On the Trail of Bernie Madoff

June 3, 2011 By

Wilmington native and Archmere Academy alumna Erin Arvedlund has been covering financial news for the last decade for prestigious publications including Barron’s, The Wall St Journal and TheStreet.com.  She gained national recognition for being one of the first journalists to report on the suspicious activity surrounding Bernie Madoff in a 2001 article in Barron’s which culminated in the 2009 publication of Too Good to Be True: The Rise and Fall of Bernie Madoff.


TSD: You were one of the first reporters to start following the Madoff case. You published an article called “Don’t Ask, Don’t Tell” in May 2001 for Barron’s magazine on the suspicious success of the hedge fund activities of the then unknown—at least to the general public—Bernie Madoff?  How did you first start following the case?

EA: I got a call from a source who said he had found this fund that never loses money, and I think you should write about it. So that was the initial tip.  And he was very helpful in calling around and getting some interesting documents on what we now know as feeder funds into mysterious hedge funds, supposedly worth billions of dollars that was run by a very successful broker, a guy by the name of Bernie Madoff, who I had never heard of. And it turned out that Madoff had a very successful brokerage firm, completely separate business, competing with Charles Schwab and JP Morgan—the traditional mainstays of Wall Street—which made it all the more bizarre. Here was this guy, making lots of money trading stocks legitimately, who apparently had a billion dollar hedge fund that nobody knew about.


TSD: Bernie Madoff was someone held in high esteem on Wall Street and had been a prominent player for decades. Were you nervous at all about challenging such a powerful figure?

EA: No, not at the time, because I just thought he was a guy who was competing with everyone else on the Street. I didn’t know he had helped found the NASDAQ or was really tight with the SEC [U.S. Securities and Exchange Commission]. I wasn’t nervous at all because upon publication [of the story], he had denied everything.


TSD: Did you actually interview Bernie Madoff by phone while he was in Switzerland?

EA: Yes, he claimed to be in Switzerland at the time, yes. Cell phones were kind of new-fangled back then; he said he was on his cell phone. He said he was raising money somewhere. He was very nice. We talked for 10 or 15 minutes. He said the [investing] was a proprietary strategy—he didn’t want to go into it. He asked his investors to keep quiet about the fact that they were his clients and he didn’t want word getting around.


TSD: Did anyone from the Madoff camp ever contact you and suggest that you were mistaken or somehow misread the situation?

EA: No. I wish that they had. But the strange part was that after the story came out, I thought that I would at least get an angry phone call, but I didn’t hear anything. Not a peep. I did find out much, much later, after he was arrested that his sons had gotten up the following Monday in front [of the company] and said to ignore me, but I didn’t know that at the time.


TSD: In the aftermath of the Madoff scandal and the collapse of Lehman Brothers Bank in the fall of 2008, Congress has taken steps to prevent these kinds of scandals from happening again, most notably with the Dodd-Frank act. What is your assessment of this legislation? Is it enough?

EA: There’s some good things and some bad things.

One thing that’s kind of boring, but very necessary, is that Dodd-Frank asks that all money managers have a third-party custodian. Bernie Madoff did what’s called self-custody, so he had control over the assets, whereas you and I invest in a mutual fund, and that money is held in custody of a separate bank. What the broker does is process the trades, so now that’s law. And that’s a good step forward.

On the other hand, the legislation includes a new whistleblower provision, which could have been helpful in preventing the Madoff scandal, but it’s in the process of being watered down. Theoretically, the provision should allow for a whistleblower to report directly to the government, but industry is so worried about this that they are demanding the person go to the company first. And we all know what happens to people who do that—they usually get fired. There were people in the banking industry who could have blown the whistle and this could have helped them. But if the provision gets watered down, I think they lose an important tool.


TSD: You spent several years in Moscow covering the Russian oil industry. What is your assessment of the breakdown of BP’s deal with the Russian oil company TNK? This was supposed to be part of BP’s comeback strategy, but the deal seems to have fallen apart. What’s your take?

EA: BP CEO Bob Dudley was the head of BP’s Moscow operation when I was there from 2003 to 2005. And he always knew that the company’s relationship with TNK was one of necessity.  TNK needed a Western oil company to come in and drill and use their technology, and BP needed the reserves.

But it’s important to remember that the Russian government has a history of politicizing the oil industry. When Yukos, one of the top Russian companies in the mid-1990s, got too powerful, they basically seized it and nationalized it and threw the head of the company in jail. I think the Russian government would do the same thing to any oil property they felt was strategically important. So they key point here is that a contract is not a contract in the American sense, but the starting point of negotiations.

 

TSD: Was this just a case of BP misreading the political situation in Russia? Did they pick the wrong horse?

EA: I don’t think it’s a case of BP picking the wrong horse. I think if BP had done the same deal with another Russian company, such as Gazprom or LUKOIL, they would be in the same situation.  It’s the same parallel: we don’t want the Chinese buying U.S. oil and gas. Unfortunately for BP, they cut the deal when the political system was a lot freer, and now they’re dealing with basically a dictatorship. The political ground shifted under them.

I think BP today will either have to give in to TNK in order to be able to book their reserves, or they will have to go elsewhere, to Africa or South America.

 

    2 Responses to On the Trail of Bernie Madoff

    1. avatar

      defiance Reply

      June 3, 2011 at 12:47 pm

      if ponzi schemers are so deleterious to society, let’s have a piece dedicated to the biggest ponzi scheme in human history; namely, the u.s. government and its 100 trillion dollars of unfunded liabilities and unsustainable social programs. not all evil and malfeasance is to be found in the private sector, regardless of what the liberal left and their amen corner in the media would have us believe

    2. avatar

      John Reply

      June 3, 2011 at 4:07 pm

      Nice interview.  Very interesting to learn about a prominent journalist who hails from Steve. 

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