Madoff's scheme

Madoff Scheme Kept Rippling Outward, Across Borders

By Diana B Henriques

New York Times 20 December 2008

By the end, the world itself was too small to support the vast Ponzi scheme constructed by Bernard L. Madoff.
Initially, he tapped local money pulled in from country clubs and charity dinners, where investors sought him out to casually plead with him to manage their savings so they could start reaping the steady, solid returns their envied friends were getting.

Then, he and his promoters set sights on Europe, again framing the investments as memberships in a select club. A Swiss hedge fund manager, Michel Dominicé, still remembers the pitch he got a few years ago from a salesman in Geneva. “He told me the fund was closed, that it was something I couldn’t buy,” Mr. Dominicé said. “But he told me he might have a way to get me in. It was weird.”
Mr. Madoff’s agents next cut a cash-gathering swath through the Persian Gulf, then Southeast Asia. Finally, they were hurtling with undignified speed toward China, with invitations to invest that were more desperate, less exclusive. One Beijing businessman who was approached said it seemed the Madoff funds were being pitched “to anyone who would listen.”

The juggernaut began to sputter this fall as investors, rattled by the financial crisis and reaching for cash, started taking money out faster than Mr. Madoff could bring fresh cash in the door. He was arrested on Dec. 11 at his Manhattan apartment and charged with securities fraud, turned in the night before by his sons after he told them his entire business was “a giant Ponzi scheme.”

The case is still viewed more with mystery than clarity, and Mr. Madoff’s version of events can only be drawn from statements attributed to him by federal prosecutors and regulators as he has not commented publicly on the case. But whatever else Mr. Madoff’s game was, it was certainly this: The first worldwide Ponzi scheme — a fraud that lasted longer, reached wider and cut deeper than any similar scheme in history, entirely eclipsing the puny regional ambitions of Charles Ponzi, the Boston swindler who gave his name to the scheme nearly a century ago.
“Absolutely — there has been nothing like this, nothing that we could call truly global,” said Mitchell Zuckoff, the author of “Ponzi’s Scheme: The True Story of a Financial Legend” and a professor at Boston University. These classic schemes typically prey on local trust, he added. “So this says what we increasingly know to be true about the world: The barriers have come down; money knows no borders, no limits.”

While many of the known victims of Bernard L. Madoff Investment Securities are prominent Jewish executives and organizations — Jeffrey Katzenberg, the Spitzers, Yeshiva University, the Elie Wiesel Foundation and charities set up by the publisher Mortimer B. Zuckerman and the Hollywood director Steven Spielberg — it now appears that anyone with money was a potential target. Indeed, at one point, the Abu Dhabi Investment Authority, a large sovereign wealth fund in the Middle East, had entrusted some $400 million to Mr. Madoff’s firm.

Regulators say Mr. Madoff himself estimated that $50 billion in personal and institutional wealth from around the world was gone. It vanished from the estates of the North Shore of Long Island, from the beachfront suites of Palm Beach, from the exclusive enclaves of Europe. Before it evaporated, it helped finance Mr. Madoff’s coddled lifestyle, with a Manhattan apartment, a beachfront mansion in the Hamptons, a small villa overlooking Cap d’Antibes on the French Riviera, a Mayfair office in London and yachts in New York, Florida and the Mediterranean.
Just as the scheme transcended national borders, it left local regulators far behind. Its lies were translated into a half-dozen languages. Its larceny was denominated in a half-dozen currencies. Its warning signals were missed by enforcement agencies around the globe. And its victims are now scattered from Hollywood to Zurich to Abu Dhabi.

Indeed, while the most visible pain may be local — an important charity forced to close, an esteemed university embarrassed, a fabric of community trust shredded — the clearest lesson is universal: When money goes global, fraud does too.

Bernie Who?

In 1960, as Wall Street was just shaking off its postwar lethargy and starting to buzz again, Bernie Madoff (pronounced MAY-doff) set up his small trading firm. His plan was to make a business out of trading lesser-known over-the-counter stocks on the fringes of the traditional stock market. He was just 22, a graduate of Hofstra University on Long Island.
By 1989, Mr. Madoff ‘s firm was handling more than 5 percent of the trading volume on the august New York Stock Exchange, and Financial World magazine ranked him among the highest-paid people on Wall Street — along with two far more famous financiers, the junk bond king Michael Milken and George Soros, the international investor.
And in 1990, he became the nonexecutive chairman of the Nasdaq market, which at the time was operated as a committee of the National Association of Securities Dealers.
His rise on Wall Street was built on his belief in a visionary notion that seemed bizarre to many at the time: That stocks could be traded by people who never saw each other but were connected only by electronics.

In the mid-1970s, he had spent over $250,000 to upgrade the computer equipment at the Cincinnati Stock Exchange, where he began offering to buy and sell stocks that were listed on the Big Board. The exchange, in effect, was transformed into the first all-electronic computerized stock exchange. “He was one of the early innovators,” said Michael Ocrant, a journalist who has been a longtime skeptic about Mr. Madoff’s investing success. “He was known to promote the idea that trading would be going electronic — and that turned out to be true.”

He also invested in new electronic trading technology for his firm, making it cheaper for brokerage firms to fill their stock orders. He eventually gained a large amount of business from big firms like A. G. Edwards & Sons, Charles Schwab & Company, Quick & Reilly and Fidelity Brokerage Services. “He was really a low-key guy. No one knew him outside of the sphere of market makers and people in the trading and brokerage business,” said Richard B. Niehoff, who was president of the Cincinnati exchange in the mid-1980s.

Mr. Madoff’s push to modernize trading did not make him popular with the traditional traders on the floor of the New York Exchange, as more of its orders were sent to his firm — partly because he was faster and cheaper, but also because he paid for those orders. Mr. Madoff pioneered a controversial practice called “payment for order flow.” He would pay big players like Fidelity and Schwab to send their customer orders to his firm instead of to the New York Exchange or other regional exchanges.

The floor traders at those traditional exchanges claimed he was, in essence, paying bribes and that brokers steering business to him were not really getting the best prices for their customers.
Those complaints led to Congressional hearings, but Mr. Madoff made no apologies. He insisted the order-flow payments were necessary to inject greater competition into the marketplace and reduce the near monopoly of the Big Board.

As the debate received more attention, Mr. Madoff became increasingly better known in the financial world. By the end of the technology bubble in 2000, his firm was the largest market maker on the Nasdaq electronic market, and he was a member of the Securities Industry Association, now known as the Securities Industry and Financial Markets Association, Wall Street’s principal lobbying arm. Still, one Wall Street heavyweight who knew him in those days said he remained “a self-effacing kind of guy,” more likely to spend time on the Riviera than at parties with other traders.

Local Hero

Unlike some prominent Wall Street figures who built their fortunes during the heady 1980s and ’90s, Mr. Madoff never became a household name among American investors. But in the clubby world of Jewish philanthropy in the New York area, his increasing wealth and growing reputation among market insiders added polish to his personal prestige. He became a generous donor, then a courted board member and, finally, the money manager of choice for many prominent regional charities.

A spokeswoman for the New York Community Trust, Ani Hurwitz, recalled a Long Island couple who asked the trust in 1994 to invest their proposed $20 million fund with Mr. Madoff. “We have an investment committee that oversees all investments, and they couldn’t get anything out of him, no information, nothing,” Ms. Hurwitz said. “So we told the donors we wouldn’t do it.”
But many charities did entrust their money to Mr. Madoff, to their eventual grief. The North Shore-Long Island Jewish Health System, for instance, reported that it had lost $5.7 million on an investment with Mr. Madoff that was made at the donor’s behest. (That donor has pledged to cover the loss for the hospital system, its spokesman said.)

Other groups saw the handsome returns on those initial investments and put more of their money into Mr. Madoff’s firm, their leaders said. “Look, for years we made money,” one said.
Most successful business executives intertwine their personal and professional lives. But those two strands of Mr. Madoff’s life were practically inseparable. He sometimes used his 55-foot fishing boat, Bull, as a floating entertainment center for clients. He used his support of organizations like the Public Theater in Manhattan and the Special Olympics to build a network of trust that began to stretch wider and deeper into the Jewish community.

Through friends, the Madoff network reached well beyond New York. At Oak Ridge Country Club, in suburban Hopkins, Minn., known for a prosperous Jewish membership, many who belonged were introduced to the Madoff firm by one of his friends, Mike Engler.
The quiet message became familiar in similar pockets of Jewish wealth and trust: “I know Bernie. I can get you in.” Mr. Engler died in 1994, but many Oak Ridge members remained clients of Mr. Madoff. One elderly member, who said he was too embarrassed to be named, said he had lost tens of millions of dollars, and had friends who had been “completely wiped out.”
Dozens of now-outraged Madoff investors recall that special lure — the sense that they were being allowed into an inner circle, one that was not available to just anyone. A lawyer would call a client, saying: “I’m setting up a fund for Bernie Madoff. Do you want in?” Or an accountant at a golf club might tell his partner for the day: “I can make an introduction. Let me know.” Deals were struck in steakhouses and at charity events, sometimes by Mr. Madoff himself, but with increasing frequency by friends acting on his behalf.

“In a social setting — that’s where it always happened,” said Jerry Reisman, a lawyer from Garden City, N.Y., who knew Mr. Madoff socially. “Country clubs, golf courses, locker rooms. Recommendations, word of mouth. That’s how it was done.”

At exclusive retreats like the Palm steakhouse in East Hampton, Mr. Madoff would work the tables or receive friends at his own, building a following that came to include lawyers, doctors, real estate developers and accountants. Tomas Romano, a manager at the Palm, recalled that “people always came to talk with him” at the restaurant. “He was very well known.” At his golf clubs — the Atlantic in Bridgehampton and the Palm Beach Country Club in Florida, for example — he frequently shot in the 80s, but often seemed far more interested in his fellow members, many of whom became investors, than in the game itself.

With his wife, Ruth, a nutritionist and cookbook editor, they were considered affable and charming people. “They stood out,” Mr. Reisman said. “Success, philanthropy, esteem — and, if you were lucky enough to be with him as an investor, money.” He added: “That was the most important thing; he was looked on as someone who could make you money. Really make you money.”

The Go-Betweens

By the mid-1990s, as Mr. Madoff’s wealth and social standing grew, he had moved far beyond the days when golf-club buddies were setting up side deals to invest with him through their lawyers and accountants. Some of the most prominent Jewish figures in high finance and industry began to court Bernie Madoff — and, through them, he reached a new orbit of wealth.
He could not have had a more effective recruiter than Jacob Ezra Merkin, a lion of Wall Street who would be president of the Fifth Avenue Synagogue. Mr. Merkin’s father, Hermann, was the founding president of the synagogue and Herman Wouk, the author, wrote its constitution.
As a direct descendant of the founder of modern Orthodox Judaism and a graduate of Columbia’s English department and Harvard’s law school, Mr. Merkin easily held his own in a congregation that included such luminaries as the author Elie Wiesel, the deal maker Ronald O. Perelman and Ira Rennert, a wealthy financier perhaps best known for building one of the biggest houses and compounds in the Hamptons.

Mr. Merkin was fluent in Jewish and secular studies, as comfortatle quoting Psalms as William James. In 1985, after a few years of practicing law at a top-tier firm, now known as Milbank, Tweed, Hadley & McCloy, he started the investment firm that would become Gabriel Capital Group. He contributed to a popular textbook on investing, lived in an art-filled Park Avenue apartment and continued his family’s legacy of generosity. Philanthropies embraced him. He headed the investment committee for the UJA-Federation of New York for 10 years and was on the boards of Yeshiva University, Carnegie Hall and other nonprofit organizations. He became the chairman of GMAC. Installed in these lofty positions of trust, Ezra Merkin seemed to be a Wall Street wise man who could be trusted completely to manage other people’s money. One vehicle through which he did that was a fund called Ascot Partners.

It was one of an unknown number of deals that prominent financial figures set up in recent years and marketed to investors, who thought they were tapping into the acumen of some Wall Street titan, like Mr. Merkin.

As it turned out, their money wound up in the same place — in Bernie Madoff’s hands.
These conduits began to steer billions of dollars into the Madoff operation. They operated below the financial radar until Mr. Madoff’s scheme collapsed, when investors suddenly got letters from the sponsoring titan disclosing that all or most of their money was probably gone.
Ascot itself attracted $1.8 billion in investments, almost all of which was entrusted to Mr. Madoff. New York Law School put $3 million into Ascot two years ago, and has now initiated a lawsuit in federal court that accuses Mr. Merkin of abdicating his duties to the partnership.
Mortimer Zuckerman, the billionaire owner of The Daily News, rebuked Ascot in a televised interview, saying he had been misled about what Mr. Merkin had done with some $30 million from Mr. Zuckerman’s charitable foundation.

Behind a wall of lawyers, Mr. Merkin did not take calls this week. In the “Dear Limited Partner” letter he sent on Dec. 11, he noted that he, too, was one of Mr. Madoff’s victims and suffered big losses alongside his investors. He has taken steps to wind down his Ascot, Gabriel, and Ariel funds. Still, some of his clients are stunned, and angry, to learn what Mr. Merkin did with their millions, while collecting an annual management fee of 1.5 percent of the assets for his services.
But before the losses and the outraged cries of betrayal, this was a heady way to steer money into an operation that has now been branded, by its own architect, as a Ponzi scheme. And nothing illustrates what a quantum leap it was for Mr. Madoff than the connections that led Tufts University to entrust him with $20 million in 2005.

Tufts did not actually send a check to Bernard L. Madoff Investment Securities. Rather, it invested in Ascot Partners, Mr. Merkin’s partnership. Mr. Merkin had been a major investor in a company whose board included James A. Stern, the chairman of the Tufts investment committee and a principal in a major private investment firm in New York called the Cypress Group.

Behind these veils of paperwork and partnerships, Mr. Madoff’s reach now extended into the top tiers of Jewish finance and philanthropy, where he rubbed shoulders with corporate directors and prominent hedge fund managers. But there were wider worlds to conquer.

The Circle Grows

Walter M. Noel was the courtly public face of the Fairfield Greenwich Group, the investment firm he started in 1983. A native of Tennessee, Mr. Noel had spent time at larger firms, notably at Chemical Bank, where he headed its international private banking practice, before setting out on his own. From the beginning, the Noel family was built on access to prestigious social circles. Mr. Noel’s wife, Monica, was part of the prominent Haegler family of Rio de Janeiro and Zurich, and their daughters would marry into international families that provided additional connections for the firm.

In 1989, Mr. Noel merged his business with a small brokerage firm whose general partner was Jeffrey Tucker, a longtime New Yorker who had a law degree from Brooklyn Law School and a résumé that included eight years with the enforcement division of the Securities and Exchange Commission. Again and again, this pedigreed experience was emphasized by Fairfield as it built itself into a fund of funds, investing in other hedge funds. It boasted to its prospects that its investigation of investment options was “deeper and broader” than those of most firms because of Mr. Tucker’s experience in the regulatory ranks.

Though he is not nearly as prominent as the Noels, who move in the forefront of Connecticut society, Mr. Tucker benefited just as much from Fairfield’s success. Indeed, last year he led a coalition of thoroughbred racing interests that sought to bid for New York State’s horse-racing franchise. But it was Mr. Tucker who introduced Fairfield to Mr. Madoff. In the early 1990s, Fairfield began placing money with him, according to George L. Ball, the former president of E. F. Hutton and Prudential-Bache chief executive who knows Mr. Noel socially.

That began a long partnership that helped the Fairfield firm earn enviably steady returns, even in down markets — and that lifted Mr. Madoff into a global orbit, one that soon extended his reach into some of the most fabled banking centers of Europe.

If the wealthy Jewish world he occupied was his launch pad, the wealthy promoters he cultivated at Fairfield Greenwich were his booster rocket. The Fairfield Sentry fund was one of several so-called feeder funds that became portals through which money from wealthy foreign investors would could capitalize on Mr. Madoff’s investment prowess — collecting those exclusive, steady returns that had made him the toast of Palm Beach and the North Shore so many years ago.
The Sentry fund quickly became Fairfield’s signature product, and it boasted of stellar returns. In marketing materials, Fairfield trumpeted Sentry’s 11 percent annual return over the last 15 years, with only 13 losing months. It was a track record that grew increasingly attractive as markets grew more volatile in recent years.

Though Fairfield Greenwich has its headquarters in New York City and its founder, Mr. Noel, operated from his hometown, Greenwich, Conn., a recent report showed that foreign investors provided 95 percent of its managed assets — with 68 percent in Europe, 6 percent in Asia, and 4 percent in the Middle East. Friends and associates say that Mr. Noel’s sons-in-law spent much of their time marketing the firm’s funds in either their home countries or regions where they had their own family connections.

One of his most visible representatives was Andrés Piedrahita, a Colombian who had married Mr. Noel’s eldest daughter, Corina, and was eventually named a Fairfield founding partner. Based in Madrid and London, Mr. Piedrahita became one of the firm’s most visible representatives in the world of European banking and investment. But his brothers-in-law also had international roots. Yanko Della Schiava, who married Lisina Noel, was the son of the editor of Cosmopolitan in Italy and of the editor of Harper’s Bazaar in Italy and France. Philip J. Toub, who married Alix Noel, is the son of a director of the Saronic Shipping Company, in Lausanne, Switzerland. Matthew Brown, who married Marisa Noel, is the son of a former mayor of San Marino, Calif. All three joined Fairfield, eventually becoming partners in marketing.

Thanks to the efforts of Mr. Piedrahita, Mr. Della Schiava and others, Fairfield reaped many millions of dollars in investor capital from Europe. The firm set up feeder programs with institutions like Banco Santander, Swedish Bank Nordea and Banque Benedict Hentsch. All became conduits that carried fresh money to Mr. Madoff.

Among his new investors were the Mugrabis, extremely wealthy art collectors from Colombia who have lived in New York for more 20 years. It was their longtime friendship with Mr. Piedrahita that led them to invest in the Sentry fund. “We had very little money with the fund — just under a million dollars — so I am not that upset personally,” said Alberto Mugrabi, a son of the family patriarch. “It was a very informal thing. We know Andrés since forever, from Bogotá, he’s a great guy, and he says to us, ‘This is the Madoff thing, he’s the master.’” He added: “I trusted Andrés. I still trust him.”

The World

Mr. Madoff’s higher profile in the highly competitive world of hedge fund management intensified the skepticism about his remarkably consistent returns. Rival money managers complained that when they sought to replicate his trading strategy based on the statements the Madoff firm sent its clients, they found it wasn’t possible.
There was a scattering of inconclusive regulatory investigations — efforts so unavailing that the chairman of the S.E.C. in Washington has ordered an internal investigation to determine how the agency could have missed so many red flags and ignored so many credible complaints over the years. But foreign regulators were not any quicker to notice Mr. Madoff’s oddities — or the rapidly expanding pool of money entrusted to the various feeder funds he serviced.

There was the small Austrian merchant bank, Bank Medici, which had $2.1 billion invested in funds that ultimately wound up under Mr. Madoff’s control. It collected those investments through two main funds, the Herald USA Fund and the smaller Herald Luxemburg Fund, sold to banks, insurance companies and pension funds since 2004.

The funds, which were closed for private investors, were incredibly popular among investors and no questions were ever asked about its constant returns of about 7 percent, said a former employee at the bank who declined to be identified because he is not authorized to talk to the news media.

Bank Medici sold the funds to investors around the world from its offices in New York, Vienna, Gibraltar, Zurich and Milan. About 93 percent of the funds’ investors are outside Austria. Just last month, the Herald USA fund won Germany’s annual Hedge Fund Awards for “proving consistency in turbulent times.“ Peter Scheithauer, chief executive of Bank Medici since September, accepted the award, saying Bank Medici’s products “should represent mainly one thing: security and returns in good as well as bad times.“ But as he prepared to brief his management board on potential losses connected to the Madoff investments on Friday, he sounded downbeat. “It’s a real tragedy,” Mr. Scheithauer said. “It’s not just us, it’s so many other people as well. If only we knew, but he was paying out fine until just recently.”
Bank Austria, which is now owned by UniCredit of Italy, owns a stake in Bank Medici and also wound up investing with Mr. Madoff through a range of different funds offered under the name Primeo by its hedge fund unit, Pioneer Alternative Investments.

Mr. Madoff was not a well-known presence on the social circuit in Switzerland. Instead, Swiss money managers would go to him, visiting his offices in the Lipstick Building in Midtown Manhattan. Seeing Mr. Madoff there was a bit like visiting the Wizard of Oz: despite his unerring success in generating smooth returns, he seemed quite ordinary, lacking the flamboyance of other well-heeled money managers. “He did not look like a huge spender; seemed like a family man,” said one veteran Geneva banker, whose firm had money with Mr. Madoff but insisted on anonymity because of the likelihood of lawsuits from angry clients. “He talked about the markets.”

The only thing that struck the Swiss banker as odd was the bull memorabilia strewn about his office. “It seemed strange for a guy to have all these bulls, little sculptures, paintings of bulls,” he recalled. “I’ve seen offices with bears. This was bulls.” But the aura of exclusivity was the constant, he said. “This was the usual spiel: ‘It’s impossible to get in, but we can get you some if you’re nice.’ He made it look difficult to get into.”

New Frontiers

What began as a quietly coveted investment opportunity for the lucky few in the Jewish country clubs on Long Island became, in its final burst of growth, a thoroughly global financial product whose roots were obscured behind legions of well-dressed, multilingual sales representatives in the financial capitals of Europe.

Indeed, often with the assistance of feeder funds, Mr. Madoff was now in a position to seek and procure money from Arab investors, too. The Abu Dhabi Investment Authority, one of the largest of the world’s sovereign wealth funds, with assets estimated earlier this year to be approaching $700 billion, wound up in the same boat as Jewish charities in New York: caught in the collapse of Bernie Madoff.

In early 2005, the investment authority had invested approximately $400 million with Mr. Madoff, by way of the Fairfield Sentry Fund, according to a profile of the firm that it prepared for a prospective buyer in 2007. Fairfield Sentry had more than $7 billion invested with Mr. Madoff and was his largest investor; now, it says, it is his largest victim. The investment authority, in turn, was one of Fairfield Sentry’s largest investors. Even after the investment authority took two significant redemptions from the fund, in April 2005 and 2006, its stake the following year of $132 million made up 2 percent of the fund’s assets under management.

The 2007 report lists Philip Jamchid Toub, one of Mr. Noel’s sons-in-law, as the firm’s “agent” with the Abu Dhabi investors, presumably meaning the person who manages the relationship with the particular clients. Mr. Toub, a Fairfield Greenwich partner, is married to Alix Noel and is the son of Said Toub, a wealthy shipping executive from Switzerland. Other investors for whom Mr. Toub is listed as the agent include the Safra National Bank of New York and the National Bank of Kuwait.

And Fairfield was finding new fields for Mr. Madoff to cultivate. In 2004, the firm turned its eyes to Asia, forming a partnership with Lion Capital of Singapore, now Lion Global Investors, to create Lion Fairfield Capital Management, a joint venture meant to introduce Asian investors to the firm. “Many investors believe that Asia holds the best global opportunities for hedge funds over the next two to five years, as compared to the U.S. and Europe,” Richard Landsberger, a Fairfield partner and director of Lion Fairfield, told HedgeWorld in 2006.

Yet it appears that Sentry remained Fairfield’s chief focus in this new vineyard. Among the institutions that had invested in the fund are Korea Life Insurance, which has about $30 million to $50 million in the fund; a Taiwanese insurer, Cathay Life, with about $12 million; and Samsung Investment and Securities, with about $6.3 million.

As Fairfield moved into Asia, another feeder fund, Stellar US Absolute Return, was incorporated in Singapore in 2006 to funnel investors’ capital into Sentry. According to data from Bloomberg News, Stellar borrowed $3 for every dollar of investor money it received, in an effort to extract higher returns.

Last year, Jeffrey Tucker went to Asia to educate potential investors in Beijing and Thailand about hedge funds, seeking to allay their concerns about previous blow-ups in the industry like Long-Term Capital Management, a Connecticut hedge fund that had been rescued under the supervision of the Federal Reserve Bank of New York when its exotic derivative investments brought it to the brink of a costly collapse.
“China is moving slowly as the reformers become familiar with what we do,” Mr. Tucker told HedgeWorld in November 2007. “It’s the same thing in Thailand. There are misunderstandings about hedge funds.”

The Scheme Collapses

But even with all the money pouring in, it was not enough, not in a year in which financial markets were plunging.

Suddenly, people wanted cash — even the people who had trusted their cash for so long to Mr. Madoff. Time was running out for history’s first worldwide Ponzi scheme.
But he maintained a brave face at the family firm that he had founded before his sons Mark and Andrew were born, and where they now worked, the firm where his brother Peter had labored at his side for decades, the firm that remained a stock-trading powerhouse on Wall Street.
But that trading business lived on the 18th and 19th floors of the Third Avenue tower, called the Lipstick Building, that was home to Bernard L. Madoff Investment Securities. Mr. Madoff operated his vast but largely unseen “asset management” business from the 17th floor, aided by a small staff that had been with him for years and a computer system separate from the trading business.

His family knew Mr. Madoff had an investment management business, but Mr. Madoff had always kept it separate. Moreover, he explained that he placed his trades through “European counterparties” rather than use the trading desks his sons oversaw.

But Mark and Andrew felt their father had been under increasing tension as the markets grew increasingly difficult this fall. In early December he remarked to one of them that he was struggling to raise $7 billion to cover redemptions. He seemed tired and drawn, but so was just about everyone else during the turbulent weeks of late November and early December.
Then, early on Dec. 10, he shocked his sons by suggesting that the firm pay out several million dollars in bonuses two months ahead of schedule. When pressed by his sons for a reason, he grew agitated and insisted that they all leave the office and continue the conversation at his apartment on East 64th Street.

It was there, at midmorning, that he told his sons that his business was “a big lie” and, “basically, a giant Ponzi scheme.” There was nothing left, he told them — and he fully expected to go to jail.
The questions have piled up since then: Could Mr. Madoff have sustained this worldwide fraud for so long by himself? Why didn’t regulators, in Washington and abroad, catch him sooner? And will anything be recovered for investors, some of whom have lost every penny?

But when the news of his arrest began to spread on Dec. 11, the first thought that struck an old friend who had known him as a pioneer on Wall Street, was, “There must be an error. It must be another Bernie Madoff.” Then he added, “But then, there is no other Bernie Madoff.”

This article was reported by Diane B. Henriques, Alex Berenson, Alison Leigh Cowan, Alan Feuer, Zachery Kouwe, Eric Konigsberg, Nelson D. Schwartz, Michael J. de la Merced, Stephanie Strom, Julia Werdigier and Dirk Johnson.