'The Wizard of Lies' describes a tragedy of Shakespearean proportions

An interview with Diana Henriques, recipient of the ACFE's Guardian Award

By Dick Carozza, CFE; Photos by Ken Gabrielson


SeptOct-henirques-1.jpgInfamous Ponzi schemer Bernard Madoff sits in prison with stage-four kidney disease waiting to die. Diana Henriques, the first reporter to obtain jailhouse interviews with Madoff, muses about the damages he caused and the lessons for all. Below is the full interview with Fraud Magazine.

He was two different men — separated by five months. Dapper and focused in August of 2010. Rumpled and rambling in February of 2011.

Diana Henriques, the first reporter to interview infamous Ponzi scheme Bernard Madoff, says that during her first jailhouse interview with him he was "almost courtly in his bearing … and deftly charming.

"He dropped occasional compliments into the conversation," says Henriques in a recent interview with Fraud Magazine. "How knowledgeable I was, how impressed he was that I knew some bit of Wall Street history, how fair and professional my coverage of the case had been, how much homework I'd clearly done."

She says it was amusing in hindsight to realize how pleasant it was for her to hear those things even though she already knew he was a crook and a liar. "It gave me a deep appreciation of how devastatingly powerful his charm must have been when people still thought he was a Wall Street genius."

On her second visit, just two months after Madoff's older son Mark committed suicide, she says she met a starkly different man. He was "thinner, ill-shaven, rumpled, rambling and consumed by guilt over what he had done to his family. His expressed remorse for his victims always seemed a bit artificial to me, but his grief over his family's downfall seemed thoroughly authentic."

Madoff, sentenced to 150 years, now sits in a cell waiting to die at the Federal Correctional Complex on the outskirts of Buttner, N.C. He has stage-four kidney disease, and his family has abandoned him. Meanwhile, Madoff trustee Irving Picard is trying to retrieve as much as possible for the victims — many whose lives are destroyed.

Henriques began writing about the Madoff Ponzi scheme when she was a business breaking-news reporter for the Times in 2008. She said she was "hooked" by the dramatic story of "one of the most trusted, respected on Wall Street [who] had run a vast global fraud and had been turned in by his own sons." She developed her material into the bestselling 2011 book, "The Wizard of Lies: Bernie Madoff and the Death of Trust." The revised and updated paperback edition was recently released.

"My hope was that readers would emerge from this almost Shakespearean tale with two new perspectives about how fraud happens," Henriques says. "First, I wanted to combat the comforting but false notion that a man like Bernie Madoff is somehow a breed apart from the rest of us, a monster that any sensible person could easily detect and avoid.

"Second, I hoped readers would gain a deeper appreciation of how we deceive ourselves and how our utterly unrealistic pursuit of certainty in an uncertain universe — always the underlying promise of every con artist — leaves us vulnerable to men like Bernie Madoff. Beyond that, I hoped to assemble as definitive an account of this historic fraud as possible, one that future historians would feel they could rely on for an understanding of this crime and its context."

Henriques was a keynoter at the 23rd Annual ACFE Fraud Conference & Exhibition last summer, where she received the ACFE's first Guardian Award, which is presented to a journalist whose determination, perseverance and commitment to the truth has contributed significantly to the fight against fraud by helping to shine a spotlight on issues central to fraud and the worldwide effort to detect and prevent it.


FM: What preconceived notions about Madoff changed after your interviews? What surprised you about him? Why is it so easy to trust and believe him?
His fatal charm didn't surprise me. Obviously, every long-running Ponzi schemer must possess the ability to win people's trust or he can't pull off his fraud. But what did surprise me was how unlike the classic Ponzi personality he was — self-effacing, modest and low-key, unlike the flashy, glad-handing salesman of our stereotypes.

FM: How did Madoff cultivate the impression at the beginning of the century that he wasn't accepting new investors — that he had all the money he needed?
There was always a sort of "velvet rope" quality to investing with Madoff. Until the late 1990s, he was able to keep each source of cash largely ignorant of his other sources. So each conduit — the accounting clients at Avellino & Bienes, the Hollywood people investing with Stanley Chais, the Minneapolis investors recruited by a trusted local stockbroker there — thought there was no other way for individuals to invest with Madoff. They thought his private clientele was a tiny, exclusive club they were lucky to have joined. Then, when his hedge fund business took off, he maintained that same air of exclusivity, perhaps because it was so useful. After all, his alleged reluctance to take on new business explained why he didn't want his role advertised, didn't want to crow about his track record, didn't set up his own fund. He didn't want word to spread because it would simply create headaches for him, he explained to clients. He'd have to turn people down, hurt their feelings, create ill will, etc. So yes, he'd let you in — but you had to keep quiet about it, or everyone else would want in, too. It explained an obsession with secrecy that was otherwise totally out of step with the Wall Street culture.

FM: You write that he couldn't accept failure. Was this his downfall?
I think so. He always found it easier to live with himself as a liar than to live with himself as a failure. Pride, not greed, was likely his deadly sin.

FM: How was Madoff able to keep his sanity during the years he ran the scheme?
He told me several times that even he wonders now how he did that. He obviously had an immense capacity for compartmentalization. And remember — one of the most insidious aspects of a Ponzi scheme is that there really don't seem to be any victims until the music stops. So it wasn't like he was going out each night and holding people up at knifepoint. No doubt, he lied to himself, too, telling himself he'd somehow be able to trade his way back to the honest side of the line.


FM: Can you briefly describe some of the ways — such as his Ponzi software — Madoff used to pull off his scheme?
It is paradoxical that a man credited with helping to bring over-the-counter stock trading into the computer age helped computerize Ponzi schemes, too. He used a basic mail-merge program to allow him to scale up his fake trades and allocate the trades across thousands of accounts supposedly containing billions of dollars. But he also had computer programs that created the illusion that all the securities he was supposed to have purchased were on the books in Wall Street's central clearinghouse. Indeed, after some question-raising stories in the spring of 2001, he used that bogus computer screen to reassure at least one feeder-fund manager that everything was shipshape. He kept old letterhead stationery and an old electric typewriter so he could create realistic-looking backdated documents to satisfy regulators' sessions. He told foreign accountants he traded with U.S. banks and told U.S. regulators he traded with foreign banks — knowing that the extra trouble involved in making those cross-border checks would likely deter further investigation, as it unfortunately did.

FM: You have contended that Ruth Madoff and her son, Andrew, are innocent. What evidence compels you to believe that?
As a reporter, I had to approach that question from the other direction: What evidence was there that would compel me to believe they were not innocent?

Frankly, it never made much psychological sense to me that Ruth and her sons would have been Madoff's knowing accomplices.

People who had known Ruth all her life described a breezy, traditional, somewhat naive wife who thought her adored Bernie was a genius, a giant, a remarkable man. That impression was confirmed in the multiple conversations I had with her while researching the book. And that simply isn't consistent with the thesis that she actually knew all along that Bernie was a cold-blooded crook who, by the way, was stealing from her entire family and all their friends — and had pulled their sons into his criminal enterprise. On a more practical level, would Bernie have dared to cheat on Ruth, as she now believes he did, if she could have dropped a dime on him with the FBI at any moment?

As for his sons, if the fraud began as long ago as I think it did, they were barely out of elementary school when it started. Try to imagine the day dad lets them in on the secret that the family firm actually is a fraud that could blow up at any minute. Andrew, especially, always had a somewhat contentious relationship with his father; Mark, tragically, was always a "nervous Nellie" who could not endure relentless psychological pressure. Would Bernie have trusted either son with such a lethal secret? As I said, the notion that they were complicit just didn't make sense.

Also, during the desperate cash crisis Madoff experienced in 2005, his family continued to tap the "Bank of Bernie" for real estate loans — something that never would have happened if they'd been in on the crime and knew how close to the brink the Ponzi scheme was. Nor did they withdraw any appreciable amount of money from their own accounts during that period — as at least two of the people accused of being Madoff's accomplices did. Finally, in the past three years, not one incriminating Post-it note has emerged from one of the most extensive document dives ever conducted in bankruptcy court. Notably, not even the Madoff trustee claims that Ruth or her sons knew about the fraud; he claims only that the sons, as securities industry professionals, should have known or should have checked.

FM: What kind of stock market trouble did Madoff get into in 1962? Did his bending of the rules pave the way for future problems?
By 1962, when his one-man brokerage firm was just two years old, Madoff was already investing money for a few dozen relatives, friends and friends of relatives. In May of that year, the stock market hit an air pocket — it's not even a blip in market history today, but at the time, it was the worst week in the market since the 1929 crash.

Madoff had put his client's money into flimsy new issues in the OTC [over-the-counter] market and he was wiped out. Faced with a choice between admitting failure — by revealing he had lost his clients' money — or covering those losses himself so his clients would still think he was a genius, he didn't hesitate. He covered the losses and lied about it. It's interesting to speculate what would have happened if he'd had the courage to face failure back then. But that would have been a different Bernie Madoff.

FM: From what you've written, Madoff never seemed to have sterling ethics, but do you think his cash crunch after the 1987 stock market crash (Black Monday and Black Tuesday) was a major factor in his ramping up his Ponzi scheme? If so, what were the conditions that could have caused him to begin his schemes?
It's possible, of course, that Madoff was a crook from Day One. I find that a little hard to believe, even though I believe he was always a man who was comfortable at the gray edges of Wall Street morality — such as it was back in his early days. Madoff claims that, after the 1987 crash, some of his largest individual investors panicked and withdrew money, despite assurances that they would keep reinvesting their profits. He claims he struggled but stayed honest until 1992, but then couldn't manage the cash flow any longer and began the Ponzi-scheme shuffle. My working theory is that when the market allowed Madoff to look like a genius through honest trading, he was honest; when it didn't, he wasn't. But that's just an educated theory.

FM: You write that in its early days, the NASDAQ market was struggling with the consequences of the National Association of Security Dealers' (NASD) flabby discipline. You write that "discipline for infractions was limp and late." Do you think that Madoff's involvement on the NASD Board of Governors encouraged him to think he could get away with his Ponzi scheme? If so, how?
Certainly, Madoff knew better than most how easy it was to get away with bad behavior in the Nasdaq market. What is remarkable is that he kept his own firm's official track record squeaky clean during the entire life of his fraud — it was conspicuously absent from the massive price-fixing scandal that hit the market in the mid-1990s, and it had only a handful of minor disciplinary infractions over the years. What may have encouraged him more than the NASD's disciplinary flabbiness was the fact that the world his Ponzi scheme operated in — the world of private money managers and offshore hedge funds — was barely regulated at all, by anybody. Indeed, it remained very lightly regulated until the reforms undertaken after the financial crisis that brought Madoff down in 2008.

FM: How did affinity fraud figure into Madoff's ploys?
No doubt, Madoff's earliest clients were his extended family members and people his father-in-law knew. Many of them were from Jewish business, social and philanthropic circles. Several large Jewish country clubs were severely hit by the Madoff fraud, as were some notable Jewish charities and universities. But by the time Madoff started pulling in hedge fund money, he was an equal-opportunity liar — his victims included Israelis and Arabs, Latin American industrialists and Swiss bankers, pedigreed Greenwich families and construction workers' pension plans.

FM: The 1992 Securities and Exchange Commission (SEC) investigation of Madoff's operation, of course, was incomplete, but how did it affect him and his company?
It actually was a potentially devastating crisis for Madoff when the SEC caught and shut down one of Madoff's long-running feeder funds, the one operated by the accounting firm Avellino & Bienes. First, Madoff had to come up with more than $400 million in real cash to return to those investors, under the SEC's eye. Then, to get that cash back into the fold, he had to accept thousands of individual accounts that had once been combined into a handful of accounts held by the accounting firm. It was that transition that forced him to develop the computer programs that allowed him to scale up the number of accounts he could handle.

FM: Madoff says his scheme began in 1992. You've written that it began "at least by the 1980s." Obviously, the start would affect the amount that the government can claim for his victims. At this point, from all that you've learned, what is your best guess as to when Madoff's operation became a Ponzi scheme?
I wish I had an answer to that, beyond educated speculation. My belief that the Ponzi scheme pre-dated 1992 is based largely on market analysis — I studied how the returns for the investment strategies Madoff claimed to be pursuing compared to the returns his investors remember getting in those days. It's possible that Madoff crossed the line between investing and Ponzi-scheming more than once, although he flatly denies it. It's also possible that he was cheating in other ways before he launched his full-scale Ponzi scheme. At least one longtime Madoff employee has confessed that he was aware of Madoff faking arbitrage trades as early as 1978. And yet, market participants I've interviewed say Madoff was absolutely conducting real arbitrage trading during those years. So there may simply not have been a bright line that Madoff crossed one day; he may have veered back and forth over that line for years.

SeptOct-henirques-3.jpgFM: How was Madoff able to conduct his fraud for so long?
In contrast to the common misperception, Madoff never paid out sky-high returns — returns that were, on their face, "too good to be true." Some years he underperformed popular public mutual funds, like the Fidelity Magellan Fund, and he always underperformed the stars of the hedge fund world. He sold consistency, not big profits. That had the happy side effect of making the fresh cash he raised go farther and last longer than it would have if he'd been trying to pay the outsize returns of the classic Ponzi scheme.

FM: You write that in the early part of the century the SEC staff had been under relentless pressure, primarily because of tightfisted budgets. The staff turnover rate was high, and many of the staff members were inexperienced and poorly trained. In what ways did these conditions allow frauds such as Madoff's to slip through the cracks?
Under the budgetary duress of those years, regulators inevitably employed a sort of investigative triage, where they applied their limited resources to the types of misbehavior that seemed like they could do the most harm. In one instance, investigators who were tantalizingly close to unmasking Madoff were pulled off the case to help investigate a major mutual-fund industry scandal — and rightly so, their superiors no doubt thought, because Americans had so much money entrusted to mutual funds it was imperative that they be closely examined. In addition, the lack of experience among the raw recruits was especially damaging in these years because this was a time when Wall Street itself was undergoing epic change, becoming more complex and more difficult to parse out with each step toward globalization and automation.

FM: Harry Markopolos, CFE, CFA, had warned the SEC for nine years, to no avail, that there was trouble in Madoff's operations. You write that Ivy Asset Management, some consultants, a few private banking teams and some prominent hedge fund managers had written off Madoff. However, none of them picked up the phone and alerted regulators or law enforcement. Why do you think this is? Why didn't they tell all of Wall Street?
Wall Street is, and has always been, an environment that is hostile to whistleblowers. It is one of the most fundamentally disturbing aspects of not only the Madoff scandal but a host of other scandals that have made headlines in recent years. No one seemed to feel he was his brother's keeper when his brother was wandering around Wall Street. Even people who were themselves honest did not seem to think they had any obligation to report their suspicions to regulators.

You know, in prison, Madoff is admired because he never "fingered" any of his now-confessed accomplices. Prisoners admire people who don't blow the whistle on wrongdoing; I'd like to think the rest of us are more enlightened, but there is a sad lack of evidence for that proposition. Until we as a society start to look at whistleblowers as brave, honorable people who should be admired — not as "stool pigeons," "rats," "tattletales" and "snitches" — we're going to be severely hampered in our ability to prevent corruption.

FM: Can you explain a bit how middle-class investors could participate in big-money investing through "fund of hedge funds" and how that contributed to the intensity of Madoff's fraud?
In the 1990s, the era when Madoff's fraud really took off, hedge funds were the hot topic at every suburban patio cocktail party. Even otherwise sensible people argued that these lightly regulated investments were appropriate for middle-class investors, who should not be denied the higher returns they produced because of some outdated notion of risk. Moreover, rising home prices had made millions of modestly affluent, relatively unsophisticated people rich enough — on paper — to qualify as hedge-fund investors. Fund of hedge funds, which were supposedly doing due diligence and diversifying their risks gave these middle-class investors an avenue into Madoff's fraud that generated new sources of cash for him — and, of course, spread the devastation caused by his fraud.

FM: Why did Madoff allow Jeffry Picower, who was probably the largest beneficiary of the scheme, to remain an investor despite his enormous and rapidly escalating withdrawals? What did this relationship say about Madoff? Picard successfully sued Picower's widow for $7.2 billion. Do you believe that Jeffry Picower was complicit in the fraud or at the least knew about it?
Madoff himself told me he believed Picower may have suspected the Ponzi scheme — but, then, Madoff is a very accomplished liar. Whether Picower suspected anything or not, he was the client who was too big to fire. Madoff had enough trouble coming up with enough cash to cover Picower's constant withdrawals; he never could have come up with enough cash to close out Picower's account and get rid of him. By the way, Picower's widow settled Irving Picard's lawsuit out of court, and continues to insist that she does not believe her husband ever suspected Madoff was a crook.

FM: In 2005, Madoff had a major liquidity crisis in his Ponzi funds, and he was pushed to the brink. Briefly, what were some ways he was able to pull out of the nosedive and roar back to the black?
First, Madoff used the creditworthiness of his legitimate brokerage firm to arrange emergency bank loans that he then secretly funneled to his Ponzi scheme. Then, he gambled big and raised the (totally arbitrary!) rate of return his biggest feeder funds were supposedly earning, to attract fresh cash and stem withdrawals. He formed alliances with a host of hedge-fund networks — most notably the one operated by the Austrian financier Sonja Kohn. And he tapped into the middle-class hedge fund mania through mainstream investment vehicles like Tremont Partners.

FM: In May of 2006, you write, the SEC investigative team drafted letters to send to Barclays Bank and the Bank of New York, asking them to confirm Madoff's trading activity. Of course, that would have blown Madoff's cover because there wasn't any activity. The SEC never sent the letters. Have you subsequently found out why?
The only answer we could find was that the regulators didn't think the information would be helpful. It's one of many awful, "if-only" moments in this story.

FM: On May 19, 2006, five SEC staff members interviewed Madoff in SEC's New York office. Madoff, you wrote, thought that "it was the end, game over. Monday morning, they'll call the DTC [or the DTCC, the Depository Trust & Clearing Corporation, Wall Street's central clearinghouse] and this will be over. And it never happened." Madoff slid through that interview. The SEC team eventually closed the investigation on Jan. 3, 2008, with the conclusion that there was no fraud. The SEC was enticingly close to uncovering the scheme through the years, but he always dodged the bullet. Could it be because they thought Madoff was front-running (which he wasn't doing)? Why weren't they compelled to look further?
Yes, I think the default position for the SEC was always that Madoff was front-running — taking advantage of the vast amount of order flow his legitimate firm handled to trade ahead of those orders and lock in illicit profits. Tragically, Madoff just didn't fit the utterly inaccurate image of a Ponzi schemer held by regulators — and, indeed, lots of other people. Yes, it was a devastating failure of diligence and investigative skill — but it was, fundamentally, a massive failure of imagination. They simply could not believe that a man like Madoff could be operating a Ponzi scheme. In fact, it is always men like Madoff — visibly successful, seemingly trustworthy and widely admired — who run Ponzi schemes. They're the only ones who can. A shifty-eyed loser may mug you or steal your car, but he will never lure you into a Ponzi scheme.

FM: After the beginning of the economic downturn in 2008, what was the final straw that finally pushed Madoff to pull the plug?
He claims that he could have kept the tap dance going, despite the chaos in the marketplace. He told me repeatedly that people still wanted to invest with him and insisted he could have raised enough fresh cash to keep the game going until markets settled down again — which, you'll recall, they had largely done by the spring of 2009. I think we have to take that with a grain of salt. Madoff had been around Wall Street long enough to recognize that the financial crisis of 2008 was profoundly worse than anything he'd ever experienced. He had to have known that the whole system was teetering on the brink of disaster. He claims he just got tired of the effort of sustaining his crime and, by Thanksgiving of that year, had decided to let it all just tumble down. But I suspect his unwillingness to make the effort reflected his awareness of just how bad things were.


FM: Madoff is cooperating with trustee Irving Picard and his team. Members of the trustee's team have interviewed Madoff for many hours in prison. Have you been able to discover what they have learned from Madoff?
I am told that Madoff was useful primarily in providing confirmation of information already obtained elsewhere.

FM: In February of 2010 Judge Louis L. Stanton dismissed a lawsuit filed by the SEC that alleged fraud by Cohmad Securities, one of the "feeder" firms that directed assets to Madoff's firm in exchange for lucrative commissions. With this kind of precedent, what's the government's recourse in prosecuting those businesses possibly connected to the fraud?
There's no doubt that the federal courts are the wild card in the Madoff story going forward. Besides Judge Stanton's ruling in the Cohmad civil case, there have been several decisions by Judge Jed S. Rakoff that have been highly adverse to the Madoff trustee. Those are heading for the appellate court, and until those appeals get sorted out, things are going to remain very uncertain for the trustee and only slightly less murky for the SEC.

FM: In June, Peter Madoff, Bernard's brother, pleaded guilty in Federal District Court in Manhattan, received a prison term of 10 years and forfeiture of $143 billion. As I understand it, as you and Peter Lattman have written in The New York Times, the guilty plea doesn't amount to an admission that Peter knew about or participated in his brother's Ponzi scheme. Rather, it confirms the government's allegations that Peter served as a sham compliance officer who exercised little if any legal oversight over the firm's operation, effectively enabling his brother's crimes. Does this jibe with your research and interviews? Do you see this as a similar prosecutorial tactic that the government will repeat in other Madoff-related cases?
In essence, the government looked at Peter Madoff's failures as a compliance officer and securities industry professional and concluded that they amounted to criminal negligence — even if he did not know that his brother was relying on his charade to conceal a vast Ponzi scheme. Peter was one of the top executives at the firm, an experienced professional, a lawyer by training, familiar with the regulatory system within which he operated. Most other minor figures in the case don't fit that profile. But clearly there are others in the Madoff circle who took advantage of "Bernie's piggy bank" to live large at the company's expense, and they may well be vulnerable to the same kind of IRS charges Peter faced.

FM: The wheels are turning slowly but deliberately. So far, prosecutors have charged 13 defendants with some degree of involvement, and eight of those have pled guilty. Do you foresee many more indictments among Madoff's colleagues and those who work at the feeder firms?
It's certainly possible that more Madoff employees will face charges similar to the tax accusations to which Peter Madoff and another former employee, Craig Kugel, have pleaded guilty. As for the feeder fund personnel, I think criminal prosecution is less likely, at least in this country. Proving criminal intent and guilty knowledge in defendants who were utterly ruined by their trust in Bernie Madoff would be a challenge. Other jurisdictions have legal codes that establish different duties for financial professionals, and they may have better tools to use in the offshore feeder-fund cases.

FM: How do you feel Picard is doing in his quest to recover money for victims?
Picard's work was tarnished by a really dreadful public relations failure in the first two years of his recovery efforts. His duties were poorly explained to the victims and poorly understood by policymakers and the public, and the result was that he became a lightning rod for controversy. In fact, the courts have ruled that he was absolutely right about the most fiercely disputed issue: how to calculate victim claims. He measured an investor's loss as the difference between the cash given to Madoff and the cash received back from Madoff before the scheme collapsed. Those who are disadvantaged by that approach protested loudly and bitterly in every available forum; those who benefitted from that approach, by and large, kept quiet and let Picard fight their battle for them.

So you have to fan away the smokescreen of that controversy to see how he's actually doing. Though out-of-court settlements, he has collected about $11 billion [at press time], including $2 billion that he will administer for the Justice Department. With net-cash losses of about $18 billion, he could produce a recovery of about 60 cents on the dollar right now, if he didn't win another lawsuit or achieve another settlement. As your readers will know, that is a stunning achievement in the world of Ponzi schemes, which typically collapse only when the cash is all gone.

FM: Do you think we've gotten all the useful information out of Madoff that we can get?
I do. He is ill with stage-four kidney disease. He was devastated by his son Mark's suicide and no doubt is furious at the government now for pursuing a criminal case against his brother. He hasn't lifted a finger to help the criminal investigation so far and I don't think it's realistic to expect any great revelation from him in the time he has left.

SeptOct-henirques-4.jpgTHE MADOFF LESSONS

FM: You write that Madoff revealed how diabolically difficult it is for regulators to protect the public in the 21st century. Can you explain that a bit?
It really gets back to a fundamental debate about how to protect investors. Do we do that through a process that securities lawyers call "merit review," where some governmental regulator passes judgment on each investment opportunity before it can be offered to the public? Or do we rely on "full disclosure," hoping that investors will protect themselves if they are provided with enough accurate information about the risks each investment involves.

In 1933, the country went with the "full disclosure" regime and it worked pretty well for a long time. But those were years when retail market on Wall Street consisted largely of wealthy individuals and trust-fund officers, people entirely at home with the jargon of the market and easily able to assess the risks they faced. That is not the world of today. Few individual investors have the time or the financial literacy to manage even a fairly basic investment portfolio. The temptation is to outsource that chore to someone they trust — and bestowing trust on someone is usually an emotional process, not a rational decision. How do we address the risks that arise when people invest as a leap of faith? I don't have a silver-bullet answer — I outline a few out-of-the-box ideas in my book — but I do know that "full disclosure" alone isn't the answer. At a minimum, we must make financial literacy as central to a citizen's education as traditional literacy is.

FM: What are your thoughts on talk about the repeal of all or parts of the Dodd-Frank Act?
Like every financial reform adopted in haste in the wake of a crisis or scandal — from the New Deal legislation that created the SEC in the wake of the 1929 Crash to the Sarbanes-Oxley legislation adopted on the heels of the Enron scandal in 2002 — the Dodd-Frank Act needs some repairs. It engages in an almost laughable amount of micromanaging, and some of its provisions will certainly prove to be more trouble than they're worth. But repealing Dodd-Frank in the name of economic recovery would make a highly dubious statement: that financial regulation is the enemy of growth, not the ally of honest capital. I disagree with that notion and, by the way, so did that founding capitalist philosopher Adam Smith. Our financial history since 1933 shows that strong, smart regulation creates strong, successful markets. We ignore the lessons of history at our peril.

FM: Is bankruptcy court the best place to unravel this case when there are scores of elderly investors are waiting for outcomes? Do you think Picard will have any success in clawing back money from the banks?
In the best of times, bankruptcy is a tediously slow, arcane, methodical and — obviously — legalistic process. Add in the difficulties of an overlapping fraud investigation, one that extends into a dozen foreign jurisdictions, and you have a real Gordian knot. So, no — an American bankruptcy court is not the best place to quickly unravel a global Ponzi scheme. But unfortunately, bad as it is, it's the only place available — unless and until we create some unified, coherent approach to cross-border global bankruptcies. There are some faint signs that we may be moving in that direction, but we have light years to go. As for Picard's ability to collect damages from the banks involved in this scheme, he has lost at the district court level, with his cases against JP Morgan Chase, HSBC and UniCredit all dismissed. He has appealed those rulings on a "fast track" basis, so I'm hopeful we'll see an appellate ruling in the next year. He faces an uphill fight; current prevailing jurisprudence is against him.

FM: Dr. Joseph T. Wells, CFE, CPA, founded the ACFE in 1988 with the express purpose of deterring fraud — stopping it before it even becomes necessary to conduct fraud examinations. What advice can you give Certified Fraud Examiners (CFEs) as they work to deter fraud, especially Ponzi schemes?
The most important lesson the Madoff case teaches anti-fraud professionals is that no deterrence program, however elaborate, will work if it can be switched off for the people we trust most. They are, of course, the people who can steal from us most easily. The second-most important lesson is to understand how easy a Ponzi scheme is to operate — it is simply a liar with a bank account. So it should always be high on the list of possible explanations for financial success — especially if the basic tripwires that make Ponzi schemes more difficult, like the use of a third-party custodian, are not in place.

FM: What can CFEs offer the corporate world, the public sector, nonprofits and society to help prevent fraud?
More than anything else, a profound understanding of what can go wrong. A CFE should be the person who reminds clients, in whatever sector, that sometimes their worst nightmares can actually come true if they do not take protective action.

FM: Why do CFEs need to try to understand the mind of Madoff?
Both because he was fundamentally different from our stereotype of the classic Ponzi schemer and because he was also precisely like every successful Ponzi schemer in his capacity to inspire trust, deflect questions and face down suspicion. There are legions of Bernie Madoffs out there — as the regulatory history since his arrest has shown.

FM: You conducted more than 100 interviews — including with both Bernie and Ruth Madoff — in preparing for this book. How were you able to persevere? What kinds of systems do you use to keep the thousands of details straight?
There's no way to sugarcoat it: Writing a book takes a vast amount of work and occupies an unbelievable amount of your mental real estate. I simply could not have done it if I hadn't been utterly fascinated by the timeless power of the Madoff story. That's why I warn budding writers: If you wouldn't stay up all night to read more about some topic, don't try to turn that topic into a book. If you're not that passionately interested, working on the book will feel like forced labor on a chain gang by the time you're finished.

It also helped that I had years of experience in organizing complicated long-term investigative projects for The New York Times. I knew that one of my earliest steps had to be the construction of a master chronology, so that information obtained from each new document or interview could be fitted into its proper place in time. Next, using a trusty searchable thumb drive that I backed up regularly, I set up an elaborate system of electronic "folders," cross-referencing material by topic (for example, "the S.E.C.'s role"), by group (for example, "The Feeder Funds") and by name (for example, "Madoff, Peter"). With that structure in place, I stored electronic versions of hundreds of lawsuits, interviews, government reports, photographs and court exhibits in the appropriate folders — and I could easily tuck a copy of a document into any other folder that seemed relevant.

FM: What propels you to be a business writer? What excites you about the newspaper business?
I first decided to be a journalist when I was a young teenager — I just fell in love with the atmosphere of excitement and curiosity and fellowship that seemed to fill the first newsroom I ever saw, in my hometown of Roanoke, Va. But my original intention was to cover government and political news. (Well, my very first intention was to be a foreign correspondent, but marriage to a U.S.-based business executive happily trumped that ambition!) Around 1980, while covering state and local government for The Trenton (N.J.) Times, I stumbled onto a cronyism scandal involving a state public revenue-bond authority — one of the many thousands of revenue-bond authorities created in the image of the formidable Port Authority of New York and New Jersey. To bushwhack my way through that story, I had to master the arcane workings of the tax-exempt bond market. Once I got my head around it, the bond markets — indeed, all markets — simply fascinated me. More importantly, I could readily see how much power these financial markets have over how we all live our daily lives and how important it was for those of us in the media to translate the consequences of that power into stories the general reader, the average citizen, could understand. So that became my mission.

Because there were almost no women in journalism when I hatched my career ambitions, my mom kept hoping I'd become a teacher. In a way, I think I have.

Dick Carozza, CFE, is editor in chief of Fraud Magazine

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