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Madoff: Don’t let Wall Street

scam you, like I did
Published: June 5, 2013 at 7:16 p.m. ET

1
By Sital S. Patel

If investment looks too good to be true,

it is, says Ponzi scheme architect

Disgraced Wall Street financier Bernie Madoff. GETTY IMAGES

" ! " # # $ %

NEW YORK (MarketWatch) — Securities

regulators are grossly underequipped to police
financial markets, hedge funds are a danger to the
market, and criminals have been scamming
investors since the beginning of time and are not
going to stop anytime soon.

Those are just a few of the observations made by

Bernard Madoff in a recent interview about
whether the financial markets are fair and how
retail investors can protect themselves from
fraudsters like him. In the interview, he described
decades of dodging scrutiny from toothless
regulators and gullible customers and said retail
investors are the least well-informed market
participants.

After all those years of racing to remain a step

ahead of the authorities, Madoff has a few ideas
about how the market can be made more fair for
retail investors. Among them: The Securities and
Exchange Commission should be beefed up, hedge
funds need to be registered and brokerages
should have independent custodians.

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Madoff, serving 150 years for orchestrating the

biggest Ponzi scheme in history, bilked his clients
of billions of dollars and fooled regulators for
decades before he was caught, tried and sent to
prison.

Since his conviction, Madoff has been in Butner

Federal Correctional Complex, a medium-security
prison in Butner, N.C. After five years behind bars,
Madoff, in a meeting with MarketWatch, appeared
friendly, relaxed and healthy, despite the prison’s
clinical feel.

During the two-hour conversation, Madoff talked

about the good old days on Wall Street,
hobnobbing with the likes of the former Treasury
secretary and CEO of Goldman Sachs, Bob Rubin,
and former Securities and Exchange Commission
Chairman Arthur Levitt.

In prison, Madoff has no access to the Internet and

gets his news from television, to which he has
access from 2 p.m. until midnight, sharing with 60
other inmates. The former market highflier now
spends his days taking care of the prison phone
system and computers and says his fellow
prisoners call him “the communications director.”

MarketWatch talked to Madoff about how

investors can navigate the pitfalls of Wall Street
and avoid getting scammed. Here is an edited
version of MarketWatch’s conversation with
Madoff.

MarketWatch: You have worked with some of the

most elite financial firms on Wall Street. How has
it changed since before you started the Ponzi
scheme?

Bernard Madoff: The individual investor is the last

person that has any information. The average
investor is coming up against professional
financial firms, hedge funds and the professional
trader, and it’s easy to be scared out of the market.

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MW: You say the individual investor is facing an

unfair market environment, what can be done to
level the playing field?

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B.M.: The SEC needs more resources to protect

investors. It’s grossly undercapitalized and it
doesn’t have money to hire the right people.
Basically it’s a training ground, by the time people
are qualified they leave and work for private firms.
They didn’t catch me because the whistleblower,
Harry Markopolos, was leading them down the
wrong alley. He was an idiot.

MW: Hedge funds are playing a bigger and bigger

role in the market, but you point out that they
might scare individual investors away.

B.M.: Hedge funds are a danger to the market and

need to be registered. A major flaw on Wall Street
is exempting hedge funds from being registered if
they contain less than $100 million. We didn’t
register with the SEC until 2006 as an investment
adviser. From 2006 to 2008, when I was caught, I
never had an investment adviser inspection by the
SEC. They are supposed to do it every two years. If
I had an inspection, I would have been caught
sooner.

‘If I had had an inspection by the SEC,

they would have looked at the
custodian accounts and seen the funds
on my books did not match the funds in
the accounts, and I would have been
caught.’
— Bernard Madoff

MW: What about the big brokerages and

advisers?

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B.M.: Brokerages and advisers should have

independent custodians and the government
should have forced me to have an independent
custodian. Client funds should be held by
independent custodians. If they had, I would have
been caught long ago. If I had had an inspection by
the SEC, they would have looked at the custodian
accounts and seen the funds on my books did not
match the funds in the accounts, and I would have
been caught. Brokerages and investment firms
should hold money with depository trustees.
Depository trusts verify to auditors the funds are
being held. Auditors do spot checks and verify
with brokerage firms or accountants. That wasn’t
done in my case. If that was done, I would have
been caught much sooner.

MW: Where do the big accounting firms fit in?

B.M.: Accounting firms should audit other

accounting firms. Everyone should require that
accounting firms check on their peers, which
would make sure audits were done properly. But
these firms use the excuse of competition [to avoid
supervision]. If accounting firms keep each other
in check, a proper audit would uncover most of the
fraud that exists — including my own fraud.

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MW: Where is the safest place to invest money

these days, with the least amount of risk for fraud?

B.M.: The best chance for the average investor is

to put money in an index fund. There are lower
commission rates and more professional
management with these types of firms. It’s the
safest and least likely place to get scammed. If you
want to hold money with brokerage firms, go with
major public firms. Chances are they will go with
proper procedures and proper compliance. If
regulators were checking my firm, they would
have caught me sooner. This way you can avoid the
mistake of putting your money at risk. Or, put your
money in mutual funds, which are large enough to
protect investors.

[Madoff avoided filing disclosures of his funds’

holdings with the SEC by selling them before filing
deadlines. Madoff also rejected calls for an outside
audit “for reasons of secrecy,” claiming that was
the exclusive responsibility of the firm’s
compliance officer.]

Madoff: Don't Let Wall Street Scam You, Like I

Did

If you are risk adverse, you should buy municipal

bonds or government bonds. But you get 2.5%
interest, lower than the inflation rate. If you are
not sure, you should put your money in a savings
account; at least it’s better than losing money and
safe from fraud.

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MW: What if the firm says an investment is too

complicated to understand?

B.M.: Wall Street is not that complicated. If you

ask an average hedge fund or investment firm how
they make their money, they won’t tell you. Most
people think it’s too complicated and they can’t
understand it. You should ask good questions, and,
if you don’t understand something, have your
accountant ask questions.

If you don’t understand something, then don’t

invest in it. People asked me all the time how did I
do it, and I refused to tell them, and they still
invested with me. My investors were
sophisticated people, smart enough to know what
was going on and how money was made — but still
invested with me without any explanations. Things
have to make sense to you. If you don’t understand
the investment, don’t put your money there.

MW: How should an individual investor get to

know Wall Street and how it works?

B.M.: Read good books. You have to educate

yourself on the market. People are very gullible.
Scamming investors has been going on since the
beginning of time, and I don’t think it’s going to
end. Use a qualified adviser. There used to be
registered advisers that were educated and
qualified on different financial investments. We
don’t have that anymore. The biggest danger is
when advisers have incentives to steer investors
one way or another to get a bigger paycheck,
which can happen.

MW: Your customers were given consistent, good

returns for years. No one realized it was a Ponzi
scheme until the financial crisis and clients
demanded their money back. How can investors
detect fraud like that?

B.M.: If it sounds too good to be true, it is. One of

the things that allowed me to go on as long as I did
is that I had a lot of credibility. I had 11% and 12%
returns, which were not that unusual at that time.
So no one questioned me, and I was able to
continue.

MW: How do you make sure your money is really

there?

B.M.: Ask for your money back periodically. What

investors should do is periodically ask for your
money back, whether it’s at a hedge fund or other
investment firm. They will try to stop you by
saying you can’t come back if you take it out, but
you will likely always be able to go back. Ask for all
your money back about every two years to make
sure [a firm is] legitimate. If my clients had done
this with me, I would have been caught sooner.

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About the Author

Sital S. Patel " "

Sital Patel covers Wall Street and the financial

services industry from New York. You can follow her
on Twitter at @Sital.

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JAMES RIBE
5d ago
Since 2013, have any of Mr. Madoff's recommended
improvements been implemented? No. Why is that?
Reply · ·

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