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CNN Live Event/Special
Madoff: Secrets of a Scandal
Aired January 10, 2009 - 20:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CHRISTINE ROMANS, CNN ANCHOR: Call it the scandal that rocked Wall Street, shook up Main Street and caused financial tremors around the world. We aren't just talking millions. Bernard Madoff's alleged Ponzi scheme cost folks around the world billions. You may have heard the headlines. It's time now to dig deeper, deeper into the depths of "Madoff: Secrets of a Scandal."
Hello, everyone. I'm Christine Romans and this is "Madoff: Secrets of a Scandal," a CNN Fortune special investigation. "Fortune" managing editor Andy Serwer will join us just in a minute but we begin with the basics.
Prosecutors say Bernard Madoff admitted he ran a 50 billion dollar ponzi scheme, that old classic scam, paying old investors with money raised from new ones. How is it Bernie Madoff may have fooled so many for so long, destroying fortunes and lives?
ROMANS (voice-over): Bernie Madoff was like money in the bank.
MAURIEL SHEBERT, PRESIDENT, SHEBERT AND CO: He was a genius. You could count on a steady return.
ROMANS: Steady, safe.
UNIDENTIFIED MALE: He was a superstar. He was the Alex Rodriguez of Wall Street.
ROMANS: A successful Wall Street veteran, with the Montauk estate, the Palm Beach mansion, the yacht in France named Bull.
PROF. JIM ANGEL, GEORGETOWN UNIVERSITY: This guy was like a t- bill. Bernie Madoff was a pioneer in trading technology. The last guy I would have suspected of something like this.
ROMANS: An a-list of clients, actors Kevin Bacon and Kyra Sedgwick, universities, hospitals, foundations, like Stephen Spielberg's, Mort Zuckerman's, Elie Weisel's. Some clients didn't even know their money managers gave their savings to Madoff. Others clamored to get in.
JERRY REISMAN, MADOFF ACQUAINTANCE:: I think he did it in a brilliant way. If approached, he would say, the fund is closed. And someone would really have to snow him to recommend you to get into that club. ROMANS: He was sought after, respected. But Bernie Madoff had a secret, kept here in the Landmark Lipstick Building on Manhattan's East 53rd Street, all the way up on the 17th floor, Madoff's private refuge, his hedge fund office. One set of doors unmarked. The other marked simply "Madoff Deliveries."
In these halls, Madoff's secret was safe until early December. According to the criminal complaint, clients were trying to withdraw seven billion dollars of their money. Madoff didn't have it. He was visibly under great stress, his sons later told the FBI. He was trying to pay out millions in bonuses two months early, a sign something was terribly wrong.
His sons, company executives, went to the Lipstick Building and challenged their father in his office. According to the criminal complaint, Madoff told them he couldn't hold it together at the office. He asked his sons to meet him instead at his 64th Street penthouse.
(on camera): It was here in the penthouse apartment the secret spilled out. Investigators say Madoff told his sons the advisory business was one big lie, basically, he told them, a giant ponzi scheme. He was finished. The investment business was a fraud.
(voice-over)(: It's all there in the crisp black and white of the criminal complaint. Madoff, confronted by the FBI, admits, "there's no innocent explanation."
Back in Madoff's office, investigators found 173 million dollars in signed checks, ready to be mailed. It was, as the tabloids called it, Madoff's 50 billion dollar lie. Bernie, the t-bill, now the most hated man in New York. The lobby of Madoff's office building filled with shocked and angry clients. The normally quiet 17th floor taken over by investigators.
Muriel Seibert has known Madoff 30 years. Her investment company is right down the hall.
SEIBERT: You had him running that amount of money, and it was all done on faith and trust.
ROMANS (on camera): Right next door to you?
SEIBERT: Right next door to me, down the hall. For a while, I couldn't go to the ladies room. I was tripping over FBI people. They have done nothing.
ROMANS (voice-over): Now she's counseling friends who have been wiped out. But for some, it was apparently too much. A French money manager had steered clients to Madoff. He was found dead in his Madison Avenue office, an apparent suicide.
If true, it was the largest ponzi scheme in history. Author Mitchell Zukoff said Madoff perfected the modern ponzi scream.
MITCHELL ZUKOFF, AUTHOR: Call it an evil genius. People could be mistrustful if he was returning 30 percent or 50 percent. But by being this metronome of 10 percent, 14 percent, that's what these people were looking for.
ROMANS: It may have seemed safe, but in the end, Madoff was the riskiest move investors ever made.
ROMANS: And now even before a trial, Bernie Madoff's name is already synonymous with scandal and greed. Andy Serwer with us now.
ANDY SERWER, "FORTUNE MAGAZINE": Thanks, Chris. Over at "Fortune Magazine," we've been covering this story every day. The big question we all have is how could this have happened? Joining us are writers Telis Demos, Katie Benner and Allan Sloan.
Allen, let me start with you, ask you very simply, how is it that one man could have fooled so many thousands of investors?
ALLAN SLOAN, "FORTUNE MAGAZINE": Well, it's real easy. You start out with the first investors, however you get them. If they're serious people and Madoff has a reputation, then people follow each other in without doing their home work. It's like that scene in the circus where the elephants are on each other's tails and they just follow each other in. And one day you wake up, and suddenly you realize you've been a fool. And by then it's too late.
SERWER: Some of those elephants, Katie, were big names, famous people, celebrities, also very sophisticated investors. What are some of the people who were caught up in this.
KATIE BENNER, "FORTUNE MAGAZINE": I think there were names like Steven Spielberg. He went in through a conduit. You can understand why, because he was going through a trusted investment adviser. There were others names that were more ironic, like Eliot Spitzer. You would think that somebody known for busting crime on Wall Street would have done a little bit more due diligence when investing his family's movie. Of course, he was caught up in the scheme as well.
Mort Zuckerman, who owns the "Daily News." There were a lot of people, a lot of bold-faced names, in New York who trusted Madoff and around the country.
SERWER: Chris, it wasn't just famous people in LA and New York, it was people all over the country, ordinary investors as well.
TELIS DEMOS, "FORTUNE MAGAZINE": Bernard Madoff worked not just through a couple of hedge funds in New York. He was working through intermediaries all around the country. There were people in Boca Raton, Florida who would bring in people through the Palm Beach Country Club. There were people in Los Angeles, who would get friends and friends of friends. There were people in San Francisco, Minneapolis, all over the country. There were people who had access to Madoff, who would introduce friends of theirs to him. And through those people, he hooked in people all over the country. ROMANS: I love, Telis, the image of the Palm Beach Country Club, where people say they are joining just so maybe they could meet him, so they could get in. I don't know if that's just after the fact dramatization or if that really happened, that people were going up to him; they wanted to get in. And it was almost as if he put a velvet rope around himself. He let some people in, some people he wouldn't. That added to the allure.
DEMOS: Madoff would say he doesn't just take any billionaire's money. In fact, he would often turn away the very richest people, in favor of people who had just made a lot of money or who had sort of moderate wealth, who felt like they were part of something special. At the Palm Beach Country Club, he had this intermediary working for him, this guy named Robert Jaffe (ph), who drove an MG, was a really slick, well dressed, educated guy, who was a member at the club, would play golf. He would say, listen, you're a trusted friend, you're a good guy, let me introduce you to this really terrific investment.
So it seemed like you were getting access to a really fabulous, elite world when somebody introduced you to Madoff.
SERWER: Katie, what is it that you think people find so alluring about this scandal? Why do people care about this? I mean, it seems to be something that people really want to know about.
BENNER: I think part of it is because there are so many celebrities and big names involved. And, also, just the amount of money is startling. Fifty billion dollars, that's like the annual revenue of a company like Pfizer. That's a lot of money to lose. And at the heart of the story, the mystery still remains, which is that nobody knows where the money is, if there's any money left, what he might have done with it. There are so few trading records. He really is truly an enigma. So that's fascinating for people.
ROMANS: Don't go away. The Madoff scandal isn't just about the US. Why the multi-billion dollar scheme hit everywhere from France to Austria to Russia.
SERWER: Hear what some victims say it felt like to lose their money to Madoff.
ROMANS: An Austrian bank, a French fund, Russian oligarchs, aristocrats and heiresses, Bernie Madoff lost money for all of them in an alleged scheme that wrapped around the world. CNN's Jim Boulden reports from London.
JIM BOULDEN, CNN CORRESPONDENT (voice-over): Bernard Madoff started his fund all those years ago by getting fellow New Yorkers to invest. At some point, his gaze focused overseas, where he found very willing investors.
DAVID BUIK, BGS PARTNERS: You are recommended by more than one person to, well, perhaps, consider putting some of your portfolio with somebody else, because his track record for me over the last five years has produced an extra two or three percent. And in the case of Mr. Madoff's outfit, it was significantly more than that. You are bound to listen.
BOULDEN: Especially in the secretive world of private banking in Switzerland and Luxembourg. These are supposed to be conservative banks, who discreetly diversify their clients' money. It's estimated five to ten billion dollars were invested with Madoff by a dozen or Swiss funds, including more than three billion dollars by one Geneva- based fund controlled by Spain's Bank Santander.
In Austria, regulators have taken over Bank Medici, after it revealed a two billion dollar investment in Madoff. In France, investment bank Natixis and banking giant BNP Paribas fell under his spell. A host of wealthy French individuals have been snared as well.
VALERIE SEGOND, "LA TRIBUNE": Those people, those very well introduced people with high profile names helped bring Madoff to the investment company.
BOULDEN: Those names apparently including L'Oreal heiress and world's richest woman Liliane Bettencourt. The 86-year old invested in a fund run by Terry de la Villehuchet (ph), the hedge fund manager who committed suicide in New York City just before Christmas.
His company says the fund lost 1.5 billion dollars through Madoff.
(on camera): The Madoff family ran a separate company based here in this building in Mayfair, in London. Now the country's Serious Fraud Office is investigating whether any of the alleged fraud took place here. It also wants to pin down exactly how much money was lost by UK victims.
(voice-over): No wealthy British individuals have yet to admit losses, though some two billion dollars of exposure have already been revealed by British financial and investment institutions. Investors seemingly everywhere, also bit in Italy, in the Netherlands, in Israel, Japan, South Korea.
ROMANS: Joining us now, Jim Boulden in London. Jim, any signs that maybe some European investors steered away from investing in Madoff?
BOULDEN: Yes, there have been reports several banks actually did warn off their investors. We heard that Credit Suisse in 2000 told some of its investors to sell out. Also Society General in 2003 apparently did some due diligence and they looked into Madoff and they said, no way.
ROMANS: And the most recent secret really, Jim, is talk reports of Madoff moving money between his UK and U.S. operations, as all of this was unfolding. BOULDEN: Yes, in 2007, apparently he did bring about 160 million dollars into the UK, nothing really surprising about that, because this was a family fund here. The question, of course, is where did he get that money. Then we've been told just a few weeks ago, "The Financial Times" says he moved about 150 million dollars back to the U.S., saying he was concerned about the weak currency, the weak pound.
So, again not really a surprise that he would be moving money between the two. What the investigators here want to know, of course, is whose money was that.
ROMANS: Jim Boulden in London. Thank you, Jim.
SERWER: Back with us now, "Fortune" writers, Allan Sloan, Katie Benner and Telis Demos. Katie, why is it, though, that so many foreign banks were involved, wrapped up in this scandal, while U.S. ones seem to have mostly escaped?
BENNER: Shockingly, this is one of the few tar pits that U.S. banks didn't fall into. But it's probably only because of luck. European banks have a longer history of managing private client money than U.S. banks do. You can see over the last few years that U.S. banks were very keen to get in on this as well, building up large asset management firms. So it does make sense that it would be Swiss Banks, like UBP, which is a very well respected asset management firm, or Bank of Santander, would be the ones to get caught.
SERWER: You don't see Goldman Sachs, Merrill Lynch, JP Morgan --
BENNER: They had their own grave to dig, didn't they?
SERWER: I think that's right. Allan, the Madoff scandal was global, as we've been saying. And it sort of mirrors the economic meltdown generally. Is that a coincidence?
SLOAN: No. There's an old expression on Wall Street that says the worse the merchandise is, the farther from home you sell it. As we've seen for a year now, really horrible mortgage securities and weird stuff have shown up in places like Iceland and all over the world and devastated places that don't even know where the United States is.
And the thing with Madoff is the world's becoming globalized. There's a lot more money now outside the U.S. than there used to be. So Madoff did what reporters are supposed to do. He followed the money, sold terrible merchandise. That's how he got all of this overseas money.
ROMANS: One of the things I think is really fascinating about all of this is that people don't understand, really, even very smart people, don't understand this globalized market meltdown that we had. Credit default swaps, how did all this really work? You can't blame one person for it. But in the Bernie Madoff scandal, you can look at one guy, in an old-fashioned scam, and say, I understand this one. I think that's where all the public fascination comes from it. SERWER: I think that's right. Of course, he had help. And whether these helpers knew that this person was running a ponzi scheme, as he described it himself, Bernie Madoff, or not, that's one of the great mysteries of this case. Telis, talk about how this was sold overseas. You talked about conduits domestically. The same was true globally as well.
DEMOS: It started with one of his -- his single largest investor, a firm called Fairfield, based in Connecticut, run by this guy named Walter Noel, who had been introduced to Madoff, ironically, through a former SEC lawyer. Walter Noel and the people that worked for him, many of whom happened to be married to his daughters, were people that helped sell these funds around the world. There was a fellow named Andres Peadralta (ph), who went to Europe and talked to investors in Spain, France, and other places.
He had another son in-law, named Philip Taubman (ph), who went down and sold it to investors in Brazil, in the Middle East. Another son-in-law worked specifically in Switzerland. Madoff may have been acting alone in the fraud itself. But as far as getting the message out there about his funds, bringing more people into it, he had a lot of very willing helpers, like Fairfield, which had over seven billion dollars invested in the fund, and was a huge help in funneling people into it all around the world.
SERWER: Allan, it looks like the reports are that Madoff didn't have enough time really to get to Asia particularly. Is that the case?
SLOAN: So it would appear. But it would be one of the few frauds that haven't taken in Asia, because, as we know, Asia has all of this money. It's funding large parts of the United States government. I think you're right, it was only a matter of time, and maybe linguistic or cultural things. I think if it had been alive another year, the Asians would have been in there, hammer and tongs.
DEMOS: Actually, people from Fairfield were working with Nomora Bank in Japan to sort of lend them money to help get Japanese investors into the fund during the past year. It was heading in that direction, certainly.
ROMANS: Now we're going to take a look at what motivated this man. What drove him? Ambition, greed? We look into the mind of Bernie Madoff. You're looking at a CNN "Fortune" special investigation, "Madoff: Secrets of a scandal."
ROMANS: By now, we've heard so many stories about how the rich and famous have lost millions in the Madoff scandal. And many of those people will survive. But what about the hundreds, maybe thousands of smaller investors? Imagine losing your entire life's savings in an instant. One woman told her story to our Alina Cho.
(BEGIN VIDEOTAPE) ALINA CHO, CNN CORRESPONDENT (voice-over): At 68, Norma Hill should be enjoying retirement. But two weeks ago, everything in her life unraveled.
NORMA HILL, MADOFF INVESTOR: I'm calm on the exterior, but I'm dying inside. I cry at night, but not now.
CHO: Twenty years ago, her husband, Jack, invested his life savings with Bernie Madoff. Two weeks later, he died of a heart attack, leaving Norma alone to raise five children. She knew nothing about money or investing. So she went to the man she thought knew everything, Bernie Madoff.
HILL: He put his arm on my shoulder and he said, I'll take care of your money.
CHO (voice-over): Did you believe him?
HILL: It was two weeks after my husband had died. And I didn't know where I was -- you know, which way to turn and I decided that he was sincere.
CHO (voice-over): For years, Norma had no reason to be suspicious.
(on camera): These are blue chip stocks.
HILL: Yes, Exxon, Intel, JP Morgan.
CHO (voice-over): When the markets began to tank, Norma felt safe, because her monthly statement said Madoff invested her money in Treasury Notes. Then, on December 11th, her son called with the news, Madoff had been arrested.
HILL: I just thought it was totally incredulous. Why would a man who was so highly regarded by all the financial wizards in the United States be arrested?
CHO: Her entire nest egg, more than two million dollars, gone.
(on camera): What about the whole notion of not putting your eggs all in one basket?
HILL: Well, hindsight is 20/20. I have Social Security, period.
CHO (voice-over): It's not the first time Norma has been victimized. In 1981, she was taken hostage in the infamous Brinks Heist, and held at gun point. The news was splashed across the headlines, not unlike what's happening now.
HILL: My car was commandeered with my mother in it.
CHO (on camera): Do you feel like you've been commandeered in another way?
HILL: Yes. Actually, that's a good way of putting it. CHO: Really like a house of cards, isn't it?
HILL: Yes, it is. Finally, it collapsed.
CHO: The government recently sent Norma some documents that would possibly help her recoup some of the money she has lost in the Madoff scandal. The problem is, there's no guarantee guarantee. Norma says the forms are daunting, hard to understand, hard to fill out. She calls that being victimized twice. She also says she lives in constant fear of losing her home. And in Norma's case, it's her only asset.
Christine, think about it. She's 68 years old. She doesn't have anything else really. She has two months worth of savings. She doesn't know where to turn to. She has her sons. But think about it, they have their own families with their own financial obligations. But the one thing she says she has learned throughout all of this is be careful who you trust.
ROMANS: Absolutely true. This is playing out over and over again.
CHO: Hundreds, possibly thousands of other people. We just don't know how many victims there are.
ROMANS: Alina Cho. Thanks, Alina. Andy?
SERWER: People who know Bernie Madoff describe him as shy and even understated, not what you might imagine from a man responsible for billions of dollars. And what investigators and victims of Bernie Madoff really want to know is what made this man tick. Just what was going on inside his mind?
CNN senior correspondent Allan Chernoff investigates the psychology of Bernie Madoff.
ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT (voice-over): In the Wall Street world of big personalities, Bernard Madoff did not stand out. He was low key, understated. His business card had no title. Friends say he was shy. But inside was the drive of a highly competitive person.
DR ALDEN CASS, PSYCHOLOGIST: There's a need to prove to the world that I am somebody powerful; I am so intelligent; I'm so respected by the rest of the world.
CHERNOFF: Madoff earned respect. In the 1970s and '80s, he built an innovative high-tech trading firm, correctly anticipating that the buying and selling of stocks would become computerized. The Madoff firm traded for big retail brokers like Fidelity and Charles Schwab, stealing volume from the New York Stock Exchange. He impressed trading expert Jim Angel. JIM ANGEL, GEORGETOWN UNIVERSITY: Here is a very intelligent man who knew this business really well, and who also was very driven to succeed.
CHERNOFF: Madoff was successful, but matching buy and sell orders is not a glamour job on Wall Street, not like managing other people's money. He bolstered his reputation by becoming non-executive chairman of the Nasdaq Stock Market in 1990, '91 and '93. At that point, Madoff was earning tens of millions of dollars. He owned property that dwarfed his 1970s home in Rosalynn, New York.
ANGEL: Here's somebody who didn't need to start a scam to become a multi-millionaire many times over. Yet apparently there must have been some flaw in his makeup that led him to get into this mess and dig himself deeper and deeper.
CHERNOFF: Madoff graduated in 1960 from Long Island's Hoffstra College, before it became a university, with a major in political science. One investor told the "Wall Street Journal" that Madoff confessed to him this year, I wish I had got to Wharton or Stanford. Madoff lacked the pedigree. He was not an alumnus of a prestigious school.
But at the Palm Beach Country Club and other social circles, he created an aura of exclusivity, by selectively choosing whose money he would manage, in effect creating a velvet rope like a chic night club.
UNIDENTIFIED MALE: Madoff made it feel as if it was an exclusive club. And that's how he sucked his people in. That's how he got them to go into this. And it was a fantastic, brilliant job of marketing.
CHERNOFF: Madoff reported steady, annual returns, 10 to 18 percent, year in, year out, never seeming to lose.
UNIDENTIFIED MALE: That determines whether you're a success or failure. They get their identity from how solid their returns are.
CHERNOFF: Bernie Madoff joined the board of Yeshiva University, then became chairman of its business school. His prominence kept investors from questioning his success, even those whose monthly account statements were pure fiction. Last month, Madoff even reported to them that cash was held in Fidelity's Spartan U.S. Treasury Money Market Fund. Fidelity says it hasn't had a fund by that name for three years.
(on camera): Several people who know Bernie Madoff say his saga reminds them of a Greek tragedy. Just like Icharis, who tried to fly too close to the sun, Madoff destroyed himself in his never-ending quest for success and respect. Even his lawyer tells CNN this is a tragedy.
Allan Chernoff, CNN, New York.
ROMANS: So who knew what and when? Did Madoff's family know? Were his employees in on the deal? And where were the regulators? You're watching a CNN special event, "Secrets of a Scandal."
ROMANS: One of the biggest secrets of the Madoff scandal, who knew what and when? How could a scandal of this magnitude continue for so long? There's Madoff's family. What did they know? His employees, were they in on the deal?
SERWER: And then there's the government regulators, whose job it is to make sure none of this happens. There's no doubt the Securities and Exchange Commission ignored specific warnings about the Madoff fraud. Within Madoff's business nearly 10 years ago.
ROMANS: And so we sent our own Abby Boudreaux to dig into the SEC's involvement or lack of involvement in bringing down Madoff.
ABBY BOUDREAUX, CNN CORRESPONDENT (voice-over): Right now the SEC inspector general Chris Cox has as many questions as everyone else.
(on camera): Some members of Congress today said the SEC failed miserably. Do you think that's a fair statement?
CHRIS COX, SEC: We haven't conducted our investigation, yes.
BOUDREAUX: Do you think that statement is fair?
COX: Once we complete our investigation, I'll be able to tell you but I really do have to go.
BOUDREAUX (voice-over): Cox says he promises to find out exactly what went wrong, whether obvious red flags were missed.
(on camera): Do you feel like the SEC dropped the ball in this case?
COX: I need to find that out after I finish my investigation.
BERNIE MADOFF, CHARGED WITH FRAUD: Today's regulatory environment is virtually impossible to violate rules.
BOUDREAUX (voice-over): This is the only video that has surfaced so far where you can hear what Bernie Madoff had to say. The roundtable discussion was about the future of the stock market. "Time" magazine business columnist Justin Fox moderated. He gave us one of the only glimpses into how Madoff says he ran his firm and his admittedly cozy relationship with SEC regulators.
MADOFF: I'm very close with the regulators. I'm not trying to say what they can't -- what they do is bad. As a matter of fact, my niece just married one.
JUSTIN FOX, BUSINESS COLUMNIST, "TIME": The thing about his niece being married to a regulator and all of that, yes, that's cringe-worthy after the fact. At the time it was sort of whatever.
BOURDEAUX: Fox said he had no idea at the time he was sitting across from one of the world's biggest con men.
FOX: It was innocuous enough, I wasn't investigating the guy, there weren't obvious red flags.
BOUDREAUX: Former financial reporter Michael Ocrant did see the red flags. In 2001 after being tipped off he wrote the first new article to question the way Madoff was doing business. Ocrant recalls a conversation with one of his sources.
MICHAEL OCRANT, FORMER FINANCIAL REPORTER: He basically said, he's either doing it through front running, trading ahead of his customers as market maker or it's a giant Ponzi scheme. And I just kind of said, come on. That doesn't make any sense.
BOUDREAUX: Madoff invited him to his office to talk.
Was he believable?
OCRANT: He was believable in the sense that how calm he was, how unplussed he was. He was just -- it was almost as if we were sitting down to Sunday tea.
BOUDREAUX: Ocrant's article was printed in May of 2001 followed by a second article in "Barron's". But according to former SEC Chairman Harvey Pitt neither got attention.
Did you know about these articles or is this the first you're hearing about them?
HARVEY PITT, FORMER SEC CHAIRMAN: No, this is the first I'm actually hearing about them.
BOUDREAUX: Pitt was chairman from 2001 to 2003. He started three months after the articles were published, yet, he says his staff never alerted him.
PITT: If I had seen the articles, I believe that I clearly would have sprung into -- into action on it.
BOUDREAUX: The SEC examined Madoff's operation at least four times since 1999 and conducted two separate investigations, one in 1992 and the other in 2006. According to government officials. No fraud was ever found, even after the SEC received this detailed 19- page road map that uncovered Madoff's scam.
It was written by Harry Markopoulos, a hedge fund expert who concluded the world's largest hedge fund is a fraud. His tip even referenced Michael Ocrant's article and contact information.
And the SEC never contacted you?
HARRY MARKOPOULOS, HEDGE FUND EXPERT: No. No. PITT: I think that the SEC performed miserably in connection with Mr. Madoff. There's -- if I were grading this and I do teach law school from time to time, I would give it an "F".
BOUDREAUX: And from the sound of it, so would members of Congress, who wanted to know how the inspector general is going to lead the investigation.
REP. GARY ACKERMAN, (D) NY: I want to know who is responsible for protecting the securities investor, because I want to tell that person or those people whose job it is that they suck at it.
BOUDREAUX (on camera): We asked the chairman of the SEC, Christopher Cox, to sit down for an interview. He declined due to scheduling issues. But he has admitted he's deeply troubled about how his agency has handled this case.
ROMANS: You know, there have been some, Abby, who simply say the SEC regulators are not qualified or they are not experienced enough to identify these serious fraud cases. Did that ever come up through your reporting?
BOUDREAUX: Yes, even at the hearing, the inspector general brought that up and he said he was concerned about that issue. And we've also heard from industry insiders who tell us that sometimes these regulators are fresh out of school and inexperienced and even can find themselves in awe of these highly successful and wealthy business execs who they're supposed to be investigating and asking questions to.
And also, keep in mind, Christine, I thought this was really interesting, we've been told many of these regulators aspire to one day work on Wall Street. So you can see why that may lead to problems.
ROMANS: All right. Abby Boudreau. And it's true. There's a revolving door in many cases between Wall Street and the SEC.
SERWER: Everyone I talk to and everywhere I look, there's outrage that the man accused of fraud of this magnitude, who has ruined so many lives, was allowed to sit in his multimillion dollar Upper East Side penthouse while some of his clients are headed to the poor house.
ROMANS: Yeah. Jeffrey Toobin is CNN's senior legal analyst. He is here to talk about ...
JEFFREY TOOBIN, CNN ANALYST: And I have to explain how the legal system created this outrage.
SERWER: How is it possible?
ROMANS: If it really is a $50 billion scam -- and it might not even be that much. Who knows? It could be a made-up number that Madoff, according to the criminal complaint, told the investigators. $50 billion and you go back to the mansion on East 64th Street. How can that be allowed?
TOOBIN: The way it can be allowed is his lawyers went to the government and went to the judge and said, look, the only way you're going to find any of this money, the only way anyone is going to be made whole is if Madoff shows you precisely how it works. He's going to cooperate with you, but he can't do that from a prison cell. He's got to have access to his books. He's got to have access to his computer. He will show you the way. It's worth it. He's not going anywhere.
And I think that's true. He's not going to escape. He's not a danger to the community. He's not going to kill anyone. So that's the argument that undoubtedly persuaded the judge and the prosecutor.
SERWER: But, Jeff, I understand you're talking about the letter of the law. But what about the spirit of the law. Think about some poor kid busted for a bag of pot. He gets thrown in Rikers. And here's a guy who is a destroyer of worlds. I mean, doesn't this trouble prosecutors?
TOOBIN: I think it does. And I think that's why you saw the prosecution move to have him remanded because it became an embarrassment that he was sitting there given the magnitude of the issue. But, in fairness, bail is not supposed to be a punishment. The two questions you always ask on bail is, is the person a danger to the community and are they a risk of flight?
Now, frankly, I think the answer with Madoff is no to both of those. But it does seem outrageous. And given the fact that this fraud appears to have been ongoing up to the day he was arrested and money may have been on its way out the door as he was being arrested, you can see why people are pretty outraged in.
ROMANS: And maybe money outgoing out the door after he was arrested because here's the issue. He's hauled in front of the judge this week and told we know you tried to send a diamond Cartier bracelet or watch and cufflinks and all of these expensive things in the mail.
TOOBIN: And mittens.
ROMANS: It clearly is a violation of his bail agreement to be sending hundreds of thousands of dollars of jewelry in the mail.
TOOBIN: Apparently a million dollars worth of jewelry and other objects that he was trying to share with his family or with his friends. Now, his claim is he didn't realize. He just thought it was gifts. He was giving out his personal effects. Look, we're talking about a guy who admitted committing a $50 billion Ponzi scheme. His judgment is probably not the best. But it is shocking that he tried to do this. And it may well get him locked up.
SERWER: What about the fact that the guy has been walking around the streets of Manhattan. You talk about him being a threat to society. What about society being a threat to him. And his wife apparently paying for bodyguards. Is that OK?
TOOBIN: That's part of his bail deal, that there are guards that are not just there to keep him from escaping. They're to keep people away from him. And given the way people's lives have been ruined by this, I don't think it's a frivolous concern. I think his safety is a genuine concern. So you bet those guards are both to keep him from escaping but also to keep him safe.
ROMANS: What happens next for him legally?
TOOBIN: He's not yet been indicted. This case is in the process of being presented to a grand jury. Undoubtedly there are negotiations going on now about a plea bargain in advance of an indictment. But the next question -- the next legal step is an indictment. And the only leverage he really has for a lower sentence is trying to find a way to get people some of their money back. But the iron rule of these scandals is that the money just frits away. There's no -- if people get back ten cents on a dollar they'll be fortunate.
SERWER: It's gonesville.
ROMANS: All right. Jeff Toobin, thanks.
She hasn't taken the subway in 30 years but after Madoff she's back on the train. We'll hear from a self-made millionaire who started with nothing and now has lost it all.
ROMANS: Alexandra Penney used to lunch at the exclusive Four Seasons. Now she jokes she's inviting friends out for fast food. Call it gallows humor but Alexandra Penney has just lost her life savings. She's invested every penny with accused Ponzi schemer Bernard Madoff. Penny is a best selling author and former magazine editor of "Self." She and a friend, Evelyn Lauder (ph) are credited with first using the now ubiquitous pink ribbon for breast cancer awareness. Now a contributor to the dailybeast.com she thought she'd weathered the bear market just fine since Madoff put her in super safe treasuries. Then December 11th she's in her home making a souffle and her best friend calls.
ALEXANDRA PENNEY, LOST MONEY TO MADOFF: She knew I was in Madoff and she's very conservative. She said, I hope this is a rumor, but I've just heard Bernie Madoff has been arrested. My other phone rang. It was my son. And he said, mom, sit down. He said, Bernie Madoff's been arrested. And I said, for what? And he said, he's a crook.
ROMANS: Was all of your money with him?
PENNEY: Every dollar. It was in an IRA because it's every cent I ever earned. ROMANS: So all the money you made since you were 16 years old was entrusted to Bernie Madoff?
PENNEY: It was.
ROMANS: In one day, it's all gone.
PENNEY: What do you do when you lose all your money? I mean, I really have a fear of being a bag lady. I had a terrific therapist who said, then, you have to put all your money in a safe place. Put it in the bank. Save and save and save and save. And if you have money, you'll feel more comfortable and you won't feel like a bag lady.
ROMANS: So how did Bernie Madoff get that money?
PENNEY: It was an old, old friend. And I had invested in -- I had financial advisers and had lost money with them. And I'm not naive. I mean, I'm pretty savvy, actually. I've run a business. I've run a magazine. And he heard me talking about this. And he said, I think I can get you into this fund. It's a safe fund. It hasn't -- it never goes down. It doesn't go up too high. It's rational. It's safe. It's done, you know, through computers. Let me see if I can get you in. I wanted something solid, stable and what I considered safe. Madoff was considered that. I talked to people -- you know, I have friend who are MBAs from Harvard, from Wharton. I'd say Madoff, they'd say, how did you get in. And I would say -- and they'd say it's great, you're golden, don't worry.
When the market started to go down, I talked to even more people and they said, oh, no, Bernie Madoff, he's still OK. He's really fine.
ROMANS: You write about this and suddenly there's this outrage about that's a rich New Yorker. I'm not worried about her. She should go out and get a job. This was your life savings.
PENNEY: It's fine. I am going to go out and get a job, but why all of the vitriol? Because I earned every cent of it. If you lost all of your life savings, I think you'd be in a panic. But I think there's a deeper issue here, Christine. And I think there is such rage and such anger and such frustration in this country that it sort of bubbled over into my self - I mean, I was being ironic and I thought funny when I said I own dozens of white shirts that I've kept since college.
ROMANS: Every penny that Madoff took was a penny that you earned.
PENNEY: Yes. I've never been given a dollar. I never took alimony, I never inherited any money. So, sure, who else earned it? Me.
ROMANS: If you had chance to talk to Bernie Madoff today, if you had the one chance to give him a piece of your mind, knowing you may never get the money back, what would you tell him? PENNEY: I really wouldn't want to talk to him. I don't even want to see the man. I don't even watch him on television.
ROMANS: He's that repulsive to you?
PENNEY: Yeah, repulsive is mild. Loathsome. It's a visceral feeling of this is not humanity. This is not a human being. This is, I guess, a sociopath.
ROMANS: Do you think that Madoff redefines greed for our age?
PENNEY: I think he's emblematic of what happened in the last decade. When I was saying I was making a souffle, everything was rising. We were all rising. The housing market was rising. Bernie Madoff's money -- people like me, my money was making nine, 10 percent. There was this incredible lift of the economic picture. And I think that the crash of the stock market and the crash of Bernie Madoff together are -- are really emblematic of -- that the system is the culprit.
ROMANS: It's not just about America's rich or famous. They feed the poor. They try to cure cancer. You're about to meet a very different type of Bernie Madoff victim.
SERWER: Charities already suffering from the financial mess took another huge hit, this time from the Madoff scandal. These are organizations that are meant to do good. And now, even far removed from the scandal, they're still paying a big price. And the people they're meant to help will pay an even bigger one. Once again, CNN's senior correspondent Allan Chernoff.
CHERNOFF (voice-over): City Harvest picking up food donations one of daily collections that help feed 250,000 New Yorkers of all faith. City Harvest received $150,000 from the Picower Family Foundation, which is now closing its doors because nearly all of the family's investments were with Bernard Madoff.
HEATHER WALLACE, CITY HARVEST: That's a significant blow for City Harvest. They're one of our top ten funders. They've been a six figure supporter of our work for nearly 10 years now. And this is funding that's going to be difficult for us to recoup.
CHERNOFF: Clowns from the Big Apple Circus visit critically ill children, another program made possible through the Picowers and other Jewish philanthropists.
GARY DUNNING, BIG APPLE CIRCUS: We make 280,000 bed visits every year. The money supported it in foundations.
CHERNOFF: The Picower Foundation which has donated over a quarter of a billion dollars over the years may have been hit the hardest. But dozens of other Jewish charities and foundations have suffered millions in losses because of Bernard Madoff's alleged Ponzi scheme like the Carl and Ruth Shapiro Foundation of Boston. It has given millions to improve health care, helping to fund the American Cancer Society, the American Heart Association, Brigham and Women's Hospital and the Dana Farber Cancer Institute. The Jewish Community Foundation of Los Angeles says it invested $18 million with madoff. Last year it granted $14 million to groups having no affiliation with Jewish causes including a new support group for victims of gang violence in Los Angeles.
MARK CHARENDOFF, JEWISH FUNDERS NETWORK: Unfortunately, the impact is going to be on the average American not for profit out there. And the fact that the American Jewish community gives disproportionately to their percent of the population, so unfortunately, the impact is going to be disproportionate as well.
CHERNOFF (on camera): The full impact may not be known for many months, if not several years, as foundations see if they can recover money lost from Madoff and seek new sources of funding. Andy?
SERWER: CNN's Allan Chernoff. Thanks.
ROMANS: Bernard Madoff fooled everyone, but what secrets have we not learned yet? You're watching a CNN/"Fortune" special investigation "Madoff: Secrets of a Scandal."
ROMANS: So many people from all walks of life have lost so much money from this scandal.
SERWER: Back with us from "Fortune" Magazine, Telis Demos, Katie Benner and Allan Sloan. Let me ask you, Telis, about the SEC and the regulators, asleep at the switch, here?
DEMOS: Well, people tend to think of the SEC as like the FBI of financial crimes. They're not. Their job is to create rules. They have sophisticated software that can detect things like people making illegal trades and things like that. And the SEC did look at Madoff over the years for things like that, for making illegal trades, for not being registered and they did catch him on a couple of small things. But they didn't detect the central fraud. That's simply because nobody really likes to think somebody as established -- he was former chairman of the NASDAQ -- could be essentially making up numbers, just simply feeding the SEC documents that were false, with just numbers that were made up. Nobody is equipped to find something like that.
ROMANS: Here's a question, Katie. Are there others out there? I talked to a woman who was paid out of her Madoff fund by the manager that got her in. Wasn't paid off by Madoff funds. Was that somebody else running a small Ponzi on the way into the alleged Madoff Ponzi? BENNER: Sure. That's something people are trying to figure out now. We were actually just talking about this, that first of all the SEC because of all the criticism, all of the fraud cases they've ever had in the entire world they're bringing out now to try to solve in order to do something about their reputation. And we just went through a period of years and years where pretty much all asset classes went up. Everyone was making money. So it was very, very easy to create some sort of fraud, some sort of fraudulent investment scheme because everyone was posting decent returns. Why not? It was only because assets started going down in value and people redeemed money that Madoff was found out as far as we know.
SERWER: Allan, big question of course is what can investors take away from all of this? How do you protect yourself?
ALLAN SLOAN, "FORTUNE": Well, there are two things. The first thing is, when some member of your social group or your race or your religion comes to you and says, hey, Allan, I've got something real hot for you because you're my buddy, that's when you investigate at least three times as much as you would for anything else. And the second thing is, whatever you do and no matter how much you trust them, you don't put all of your money or 90 percent of your money in one place with one person unless you're prepared to lose it all.
SERWER: All right. Thanks Allan Sloan, Katie Benner and Telis Demos.
ROMANS: The Bernie Madoff scandal changes every day. New secrets emerge. Make sure to stay with CNN for the very latest breaking news on this case.
SERWER: And make sure to check out the pages of "Fortune" magazine, fortune.com and cnnmoney.com to stay on top of the story every minute of every day. Thanks very much.