The Madoff Case



How the Wall Street Journal and the New York Times Buried the Madoff Scandal for at Least Four Years

Eamonn Fingleton


April 23, 2009


An old maxim has it that newspaper editors separate the wheat from the chaff, then print the chaff. By this standard, the editors of the Wall Street Journal showed special deftness in their handling of the Madoff affair.


They used the occasion of whistleblower Harry Markopolos’ testimony in Washington in February to address seemingly every minuscule detail of the scam. They even published an irrelevant, if lovingly crafted, floor plan of the Madoff firm’s office in the Midtown Manhattan Lipstick

building. Yet, in all their apparent desire to “flood the zone” (maybe they were angling for a Pulitzer!), one detail was missing. Not a word of explanation was offered about the curious role played by the Journal’s own Washington-based investi­gative reporter John R. Wilke.


As Markopolos’ written testimony made clear, Wilke long ago knew the score. As far back as 2005, he had been entrusted with Markopolos’ now famous dossier raising no less than 29 red flags about Madoff. It is hardly an exaggeration to say that, on the strength of an

afternoon’s research, a good reporter could have worked up any one of Markopolos’ points into a cracker of a front-page story. Taken as a whole, the dossier represented the biggest “career development opportunity” any journalist has been handed since Deep Throat delivered the

goods on Richard Nixon to Woodward and Bernstein a generation ago.


There are differing accounts of what happened next. According to Markopolos, Wilke was hot to trot but needed the blessing of higher-ups. And, unfortunately, the Journal’s “news” operation is apparently run much like an Amtrak marshaling yard. As months turned into years,

Markopolos’ 29 red flags festered like so many rotten tomatoes in some desk jockey’s in-tray. Other sources, however, place the blame firmly on Wilke’s shoulders. Apparently, he started to dig but lost heart because there was so little publicly available information on Madoff’s

modus operandi.


It is all very puzzling. The question, of course, is why would Markopolos lie about something like this? And then there is the simple fact that his testimony on other, more weighty matters has already been resoundingly vindicated.


What is not in dispute is that, to the Journal’s eternal shame, the story eventually came out only after an avalanche of redemptions left Bernie with nowhere to hide and he turned himself in. In the interim, by remaining silent, the Journal played a devastatingly ignominious role in

one of the biggest and most brazen scams in history.


If the Journal’s shame is particularly acute, virtually no one in the wider American financial journalism profession emerges from this fiasco with much credit.

One dog that snoozed in its kennel was the New York Times. The Madoff scam was, of course, a local story for the Times, not least because Times editors undoubtedly knew many of Madoff’s victims socially. It is surprising, to say the least, that no Times person ever seems to

have sensed there was something fishy going on in the Lipstick building. The Upper East Side was buzzing with rumors about his apparently sensational investment returns. Many a New York socialite either had money invested with him – and boasted of it in a loud stage

whisper – or at least wanted to do so.


Yet it was only on the day of Madoff’s arrest that the Times condescended to inform its readers that many of his more alert peers had sensed he was a fake all along. For years, he had been pegged as an outright Ponzi artist by Goldman Sachs and Credit Suisse, for instance,

and he was blacklisted also at Deutsche Bank, Merrill Lynch, and UBS. Indeed, as far back as 1991, CounterPunch contributor Pam Martens, in her capacity as a Wall Street broker, had told him she was on to his game and had so advised a client.  For thousands of aggrieved

Times readers, who lost their life savings in Bernie’s financial Bates Motel, the question is why they were the last to know.


To be sure, primary blame for dropping the Madoff ball lies with the Securities and Exchange Commission (SEC). But the fact that the SEC is a basket case is not news. Infected by the “greed is good” virus that has ravaged political discourse for nearly three decades, American

financial regulation has now become so corrupt and incompetent that it would embarrass a Third World kleptocracy. What is news – at least to those who lack independent sources of information – is that top American editors and reporters now seem no more willing to tackle

wealthy and well-connected crooks than their avowedly venal and cowed peers in, say, Jakarta or Harare, even though the physical perils of doing so here in the US are non-existent.


Which journalists and publications have been most remiss? It is not just the Journal that would prefer you didn't ask. Virtually the entire American media establishment has gone catatonic. Searches of Nexis, a news clippings database that includes many publications in the

English language, indicate as much.  As of mid-April, anyone who searched for, for instance, “Markopolos and Madoff and Wilke” found only eight results, of which only one came from the mainstream press (a brief note by Howard Kurtz of the Washington Post). The entire

subject seems to be a no-go area even at the New York Times, which has yet to mention Wilke’s name. Is this a case of people in glass houses not throwing stones? It sure looks like it.  What is certain is that in one hitherto unpublicized email message included in his written

testimony, Markopolos stated that various Times people, most notably assistant financial editor Gretchen Morgenson, were “pretty much in the know.” It is not clear whether he had been in direct touch with any of them, but this would seem to be a reasonable inference. For the

record, Morgenson, who in 2002 won a Pulitzer prize for her “trenchant and incisive” coverage of Wall Street, has told CounterPunch she can’t recall ever hearing from Markopolos. She added: “If you could be more specific about when it was that he supposedly contacted me I

would be grateful.” As it happens, the date is not indicated in the correspon­dence and  Markopolos is incommunicado.


As for the Journal, the closest it has come to acknowledging its own role has been in two sentences summarizing Markopolos’ complaints about its inaction. In covering Markopolos’ oral testimony in early February, it wrote: “Mr. Markopolos said that in December 2005, he

contacted a reporter at The Wall Street Journal, resulting in a number of phone calls and emails. Mr. Markopolos said he thinks that senior editors prevented the reporter from the newspaper’s Washington Bureau from flying to Boston to meet and discuss the Madoff issue.”


Fair enough – but the Journal didn’t leave it there. It went on: ”A spokesman for Dow Jones & Co., publisher of The Wall Street Journal, said Mr. Markopolos was ‘ill-informed and incorrect’ but declined to comment further on Mr. Markopolos’ statements.”


Dow Jones’ comment is a functional lie – an outrageous and deliberate distortion. Anyone who studies the full context can see that the “ill-informed and incorrect” epithets can only relate to the one implausible inference in Markopolos’ testimony, his idea (unmentioned in the

Journal report) that Journal staff may have feared for their personal safety. Markopolos feared for his own safety, but, as a lone whistleblower struggling to get the attention of the SEC, he had more to worry about than a major national institution. The main thrust of Markopolos’

allegation – that the Journal wantonly ignored the biggest investment scandal in modern times – is in no way addressed in the Dow Jones comment.


The former executive editor of the Journal, Paul Steiger, who ran the paper in the relevant years, has disavowed personal responsibility for the fiasco. In an email message to CounterPunch, he wrote: “No mention of Markopolos’s initiative, or indeed no mention of Madoff, came up

the line to me, nor would it be expected to. Only if the Washington bu­reau had decided to pursue a story would that happen.” He added that John Wilke was “an outstanding journalist” who at the time was producing “a string of deep, exclusive reports about such things as the

misuse of earmarks.”


If Steiger’s comments are meant to exonerate Wilke, by the same token they  appear to spotlight  Gerald Seib and Nikhil Deogun, who served respectively as the chief and deputy chief of the Washington Bureau in the years concerned. Asked to comment, Deogun referred

CounterPunch to the Journal’s spokesman who, in turn, is not prepared to speak for attribution. Meanwhile, Seib flatly denies responsibility. Responding to CounterPunch, he wrote: “Your question appears to simply accept the premise that a Markopolos initiative was

‘sidetracked,’ and then asks me to comment on that. So let me try to be as clear as possible here: It is com­pletely, absolutely, 100% incorrect to say that some reporting initiative was sidetracked. The notion is flatly wrong.”


It may be worth noting that both men have prospered mightily since  Rupert  Murdoch took  control of the Journal in 2007.   Seib has rocketed to assistant managing editor and is a fixture on Murdoch’s Fox Business News channel. As for Deogun, he  was promoted to the plum

assignment of  foreign editor while still not yet 40. Given that the testimony of both Steiger and Markopolos seems fairly solid, it would appear that either Seib or Deogun or perhaps both are in the soup, with negative implications for Murdoch’s efforts to rebuild morale at 200

Liberty Street. A fair inference is that Wilke may have had his calendar loaded down with busy-work chasing political minnows in Washington when, with leadership and the help of a numerate colleague, he could have reeled in a financial whale in New York.

How could any capable editor fail to see the possibilities in the Markopolos dossier? Ryan Chittum, a blogger at the Columbia Journalism Review’s website, has opined that the fault lay with – get this – Markopolos! Markopolos was not credible enough, apparently – this despite

the fact that he was an acknowledged expert in options trading, the field where Madoff was ostensibly performing such alchemy.


Let’s first note that Chittum may have an axe to grind. He is not only a former Wall Street Journal reporter, but his work has been published at ProPublica, a website that just happens to be run by Paul Steiger.


Was Markopolos really such a hopeless witness? Not in the eyes of Mike Garrity, head of the SEC’s outpost in Boston, where Markopolos lives. Garrity was clearly impressed by Markopolos and did his best to help. Unfortunately, he could not do anything directly because

jurisdiction lay with the SEC’s New York branch. In a telling departure from the usual pattern of bureaucratic indifference in such circumstances, however, he repeatedly encouraged Markopolos to keep banging on New York’s door.


Markopolos had a “credibility problem” only in the sense that some of his more sophisticated analyses may have gone over the heads of Journal apparatchiks (as it seems to have gone over Chittum’s). The fact is that Markopolos front-loaded his lengthy dossier with his most

technical and – to an intelligent, financially literate reader – most telling points. Big mistake. The poor fellow had not realized that, judged even by the indifferent standards set elsewhere, even senior financial journalists in the United States are notoriously mediocre. Virtually

without exception, they cannot read a balance sheet – an ability that is to serious financial reporting roughly what eyesight is to driving a car. 


Moreover, financial knowledge at the Wall Street Journal seems to vary in inverse proportion to rank. Journal editors are “big picture” people, who are too busy spouting globalist claptrap or defending the bombing of Arab schools to try to sit down and read about a $50 billion fraud

in their own backyard.


Yet the truth is that any intelligent young financial reporter with, say, two years experience should have had no difficulty understanding – and concurring with – even the most abstruse aspects of Markopolos’ argument. For the rest, the case was so obvious that even a novice

could not have missed the point.


For a start, what inference is to be drawn from the fact that, as we have already noted, Madoff was blacklisted by some of Wall Street’s top securities houses – and this despite a long record of producing ostensibly some of the best returns of any fund manager in the world?


Then there is the fact that even as Madoff’s investment business ballooned, he stuck with a three-person hole-in-the-wall auditing outfit run by his elderly brother-in-law (Red Flag 17). Anyone who manages $1 million of other people’s money, let alone $50 billion, finds it a useful

earnest of good faith to have his books audited by an independent and preferably well-known firm. As Markopolos pointed out, Madoff’s eccentric choice of auditor became an explicit issue when European bankers, acting on behalf of an Arab client, requested an independent

audit. Madoff showed them the door, thereby passing up the opportunity to rake in a large chunk of cash.


The journalistic significance of Red Flag 17 is that, like many of the other lower ranked flags in the Markopolos dossier, it was easy to check out. In fact, unless Madoff chose to stonewall, it could have been instantly confirmed with a single phone call. Although in itself it did not

prove very much, it strongly suggested that further inquiries would have been well worth the effort.


In his aversion to normal reality checking, Madoff ran true to the classic Ponzi type. Classic, too, was his excuse. His investment methods, he explained, were proprietary, and if he let independent auditors in, he risked losing his secrets to competitors. This was, of course,

balderdash. Imagine how such an excuse might play in any other field. Suppose a golfer claimed his swing was a secret, so no one except a 78-year-old relative should be permitted to witness his play and check his score. The point is absurd, and in real life we know that Tiger


Woods and Phil Mickelson have no problem with lesser mortals dissecting their play.


The full absurdity of Madoff’s excuse is obvious when you realize that no genuinely successful investor has ever had much fear of auditors. An auditor comes in after the fact – weeks, if not months, after the balance sheet date – to confirm that assets claimed to have been held

at said date were actually there. They cannot outBuffett Buffett simply by knowing what stocks Buffett held three weeks ago. Still less can they hope to reverse-engineer  the financial logic behind Buffett’s stock-picking. Indeed, even though Buffett has gone to some lengths to

explain his techniques, remarkably few of his disciples have had much luck emulating him. Madoff’s talk of a secret investment method was one of the oldest and most transparent tricks in the fraudster’s repertoire – a minimally disguised version of the imaginative scam,

perpetrated during the South Sea Bubble in eighteenth-century London, in which a stock promoter announced the launch of ”a company for carrying on an undertaking of great advantage, but nobody to know what it is.”


Of course, defenders of the press’s virtue point out that Madoff was widely trusted by society figures. Certainly, he had no trouble relieving the great and the good of their wallets. Not least of his victims were such familiar names as CNN talker extraordinaire Larry King and

Dangerous Liaisons star John Malkovich. But in common with most of Madoff’s other celebrity victims, neither King nor Malkovich is a economic sage. As any Wall Streeter can tell on sight, they fit in a different category, and there’s one born every minute. (It is only fair to point

out that celebrities seem particularly vulnerable to Ponzi schemes. Sir Isaac Newton was among countless bigwigs taken to the cleaners in the South Sea Bubble. Ever afterward, he had the vapors any time the subject came up.


Of more forensic interest is the fact that some financial notables got their coattails caught in Bernie’s wringer. One  example was Henry Kaufman, a former top Salomon Brothers executive whose pessimistic commentaries on America’s  economic prospects in the Carter years

earned him the soubriquet Dr. Doom.


Then there is the ubiquitous Mort Zuckerman, publisher of the New York Daily News, a man who made his pile in Boston real estate and is thus presumably sensitive to scam artists. If Madoff’s Ponzi act was good enough to fool Zuckerman, surely the press has a secure alibi?


Actually, no. The point is that Markopolos’ dossier was not available to Zuckerman. Had it been, his money would surely have been out of the Lipstick building in a New York minute.


Most of the facts unearthed by Markopolos were truly unexpected and were accumulated only after years of dogged sleuthing. Markopolos’ interest had been first piqued as far back as the 1990s, when colleagues told him of this amazing fund manager who was ostensibly using

a conservative options-based hedging strategy to generate consistently superlative returns. As an options expert, Markopolos quickly determined that what Madoff was claiming was impossible (in this conclusion, he was joined by many Wall Street authorities, not least analysts

at Goldman Sachs). Either Madoff was faking or he was pursuing a quite different investment strategy, in all probability a shady one, known as “front-running” (more about this in a second). At a minimum, Madoff was a liar.


This conviction inspired Markopolos to dig ever deeper and sustained him through many vicissitudes. The basic problem was that a highly secretive Madoff had structured his business so that statutory disclosure obligations were risibly light. After years of piecing together

information from a wide variety of mainly private sources, however, Markopolos became convinced that front-running was not the explanation. That left only one possibility: Madoff was running the biggest Ponzi scheme in history. Markopolos’ 29 red flags summarized the

argument. Only the most obvious action required – and, in all probability, it would have been undertaken almost immediately had the press got on the SEC’s case – was that Madoff’s operations be subjected to a thorough, independent audit.


Although Madoff’s investors knew nothing of the 29-flag dossier, the more sophisticated of them surely never swallowed his presentation of himself as a financial magician. As the author Michael Lewis has pointed out, it is a fair bet that they always assumed he was front-

running. In other words they realized he was a crook but just not in a way that threatened their wallets. To understand this line of reasoning, one must first realize that Madoff was not only a fund manager but a broker/dealer, and a big one at that. Front-running refers to the

practice by brokers of exploiting  privileged knowledge about  future buying and selling by large financial institutions to make private profits.  A typical instance might start when a broker receives a big order from an institutional investor to buy shares in, say, IBM. This is more or

less guaranteed to send the price shooting up, and if the broker can nip in seconds ahead with an order for his personal account, he or she is guaranteed an almost certain, risk-free, and instantaneous profit. Front-running is pandemic on Wall Street and, as Madoff’s more

sophisticated investors realized, almost no one was better placed to profit from it than Madoff. Basically, they assumed he was turbocharging his fund management performance thanks to his brokerage knowledge. Of course, in theory he might have been prosecuted but, given

what a shambles American financial regulation had become, the risk was slight. In any case, as Michael Lewis has argued, his investors may have reasoned that the worst that could happen was that “a good thing would come to an end.”


Up until December,  the financial press had virtually never taken a serious look at Madoff. The closest it had ever got to figuring him out was in two articles published in 2001.


Written respectively by Michael Ocrant of MARHedge magazine and Erin Arvedlund of Barron’s, these were both legally constrained accounts of the skepticism al­ready then rife among Madoff’s competitors. The conclusion an intelligent reader would have come to was that front-

running was probably the explanation (Arvedlund’s article, for instance, was coyly headed, “Don’t Ask, Don’t Tell”).


Although Markopolos had yet to surface as a potential press source, he was already way ahead. As he realized, front-running only really works where the front-runner is small in relation to the institutional orders he exploits (otherwise, he can’t get out of his own way). This is

where Markopolos’ sleuthing paid off. He knew that although Madoff tried to pass himself off as a small player who was merely investing on behalf of a few friends and relatives (an alibi that tended to reassure the sophisticates who believed he was front-running), by 2001 the

amount of new money he was pulling in was already torrential.


As Markopolos went on to document, Madoff had structured his business to make it difficult for all but the most determined investigator to fathom its true scale. In particular, he relied on a slew of so-called feeder funds to bring in most of the new money. Investors in many of

these funds never knew where their money ended up.


The conclusion from all this is that up until 2005, the press bears relatively little blame for its failure to spot an arch Ponzi artist at work. Yes, even before Markopolos surfaced, a capable reporter with a little knowledge of previous Ponzi schemes could have spotted the truth, but

it would have taken some luck and considerable digging.


The real disgrace is the press’s treatment of Markopolos. Although we have yet to find out how many news organizations he talked to, it is already clear that the Journal’s behavior was inexcusable. For the record, Paul Steiger is at one with the current Dow Jones establishment

in implying that the problem was nothing more than a bureaucratic snafu. In his note to CounterPunch, he wrote, “Mr. Markopolos’ suggestion that the Journal would have been intimidated from pursuing Madoff, or was somehow in cahoots with him, is fantasy. The Journal wrote

tough stories about infinitely more powerful people, such as Dick Grasso and Hank Greenberg.”


Perhaps. But the fact that the Journal went after Grasso and Greenberg does not mean that it could not be blown off-course in other cases.  The most likely explanation is surely that Madoff pulled strings. As a big donor to politicians and charities, he undoubtedly had plenty of

surrogates with access to relevant journalists. Then, there is the fact that cronyism is rife both on Wall Street and in Washington. On top of all this there was the problem that the most damning aspects of Markopolos analysis would have gone over many heads at an editorial



One thing is for sure: the rest of the press should long ago have held the Journal’s feet to the fire. Why should newspapers set the bar of public accountability any lower for themselves that they do for, say, General Motors or Exxon Mobil?


Eamonn Fingleton is the author of In the Jaws of the Dragon: America's Fate in the Coming Chinese Hegemony (Thomas Dunne Books 2008). He can be reached via his website or by emailing




Madoff's Money Trail Leads to Washington

Lobbyists, Congress and the Ponzi Scheme

Pam Martens

December 22, 2008


The forces of the universe sent us a corruption triple play the week of December 8th.  Just in case there were any slumbering souls still doubting the multi headed monster we need to slay to avoid becoming Rome, those benevolent forces assaulted our senses with a politician,

a lawyer, and a Wall Street icon in a three-day sweep of unimaginable crime.  Unimaginable, at least, to those of us bereft of adequate imaginations to keep up with the criminals.


The trifecta began on Monday, December 8, with Marc Dreier charged by Federal prosecutors in Manhattan with selling bogus promissory notes to steal what currently adds up to over $380 million.  Mr. Dreier, a graduate of Harvard Law and Yale College, is the owner and

founder of Dreier LLP, a prominent law firm employing over 250 lawyers.


On Tuesday, December 9, the Feds arrested Democratic Governor Rod Blagojevich of Illinois, revealing transcripts of taped phone calls where the governor was strategizing on how to sell the U.S. Senate seat of President-elect Barack Obama to the highest bidder or career

 enhancer and, separately, getting revenge on the editorial board of the Chicago Tribune whose writers were saying bad things about him (for some strange reason).


We had a day off to allow our psyches to mend and then Thursday, December 11 arrives.


We are told that Wall Street icon, Bernie Madoff, a key player in self regulation of Wall Street, has stolen $50 billion from investors in a Ponzi scheme stretching over what is now emerging as a three-decade crime spree, or longer.  Despite our sprawling Homeland Security

 apparatus that regularly catches Democratic governors, law enforcement did not catch Madoff; his two sons turned him in after he confessed.


As of December 19, Blagojevich had been released and was in the Governor’s Mansion issuing pardons; Madoff was in his $7 million penthouse in Manhattan after being allowed to post, as collateral for his bond, the East Coast mansions he likely bought with Ponzi money

 stolen from an eclectic group of charities, Florida pensioners and a well-heeled country club set.  Dreier was still in jail even though he stole less than 1 percent of the Madoff take.  Apparently, Mr. Dreier lacks the right friends in high places.


The major beneficiary of the week was Citigroup.  The leaky piggy bank disappeared from the news along with the investor lawsuit charging it with running its own Ponzi scheme on a scale to dwarf Madoff to piker status.  Had it not been for the Madoff media frenzy, folks might

 have started connecting the dots to a $300 billion taxpayer bailout of a bank serially charged with global misdeeds, market maneuvers internally named “Dr. Evil” and “Black Hole,” and recent press reports that Citigroup had stashed over $1.2 trillion off its balance sheet. 


I seldom have the urge to give a comforting pat on the back to people profiled in the Wall Street Journal.  But that was my reaction when I read the 21-page whistleblower document about Madoff that was written by Harry Markopolos to the Securities and Exchange Commission

 (SEC) on November 7, 2005. The Journal still has the document on its web site and Markopolos provides a step by step plan for the SEC to follow to nail Madoff as a Ponzi fraudster. The letter followed a five-year effort by Markopolos, who supplied documentation and made

repeated requests to the SEC to investigate Madoff. 


Here’s how the SEC characterized the letter from Markopolos  in a January 4, 2006 memo: “The staff received a complaint alleging that Bernard L. Madoff Investment Securities LLC, a registered broker-dealer in New York (“BLM”), operates an undisclosed multi-billion dollar

 investment advisory business, and that BLM operates this business as a Ponzi scheme.  The complaint did not contain specific facts about the alleged Ponzi scheme…”


Here’s a tiny sampling of what Markopolos told the SEC in his 21-page November 7, 2005 letter.  You decide if these are “specific facts.”

“I am a derivatives expert and have traded or assisted in the trading of several billion $US in options strategies for hedge funds and institutional clients…(Highly Likely) Madoff Securities is the world’s largest Ponzi Scheme…The [Madoff] family runs what is effectively the world’s largest hedge fund with estimated assets under management of at least $20 billion to perhaps $50 billion…The third parties organize the hedge funds and obtain investors but 100% of the money raised is actually managed by Madoff Investment Securities, LLC in a purported hedge fund strategy.  The investors that pony up the money don’t know that BM [Bernie Madoff] is managing their money…Some prominent US based hedge fund, fund of funds, that “invest” in BM in this manner include: A. Fairfield Sentry Limited (Arden Asset Management) which had $5.2 billion invested in BM as of May 2005…Access International Advisors…which had $450 million invested with BM as of mid-2002…Tremont Capital Management, Inc…Tremont oversees on an advisory and fully discretionary basis over $10.5 billion in assets.  Clients include institutional investors, public and private pension plans, ERISA plans, university endowments, foundations, and financial institutions, as well as high net worth individuals…Madoff does not allow outside performance audits.  One London based hedge fund, fund of funds, representing Arab money, asked to send in a team of Big 4 accountants to conduct a performance audit during their planned due diligence.  They were told ‘No, only Madoff’s brother-in-law who owns his own accounting firm is allowed to audit performance’…Only Madoff family members are privy to the investment strategy.  Name one other prominent multi-billion dollar hedge fund that doesn’t have outside, non-family professionals involved in the investment process.  You can’t because there aren’t any…There are too many red flags to ignore.  REFCO, Wood River, the Manhattan Fun, Princeton Economics, and other hedge fund blow ups all had a lot fewer red flags than Madoff and look what happened at those places…”


Here is what the SEC’s memo of November 21, 2007 said following its investigation:

“The staff found no evidence of fraud…All files have been prepared for closing…Termination letters have been sent to Bernard L. Madoff Investment Securities LLC, Bernard L. Madoff, and Fairfield Greenwich Group.  The staff has no objection to the eventual destruction of the files

 and has no knowledge of any impediment to such a disposition.”


Let me run that by you again.  Mr. Markopolos, a private citizen, uses his personal time and energy over a seven year period to document a fraud occurring under the nose of the SEC that could impact the international reputation of the United States along with the financial well

being of pensioners, university endowments, foundations and private investors.  After losing track of the case for five years, the SEC finally gets around to investigating using taxpayers’ monies.  They come up with nothing despite being given a perfect path to follow to the fraud. 


And their final suggestion for dealing with the investigation is to destroy the files!  With regulators like these, who needs Ponzi artists?


In 1992, eight years before Mr. Markopolos started hounding the SEC to take  action against Madoff, the SEC was settling an investigation against two Florida accountants, Frank Avellino and Michael Bienes.  The pair had started raising money for Bernie Madoff to manage in

 1962, just two years after he came to Wall Street.  Avellino and Bienes has sold over $440 million in unregistered notes to thousands of people over yet another three-decade period when the SEC was napping.  Mr. Madoff was not charged.


Representing Avellino and Bienes in that matter was Ira Lee Sorkin, the former head of the SEC region in New York City.  Mr. Sorkin represents Bernie Madoff today.  Put in charge as trustee of the Avellino and Bienes funds and records was Lee Richards.  The SEC has put Mr.

Richards in place as a receiver and document custodian in the current matter, overseeing the London black hole operation known as Madoff Securities International Ltd. 


Marc Mukasey, the son of the U.S. Attorney General, Michael Mukasey, is representing Frank DiPascali, a key Madoff employee.  This has resulted in the highest law enforcement officer in the nation recusing himself from the investigation of the largest Ponzi scheme in



Naturally, the Madoff money trail of special favors and exceptions leads straight to Washington.  From 1998 through 2008, Bernard L. Madoff Investment Securities paid $590,000 lobbying Congress and the SEC, according to the Center for Responsive Politics.  His lobby firm for

most of those years was Lent, Scrivner & Roth, with Norman F. Lent III signing the disclosure documents in the House and Senate.  One of Madoff’s hot button issues during those years according to the disclosure documents was getting a single regulator.  That meant, for

starters, merging those prying eyes over at the New York Stock Exchange into the clubby pool of self-regulators at the National Association of Securities Dealers where the Madoff family held numerous seats of power.  That wish came true when NASD Regulation merged with

the enforcement and arbitration units of the New York Stock Exchange in July 2007 to create the Financial Industry Regulatory Authority (FINRA).  CEO of the consolidated body is Mary Schapiro, who formerly headed up NASD Regulation, one of the most conflicted bodies in

the history of finance.  Ms. Schapiro has just been nominated by President-Elect Barack Obama to be the new SEC Chair.  Expect to hear more about killing off the SEC (instead of giving it some teeth) and giving Madoff and his fellow miscreants their ultimate dream of just one

compromised regulator instead of three.


The Madoff family almost uniformly gives to the same candidates.  Cumulatively, since 1993, they have given more than $400,000 to political candidates, committees and PACS.


The Madoff family is also a uniquely telepathic group.  When one member had an idea, invariably they all had the same idea.  For example, in May 1998, June 1999 and June 2004, a total of seven members of the Madoff family (all living in New York) decided to enrich the coffers

of the Ed Markey Committee to the tune of $30,000.  Mr. Markey does not represent New York.  He is a Democrat who has represented the 7th Congressional District of Massachusetts for more than 30 years.  What could have been the motivation?


On February 24, 1997 I flew on US Air flight 6431 from New York to DC along with producer Dean Irwin and a film crew from ABC’s 20/20.  We were all heading to Ed Markey’s Congressional office to talk about one of Wall Street’s dirtiest secrets: their denial of an employee’s

right to sue the Wall Street firm in an open courtroom, mandating instead, as a condition of employment, that the workers contractually agree to usher all claims (even whistleblower claims) into a crony system of arbitration run by Wall Street firms where case law and legal

precedent are not followed and discovery is limited.  The system draws a dark curtain around the misdeeds of Wall Street and is an enabling agent for ever greater crimes sealed in secrecy.  A dream come true for a Ponzi operator.


Congressman Markey was a threat to Wall Street because he continued to introduce legislation known as the Civil Rights Procedures Protection Act that would have outlawed mandatory arbitration for certain employee claims and allowed those claims to proceed to an open



The 20/20 crew spent a good portion of the afternoon filming Congressman Markey and myself talking about arbitration.  When the program aired, Congressman Markey was gone from the film and just a brief statement was inserted.  For decades now, that legislation, or similar

legislation, has been introduced and then died a quiet death; much like the SEC investigations of Madoff.


Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article.  She writes on public interest issues from New Hampshire.  She can be reached at



The Ponzi Paradigm

And God Created Bernie...


December 23, 2008


Last week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default. So He sent Bernie Madoff to dominate the news for a week and give the mass media an opportunity to familiarize newspaper readers and TV watchers with just how Ponzi schemes work. What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”

If the media were able to wait until as late in the financial collapse as last week to provide helpful diagrams about how Ponzi schemes need to keep on growing exponentially, it is simply because bad foreign financial news is not deemed newsworthy in North America. But Europe has been having its own run-throughs, headed by Spain – which by no coincidence is now experiencing the biggest real estate bust outside of the post-Soviet economies.

The best case study occurred two years ago. On May 9, 2006, Spanish police raided 21 homes and offices of Afinsa Fienes Tangibles SA, the world’s largest postage-stamp dealer, and rival firm, Forum Filatélico. They charged eleven men with running a $6.4 billion pyramid scheme that (and Afinsa)took in some 343,000 investors – 1 per cent of Spain’s entire population, making the fraud one of the largest in Spanish history.

An economy either is in trouble or has lost its sense of balance when investors shy away from tangible capital formation in favor of buying postage stamps and similar collectibles. Unlike machinery and technology, stamps do not produce real goods and services. They have long since been printed and sold by the government, and will never be used actually to mail letters. However, stamps have shown themselves to be a great vehicle to attract savers who think that buying them can produce an exponential earnings growth – or more technically, “capital” gains, if we can stretch economic terminology far enough to call a stamp collection “capital.”

If value resulted merely from scarcity, then postage stamps, coins and master paintings all would seem to increase almost automatically over time, just like most land does. But these trophies of wealth do not promote rising production, consumption or living standards. As stamps do not earn money by employing labor to produce goods and services, their price gains are neither profit nor capital gains as classically understood. They are what economists call a windfall.

The Spanish postage-stamp scheme seems to have taken off in 2003, the year in which Spain’s free-market conservative government deregulated public insurance and oversight for non-financial investment funds. Afinsa Group bought two-thirds control of the New Jersey stamp and coin auction house Greg Manning and merged it with the Spanish auctioneer Auctentia to create Escala as the world’s third largest auction house (after Sotheby’s and Christie’s). Escala moved its operations to New York City and listed its stock on the Nasdaq over-the-counter market. Despite the stock market’s lethargic trend, the company’s earnings showed such rapid growth that in just three years its share price soared from under $5 to $35, tripling in 2005 alone.

Afinsa’s purchases accounted for 70 per cent of Escala’s profits, thanks largely to the fact that as its Spanish parent’s sole supplier, Escala marked up its stamps by a reported 1,150 per cent, out of all proportion to the usual 25 per cent. Afinsa thus was carrying stamps for which it paid 58 million euros on its books at €723 million, over ten times their catalog values – which are fictitiously high in any case, being published mainly for the benefit of stamp dealers to give their customers the idea that they are getting a good buy. But as Forum Filatélico’s chairman, Francisco Briones, explained to a reporter from London’s Financial Times: “It was ‘normal’ to charge clients such inflated prices because of the services provided . . . including the custody and conservation of stamps.”

Afinsa paid its stamp investors an annual rate of 6 to 10 per cent interest, beating most competing yields as the global financial bubble was pushing interest rates steadily downward. (Spanish government bonds paid only 3.5 per cent.) To build up trust, Afinsa gave its clients post-dated checks for the gains that were promised. It also promised to buy back the stamps it sold, at the original price. This gave an appearance of liquidity to the normally illiquid market in stamps, fine arts and other collectibles, where 25 per cent commissions to auction houses are normal. These ploys convinced the majority to simply re-invest the money to buy yet more stamps, which the company held in its offices ostensibly for safekeeping and preservation.

Money poured in, giving stock-market investors in Escala much higher returns than the stamp-buying customers nominally were receiving. As one news report remarked, why buy stamps and coins when you can invest in companies dealing in them? But within a week of the arrests, Escala’s stock plunged below $4 a share.

The denouement came shortly after Lloyd’s of London withdrew from a €1.2 billion policy to insure Afinsa’s stamps. One of its experts noticed that if $6 billion really had been invested, it would have bought up all the investment-grade stamps in the world many times over. The fact that stamp prices did not reflect any such extraordinary buying implied that few bona fide stamp transactions occurred at all, and there had been a massive over-billing.

As matters turned out, most of Afinsa’s stamps had no investment value. This explained why there were no receipts for transactions with Escala. The police found €10 million in €500 banknotes (worth about $650 each at the exchange rate of $1.30 per euro) by breaking open a newly plastered wall at the Madrid home of Afinsa’s main stamp supplier, Francisco Guijarro. What they could not find were any receipts for the stamps that he allegedly bought. And despite the remarkably high markups charged for curating the stamp collection, it was rife with phonies, as Lloyd’s had suspected. Concluding that the bills Senor Guijarro had sent to Afinsa were just a cover for a money laundering operation, the prosecutors charged the family members and officers who controlled Afinsa with embezzlement, money laundering, tax evasion, fraudulent bankruptcy, breach of trust and forgery.

The arrests recalled memories of a more famous U.S. fraud involving postage stamps some 86 years earlier, in 1920, by Charles Ponzi – the man who bequeathed his name to history in the form of Ponzi pyramid scheme. He is reported to have arrived in Boston in 1903 with only $2.50. Not speaking much English, he took menial jobs. Fired as a waiter for shortchanging customers, he moved up to Montreal and became an assistant teller in an Italian immigrant bank. It grew rapidly by paying double the normal 3 per cent rate of interest on savings accounts, but failed when its real estate loans began to go bad. The bank’s attempt to give the impression of solvency seems to have given Ponzi the idea of paying interest out of new deposit inflows rather than actual earnings. As long as clients felt they were receiving interest regularly, they tended to be calm about the principal balance.

Ponzi was sent to a Canadian prison for forgery, and then was jailed in Atlanta for trying to smuggle Italian immigrants into the United States. After his release he moved back to Boston and got a job selling business catalogs. A Spanish customer sent him a postal reply coupon, which allowed its holder to buy stamps in foreign countries for return mail rather than using domestic currency to buy a stamp.

Prices for these coupons were long out of date, having been set in 1907 by the International Postal Union. World War I drastically shifted exchange rates, enabling buyers to pay a small amount in Britain – or even less in Germany with its depreciated currency – and obtain a return stamp order that was good in the United States.

The markup on these tiny postal orders was large. An American penny could buy foreign stamp orders that could be converted into six cents in U.S. stamps, for a 500 per cent profit. The problem was that it would take a truckload of such postal orders to make serious money. A million-dollar investment would involve a hundred million penny coupons – which then would have to be converted into stamps and sold in competition with the U.S. Post Office, presumably at a discount, mainly in immigrant neighborhoods.

Focusing on the principle of arbitrage rather than such laborious implementation, Ponzi explained that he could make a 400 per cent gain after expenses. He promised that investors could double their money in 90 days, pretending to take due account of the costs and shipping time from Europe to America. When his Securities Exchange Company paid early investors the high returns he had described, they spread the word to others. Ponzi’s inflow of funds rose from $5,000 in February 1920 to $30,000 in March, and $420,000 by May. By July an estimated $250,000 a day was flowing into his firm, mainly from small investors who let their book credits build up rather than taking out their money. Some people put their life savings into the plan, and even borrowed against their homes.

Ponzi spent most of the money on himself, buying a mansion and bringing his mother over from Italy. The financial reporter Clarence Barron (publisher of Barron’s) noted that if he really had invested the money as he told his investors he had done, Ponzi would have had to purchase 160 million postal reply coupons. Yet the post office reported that few were being bought at home or abroad, and only 27,000 were circulating in the United States.

Federal agents raided Ponzi’s offices in August, and did not find any postal reply coupons, just as Spanish police did not find investment-grade postage stamps in the scheme’s 2006 replay. Ponzi was sentenced to prison yet again, but jumped bail and tried to make some quick money selling Florida real estate. He soon was recaptured, and was deported back to Italy upon his release in 1934.

What Ponzi sold was hope, pandering to peoples’ unrealistic desire to believe that a new way to make easy gains had been discovered, with no visible upper limit as to how long gains can persist in excess of the economy’s own rate of growth. It is a measure of how much harder it is to make returns in today’s world – and hence, how little hope needs to be excited – that whereas Ponzi promised to double his investors’ money every three months, the Spanish stamp scheme paid only a 6 to 10 per cent annual return. Neither fraud actually made any trading gains or profits, but simply paid investors out of new money coming in from fresh players. New inflows were treated as earnings. That’s how pyramid schemes work.

It was almost as if the Spanish operators had read one of the biographies of Ponzi that began to appear as observers noticed the common denominators between the global financial bubble of the 1990s and earlier bubbles. These bubbles provide a classic contrast between the real wealth of nations and what the business press these days calls “wealth creation” that simply takes the form of rising asset prices – “capital gains,” most of which are land-price gains.

No doubt stamp collectors would have viewed the bidding up of stamp prices as wealth creation if it actually had occurred. But all it would have achieved was to inflate the price of old stamps, much as the world’s growing ranks of billionaires were bidding up prices for master paintings and modern art, designer furniture and beachfront homes. If all the economy’s savings went into Rembrandts and Picassos, their price obviously would soar, just as putting $6 billion into postage stamps would have established higher plateau levels for stamp prices.

The flow of funds into any category of assets bid up their prices. This is true most of all for land, one of the most universal economic needs and conspicuous-consumption status measures. But does this really “create wealth”? Do market prices reflect use values, living standards and the progress of civilization?

The requisite characteristic for such price gains is indeed scarcity, but not so much that there is not enough for large numbers of buyers to make a market. If psychological utility is the key, “scarcity” has value only as a compulsive acquisitive character – wealth addiction. It means having what other people lack, with connotations of denial. Most money in search of mere scarcity is not going into trophies of the nouveau riches, but into the world’s most abundant yet also most universal scarce resource: land. Nature is not making any more of it. Yet everyone needs land to live on, making it the object of personal and business saving par excellence. Even in today’s postindustrial economies, land and its subsoil wealth represent the largest components of national balance sheets.

But inasmuch as land cannot be manufactured, savings cannot increase its supply by active investment. This poses a traumatizing problem for economists. National income statistics count any money spent that is not consumed as saving. Following John Maynard Keynes, they define saving as equal to investment. This sows the seeds of confusion with regard to the character and preconditions of economic growth. Can we really call it “wealth creation” when society directs its savings merely into speculation rather than into building up productive powers or living standards?

Classical economists vacillated over treating land as a factor of production or as a legal property right to extract a tollbooth around a given site and levy an access charge much like a user-tax. A factor of production contributes to production and income as more income is invested in it. A rent-yielding property reduces the economy’s flow of income. In the latter case land is part of the institutional property system, not the technologically based production sector of the economy.

What is beyond dispute is that real estate is highly political at the local level. Urban development tends to be shaped by insider dealing and public infrastructure spending to increase local property prices and lobbying to obtain low tax appraisals. It is axiomatic that the more economically powerful a source of wealth becomes, the greater its political power to lobby for special tax advantages. At the national level, real estate uses part of its revenue to back politicians who give it a widening wedge of special income-tax favoritism.

In the financial sphere, every bubble has been led by governments. Bubbles need to be orchestrated by opinion makers, topped by public officials giving a patina of confidence. The “madness of crowds” is a euphemism designed to divert blame away from governments onto the public. In the United States, Alan Greenspan played the role of public bubblemeister similar to that which Walpole had played in England’s South Sea bubble and John Law in France’s Mississippi bubble nearly three centuries ago, in the 1710s.

Today’s balance sheets confuse bubble wealth with real capital formation. “Investment” has become whatever accountants say they are. So have asset and debt values, given today’s leeway for financial fiction. The practice of “marking to market” permits accountants to project hypothetical gains at astronomical rates of interest, or trivializing by discounting, applying purely mathematical functions that have lost all connection to realistic rates of growth. The result is that the financial sector itself has become decoupled from the “real” economy.

The tragedy of our time is that saving today is being diverted in ways that are decoupled from real capital formation, but merely add to the economy’s debt and property overhead.

Suppose that Ponzi actually had bought International Postal Orders, and that the Spanish stamp companies actually had invested $6 billion in rare philatelic items and coins, driving up their price to create paper gains for the investors. To whom would they sell, in order to take their gains? (This is the proverbial “greater fool” problem.) More to the point, how positive would have been the broad economic effect of such asset-price inflation?

The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.

Suppose that mortgage-packaging companies are honest in their appraisals of current price trends. The real estate bubble is nonetheless speculative and postindustrial. The analogy is found when financial managers endorse government policies that encourage the inflation of price for stocks and bonds, stamps and coins, Rembrandts and modern art by claiming that this creates wealth and hence, by definition, pulls living standards and culture onward and upward.

What is wrong with this picture? For starters, it fails to define value as distinct from price, windfall and capital gains as distinct from earned income. It also neglects the fact that market prices rise and fall, but the debts remain in place. And when debts cannot be paid, savings are wiped out.

On May 9, 2006, the price of Escala shares fell by half as news of the police raids spread. By Friday its stock was down almost 90 per cent. On Monday it jumped by 50 per cent, from $4.34 at Thursday’s close to $9.45 a share. Hedge funds were making and losing money hand over fist, dwarfing the gains and losses made from stamp trading. A veritable market in crime, punishment and beating the rap was in play.

What does this have to do with true capital formation? Individuals are getting rich while the economy is polarizing between creditors and debtors, property owners and rent-payers. Unproductive investment occurs when it takes the form of windfall “capital” gains, and when it involves going into debt for real estate, stocks or bonds, or “collectibles.” Unproductive credit occurs when commercial banks make loans that merely finance the purchase of property, companies or financial securities already in place.

Two centuries ago, French followers of Count Henry St. Simon outlined an industrial system that was to be based mainly on equity financing (stocks) rather than debt (bonds and bank loans). Their idea was to make industrial banking a kind of mutual fund, so that claims for payment (and hence, the value of savings) would rise and fall to reflect the economy’s earning power. The industrial banking that developed largely in Germany and central Europe differed from the short-term Anglo-American collateral-based trade credit and mortgage lending. But since World War I, global financial practices have been more extractive than productive.

The consequence has been that debts on the economy-wide level have grown more rapidly than the ability to pay. Instead of reducing this debt overhead by earning their way out of debt, economies have sought to inflate their way out of debt. However, the mode of inflation is not the familiar rise in consumer prices, much less wage inflation. Rather, it is asset-price inflation, emanating largely from the United States. Since the gold-exchange standard gave way to the paper dollar standard in 1971, the U.S. economy has become unique in being able to create credit – and foreign debt – without constraint. The result has been an unparalleled growth in debt relative to income, production and wages. This “debt pollution” has been likened to environmental pollution.

We have entered an era in which financial markets resemble the stamp-buying funds. Governments have replaced industrial growth with purely financial wealth creation in the form of a real estate and stock market bubble. This has turned the economic universe upside-down relative to what the classical writers expected to result from the technological progress unleashed by the Industrial Revolution and its parallel agricultural, commercial and financial revolutions. Property and credit have become costs instead of a benefit, institutional forms of rent- and interest-extracting overhead rather than helpful inputs.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website,

See Wikipedia, “Charles Ponzi,” based mainly on Mitchell Zuckoff, Ponzi's Scheme: The True Story of a Financial Legend (Random House: New York, 2005).