Neil was ambivalent, but when pressed he leaned toward front-running. For a long time Neil just couldn’t get beyond Madoff’s reputation. He was a respected public figure who had served on major securities industry boards; he had tremendous credentials. And theoretically he was making so much money from his brokerage there was no need for him to cheat like this. Bernie Madoff was a very wealthy man; if he needed more money, he could easily have raised more than he could possibly spend in his lifetime by selling his broker-dealership and retiring. Neil got caught up in the logic of it. It made no sense. Why would Bernie Madoff risk everything in his life to steal money he didn’t need?
We spent a considerable amount of time wondering about it. This was our mystery, and it served as a welcome diversion from the normal work of the day. One theory that seemed to make sense was that Madoff’s broker-dealership had been devastated by a technical shift in stock price reporting from fractions to decimals, which had made him desperate for cash. At that time we had no way of knowing precisely how long Madoff’s fraud had been in existence. We could trace it back to the beginning of his involvement with Broyhill and Access, which was only a few years earlier. That made us suspect it might have something to do with a fundamental change in the way the market quoted stock prices. Until 1997 the smallest fraction in a stock quote was 1/8, which was 12.5 cents. That meant any change in the value of a stock was a multiple of 12.5 cents. A broker-dealer could easily earn 12.5 cents per share. So if Madoff paid two cents a share to buy the right to market a block, he could still earn more than a dime a share. In 1997, that spread was narrowed to 6.25 cents, substantially cutting profits for the market makers. In 2000, technology allowed the market to begin quoting stock prices in decimals rather than fractions. The good old days of 12.5 cent bid/ask spreads were history. The exchanges began quoting stocks with a five-cent spread; in some instances the spread was only a penny. As Frank pointed out, Madoff’s profits were down 92 percent. So we knew that Madoff’s broker-dealership was no longer a cash cow for him; it was actually possible that it was losing money, and this sudden and substantial loss of income could have been his motive.
What continued to frustrate me was the insistence of Rampart’s management that I create a competitive product. Frustrate me? They were a pain in the ass. How come you can’t do it, Harry? Just give us something to sell, Harry. C’mon, Harry, what are we paying you for?
There is no one in the world who can tell you how many different financial products there are. There are literally thousands of really bright people who sit in offices around the world coming up with esoteric ways for people to get around government regulations, income taxes, estate taxes, and other barriers to the creation and preservation of wealth. Mutual funds, for example, were an innovative product in the mid-1920s. One day they didn’t exist, and decades later they were worth trillions of dollars. When creating a new product there are very few rules that have to be followed. Frank Casey explains it this way: “I can do anything I want. I could tell a client that I aligned Venus with Mars and when they were in the seventh heaven I bought stock and every time that happened I bought and I won. And that client might investigate to make sure Venus and Mars actually were aligned and in the seventh heaven when I bought and that I made money! And then that client would willingly invest in my product.”
So creating a financial product wasn’t the problem; the problem was creating a product that could compete with a Ponzi scheme. In the spring of 2000, less than six months after we had first encountered Bernie Madoff, my anger at being forced into that position became the trigger that made me decide it was time to go to the SEC.
I went to the SEC primarily for my own self-interest. After Madoff imploded, people who knew nothing about me would write that I went to the SEC to try to collect a reward, that I did it for personal monetary gain. It is literally impossible to be any more inaccurate than that. I wanted to rid myself of the pressure of having to develop a product that couldn’t be created. Bernie Madoff was my competition, and I couldn’t compete with him because I had to generate my returns through real trading, while he was creating his returns on a computer. He was playing on my field, in my space, and I knew he was a dirty player. I decided it was time to go to the referee and get him thrown out of the game. The SEC was the referee.
The United States Securities and Exchange Commission was instituted during the Great Depression by President Franklin Delano Roosevelt to restore public trust in the financial markets. Congress established the SEC in 1934 primarily to make sure that the kind of financial abuses that had contributed to the stock market crash of 1929 could never happen again. The SEC, which is supposedly an independent and nonpolitical agency, was created to regulate the entire securities industry. The
