(upbeat music) - We are honored to be joined by Diana Henriques who is the author of an important book "The Wizard of Lies: Bernie Madoff and The Death of Trust".

Diana, great to see you.

- Great to be here with you, Steve - I was just telling you before we got on the air I saw you on the Netflix documentary about Bernie Madoff and I couldn't follow some of it, but I followed everything you said.

Put this book in perspective.

Bernie Madoff, and again, we're seeing in a variety of states, but our primary audience, New York, New Jersey, were a disproportionate number of people who got the shaft, got screwed, by Bernie Madoff in this region?

- Yes, although he had victims all over the world.

This was really the first global Ponzi scheme, Steve, and it pulled in money from Palm Beach to the Persian Gulf.

There were salesman in Beijing.

There were people in Latin America, all over Latin America.

But the early investors who were the ones that ultimately, given the way it played out in the bankruptcy court, were the ones who suffered some of the most heart-rending circumstances.

The early investors were from this region, largely New York, some in suburban Connecticut, and thousands in New Jersey.

So, the scam began in Manhattan.

One of Madoff's top lieutenants, Frank DiPascali lived in Bridgewater.

Some of the crucial scenes that I describe in the book as the fraud was unraveling played out in some of our local diners.

So, I mean, yeah, it was a New Jersey story at its roots and although it's damage stretched all around the world, it remained a cause of great pain for so many New Jersey and New Yorkers.

- Including in Israel as well.

- Yes, Israel suffered greatly through the loss of charitable funds, grants that had been made.

Bernie was an equal opportunity defrauder, I mean, when you're adding Elie Wiesel to one of your victim lists you're really not too concerned about the harm that you're doing.

- Yeah, the term Ponzi scheme some people think they know what it means, but the Ponzi scheme is named after someone named Ponzi.

- It was, Carlo Ponzi, Charles Ponzi, who was a fraudster.

- Why does it have to be an Italian?

By the way, why am I holding my hand here?

Why does it have to be an Italian?

But go ahead, I'm sorry.

- Actually, if it makes you feel better, he came to New York from Canada.

- I feel a little bit better, but go ahead.

- Bostonian 1920, he set up this elaborate scheme involving some bizarre thing called international postal certificates and he was promising people ridiculous monthly returns of 30%, 50%, and he pulled in a lot of money.

It exploded, I'm pleased to say thanks to some attention from some good business journalists up there in Boston in 1920.

It crippled a couple of banks in the course of its failing, but the whole scheme lasted less than a year.

So, it's surprising to me that his name remains stamped on this form of fraud.

But the fraud itself is actually much older.

It goes back to the 1800s when it was called a Peter to Paul scheme, and you can see why immediately, you're robbing Peter to pay Paul.

That's the essence of a Ponzi scheme.

- I'm sorry for interrupting.

A pyramid, not the same as a pyramid?

- Abroad in British English, a pyramid scheme is often used interchangeably with the Ponzi scheme.

In the US under US law, it's a different critter.

A Ponzi scheme is a robbing Peter to pay Paul fraud.

In which the only money available to pay investor returns is money gotten from other investors.

There's no actual investing being done at all.

In the US, pyramid schemes are sometimes applied to multi-level marketing programs and such.

So, I think it's just cleaner and easier to say Ponzi scheme and I educate the people abroad that you think of this as a pyramid scheme, but it's a Ponzi scheme.

- So Diana, when I was watching you on the Netflix documentary, I turned to my wife and I said, "We get those monthly statements", I'm not gonna say the name of a very reputable firm handling our family money.

And I said, "You know, I'm listening to Diana and all these people who were clients, friends, family members of Bernie Madoff.

They're getting a monthly statement.

It's telling them what the returns are.

It was all made up.

It was all fake.

They were just printing out these monthly statements and it was never real.

And the only way people would get paid is by new money coming."

- Precisely.

And so, your question is, is the question that haunts me about the viciousness of this kind of fraud?

How do you trust anybody when you see how easy it seems to rip people off?

And the fact is, Steve, it is easy.

Modern commerce is fueled by trust.

You sent money off to some online website this week to buy something for the puppy.

You don't know that they're there.

You don't know you're gonna get it, but you trust that you will, because almost always you do.

And almost always, the people we deal with in finance are honest.

And the con artists like Bernie Madoff look at that almost always and they see an opportunity that they can slip through.

They can hijack our tendency to trust, our willingness to trust, and use it to defraud us.

So yes, we could cure Ponzi schemes just by, with clinical paranoia.

If nobody trusted anybody, there would be no Ponzi schemes.

There also be no decent society and no modern commerce.

So, it's a trade off and we as investors need to learn how to protect ourselves from our own tendency to trust too much.

- But Diana, because Bernie Madoff had a relationship with the Securities and Exchange Commission, is the SEC or NASDAQ, was he at NASDAQ?

- A non-executive director for three terms at NASDAQ and really one of the principal figures in NASDAQ's history, who's responsible for its creation.

He was an advisor to the SEC in an informal way.

He attended round table discussions.

He testified before congressional hearings.

- He did as an expert.

- As an expert.

And he was an expert, Steve.

He was in my Rolodex long before you guys had ever heard of him, because his trading firm pioneered the after hours trading in stocks listed on the New York Stock Exchange.

So, I'm a reporter.

News happens after the stock exchange is closed and I wanna know what's happening to stocks.

As a result, I call Bernie's trading desk, because they are trading round the clock until the stock exchange opens the next day.

He pioneered trading in foreign securities here in the US.

He was an innovator.

He was someone who understood how the modern market was working and how it was changing and became a reliable source not only for people like me who covered market structure and securities regulation, but for securities regulators and people trying to work out the best way markets should work.

So, it's really a Dr. Jekyll, Mr. Hyde's story.

Where you've got Dr. Jekyll, a legitimate expert in NASDAQ trading and you've got Mr. Hyde running a Ponzi scheme downstairs.

- Why do you think he did it?

- Oh Lord, I don't know that we'll ever be able to see into that heart of darkness, but I think it was a fatal degree of pride.

And he has said in some later comments to other writers, he just couldn't bear to be seen as a failure.

And so long as the market cooperated and let him look like a genius.

And you know from 1982 on, we had a bull market the likes of which this country had never seen before.

- Until '87.

- Yeah, up until '87.

And then a brief stumble and then it continued on into the nineties.

But that brief stumble, I think was significant for him, because I think it's at that point that the market stopped giving him the kind of results that he'd been promising people and being, kind of preening himself about being able to provide the boy genius, the Wizard of Wall Street here, able to give people these incredibly consistent, non-volatile returns in a volatile market.

And so, I think he was so invested in that image of him as this enormous success he couldn't let it go.

And if he had to decide whether to be seen as a, whether to live with himself as a failure or to live with himself as a liar, it was a lot easier to live with himself as a liar.

- Did he target the Jewish community?

- I don't think deliberately.

No, his early investors were friends, friends of family, of his father-in-law, who was an accountant in the garment industry.

I haven't done the demographics, but we both know that there's a long history of Jewish entrepreneurship in the garment industry.

And that's who Saul Alpern, his father-in-law, steered into his orbit.

So, that was his initial clutch of clients.

Then he became active in Jewish philanthropies, as wealthy people would.

And that was a new collection of potential investors in his scheme from the boards he served on and the philanthropies he supported, and so, that expanded.

But by the time, which was about 1989, by the time hedge fund money started to pour in, most of that money was coming from offshore.

Most of that money was coming from Europe, the Caribbean, England.

And then we're getting into the equal opportunity fraudster period of the scam.

- Biggest lesson from your perspective in the Bernie Madoff scandal?

- The biggest lesson for me is beware of your own willingness to trust.

You can't rely on the regulatory machinery to protect you.

You need to look out for yourself.

People don't want to hear this, but I say it and I'll say it to you.

Don't do business with friends and family, because the trust that you must have, the trust that makes those relationships so precious to you, will blind you to the red flags that you should see in your business affairs.

There were so many people that I document in that book who trusted Bernie, because they knew Bernie, they loved Bernie.

And that's the lesson we all need to take from it.

- Diana, I wanna thank you.

- Thank you, Steve.

- It's one thing that, excuse me, one thing to see on Netflix.

It's a lot better to have you here like this for us.

Diana Henriques is the author of the book, "The Wizard of Lies" Bernie Madoff and The Death of Trust".

Thank you so much.

- Thank you, Steve.

- I'm Steve Adubato, that's Diana.

We'll see you next time.

- [Narrator] One-On-One with Steve Adubato has been a production of the Caucus Educational Corporation.

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