Madoff Told SEC Fraud Started as Legitimate Strategy Gone Wrong

Madoff Told SEC Fraud Started as Legitimate Strategy Gone Wrong


Oct. 31 (Bloomberg) -- Bernard L. Madoff said his multi- billion-dollar Ponzi scheme started when a legitimate investment strategy went bad and he tried to cover up, according to an interview with the U.S. Securities and Exchange Commission.

The “problem occurred when I made commitments for too much money and then I couldn’t put the strategy to work,” Madoff told SEC Inspector General H. David Kotz in a June 17 interview described in a report yesterday. “It was my mistake not to just be out a couple hundred million dollars and get out.”

Kotz’s exhibits, including an account of his interview with Madoff, were posted on the SEC’s Web site. No transcript of the interview was released.

The inspector general’s 457-page report, released Sept. 4, offered an exhaustive look at how the SEC missed chances since 1992 to detect a fraud that burned thousands of investors. Kotz faulted the agency for inadequately pursuing tips, assigning inexperienced staff to conduct reviews and failing to seek trading records that would have revealed the scam.

Madoff, who is serving a 150-year prison sentence after pleading guilty to a fraud that federal investigators said dated to at least the 1980s, funneled funds from new clients to pay returns purportedly generated by a trading strategy known as a split-strike conversion.

‘It Never Happened’

“I had a European bank, I was doing forward conversion, they were doing reverse conversion,” Madoff said without elaborating. He said when the strategy went bad, he thought, “I’ll just generate these trades and then the market will come back and I’ll make it back. And it never happened.”

SEC investigators have said Madoff and employees at his New York-based firm, Bernard L. Madoff Investment Securities LLC, used a variety of ruses, such as creating sham trading records, to avoid detection of the fraud.

Madoff told Kotz that SEC Chairman Mary Schapiro was a “dear friend” and that he knew former chairman Arthur Levitt “very well,” according to the interview exhibit.

Levitt “did not recall having lunch with Mr. Madoff and did not believe he ever met with Mr. Madoff alone,” according to a synopsis of Levitt’s interview with Kotz also released yesterday. Levitt is a director of Bloomberg LP, the parent of Bloomberg News.

SEC Commissioner Elisse Walter was called a “terrific lady” by Madoff, who said in the interview that he knew her “pretty well.”

‘Professional Sense’

Walter told Kotz in an Aug. 5 interview that she knew Madoff in a “professional sense” and had interacted with him at financial industry conferences. “I would not say that I know him pretty well,” she said.

Kotz, in an e-mailed statement after releasing yesterday’s report, said his nine-month investigation “did not find any corroboration or evidence to support Madoff’s claim of a close relationship with Mary Schapiro,” who took the SEC helm a month after Madoff’s December arrest.

“It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors,” Schapiro said in a statement released with Kotz’s September report.

Though the report describes dozens of contacts between Madoff and senior SEC officials, it doesn’t find that managers improperly influenced or interfered with inquiries. Nor did Kotz find that an SEC employee’s romantic relationship with Madoff’s niece had any affect on the agency’s examinations.

Instead, Kotz said the SEC failed to scrutinize Madoff during a 1992 probe of a firm that funneled him money. Years later, employees failed to scrutinize his consistently strong profits, didn’t press harder when they caught him in lies and abruptly ended an examination to focus on mutual-fund abuses.

Madoff said SEC examinations were a “nightmare” and that he was “worried every time,” according to the interview excerpts. “I wish they caught me six years ago, eight years ago.”

The criminal case against Madoff is U.S. v. Madoff, 09-cr- 213, U.S. District Court, Southern District of New York (Manhattan).

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