out her life. She has lost all contact with her former society friends and is believed to be in the Connecticut area working an hourly wage job. Quite a fall from flying in a personal jet to visit Kings and Queens.