How Bernie did it
Madoff is behind bars and isn't talking. But a Fortune investigation uncovers secrets of his massive swindle.
By James Bandler and Nicholas Varchaver
Last Updated: April 24, 2009: 7:19 AM ET
NEW YORK (Fortune) -- The employees were transfixed. Standing on the mid-Manhattan trading floor of Bernard L. Madoff Investment Securities in late 2007, a half-dozen staffers stared up at the ceiling-mounted TV as CNBC aired a report on the mysterious Palm Beach death of a hedge fund manager who had been leading a double life. The police, it appeared, were even considering the possibility that he had been murdered. "Bernie," someone casually asked as Madoff happened to walk by, "have you heard of this guy?"
Madoff glanced at the screen, blanched, and exploded: "Why the fuck would I be interested in some shit like that?" The employees recoiled. "I never saw him react like that before," says a Madoff trader who witnessed the outburst. "It obviously hit a nerve."
Such a loss of control was highly out of character for the boss. But the traders didn't know at the time that Madoff had an extraordinarily elaborate second life going on just two floors below them, one that was building toward an epic, and inevitable, explosion. It took a special pass to get into the "back office" on 17, where Madoff was conducting his $65 billion Ponzi scheme. And even if a person could get in, there wasn't much to see: an antiquated IBM computer server kept in a locked room, piles of trading statements, and a staff of about 20 paper pushers and clerks.
In retrospect, of course, there were clues, as a Fortune investigation has discovered. The IBM server, for instance, an AS/400 that dated from the 1980s, was so old that some data had to be keyed in by hand, yet Madoff refused to replace it. The machine -- which has been autopsied by the government -- was the nerve center of the fraud. The thousands of pages of statements printed out from it showed trades that were never made.
Then there was the man who ran the floor, Frank DiPascali, Madoff's chief deputy on 17. He was a 33-year veteran of the firm, with a rough Queens accent and a high-school education, but nobody was quite sure what he did or what his title was. "He was like a ninja," says a former trader in the legitimate operation upstairs. "Everyone knew he was a big deal, but he was like a shadow."
There were other mysteries, as we shall see. But even after it detonated five months ago in a fireworks display of betrayal and recrimination, Madoff's scheme -- possibly the biggest investment fraud in the nation's history -- has remained among the hardest to penetrate. Most commonly, white-collar cases begin with a quiet, behind-the-scenes investigation, followed by a series of deals with junior employees, who are squeezed by prosecutors to cough up details about their superiors. Step by step, the prosecutors move up. Finally comes the denouement: the ringmaster hauled into court in handcuffs.
But with Madoff every aspect of that traditional narrative has been inverted. The case began with his flabbergasting confession, which set off the investigation. Madoff claimed he committed his crimes all by himself, but because they spanned decades and continents, a fog of suspicion immediately engulfed Madoff family members who worked at the firm, as well as employees and business associates.
Now that fog may be about to lift. Fortune has learned that Frank DiPascali is trying to negotiate a plea deal with federal prosecutors in which, in exchange for a reduced sentence, he would divulge his encyclopedic knowledge of Madoff's scheme. And unlike his boss, DiPascali is willing to name names.
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http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/index.htm?postversion=2009042406
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