Ponzi Schemer Madoff Describes SEC Investigator as an “Idiot“

Bernard Madoff, who became known as the operator of the Ponzi scheme thought
to be the largest investment fraud in Wall Street history, said he wasn’t impressed
by the people that the Securities and Exchange Commission sent to investigate
him in 2006. He even called one SEC investigator a “blowhard,” who
talked tough but didn’t examine anything well.

Madoff offered such details in an interview with SEC Inspector General H. David
Kotz. The SEC released the interview details late Friday. The report indicates
that the SEC received tips about Madoff’s scheme during the last 17 years, but
didn’t detect the fraud until much later.

In March, Madoff pleaded guilty to 11 felonies and admitted to turning his
wealth management business into a massive scheme that defrauded thousands of
investors of billions of dollars. Madoff created the Wall Street firm Bernard
L. Madoff Investment Securities LLC in the 1960s, and he was its chairman until
he was arrested in December of last year. FBI agents charged him with securities
fraud, and in June he was sentenced to 150 years in prison.

The US Securities and Exchange Commission Office of Inspector General conducted
examinations of Madoff’s business going back to 1992. Here are highlights from
the documents released Friday detailing Kotz’s interview with Madoff:

During a June interview, Madoff said that the prosecutor and trustee in the
criminal case “misunderstood” things he said and that as a result,
a lot of misinformation is being circulated about the scandal. However, he said,
“I’m not saying I’m not guilty.”

Madoff described Peter Lamore and William Ostrow as “two young fellows,”
who spent two months, and they “spent 90 percent of their time looking
through emails.” He said that this is “routine for the SEC now; they
feel that’s the way they find things.”

Ostrow and Lamore looked through bank reconciliations, expense accounts and
checks. Madoff said he didn’t understand what they were looking for; he said
that he had “tons of capital” and so he “didn’t understand why
they were looking at that stuff.” Also, Madoff said that Ostrow was “so
cryptic” and that he spent a “huge amount of time looking at invoices
for expenses.” Ostrow looked at canceled checks and phone bills, so Madoff
reckoned that Ostrow was looking for wrongdoing pertaining to something going
on in the industry at that time.

Madoff also noted that during the 2006 investigation, Ostrow kept asking for
computer runs. Investigators “kept asking (the computer programmer) to
do different runs” and to reformat the material.

Madoff said that Ostrow and Lamore asked him, “Do you do a retail business?”
to which he replied, “No.” He said, however, that “at this time
[in 2006], I was trying to conceal.” He also told them, “I don’t manage
money.”

Madoff said, “Everything the SEC did prior to 2006 was a waste of time.”

Also, he said that during this exam, they “never looked at front running.”
He said that two months after Ostrow and Lamore left, he got a letter citing
him for “two ridiculous violations,” which they were wrong about;
the violations they cited were incorrect, he said. He went on to say that when
he submitted a response to the SEC letter and copied it to the Financial Industry
Regulatory Authority (FINRA), FINRA responded, “What the heck? Are you
nuts with this nitpicking?”

Madoff said, “After two months, they found two to three nitpicky things,
and they were wrong about those things.” He said he didn’t provide false
documents to the Office of Compliance Inspections and Examinations (OCIE) examiners,
except the client statements. He stated that he did not provide or make false
records for the SEC. He added that they “never asked for Depository Trust
Company (DTC) records” or other records that needed to be prepared.

Ostrow and Lamore “never really got into books and records as related
to stock records or DTC records.” Madoff said that “they never even
looked at my stock records” or did a “box count”; he was “astonished”
that they didn’t ask for DTC records.

He said that if they had gone to DTC, they would’ve seen his market-making
position and that it “would’ve been easy for them to see” the Ponzi
scheme.

Madoff said, “I got away lucky” during an enforcement investigation,
but that he thought it was just “a matter of time” before he would
be caught and that “that was the nightmare I lived with.”

Enforcement investigators “asked all the right questions, but it was still
focused on front-running,” Madoff said. He said that the investigators
dismissed the allegation of a Ponzi scheme as “inconceivable to them.”

Madoff said he got the impression through all the exams and investigations
that “it never entered the SEC’s mind that it was a Ponzi scheme.”
And he said he “was relieved” when he got a letter from Enforcement
indicating the case was over.

However, he said that there were two points when he thought “the jig was
up”:

* During the on-site OCIE exam, because he thought it was routine for the SEC
to check with an independent third party

* Right after his testimony during the enforcement investigation when they
asked him “what’s your DTC account number?”

Madoff said he was “worried every time” he was examined or investigated
by the SEC, and that “it was a nightmare for me” because “it
was very basic stuff.” He added, “I wish they caught me six years
ago, eight years ago….”

Madoff noted that every firm keeps books and records differently, and having
an examination is “like getting a tax audit; it’s a pain in the ass.”
Also, he said that you can deal with investigations by making things difficult
for examiners or by cooperating and making things easy, which is “what
we always did.”

Talking about Ostrow, Madoff said he “was very cryptic” and was “doing
things that made no sense to us at all.” He added that Ostrow was a “total
asshole” and “an idiot.” Madoff also described Ostrow as a “blowhard”
who “talked tough, but didn’t look at anything.”

Madoff said that reconciling records with DTC was something they “should’ve
done in ’06.” When questioned as to whether the Ponzi scheme would have
been uncovered by the SEC if it had gone to DTC, he said, “Yes. It’s very
easy to do.”

In trying to discover a Ponzi scheme, he said, “It’s very easy if you
want. You must do a third party check. It’s absolutely a must.” He went
on to add that “It’s Accounting 101 to look at DTC, do a box count”
if you are looking for a Ponzi scheme.

When asked, “Did you ever have fake DTC records ready in case the SEC
asked for them?” Madoff answered, “No.”

Madoff also said that he was the only representative from BLM that dealt with
SEC staff because that was the way he “always” handled exams. He said,
“I always dealt with the exams. My brother handled the market making exams.”

He also said that 2003 was the first time he could’ve been caught by the SEC.
He denied that he ever acted as a reference for an SEC employee who was seeking
a job. And he said that he never called anyone at the SEC or Congress to influence
an examination of his firm.

Talking about beginning the Ponzi scheme, Madoff said the “problem occurred
when I made commitments for too much money and then I couldn’t put the strategy
to work.” He stated, “I had a European bank, I was doing forward conversion,
they were doing reverse conversion.” He stated that the returns he typically
generated, “I thought I was going to be able to do.” He explained
that when that didn’t happen, he thought, “Fine, I’ll just generate these
trades and then the market will come back and I’ll make it back … and it never
happened.” He added, “It was my mistake not to just be out a couple
hundred million dollars and get out of it.”

Madoff noted that he was in the securities industry for 50 years prior to his
arrest and that he “wrote a good portion of the rules when it comes to
trading.” He said, “I’m very proud of the role I played in the industry
… of course I destroyed that now.”

When dealing with the SEC, there was “never any hint” that the SEC
was looking for signs of a Ponzi scheme or that they were looking at his trading,
Madoff said. He said that this was “primarily because of the reputation
I had.” He had not been aware of the specificity of the complaints brought
to the SEC’s attention.

Even if somebody said he was doing a Ponzi scheme, he said, they’d “probably
discount this accusation” because they’d think ‘Why would he do a Ponzi
scheme?’ He added, “Of course they’d be shocked it’s a Ponzi.” He
stated that they would be “astonished.”

The only problem with SEC headquarters is that he had “too much credibility
with them and they dismissed the Ponzi,” Madoff said. “You can’t have
the transparency the regulators want you to have because it’s proprietary and
detrimental.” He added, “By and large the industry is honest”
and “I got myself in a terrible situation, it’s a nightmare … The thing
I feel worst about besides the people losing money is that I set the industry
back.”

Madoff noted that he “did work in the industry long before I did anything
wrong.” He added, “It’s a tragedy, it’s a nightmare.”