Erin Arvedlund, Who Uncovered Bernie Madoff Scandal, Speaks to Rider Students

Accounting Newsletter Issue - May 14, 2013

Bernie Madoff leveraged his personal likability, the reputation of his successful brokerage firm and the promise of high returns to create a $50 billion Ponzi scheme that made his name synonymous with scandal and fraud. Madoff stole from and deceived hundreds of his trusted investors, many of who lost everything. Many financiers solely invested with Madoff because of the high returns he offered but sadly this was not a good decision and many people lost everything. 

However, as competing hedge funds grew tired of hearing about Madoff’s investment triumphs, Erin Arvedlund began looking into the hedge fund that seemed to have it all. Arvedlund, the author of Too Good to Be True: The Rise and Fall of Bernie Madoff, spoke to sever Rider accounting classes during the spring semester as a guest of Dr. Dorothy McMullen, associate professor of Accounting. 

Arvedlund was one of the first people to investigate Madoff’s hedge-fund fraud, for an article in Barron’s newspaper on May 7, 2001 – some seven years before his massive fraud was revealed. 

During the course of her investigation, Arvedlund discovered several red flags alerting her that something was amiss. The first was when she started calling around to financial institutions such as Merrill Lynch and Citibank to find that none had ever processed any of Madoff’s trades. She also talked to investors who said that Madoff allowed them to withdraw their money whenever they wanted, as from a bank. Arvedlund tried to contact him more than 30 times, but the cagey Madoff was always unavailable to speak with her.

Finally, right before her story ran in Barron’s, she got a hold of Madoff, whom Arvedlund described as being “sweet as pie” and very calm. She proceeded to ask him about his hedge fund and what made it so successful. He told her that he could not answer any of her questions, saying, “I can’t discuss any details because it’s proprietary.”

Arvedlund’s story subsequently ran, and while she anticipated outrage, the silence was deafening. Madoff perpetrated his fraud for seven more years, until it was discovered in 2008. 

Arvedlund believes Madoff was able to sustain his scheme for so long because of what she called the “velvet rope trick,” in which he turned away affluent investors, heightening their desire to be a part of his fund and discouraging them from probing too deeply into his investments. Madoff also managed to keep the IRS happy by continually paying taxes on the hedge fund’s phony gains. 

The lack of regulations on hedge funds further enabled Madoff’s Ponzi scheme. Arvedlund described one of Madoff’s practices as “self-custody,” whereby Madoff never involved a third party and personally kept all of his investors’ money. She explained that Madoff kept all of the money in the same J.P. Morgan Chase bank account, totaling as much as $8 billion at one point. 

Arvedlund said that along with herself, the secret of Madoff’s fraud was also known by Harry Markopolos, a former securities industry executive now working as an independent forensic accounting and financial fraud investigator, who tried several times in vain to alert the SEC. She said that had the authorities paid greater heed to the warnings of her and Markopolos, Madoff’s $50 billion fraud could have been stopped sooner.