The Rise and Fall of Bernard L. Madoff

Posted by: Monica Gagnier on December 12

No one could have been more shocked than I to read that federal investigators yesterday arrested trader and fund manager Bernard L. Madoff for allegedly defrauding investors of $50 billion in a Ponzi scheme.

I got to know Madoff, and his brother Peter, who has not been indicted, during the 1980s, when I covered NASDAQ for the startup financial paper Investor’s Business Daily and later for the newsletter Trading Systems Technology.

The Madoff brothers helped push for greater transparency and accountability to the over-the-counter market, which was then in a major battle for listings with the New York Stock Exchange and the American Stock Exchange. That was their public stance; I can’t vouch for what their position was behind closed doors.

Bernard Madoff, a former chairman of the NASDAQ Stock Market and founder of Bernard L. Madoff Investment Securities, was one of the few NASDAQ market-makers who competed with the New York Stock Exchange, by trading stocks listed on the Big Board. His broker/dealer firm did this through an electronic market that was operated at the Cincinnati Stock Exchange.

Through the Cincinnati exchange, the Madoffs were pioneers in electronic trading and publicly spoke of the need to use technology to transform the inefficient and sometimes shady over-the-counter stock market.

The Madoff brothers were boys from the Outer Boroughs who made the big time. I liked their street smarts and their charm. Bernie was the elder statesman and Peter was the young visionary. They were generous with their time, whether it was explaining the intricacies of market structure to a fledgling reporter or striving to improve the competitiveness of the NASDAQ Stock Market.

It was thanks to the efforts of people like Bernie Madoff that NASDAQ was able to attract listings from top-tier tech companies such as Apple, Sun Microsystems, Cisco Systems, and later search powerhouse Google.

The Madoffs weren’t altruists; they were realists. They understood that high standards in the OTC market would help attract the best publicly traded companies to NASDAQ. That in turn would increase trading volume, giving their broker/dealer firm more chances to earn the spread between the bid and ask price for a stock, even as greater transparency narrowed that spread.

My first thought upon reading how Madoff’s secretive investment fund had crumbled in the wake of the stock market collapse was that I was glad that former NASDAQ CEO Gordon Macklin, who died in 2007, wasn’t here to witness his friend’s downfall. After all, the Madoffs have been in the OTC business for nearly half a century and on Wall Street are synonymous with NASDAQ.

It’s ironic that a man who campaigned for greater transparency within NASDAQ should end up being charged with fraud and losing billions for innocent investors. What could possibly have driven him to risk his family’s name in a world (Wall Street) that depends on the sanctity of the promise, “My word is my bond”?

Obviously, Madoff lost sight of the fact that there are some things worth more than money in this world — namely, your standing within the community.

Credit: http://www.businessweek.com/blogs/recession_in_america/archives/2008/12/the_rise_and_fa.html