December 12, 2008 / 8:54 PM / 10 years ago

NEWSMAKER-Madoff's confounding success finally dissected

NEW YORK, Dec 12 (Reuters) - An investor who recently met with Bernard Madoff to discuss the asset manager’s gravity-defying success was particularly struck with the fact that his office was completely paperless.

“There were tons of computer banks, and that looked normal. But they would never explain their trading strategy or how they made money,” the potential investor, who requested anonymity, said afterward.

“That worried me. And there had been speculation for years that he was front-running.”

On Friday — a day after Madoff was arrested for allegedly running a whopping $50 billion “Ponzi scheme” — market authorities were up on the eighteenth floor of his midtown Manhattan building, searching the office computers for clues on how he ran his mysterious business.

The U.S. Securities and Exchange Commission is trying to dissect a man who appears to have confounded the financial world for decades, and who now holds it shocked after the bombshell allegations of two of his senior employees. See: [ID:nN12444672]

The 70-year old founder of Bernard L. Madoff Investment Securities LLC, where he managed billions in a separate fund, was best known as chairman of the Nasdaq Stock Market in the early 1990s.

Madoff was a trailblazer in electronic markets, credited for his role in changing the way securities are traded. His list of memberships, chairmanships and directorships makes for a long resume.

Even longer was Madoff’s following of investors anxious to benefit from his impressive track record of managing assets, which seemed to defy the selloffs that shook markets the last couple decades.

The Hennessee Group, which tracks performance, tracked Madoff, who had $17 billion in funds under advisement, from 1994 to 2007. During that time he had only five down months.

“People who came to us for portfolio construction were often already invested with Bernie Madoff — he had hundreds of clients,” said Charles Gradante, who helps people select hedge funds as a co-founder of the Hennessee Group.

“Now his whole legacy is destroyed. He was God to people.”


Madoff used money saved from lifeguarding in Queens to emerge decades later as a self-made Wall Street titan with strong ties to elite circles in Florida and Long Island.

By all accounts, his downfall has the potential to ruin some of the country’s wealthiest individuals who trusted him with their savings, often after meetings at private clubs. See: [ID:nN12277760]

“Bernie was a nice guy, very affable. He was high-profile but not in a loud way,” said Gradante, who has known Madoff for years and noted the constant “chatter” over Madoff’s affairs.

“I suspect most of it may have been jealousy with people wondering how Bernie managed to attract so much money and have such good returns for so long.”

In charges filed on Thursday, prosecutors and regulators said the fat returns were due to a Ponzi scheme, where a swindler uses cash from new investors, attracted by the promise of big returns, to pay off earlier investors.

The broker owned homes in Manhattan, France and Palm Beach, Florida, as well as a yacht. He would often make anonymous donations to big causes such as cancer and diabetes research, Gradante said.

Through his career, Madoff frequently sparred with the New York Stock Exchange, now part of NYSE Euronext NYX.N, on one occasion calling it a “monopoly afraid of competition.”

His firm is currently among the top 25 market makers for Nasdaq, and he remains a member of the committee that nominates people for Nasdaq OMX Group’s (NDAQ.O) board of directors.

Madoff “built a career out of attacking the NYSE,” Charles Gasparino wrote in his 2007 book on former NYSE CEO Richard Grasso, called King of the Club.

Madoff pushed cheap, efficient, electronic trading, arguing that fair prices are best set by “multiple players interacting continuously,” Gasparino wrote.

He also helped spawn an industry of trading against the retail customer to capture the differential between the bid and the offer in stocks, said Jon Najarian, a founder of Web information site

“He was definitely one of the legends on Wall Street,” said Najarian, who met with Madoff in 1995 to discuss buying his minority stake in what was then the Cincinnati Stock Exchange — a deal Madoff resisted.

“I was shocked by the news,” Najarian said of the arrest. “I am saddened and if true, it is one more example of trusted people behaving badly to our mutual detriment.” (Additional reporting by Svea Herbst-Bayliss in Boston, Doris Frankel in Chicago and Aarthi Sivaraman in New York; editing by Bernard Orr)

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