Too Good to Be True: The Rise and Fall of Bernie Madoff
By Erin Arvedlund
Portfolio/Penguin Group
$25.95, 310 pages
When Bernie Madoff’s $65 billion Ponzi scheme unraveled at the end of 2008, many in the industry wondered how he did it, how otherwise savvy investors were lured into it, and how regulators failed to stop it. These are the questions that Erin Arvedlund attempts to answer in her book “Too Good to Be True: The Rise and Fall of Bernie Madoff.”
The book explores Madoff’s background, interviewing classmates from his days at Far Rockaway High School in New York, who noted that Bernie was an average guy who they never dreamed would ascend to titan of Wall Street and chairman of the Nasdaq. She also discusses Madoff’s involvement in the early development of electronic trading, including the Nasdaq and the Cincinnati Stock Exchange, an all-electronic stock market that actually moved to Chicago through a membership deal with the Chicago Board Options Exchange (CBOE) in 1995.
The book goes on to explain how Madoff carried out his Ponzi scheme through his illegal advisory business with the help of the legal side of his business, a brokerage firm. Both businesses were on three floors of the same building. Arvedlund’s descriptions of how the activity on the broker-dealer business on the eighteenth and nineteenth floors differed from the advisory business on the seventeenth are fascinating. It’s amazing how Madoff was able to get away with mailing his investors tickets for trades supposedly made on their behalf that never actually happened. The book explains that instead of actually trading for the advisory business, he would take investors money, deposit it into a bank account, and send it back to earlier investors.
Madoff’s fund made returns that were impossible to achieve, as it would still do well when the market was having a downturn, yet investors turned a blind eye to this. The book discusses the false sense of security and trust that several prominent investors put in Madoff and how his victims wanted so badly to believe that they had an edge that they went along with the scheme without doing due diligence.
Arvedlund interviews industry experts that were on to the idea that something was rotten with Madoff’s returns. Alan Jacobson, a former head of investor education at CBOE, noted that many of the returns in Madoff’s fund, in the 20% range, even when the stock market was down or flat, did not make sense. Harry Markopolos, who worked at a business that lost clients to Madoff, alerted the SEC to Madoff after investigating his trading strategies, trading history and returns and realizing that they made no sense. A 2006 investigation by the SEC found that Madoff was not running a Ponzi scheme. Arvedlund digs into why SEC investigations into Madoff were inadequate, pointing out that many of the SEC’s staff were lawyers with no background in finance or trading. She also says that under Chairman Christopher Cox “the SEC morphed into a weak, defanged shell of itself” and his tenure “would come to be known as one of the most dysfunctional and inept periods in the commission’s history.”
One of the more amusing accounts in the book is the story of Salomon Konig, a money manager who is essentially in exile in the United States after running a mini Ponzi scheme in Venezuela. Konig would ask any fund of hedge funds he considered doing business with if they had any money in Madoff, and if they did, he would not deal with them. As another of Arvedlund’s interviewees points out, “it takes a crook to smell another crook.”
“Too Good to Be True” is an informative account of how Madoff carried out his scheme, how he lured in his victims, how industry experts raised alerts about it, and, ultimately, how the investigations into it failed. Anyone who is interested in this Ponzi scheme to end all Ponzi schemes will find it a worthwhile read.