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The Madoff affair
A sidekick sings
Aug 13th 2009 | NEW YORK
From The Economist print edition
Frank DiPascali will help prosecutors understand the Madoff fraud
HOW did Bernie do it? With an old IBM computer, oodles of chutzpah and, it seems, help from multiple
sidekicks. On August 11th Frank DiPascali, the senior lieutenant in Bernard Madoff’s bogus fundmanagement
business, admitted to fraud and was arrested. His willingness to confess and, apparently, to
co-operate—in contrast to Mr Madoff, who went to jail insisting he acted alone—is a coup for prosecutors.
They will waste no time going after the unidentified “other people” with whom Mr DiPascali says he and his
boss perpetrated the scam.
Mr DiPascali was the main point of contact for investors, who ranged from Jewish charities to film moguls.
He also oversaw the mechanics of the vast Ponzi scheme. It purported to be making steady, double-digit
returns trading options on a share index. In fact, client funds sat in an account at JPMorgan and were
withdrawn only to meet redemptions or to be parked in Treasuries and the like. This was “nothing more
than a slush fund”, according to a complaint against Mr DiPascali by the Securities and Exchange
Commission.
Though there was no actual trading, the conspirators were far from idle. They cooked up phantom trading
records, client confirmations and account statements to corroborate the fictitious investment strategy.
They made thousands of wire transfers between the firm’s London and New York offices to make it look
like it was earning commissions from real transactions.
Hindsight is a wonderful thing when cooking the books. The complaint says that Mr DiPascali “picked
advantageous historical prices, often near the lows, to create the appearance of a profit once the
purported trade was booked.” A single computer was programmed to allocate trades, pro rata, to
individual accounts.
Some of the ruses bordered on comical. Worried that returns were suspiciously high, Mr Madoff
occasionally instructed Mr DiPascali to book fake trades designed to lose money. They even created a fake
computer platform so that, should outsiders spring a surprise visit, they could be shown “real-time”
trading.
Absurd, perhaps, but not amateurish. The two made full use of their deep understanding of the workings
and oversight of stockmarkets to pull the wool over inspectors’ eyes. They created a list of counterparties
that were unlikely to be checked on: European firms for American regulators, and vice versa. They
pretended to exit their options-trading strategy and shift into Treasuries before the end of each quarter, to
avoid having their fishy positions disclosed in investors’ filings. To hide the scale of the operation, which
had thousands of accounts, they devised a subset of 10-25 “special” accounts, which they presented as
their full universe of business. Why regulators swallowed this, when Mr Madoff was widely known to have
had hundreds of clients, is a mystery.
Who else was involved? Prosecutors have filed charges against the firm’s accountant, who denies them.
They are looking to build cases against certain investors and “feeder” funds that funnelled their money to
Mr Madoff. But the most fertile territory could be the co-workers whose help would have been needed to
handle the programming and the mounds of paperwork. In court, Mr DiPascali lamented becoming “loyal
to a terrible, terrible fault”. In that, he was surely not alone.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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