April 8, 2011 5:04 pm

From behind bars, Madoff spins his story

 
Bernie Madoff

Madoff in New York in March 2009, shortly before pleading guilty to fraud charges

We are cruising through North Carolina on a foggy morning in late March, heading up to its rural north. Our route takes us through swampland shrouded in a thick mist; spruce trees and an occasional pink dogwood line the interstate. Butner, population 6,391, is our destination.

The town is home to a vast federal prison complex that includes a hospital, a minimum security unit and two medium security facilities. Since July 14 2009, arguably the most notorious inmate at FCI Butner Medium I has been Bernard Lawrence Madoff, the disgraced New York financier who orchestrated a $65bn Ponzi scheme, among the biggest financial frauds of all time. He is prisoner 61727-054.

When the Madoff scandal broke in 2008, a Financial Times reporter learnt that two acquaintances of his were close to the Madoffs and passed along an invitation for any member of the family to speak with the paper. For more than a year, there was silence. Then, early last December, the reporter received an e-mail from Madoff himself. Following sporadic correspondence, and at very short notice, a message came from the prison: Madoff would meet with the FT.

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It is only the second time he has agreed to meet a reporter in prison. But as we drive north, we wonder if this man who built his career on lies will tell us the truth. Or when we get to the prison, will he simply vanish – like all those billions in his Ponzi scheme? Crossing rusted train tracks, we drive a couple of miles and arrive at the main intersection of this one-traffic-light town.

Butner revolves around the prison. Its centre is just a clutch of convenience stores and a petrol station. In search of strong coffee we consult an iPhone: the nearest Starbucks is 18.4 miles away. Instead, we go to a diner and order the classic southern fare of biscuits and grits. The coffee is terrible.

Nervously, we pore over our files. No matter how many times we read about Madoff, his tale never loses its ability to shock. Over at least 16 years, Madoff deceived investors, regulators, banks and associates. His Ponzi scheme – a fraud which involves paying old investors with funds from new ones – made him extraordinarily wealthy. He took in $20bn in capital from investors including European nobility, average American workers, worthy charities and his own close-knit family and Jewish community. Madoff’s scheme was the largest in history.

Yet the man behind this fraud never looked anything like a crook. Instead, he was the former chairman of the Nasdaq stock market, a buddy of regulators, and vice-chairman of the National Association of Securities Dealers, his industry’s self-regulatory body. He lived a gilded life, flitting with his family between a penthouse in New York and holiday homes in Palm Beach and Long Island, travelling in private jets and on his yacht, called Bull.

The earlier fog has lifted, opening up to a bright day. We drive towards the prison through a rolling wooded landscape. It would be lovely were it not for the stark, low-slung concrete buildings and rolls of razor wire, glinting in the sun.

We enter FCI Butner Medium I, a drab, white building. Brusque guards order us to deposit our belongings into a locker, except for pencils and paper, and we pass through a metal detector. Our hands are stamped. We walk into a sealed area with a heavy iron gate that locks behind us before the next door opens. The interior is spare, and our footsteps echo against tile and cinderblock. On the walls of a long corridor, somebody has hung a dozen Ansel Adams posters. We have seen the same pictures hanging in Wall Street offices.

As the guard escorts us past the prison cells, we are given our orders: we will meet Madoff in a visitors’ room; we have exactly two hours; a guard will watch, but will only intervene if there is “trouble”. We ask, half in jest, if we can exchange a handshake. “No,” our minder says sternly. And then the door opens.

. . .

Madoff sits in a metal chair, his arms folded across his chest and his legs outstretched. He has his back to us, head turned slightly to reveal his now infamous profile – the aquiline nose, drooping jowls and curly silver hair. As we approach, he rises with a smile, says hello and extends a hand.

Should we take it? We pause – then meet his grasp. The grip is firm and he looks us directly in the eyes, as if welcoming us into his old Manhattan office.

“So, how are you doing?” we ask as we sit. We are in a large room overlooking a sun-drenched courtyard. Shelving holds books and some children’s toys. Behind us, two vending machines make an irritating hum.

“As well as might be expected,” he replies. He is neatly dressed in khaki prison garb – very different from the velveteen monogrammed slippers and tailored suits he once wore. Thin, but looking healthy at 72, his slightly tanned face ­suggests he has been outside. The lines around his eyes are ­pronounced, and age spots dot his hands, as do a few blue marks from a ballpoint pen. He wears simple, brass-rimmed glasses and smells faintly of aftershave.

“Let me set the ground rules,” he says, already trying to take control. He knows exactly why we have come: we want to understand what would motivate a man who looks like a friendly family doctor to engage in such a devastating fraud. And, for reasons we can only guess, he wants to comply.

“Nothing that I say should be taken as an excuse for my behaviour,” he starts, in a thick New York accent. “I take full responsibility for what I did. I was aware of what I was doing.” As he talks, his body is completely still. The speech sounds well-rehearsed; it seems that he has not only worked out his story with his therapist or lawyer, but also mastered the jargon of pop psychology.

So why, we ask, did you do it? “You have to understand my history.” He sighs. “I started with $500 in capital. I watched my father go bankrupt. I was very driven. But I was always outside the club, the club being the New York Stock Exchange and white shoe firms. They fought me every step of the way.”

 
Bernie Madoff's holiday home in Montauk, Long Island

One of Madoff’s luxury holidays homes, in Montauk, Long Island, subsequently sold to help pay back investors

This part of the story, at least, is absolutely true. Madoff was born in 1938, the son of Ralph and Sylvia Madoff, a Jewish couple from Queens, New York. During most of his childhood, his father ran a moderately successful sporting goods business. But it failed when Madoff was a young man, shattering the family’s comfortable middle-class existence. Madoff met Ruth Alpern, who would become his wife, in high school, and managed to get himself into college, working to support himself by installing sprinkler systems. He toyed with the idea of entering Wall Street, but assumed that it would be impossible for somebody like him, with few academic credentials and no family money, to break in. So in 1960 he founded Bernard L Madoff Investment Securities, his own tiny brokerage, in office space borrowed from his father-in-law.

It was such a tin-pot operation that it initially attracted no notice. In the 1960s, Madoff focused on a minor field: making markets for small parcels of bonds. But as time passed, BLMIS – as it came to be known – grew. He entered the more prestigious world of trading equities. Then, with the help of his brother, Peter, he innovated with technology. Traditionally, the business of trading equities on Wall Street had been conducted by a club of human brokers; however, by the 1970s the Madoffs had begun using computers. The traditional firms – and brokers – hated this. “They even had congressional hearings against me,” Madoff recalls.

He is a born raconteur. The words pour out with a sense of rhythm, timing and even humour. He clearly hopes to have a hand in shaping his legacy.

 
Jeffry Picower with his wife Barbara©Getty

Jeffry Picower with his wife Barbara

Starting in the 1960s, Madoff began managing money. He soon had four prominent clients: Jeffry Picower, a New York investor; Stanley Chais, another investor; Norman Levy, a real estate developer; and Carl Shapiro, a Boston clothing manufacturer. These men would eventually become the largest beneficiaries of Madoff’s Ponzi scheme, taking out much more than Madoff’s own family. Picower alone took out an eye-popping $7.2bn over the years. But during the 1970s and 1980s, Madoff insists he was making money for them legally.

 
Carl Shapiro

Carl Shapiro

Exactly what drew these powerful men to Madoff’s small-time firm has never been clear. The four were not all friends. Ethnicity might have played a part: all, like Madoff, were Jewish. However, there was another, practical factor: taxes. In the 1970s and 1980s, the tax rate was punitively high, prompting many wealthy families to seek creative ways to reduce their tax bill. And one option was to invest in the stock market, since long-term capital gains were not taxed as highly as short-term profits.

During most of the 1980s, as Madoff tells it, the strategy worked. He bought long positions for his big four clients, and some new clients, and saw high returns. “I caught [the market] at the right time. So they had big long-term gains. They were just deferring tax and rolling it,” he recalls.

Then it went badly wrong. “It was all fine until the market crashed in ’87, and these people started to go into a total panic,” he says. “The long-term gains started to evaporate. But they refused to close it out – they were greedy.”

Madoff says he told them to hold their positions until the market recovered. But in 1986 the US authorities had tightened the tax code. That left the families wanting to liquidate some of their holdings. This, he says, was difficult. When he had invested in the US equity market he had hedged – or protected his positions – by making trades in the opposite direction with other investors, particularly in Europe. These, he claims, could not be unwound quickly – leaving him locked in. “I had long-term hedges in Europe – I was at their mercy,” he says with a heavy sigh. “So I had to find other clients.”

Madoff says his four big clients were motivated to help him, and referred their friends to him. “Picower brought in clients, Shapiro brought in clients, Levy brought a lot – he had a fund with his bank,” Madoff tells us.

And these four men were not the only source of funds. In 1992 Avellino & Bienes, a firm that had already been funnelling money to him, closed down after being investigated by the Securities and Exchange Commission for being a Ponzi scheme. Avellino & Bienes was founded by two men who had worked for Madoff’s father-in-law, Saul Alpern. “I got hundreds of phone calls from their clients – they had clients who had $50,000 who wanted to get in. So I put a minimum of $500,000 for an investment. I brought in, over a period of a month, lots of new clients.”

As the new money came pouring in, Madoff insists he planned to continue using his legitimate investment strategy, which was based around a so-called “black box” – a complex technique that relies on computing algorithms to select trades. “Before, I had helped develop products for the Chicago Board Options Exchange for index trading – I had built a model for that business,” he says. “So I thought I would put together a portfolio of S&P 500 stocks, with 85 per cent exposure, then used OEX [the S&P 100 index] positions as a hedge.”

This type of jargon sounds unintelligible to non-bankers, but is entirely typical – and credible – on Wall Street, and Madoff delivers it without missing a beat. Is he lying? It is impossible to tell; but as he speaks, he becomes so animated that colour flushes into his cheeks.

“But the problem [with my black box] was that to make it work you need to have volatility, volume and momentum. And, of course, we didn’t get that.” Soon after Madoff took in this new influx of capital, the markets became becalmed – which prevented his “black box” strategy from producing profits. Yet his new clients expected generous returns, and were soon demanding redemptions.

So in 1992, he says, his slide into the Ponzi scheme began, using money from new deposits to pay some returns. “I thought I could do it. I did! I took the money – let’s say I had $1bn, by then – and I was convinced that when the market straightened out I would be able to cover things.” But it never happened. “The turning point was really about 1992 onwards. From then on, it started getting worse and worse. I spend a lot of time thinking about it – it is almost like a blank to me now. I try to piece it together; why didn’t I say, ‘I cannot do it?’ Why didn’t I return the money to those four or five clients – and the others – and say, ‘I can’t do it.’ Why?”

Silence; we look at him expectantly. Madoff blinks intensely and often: it is a tic that grows more pronounced during pivotal moments of our conversation, like a poker player’s tell. In the corner, the prison guard nonchalantly taps at his computer, seemingly oblivious.

. . .

 
Bernie Madoff in his New York office in 1999

Front man: Madoff in his New York office in 1999. According to Madoff, at this time the Ponzi scheme had been in operation for seven years

Exactly when the Ponzi scheme started is actually a matter of dispute. The trustee seeking to retrieve assets for Madoff’s victims, Irving Picard, says the fraud began as early as 1983. But Madoff denies this, telling us that in the 1980s, at least, he was making plenty of legitimate trades. “[The prosecutors] came up with this idea that I came up with this whole legitimate business to come up with this fraud,” he says. “That is wrong. In the end I left $1bn on the table. I had access to any Swiss bank and offshore bank in the world if I had wanted to stash money. But it wasn’t about the money.”

To hear Madoff say it was not about the money strikes us as improbable. He spent lavishly on his lifestyle; after the fraud was revealed, authorities uncovered $75m in a Gibraltar bank account and millions in jewelry and luxury goods. These were reminders of how much Madoff personally had to lose. He was on the board of Yeshiva University and a regular at charity balls in Manhattan. He and Ruth holidayed in Monte Carlo, where she liked to shop.

We ask why he didn’t just hand the money back to investors. After all, he says that in 1992 he was already a fairly wealthy man, since the market-making operation was performing well. “Ego,” he explains. “Put yourself in my place. Your whole career you are outside the ‘club’ but then suddenly you have all the big banks – Deutsche Bank, Credit Suisse – all their chairmen, knocking on your door and asking, ‘Can you do this for me?’

“[I was] under a lot of pressure – a lot,” he mutters. “And I was embarrassed. It was the first time in my life that something hadn’t worked. I was just dumb. Dumb! Starting in the early 1990s there were no trades. It was just paper. But let me tell you,” he adds forcefully. “It looked real.”

Once the Ponzi scheme was under way, it required a constant influx of new cash. Madoff began taking on clients referred to him by existing ones, who were inclined to keep their money parked with him because of the steady returns. At some point – Madoff never makes it clear exactly when – the real trading ceased altogether, and he began forging trade records for clients. And he says Picower, Chais, Levy and Shapiro – his big four clients – knew something was amiss. “They were complicit, all of them,” he says.

Madoff’s accusations cannot be corroborated. None of the four families has been charged with criminal wrongdoing. Picower is dead, and his estate settled for $7.2bn; his lawyers maintain he was not aware of the fraud. Levy is dead and his family settled for $220m. Chais is dead; his family denies any wrongdoing and has not settled. And Shapiro, the only one still alive, settled for $625m but denies any wrongdoing and has not been accused by authorities of being complicit. In the words of his lawyer, “Mr Madoff is a liar. These latest statements are no more believable than all the other lies that Madoff told his investors and the authorities for decades.”

On its surface, the fraud looked real enough to attract a steady stream of new investors, and not just from the US. According to Madoff, there were rich clients on both sides of the Atlantic eager to use his services to dodge local regulations. In France, for example, wealthy clients initially invested with him in order to avoid rules that prevented them from exporting francs.

“I did it for all of them – so many important people from France and elsewhere,” says Madoff. “That woman from L’Oréal, Christian Dior, so many – I even impressed myself. They came up to my office to meet me. They really wanted to deal with me.” The woman from L’Oréal Madoff refers to is Liliane Bettencourt, one of Europe’s richest women.

The returns on Madoff’s funds were not extraordinarily high, running at about 10 per cent; however, they were steady, which appealed to conservative European investors. Clients were also reassured by the apparently close ties that Madoff enjoyed to respected French and Swiss banks, such as Union Bancaire Privée.

Not everybody in Europe was keen to deal with the fund: Société Générale, for example, stayed away. But most investors seemed impressed by Madoff’s “black box”. Some also suspected that Madoff might be using inside information to give him an “edge”. That added to his allure. “The Swiss thought this – they are the most suspicious of all,” Madoff says, revealing a dislike that may stem from his Jewish heritage and the actions of some Swiss banks in relation to Nazi Germany. “Slimy people.”

In the US, Madoff used his powerful network of contacts across the wealthy Jewish community to lure money. By this time, Madoff had moved into the very heart of the financial “club” he once scorned. He was appointed the chairman of the Nasdaq index, to the board of the Depository Trust & Clearing Corporation, and was vice-chairman of the NASD, his industry’s self-regulatory body.

This did not prevent the regulators from watching him. “In 2002 I had a contact with the SEC, who were concerned that I was front-running,” he recalls, referring to the practice of using insider information to inform trades. “I started laughing to myself – I knew I wasn’t because I wasn’t doing the trades.” Some of his rivals also asked why his returns were so steady. Harry Markopolos, a fund manager, was so suspicious that he filed reports to the SEC in 2000, and again in 2005, suggesting that Madoff was running a Ponzi scheme. “Markopolos was the biggest idiot in the world,” recalls Madoff, displaying his first flash of anger, blinking hard again. “He had a hedge fund that couldn’t make money and his clients abandoned him [so he called the regulators].”

But the regulators did not crack down. “The regulators get calls all the time,” Madoff says. They didn’t investigate “because I had the reputation at the time for being the gold standard. I had all the credibility. Nobody could believe at that time that I would do something like that. Why would I? Stupidity – that is why. But remember that when people asked me about the strategy, it made sense. I was big, credible.”

 
The "Lipstick Building"

The so-called Lipstick Building, the Manhattan home of Bernard L Madoff Investment Securities

He breaks into a new string of effusive stories; Madoff recounts how a couple of years before the credit bubble burst, the head of a major Swiss bank came to his Manhattan office – dubbed the “Lipstick Building” due to its design – for a briefing on BLMIS. “I never saw anyone look more like a Nazi in my life,” Madoff says. “It was tough as a Jewish person.” For two hours he explained his investment style to them. “Nobody could find fault in the strategy,” he insists. “They were literally embarrassed.”

That his improbable returns were accepted without a second thought is not so surprising. Across Wall Street, numerous other investment funds were also wielding “black box” strategies at the time. They also offered high returns, using computing techniques that few investors truly understood. “Does anyone know how, say, Renaissance really makes its returns?” Madoff asks rhetorically, referring to the wildly successful hedge fund.

Madoff even duped those running their own intricate investment schemes. “I had, through the funds, some of the heads of the biggest trading desks on Wall Street who had access to all the data,” Madoff tells us. “I had senior partners at Goldman Sachs.” Indeed, James Simons, founder of Renaissance Technologies, directed the foundation of Stony Brook University, where he was on the board, to invest with Madoff. “These guys didn’t think that I was running a scam,” Madoff gloats, a note of disdain creeping into his voice. “So how do you expect Mrs Green of Fort Lauderdale, Florida to be spotting the red flag?”

But how does he feel about ruining all those ordinary people’s lives; all those innocent “Mrs Greens”? Did he feel pleasure – or revenge – in this? He shakes his head. “I was scared to death,” he says. “I took no satisfaction in this. There was no malicious action on my part.”

Suddenly, Madoff the raconteur evaporates; he starts to speak very carefully. “I have spent a lot of time with a psychologist [in prison], which I had never done before in my life, in order to try to figure out how I could have done it,” he says. “There are these mafia people who can kill people all day long, do terrible things, and then go home to their families. I used to wonder how it was that people in wars could shoot people. But the thing is that you can compartmentalise things in your life.”

He pauses. “I have done a lot of soul-searching. I take responsibility. I do,” he repeats, sitting very still. “I do.”

Madoff insists that his wife, his brother and his two sons never knew about the fraud. Although his sons worked in his family firm, they were in a separate department that was ringfenced. “My sons and my brother, they were no part of this,” Madoff says. “They did not like dealing with retail clients.”

He says Sonja Kohn, an Austrian woman who funnelled $9bn to Madoff from European clients over the years, shares no blame, despite the trustee’s lawsuit allegation that she was his “criminal soulmate”. “There was nothing mysterious about her,” he says. “Did she know what was going on? No more than any other client.”

He also insists that Fred Wilpon, the owner of the New York Mets baseball team, and his business partner Saul Katz, “didn’t know” either – even though the two men are currently the focus of a probe by the trustee. “They were totally unsophisticated,” he says. “Their mistake was over-extending themselves with the team, with that leverage.”

Stephen Raven, who managed BMLIS operations in London, falls into the same category, since “no one in London had a clue,” says Madoff. “Stephen Raven is a typical English person, a bit of an old woman. He was a lovely guy. He just wanted to be accepted into the right clubs. He never got over the fact that he didn’t go to [the right] school.”

But Madoff again says that others, including his big four clients, were complicit. “I don’t feel bad for [those four] because they pushed me into it,” he says. “They knew they had me and they sensed that I would never be able to turn the money over.”

He is also profoundly cynical about the rest of Wall Street, pointing out that the large banks not only handled his cash, but also marketed his funds. “UBS and HSBC are going to have big problems – Picard is suing all of these [banks] and he thinks he can get $50bn or so. HSBC sat up there twice and set up and looked over my books and records, for two weeks, and missed things. The big difference between the big banks and funds, and regular clients, is that the banks and funds have all the information from the regulatory filings – but the regular clients did not have. Price Waterhouse came up to my office once a year and checked things out.”

UBS says it was not aware of any wrongdoing by Madoff. HSBC says it did not know that fraud was being committed and lost $1bn of its own as a result. HSBC never marketed Madoff funds to its clients, while UBS and other banks did.

In Madoff’s eyes, JPMorgan is also tarnished by association. Before JPMorgan and Chase Manhattan merged in 2001, Madoff had his accounts with Chase. So did some of his first clients, such as Levy. But the bank never raised alarm bells. “Look, I am not a banker but I know that billions of dollars going in and out of a bank account is something that should alert you to something. [They] got all the financial statements. [They] could have seen – I was using them as custodian, and they never questioned it,” he insists.

That was partly, he argues, because none of the banks dared to challenge powerful men such as Levy. “Norman Levy was a big bear of a man,” says Madoff. “He was big in real estate, everyone was intimidated by him.”

More recently, JP Morgan created structured products linked to Madoff’s funds, which were sold to investors. In the year before Madoff collapsed, some officials rang alarm bells inside the bank, and shortly before the fraud was exposed, the bank withdrew some $250m from funds linked to Madoff. But the bank never publicly spoke out – even though they had never been able to do full due diligence. “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement,” says Madoff. “That’s where the money [for Picard’s settlement] is going to come from. There were people at the bank who knew what was going on.” JPMorgan says Madoff’s assertion that its employees knew what was going on is patently false, and that it complied fully with all applicable laws and regulations when handling Madoff’s accounts.

Madoff also scorns the regulators. In the past two decades, the SEC fielded six complaints about BLMIS, including specific accusations that it was a Ponzi scheme. “Look, in 50 years I had probably 100 examiners from the SEC and [NASD] and my firm was considered – I’m sure they’re embarrassed about it now – was considered a model firm,” he says. “They thought I was too close to the regulators.”

He laughs dryly. “My complaint about regulators and the SEC, which dates back as long as I’ve been involved, is I feel they spend too much time going after minor infractions and no time going after the major firms and investment banks,” he says. “Very little, if anything, has been done with this new regulatory reform that is going to correct this.”

. . .

The guard breaks away from his computer and waves two splayed hands in the air; we have 10 minutes left. Madoff shifts; for the best part of two hours he has remained frozen in his chair, save for a brief moment when he stands up to stretch one leg. “I get cramps these days,” he says apologetically.

As the end of the interview nears, we approach more sensitive territory: the shattering damage inflicted on his family. By late 2008, Madoff realised his time was up. After the financial crash, it was becoming harder to raise new funds, and his old clients were demanding their money back. Some observers have speculated that these angry clients might have included criminal elements. But Madoff denies this. “I turned myself in because there was no other choice,” he says. “My life was never threatened. I have never met anyone with a crooked nose, other than myself.”

By early December 2008 Madoff faced $7bn in redemptions – and he did not have the money. On December 10, the night of the BLMIS office Christmas party, his sons could tell something was wrong. “I was comatose,” he says. “They had never seen me like that.” So Madoff, his sons, his brother and Ruth retired to their plush Upper East Side home, where he told them the family fortune was built on a fraud. “I was crying,” he says. “They were crying.” His sons, on the advice of their lawyer, turned their father in to the police. He was arrested the next morning.

Madoff says he never considered fleeing. “In the end I was almost relieved,” he says. “The pressure I was under in the last 16 years was almost unbearable. I wish they caught me sooner.”

However, his moment of relief unleashed hell on his family. They were hounded by lawyers and journalists. On the second anniversary of Madoff’s arrest, Mark, his eldest son, committed suicide by hanging himself while his own two-year-old son slept in the next room. His other son, Andrew, has broken off contact. “They don’t speak to me,” he says in a flat voice. “It’s horrible. They feel like I betrayed them. And I did. But I had no choice. By the time I realised, I couldn’t get out.”

 
Ruth Madoff

Ruth pictured in 2009

He says he is in touch with Ruth only rarely. “She was very angry with me, but she could understand how it happened, knowing me and those people I was dealing with. My sons, I think, know that too,” he says, for a chilling moment speaking as if Mark is still alive. “I hope I can repair things with Andy. Mark is a different personality, he couldn’t stand it.”

He pauses and his eyes well up with tears. Since his arrest, Madoff has been taking anti-depressants but they cannot numb him to this. “I worry about my wife. We had a very close relationship and now she’s alone,” he says. “She’s very afraid of the media. She gets followed when she just goes to the supermarket. She is like a hermit now.”

So what does he have left to live for? He has been sentenced for 150 years and will die in prison. Blinking away the tears, he says his main focus is to help Picard, the trustee, recover funds for his former clients. But he has not met with Picard personally and refuses to help prosecutors in any criminal cases. The distribution of funds to Madoff victims is a complex ordeal that is taking years, and many of the settlements, including the $7.2bn from the Picower estate, are tied up in appeals.

Madoff is of the opinion that individuals should not be pursued by the trustee. “I do not think that Picard will be successful in clawing back money from individuals, including the Mets family,” he tells us. “He shouldn’t. If they can claw money back from the average person who was involved, then who will ever invest in a hedge fund ever again? But the banks are different.

“I said at the very beginning when I met with the SEC and Picard that my hope is that everyone will receive their principal [which amounts to $20bn]. Back then, everyone laughed. But [Picard] has already recovered $10bn and he will cover $20bn easily. If he is successful, he may get $50bn. That means that there will be $30bn profits to go around, which would make me one of the greatest money managers in modern history.”

He chuckles. Perhaps he knows how delusional this sounds. Or perhaps he is hoping to convince the world that he can still do some good, can still deliver good returns.

We ask if there is anything else to his life in prison. Madoff looks blank. Eighty per cent of the other inmates are in for drug-related crimes, he says, adding that he is treated well and has a roommate he likes. “The staff is respectful of me,” he says. “I have a room with a wooden door. There are no bars on the windows.”

Several business schools have approached him, he adds, and asked him to work on ethics courses. He likes that idea; Harvard and Northwestern are in his sights. But from 10am to 7pm, four days a week, he mans the commissary, or prison store. Fittingly, Madoff tells us, it is called the “money management department”.

He says he gets lots of mail from well-wishers, but no hate mail. “I spend most of my time in my room, reading,” he adds. “And – this is my secret – Danielle Steel.” We all laugh. “Yes, Danielle Steel.”

For the first time during the two hours Madoff looks truly embarrassed, even ashamed. Perhaps escape into fantasy – even of the trashy, romantic variety – is simply the most logical outcome for a man in his position. After all, what does he have left to live for, other than a chance to repair his tarnished legacy?

As we leave the prison, we are still not sure where the truth ends and his lies begin. What we know is that this is a man who mercilessly ran a Ponzi scheme for at least 16 years, corrupted the financial system, destroyed lives and bankrupted families and charities. Yet, in the flesh, Madoff spins a credible tale of how a renegade entrepreneur ­conquered Wall Street and was drawn into crime by personalities and forces he could not control. It sounds almost convincing; or at least no more absurd than many of the other stories we hear every day in western finance.

The fact that so much of Madoff’s story is so commonplace on Wall Street – the tax shelters, black boxes and mysterious returns – is what allowed him to go undetected for so long. And this is why Madoff has sent chills through investors at every level. If the most sophisticated minds in finance were easily duped through an elementary scheme run by one of their own, how can anyone with money invested in the modern financial system know who to trust? This bedevilling question is why Madoff cannot be ignored, even as he ­languishes in a North Carolina prison.

David Gelles is US media and marketing correspondent. Gillian Tett is the FT’s US managing editor. For expanded coverage and full statements from JPMorgan, UBS, HSBC and Madoff’s prominent clients, go to www.ft.com/madoff

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The case continues

Tracking down the missing billions

It has been more than two years since the financial markets were stunned by the arrest of Bernard Madoff, a Wall Street trader who in a teary confession to his family admitted to swindling investors out of $65bn, write Kara Scannell and Megan Murphy. Since then, Madoff has been sentenced to 150 years in prison and seven other Madoff employees or agents have been charged. Five of them are fighting the allegations and two have pleaded guilty. Madoff’s family remains under investigation.

Investors in the fraud, which investigators estimate went back decades, haven’t received any recovered money yet. The court-appointed trustee, Irving Picard, has acknowledged claims from more than 2,400 victims representing about $6.8bn in losses. The fraud claimed hundreds of wealthy individuals, charitable foundations and academic institutions.

Picard has sued more than a dozen US and European banks, long-time friends of Madoff and his relatives, seeking over $100bn in improper gains and fines. Picard estimates the actual losses from the decades-long fraud are about $19.6bn, much less than Madoff predicted. Madoff’s wife of 50 years, Ruth, is still being pursued for millions of dollars, while one of his two sons, Mark, committed suicide last December.

How Madoff was able to keep the scheme going for so long remains a matter of heated debate. Picard has claimed that major banks, including JPMorgan and HSBC, ignored serious warning signs about the business long before Madoff’s December 2008 confession. The banks, several of which lost hundreds of millions of their own in the fraud, claim they were duped as well and have vowed to contest the allegations. 

Investigators claim Madoff, who started out as a middleman connecting buyers and sellers of stocks on US exchanges, never actually ran an investment advisory business. They have found no records to support Madoff’s contention that he made any trades, in spite of his repeated boasts of financial wizardry and developing a profitable “black box” computer trading model. Lawyers involved in the case say one of the fraud’s most surprising elements is just how basic it really was.

So far Picard has reached settlements with some wealthy families and one bank totalling $9.8bn, nearly half of his estimate of the entire fraud. Only $2.6bn of this is currently available in cash to be distributed to harmed investors, he has said. The $7.2bn settlement he reached last year with the widow of Jeffry Picower, a long-time Madoff friend and investor, is still tied up amid legal challenges.

Despite the long-running investigations the entire story of the fraud – Madoff maintains he acted alone – may never be fully told.

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