Nobody Called

How does a fraud that had been published in a trade magazine, filed with regulators three times, and blacklisted on the trading desks of major banks keep running until December 2008? Not by hiding. In 2006 the Securities and Exchange Commission's enforcement staff obtained Bernard Madoff's account number at the Depository Trust Company, where the ownership of American securities is recorded in fact rather than on a statement mailed to a customer. One telephone call would have established whether the positions on his customer statements existed. They did not. Nobody called.

That is the finding of the Commission's own Inspector General, in a 477-page report this book uses as its spine, not its coda. Between June 1992 and December 2008 the Commission received six substantive complaints, opened three examinations and two investigations, and closed every one. Michael Ocrant published the impossibility of the returns in MARHedge in May 2001, Erin Arvedlund in Barron's six days later. Harry Markopolos filed in 2000, in 2001, and again in November 2005 under the title "The World's Largest Hedge Fund is a Fraud." The fraud was not hidden. It was disbelieved.

Explaining why nobody looked means saying what Bernard Lawrence Madoff actually built. His firm made markets in New York Stock Exchange-listed shares away from the exchange floor. He paid retail brokers for order flow, was denounced for it, and won the argument, and it is still how commission-free retail broking is financed. He chaired the Nasdaq board and sat on SEC advisory committees. The reputation of that business stood over the other one, two floors below it, reached by a separate elevator, staffed by about twenty people producing four thousand account statements a month.

Two figures are never allowed into one sentence: some $64.8 billion of fictitious balances on the statements, and $17.5 to $20 billion of real principal that people handed over and never got back. Withdrawals exceeded the balance.