My Brush With Bernie Madoff
b'I watched the ABC movie about Bernie Madoff this week, which brought back a surge of memories I\\u2019d like to share with you.
It was circa 2004 when I got a call from a client just dying to sign up with Bernie Madoff...
It was circa 2004 when I got a call from a client just dying to sign up with Madoff. My client had been talking with a friend who had been in the Madoff fund since its inception in the 60\\u2019s and was arrogantly touting its many attributes.
This friend had invested 2-3 million with Bernie Madoff and had also gotten others to do the same. He told my client he thought he could convince Madoff to invest his money since he knew Madoff personally and so had an \\u201cinside track\\u201d. Rounding out the rest of this story, this friend had also involved the in-laws of my client\\u2019s daughter, and those in-laws had invested all of their money\\u2014plus their entire company\\u2019s bankroll into the fund.
A few days later, at my request, my client and his friend came back to my office with the Madoff statements, so I could take a look. The first batch of statements looked legitimate (like any other brokerage statement) but were missing some important details. When I asked if there was more, I was handed a large bundle of print-outs printed from an old dot-matrix printer. You know, the type of paper with the holes on each side! This print-out contained all of the trades going back a number of years.
I thanked them, and over the following number of days, I studied it all. The information on those sheets raised a lot of questions.
The first thing I noticed was that all of the trades were made in the middle of each month\\u2014different dates of the month, but definitely clustered in the middle. Each trade contained a purchase of an index fund, which held the top 100 companies in the S&P 500. Alongside these trades were purchases of puts and calls, which are normally used to enhance the return or protect the principal.
It didn\\u2019t make sense. How could anyone know what particular day to buy and sell these investments in order to achieve a consistent annual profit of 10%? There were only two possibilities, as far as I could see.
The first possibility was that somehow Madoff knew when large institutions were actively in the market buying and selling. If Madoff placed his own trades before placing his investor\\u2019s, he might be able to pull this off. I knew Madoff\\u2019s brokerage firm was a market maker, which is a firm that facilitates trading in a security and therefore sees customer order flow. So bottom line, if he sees the order flow, he can get in front of it.
There\\u2019s only one problem with this. It\\u2019s illegal. It\\u2019s called front running, and it is against the law for any broker to put his own trades ahead of a customer\\u2019s order.
That was a big red flag.
The other possibility was that it was all a fraud. I couldn\\u2019t wrap my head around this. Madoff\\u2019s name had been around ever since I could remember, and I had never heard any negative news surrounding him. The thought of a Ponzi scheme crossed my mind, but I couldn\\u2019t believe it.
Needless to say, I counseled my client against putting his money with Madoff, which turned out to be one of the best things I had ever done. Saving a client from disaster is a wonderful thing.
What happened to the friend? The friend, who had believed he was worth $8-9 million (according to my client) and had received his original investment back through monthly dividends (of other people\\u2019s money, of course), ended up with nothing. The in-laws were wiped out as well, along with so many others.
Some further thoughts and take-aways from the Bernie Madoff tragedy
In 2009 or 2010, I interviewed Laurence Leamer, a terrific author in Palm Beach, who had written a book called Madness Under the Royal Palms about Palm Beach Society. He mentioned that the Jewish Community in Palm Beach was very philanthropic.'