Author: Lionel S. Lewis
Publisher: Santa Barbara, CA: Praeger, 2016. 397p.
Reviewer: Denis Collins | January 2017

How can a Wall Street investment firm get away with operating a Ponzi scheme for at least 20 years, and possibly as long as 40 years, without detection? Lionel S. Lewis’ book Bernard Madoff and His Accomplices provides insights about how the scheme operated, until its exposure in December 2008. Lewis allows the swindlers to speak in their own voices, relying on transcripts of their guilty pleas and 11,000 pages of testimony given under oath over the course of the 5- month trial of five confederates who pled not guilty.

So, here’s how: Begin by hiring young working class employees who are exceedingly grateful to work for an impressive Wall Street investment firm. Treat them like family while growing the business. When reciprocal trust is earned, assign your well-paid secretary a few seemingly insignificant financial tasks — tasks whose fraudulent nature is unknown to her. Continue to enhance your Wall Street status and promise spectacular financial returns to a few of your wealthy clients and family friends. Then, have your secretary ask a few other trusted employees to help her with the, still unknown to her, fraudulent tasks, slowly increasing the number of people implicated. Isolate the fraudulent operations from your legitimate businesses. When employees question the legality of their tasks, provide vague and convoluted explanations, and then lavish the inquisitive employees with higher pay, bonuses, and investments earning 10-20% annual returns that make them rich beyond their dreams. Over time, some employees will realize that their activities are illegal, but by then your confederates will have formed a tight social group. If one of them informs federal authorities about the fraud, their work friends will end up in jail. After a few decades, Madoff’s Ponzi scheme reached about $65 billion, with about $18 billion being actual money invested by 4,800 investors — the largest financial fraud in United States history.

Welcome to Bernard L. Madoff Investment Securities (BLMIS) founded in 1960 by penny stock trader and recent college graduate Bernie Madoff, age 22. BLMIS grew to provide three services: transacting customer orders, a proprietary trading business investing company money, and Investment Advisory (IA) services where customers entrusted Madoff to invest their money. The entire IA business, which operated on a separate floor, was a Ponzi scheme. Madoff deposited all client funds in his personal bank account. He used the money to live an extravagant lifestyle, and to pay exorbitant salaries to his employee confederates and family members. Madoff withdrew funds, along with the promised annual returns, when requested by clients. Generally, the two other businesses were legitimate, although the IA controller occasionally shifted client deposits into the legitimate businesses so they appeared more profitable.

Appropriately, Lewis applies a con game framework to explain the massive Ponzi scheme’s internal operations. Madoff is the “con” man who gains the confidence of his investors, or “marks.” He is aided by three types of confederates: “ropers” who bring in business, “steerers” who are satisfied customers that “marks” emulate, and “boiler room” operators who create a fictitious setting, including falsifying documents. If all the world is a stage, the only real people in this scenario are the greedy deceived marks; everyone else is an actor or stage hand.

Chapter 1 highlights five different con games used by Madoff, two of which are distractedly fictitious. The second chapter introduces the fourteen guilty confederates and provides short testimonies from seven of them. The crux of the book are Chapters 3, 4, and 5. More than 80 percent of each of these chapters is sworn testimony from one of three boiler room operators: controller Erica Cotellessa-Pitz, trader David Kugel, and personal secretary Annette Bongiorno. The first two pled guilty, while Bongiorno pled not guilty. Sadly, missing is the testimony of Daniel Bonventre, the former Director of Operations who worked at BLMIS for 40 years and received the longest confederate jail term, 10 years. Less direct testimony populates the rest of the book, with chapters about six ropers, three steerers, and JPMorgan Chase Bank, which earned more than $500 million in fees from Madoff’s frequent deposits and transfers to his personal account, totaling $150 billion from 1987 to 2008.

According to Lewis, when Madoff went criminal remains uncertain. Nobody believed Madoff, a pathological liar, when he claimed the Ponzi scheme began in 1992 and that he was the only employee engaged in fraudulent activities. Former controller Irwin Lipkin claimed it began in the 1970s when he and others started falsifying profit and loss statements on a monthly basis. Lewis, however, suggests it may have begun as early as 1962, when the highly ambitious but insecure Madoff illegally invested too much of his clients’ money without their permission in risky stocks and hid the losses from them. He then inflated profits and promised financial returns that made his unregistered investment services appear more appealing to clients.

The IA business had about 25 employees. IA employees engaged in a host of frauds, including falsifying trading ledgers, trading tickets, client reports, tax statements, profit and loss statements, audits, commissions earned, no-show jobs, and verbally lying to the SEC. For instance, employees, including computer programmers, would be instructed to create accounting and trading records to reflect an historical 24% rate of returns for clients.

In addition to Madoff, fourteen IA employees and accountants pled or were found guilty. Of the ten who pled guilty, seven admitted knowing that they were engaged in criminal activity and at times cooperated with each other. The other three confederates who pled guilty claimed ignorance that the directives they followed were criminal at the time. According to Lewis, at least six other confederates should have been prosecuted.

Only the fast-talking Frank DiPascali, Jr. admitted knowing that the entire IA operation was a Ponzi scheme. DiPascali was a neighbor of Madoff’s personal secretary, hired in 1975 shortly after high school graduation, and rose to be Chief Financial Officer.

How could the other confederates not know about the Ponzi scheme? Their primary explanations revolve around Madoff’s convincing lies. As proof that they didn’t know, confederates offered the debatable logic that they would have spent more money from their own IA accounts prior to the firm going bankrupt had they known. For instance, Bongiorno opened her IA account in the 1980s. She did not withdraw any money until 2006, when she noticed that other employees were withdrawing money. She withdrew $1 million in 2006, and still had more than $50 million in her IA accounts in 2008. Had Bongiorno known, she argued, she would have withdrawn more money sooner and not lost all of her savings when BLMIS declared bankruptcy.

How did Madoff explain his fraudulent activities when questioned? He was clearly an expert liar; after all, Madoff did not legally register as an investment advisor until 2006, after almost forty years of advising investors. When questioned by employees, clients, or regulators as to how he obtained such remarkable annual results, Madoff explained that he operated a confidential split-strike strategy. If questioned further, he hesitantly explained that his state-of-the-art computer system sold call options at a price above the S&P stock index and bought put options close to the index, which was used as cash for the call options. What more information do you need than that! As for the after-the-fact trading documentation requests, they were for transactions traded overseas. No one pushed back. In other words, they did not want to know of their complicity.

Employee complicity, Lewis argues, is also evidenced by the fact that four of the fifteen guilty parties were father and son pairings. Irwin Lipkin, Madoff’s first employee, served as controller until retiring in 1998 after 35 years with the firm. His son joined BLMIS in 1992 after graduating from college. After his father’s retirement, the son falsified his mother and father’s no-show jobs, among other crimes. Similarly, David Kugel, who falsified trades as early as the 1970s, brought in his son in 2000, who continued his father’s illegal habits.

Investor gullibility is exemplified by Jeffry Picower, who began investing with Madoff in the mid-1970s. Picower was roped in by his own brother-in-law, Madoff’s accountant, and would eventually make 670 withdrawals totaling $6.7 billion. His withdrawals provide a sense of the magnitude of falsified client documentation IA conspirators had to perform to account for all those profitable stock transactions. Lewis’ previous Madoff book, Con Game: Bernard Madoff and His Victims, provides extensive testimony on how investment victims were duped and how their lives were impacted.

Madoff’s con game ended due to the 2008 global financial crisis caused by the housing market collapse. Madoff was faced with an onslaught of $7 billion in withdrawal requests, which he could not meet. After Madoff informed his two sons, who worked for legitimate BLMIS businesses, that the IA business was “one big lie,” they turned in their father to federal authorities.

In June 2009, at the age of 71, Madoff was sentenced to 150 years in prison, the maximum allowed. With good behavior, Madoff could be released at age 201 in 2139; so he will spend the rest of his life in prison. Apparently, the sentencing for his confederates occurred too late to be included in Lewis’s book. In December 2014, confederates who pled not guilty were sentenced to between 2.5 and 10 years. Sentencing for confederates who pled guilty ranged from time served to 10 years, with most receiving short sentences for having cooperated with prosecutors. DiPascali, who pled guilty and was facing up to 125 years, died prior to his sentence determination.

How can this book be used in a classroom setting? Law students can read Bongiorno’s forty pages of testimony and devise questions that would get her to admit that she knowingly participated in fraudulent activities with her colleagues. Similarly, students can read DiPascali’s testimony, particularly how he creatively explained the legitimacy of BLMIS transactions, to develop questions that would generate a more truthful response. Another approach could be for students to develop client guidance for breaking employee silence that would result in prison terms for friendly co-workers.

Lastly, students, as always, can debate whether the punishment fits the crime. For instance, Bongiorno, hired at age 19 in 1965 and promoted from secretary to office manager, participated in criminal behavior over forty years, withdrew fraudulent investment earnings, and instructed others to provide fraudulent information. In 2009, she faced an estimated 75-year prison term. What would be an appropriate prison term? The six years in jail she received? If not, why was she granted such a short jail term, and how would they argue for a longer sentence?

Lionel Lewis has provided an important service gathering these testimonies in one book. Now if only we could read transcripts of the conversations between each of the fifteen guilty parties and their consciences!

Denis Collins, Ph.D., School of Business, Edgewood College

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