Archmere graduate Erin Arvedlund was at her Barron’s Magazine desk in New York City in the Spring of 2001 when she received a fateful call.
A longtime Wall Street source was on the line, offering Arvedlund the scoop on a money manager who had an unprecedented winning streak going back decades. The source wasn’t calling to expose any wrongdoing; quite the contrary – this tipster wanted in with the elusive investor and figured that lining up a laudatory story in the influential financial publication would advance his cause.
Things didn’t work out that way for the caller, Arvedlund or the genius investment guru who, seven years later – thanks in large part to Arvedlund’s investigative reporting – would gain international infamy for his deceit.
His name? Bernie Madoff.
Arvedlund was back on her hometown turf this week to share her riveting story at a luncheon hosted by Westover Capital Advisors, a local investment firm that regularly brings in guest speakers on a range of topics related to finance, the economy and politics (Westover Capital is a TSD advertiser).
Westover Capital President and CEO Murray Sawyer set the stage for Arvedlund’s talk by quoting the father of modern finance, JP Morgan, that “character dictates trust” and that trust is the essential heart of our financial system. Sawyer explained that “trust is the con man’s ultimate tool” and Bernard Madoff’s unprecedented Ponzi scheme – of the ten largest such frauds in history, the runner-up is one-tenth the size – continued for so long due to his “uncanny ability to gain the trust of his victims.”
Once she started to learn about Madoff and his mysterious modus operandi, Arvedlund, who has reported for Dow Jones, the New York Times the Philadelphia Inquirer and herself worked in the hedge fund industry, was not as easily duped.
In May 2001, her article “Don’t Ask, Don’t Tell: Bernie Madoff Attracts Skeptics in 2001,” was the first to pose tough questions about how Madoff could produce consistently steady, positive returns through significant market volatility. Arvedlund’s reporting set the stage for Madoff’s undoing (in an interview with the SEC, Madoff referred to her as “that idiot woman from Barron’s!”) and led to her critically-acclaimed 2009 book “Too Good to be True: The Rise and Fall of Bernie Madoff.”
Calling Madoff an ‘equal opportunity thief’ who stole from churches, investment groups, colleges and pensioners, Arvedlund revealed that the investment advisor’s crime lasted for 45 years, causing a net cash value loss of $20 billion. During those decades of deceit, Arvedlund says Madoff never made a single trade.
Arvedlund spoke with us about the greatest investment scandal in history and the resulting human tragedy that it caused. She also offered advice on what to watch out for when something might sound too good to be true.
Town Square Delaware: Tell us a bit about your background growing up here in Delaware.
Erin Arvedlund: My parents moved here in 1976. My dad came to work here at DuPont at the pension fund. I went to grade school through 8th grade at Ursuline Academy, which I love, and high school at Archmere. I always loved to write and being a reporter was the only way I knew how to make a living.
TSD: You actually left journalism to work on Wall Street – how did you continue your investigation into Madoff after your first article about him in 2001?
Arvedlund: I left journalism in 2005 – I went to work at a hedge fund, at Alliance Bernstein. I always had a gut feeling that something was not right with Madoff, but I had already written the story. So, I thought well, there’s the end of it. Either I’m crazy or there is something realy wrong. And then the market crashed in 2008, and that’s when he was uncovered. At that point, I was contacted by a publisher to turn the Barron’s article into a book.
TSD: Had you crossed paths with Madoff before your article?
Arvedlund: I did not know Madoff. I heard rumors over the years that all was not right. But I was never able to uncover him until the market crashed.
TSD: You called Madoff to interview him for your article in May 2001. How did that go?
Arvedlund: I called him and said, “I would really love to get your take on this hedge fund. Nobody seems to know how you do it. What’s your strategy? And he was very nice. He got on the phone and said, “I would be happy to tell you more about it, but I can’t. It’s a proprietary strategy.”
And I thought, Hmmm… that’s strange. No one seems to be able to reverse engineer this. My original source who called me, who was an options trader for Deutsche Bank, said he had been trying to trade with this guy. He said, “I want to sell him options. But no one on Wall Street has ever done a single trade with him. What’s going on here?”
TSD: Tell us about some of the Bernie Madoff red flags you discovered and wrote about.
Arvedlund: The first red flags were that the returns were way too good in down years. Too consistent. They didn’t move in conjunction with the market.
The second red flag was he had a lot of secrecy. He didn’t let investors tell anyone he was their money manager. Investors and money managers couldn’t do any due diligence or learn how he did it, and he wouldn’t explain his strategy.
Third – he had a very strange fee arrangement, which is a little too complex for most readers. But essentially, he was allowing a lot of his fund raisers to keep fees to which he was entitled and that was the way he incentivized more money to come into the firm.
TSD: What surprised you most about investigating this?
Arvedlund: What surprised me most was finally meeting with the FBI agents who looked into Madoff’s operation and finding out it had gone on for 45 years and that he had been concocting phony statements for 45 years. It would have been so much easier to just put the money in an index fund. But instead, he went to all of these terrible lengths to deceive people.
TSD: Was the second biggest surprise perhaps how long it took after your first article for a crime of this magnitude to come to light?
Arvedlund: Sure, It took seven years from the Barron’s story until his arrest. That was far too long. He probably could have been discovered earlier.
TSD: As a result of the Madoff case, all clients now have better transparency.
Arvedlund: Yes, now investors can see their accounts. They’re held in custody by a third party. So, if someone comes to you and says, “I want you to invest in my company. I’m going to take the money and put it in my account,’ run in the other direction. If, however, they say, ‘Your money will be in custody at a bank, you will have access to the accounts, you can see what we’re doing,”
TSD: Any other advice for investors?
Arvedlund: You have to be very wary about where the money is going. Make sure you have access to the accounts and do a ton of due diligence before that. Talk to other people who have invested with them. See what their experience has been. And for God’s sake, don’t give them all your money.
TSD: What other authors have written about Madoff whose works you find interesting?
Arvedlund: Harry Markopolos, who was a competitor of Madoff and whistleblower who went to the SEC. He suspected Madoff was a fraud in 2003. He wrote a book called “No One Would Listen.” Madoff’s mistress wrote a book. And “Wizard of Lies” by Diana Henriquez. And some of the investors wrote a book called “The Club No One Wanted to Join” and they wrote about their experiences and the aftermath of being a Madoff investor.