The Securities and Exchange Commission has admitted it missed repeated opportunities to discover what may be the largest financial fraud in history, a multi-billion-dollar pyramid scheme operated by Wall Street legend Bernard Madoff. Now several non-profits and foundations are being forced to close, because their entire endowments have been wiped out. We speak to Robert Crane of the now-shuttered New York-based JEHT Foundation and ProPublica reporter Paul Kiel. [includes rush transcript]
This is a rush transcript. Copy may not be in its final form.
AMY GOODMAN: The Securities and Exchange Commission has admitted it missed repeated opportunities to discover what may be the largest financial fraud in history: a multi-billion-dollar pyramid scheme operated by Wall Street legend Bernard Madoff.
The SEC said it received credible allegations about the scheme at least nine years ago and will immediately open an internal investigation to examine why it had failed to pursue them. SEC Chair Christopher Cox said, "Our initial findings have been deeply troubling." He also said the agency’s inspector general would investigate whether personal relationships between Madoff’s family and SEC staff played a role in the failed oversight.
Bernard Madoff was the former chairman of the NASDAQ stock exchange and a respected figure on Wall Street for nearly half-a-century. For decades, his firm, Bernard L. Madoff Investment Securities, had been one of the top market makers on Wall Street. In Washington, regulators had sought his advice on any number of regulatory issues over the years. In 2000, he served on a government committee established to protect investors by ensuring accurate and full public disclosure of information to them. In an old video of Madoff that’s come to light, he tells an audience it’s tough to skirt the law.
BERNARD MADOFF: In today’s regulatory environment, it’s virtually impossible to violate rules. And this is something that the public really doesn’t understand. And if you read things in the newspaper and you see somebody, you know, violate a rule, you say, well, you know, they’re always doing this. But it’s impossible for you to go — for a violation to go undetected, certainly not for a considerable period of time.
AMY GOODMAN: Investigators now accuse Bernard Madoff of doing just that. He was arrested at his home last week on fraud charges. According to court documents, Madoff said his money management business was "basically, a giant Ponzi scheme," a type of fraud in which early investors are paid off with money from later investors, until no more money can be raised and the scheme collapses. He estimated investors had lost as much as $50 billion. The fraud could be larger than the Enron scandal of 2001. Over the decades, Madoff steadily expanded his circle of investors, drawing in small individual investors, charities, pension funds, prominent billionaires and European banks.
Now several non-profits and foundations are being forced to close, because their entire endowments have been wiped out. One victim is the New York-based JEHT Foundation, which was dedicated to electoral reform and improving criminal justice and human rights.
Robert Crane is president of the JEHT Foundation. He joins us here in our firehouse studio. We’re also joined by Paul Kiel, a reporter from ProPublica, which has been covering the Madoff scandal.
We welcome you both to Democracy Now! Paul, let’s start with you. Explain this whole — how this happened.
PAUL KIEL: Sure. Well, they’re still trying to figure out exactly how this happened. But, essentially what it is, Madoff had this big broker-dealer, which is a type of market making. It’s not a particularly sexy kind of business. He had a room full of traders. But on an entirely separate floor, he had this investment advisory business, which he had been running for decades. And year after year, he was able to give investors, you know, ten percent, like clockwork, these very consistent good returns. And, you know, there was a number of suspicions from outside the firm, but his investors were very happy with what he was able to deliver for them. And it seems they’ve all come crashing down, I think it’s pretty fair to say, as a result of the recent financial crisis.
You know, the way a Ponzi scheme works is you take money that’s coming in, and you pay out people who have been with you for a long time the returns that they’re expecting. And usually what happens, the way a Ponzi scheme falls apart is, all of a sudden you don’t have that new money coming in to pay the people who need their money. You know, investors get angry that you’re not giving them their money. Eventually they go to the SEC or something like that, and the whole edifice comes crashing down.
In this case, he apparently had investors asking for as much as $7 billion, and he apparently only had about $200 to $300 million left, which he planned apparently to give to certain friends of family as sort of the last ditch thing he did before he turned himself in. But he confessed to his sons last Tuesday. His sons were the two senior executives below him. His brother also was an executive there. Apparently, last Tuesday, he confessed to them the whole thing. They said that they had no idea. They eventually went to the SEC and the US attorney’s office. And then on Thursday, the US attorney’s office showed up at his apartment and said, “Hey, we’d like to know if there’s an innocent explanation for this.” And he said, you know, “I’m a complete fraud. This is” —- you know, he called it a “giant Ponzi scheme” and said it’s all one big lie. And so, you know, that was that. And -—
AMY GOODMAN: How could his sons not know and his brother not know?
PAUL KIEL: I mean, theoretically — well, what they say in the complaint is that he kept the books, you know, under lock and key. It was run on a completely different floor. There wasn’t any overlap, in terms of the people who worked for the sons in the broker-dealer side of the business and, you know, his investment advisory business. I mean, of course, there are people who find that unbelievable, that his sons, who worked for him for twenty-five years, ever since they came out of college, didn’t — had no idea that this was going on.
AMY GOODMAN: Talk about the early warnings, people who did try to blow the whistle or ask serious questions.
PAUL KIEL: Right. There was an executive from a rival investment advising firm who, as early as 1999, wrote the SEC, I think, in Boston and New York repeatedly. In one of the 1999 letters, he actually did say this is, you know, the world’s biggest Ponzi scheme. And basically, when he and others, you know, investment advisers who had clients saying, “You know, I’m thinking of investing in Bernie Madoff,” what they would do is they would look at — OK, he says that he has this certain strategy of how he’s making his very consistent returns, and they would try to replicate that strategy or see, you know, is this possible that he’s doing this. And they would say, like — they would look at it, and they would say, “No, there’s no way that someone could have these sorts of returns in good times and bad, like clockwork.” I mean, he even didn’t really lose money this year, you know, apparently. So, you know, this one investment adviser apparently wrote the SEC consistently from 1999 until as recently as this April, saying, “You’ve got to look into this guy.”
There is another case of an investment adviser whose clients were thinking of investing in Madoff. And so, he said, “OK, let me take a look at it.” He looked at his — you know, what he said his strategy was. He looked at his returns. He’s very skeptical. He found out that he had this auditing firm. All these investment advisers have to have auditing firms. And he’s like, “Well, I’ve never heard of this auditing firm.” And so, he looked into it, and it was run out of a very small office in a place called New City, New York. It had three employees. One of the employees was apparently, you know, in his seventies. One was a secretary. And supposedly this is the firm that’s auditing a firm that’s handling $17 billion, you know, $25 billion worth of assets, which is just incredible.
AMY GOODMAN: Madoff was the former head of the NASDAQ stock exchange.
PAUL KIEL: Right. I mean, he was someone — I think Arthur Levitt, the former SEC chairman, said recently, you know, everybody knew this guy, who was established. He was a fixture on Wall Street. You know, it was sort of a — it was a perfect scam in that way, in that he had this public face that everyone — you know, he was trusted. He was sort of like, you know, one of the grandfathers of Wall Street at this point.
AMY GOODMAN: The interrelationships with the Madoff family and the SEC, could you explain what some of those are?
PAUL KIEL: Right. So, apparently — this came out a couple days ago, and Christopher Cox confirmed this in a statement last night — that I believe it’s Madoff’s niece married a man who worked in the SEC enforcement division.
AMY GOODMAN: Eric Swanson.
PAUL KIEL: Right. And what they say, though, is he actually did — he was involved in one of the investigations of Madoff’s firm — this was the broker-dealer side, not the investment advisory side — back in 2004, but that, you know, the romantic relationship —- they didn’t get married, I think, until 2007. So they’re saying that that -—
AMY GOODMAN: He had left the SEC by then.
PAUL KIEL: Right, but Christopher Cox does say that, you know, “We’re going to look into this.”
AMY GOODMAN: You work for ProPublica.
PAUL KIEL: Mm-hmm.
AMY GOODMAN: That’s one of the —- that’s an organization that was partly funded by JEHT.
PAUL KIEL: Right.
AMY GOODMAN: We’re joined right now by Robert Crane, who is the head of the JEHT Foundation. J-E-H-T, what does that stand for?
ROBERT CRANE: Justice, Equality, Human Dignity and Tolerance.
AMY GOODMAN: Talk about how you were funded and what’s happened to you now.
ROBERT CRANE: Sure. We were funded by an individual family, donors who unfortunately had invested their funds with Mr. Madoff. And -—
AMY GOODMAN: They are...?
ROBERT CRANE: And they are the Jeanne Levy-Church and Kenneth Levy-Church. And they — but it goes back before them. Their father before them was a close friend and confidant of Mr. Madoff. And so, for the Levy-Churches, it was really, I think —- this is doubly painful, in many ways, because it’s also a betrayal of a history and a friendship and what they assumed was a friendship that went back over thirty years between her father and Mr. Madoff. And when she came -—
AMY GOODMAN: He was — Madoff was fully managing the money of JEHT, of the Levy-Churches?
ROBERT CRANE: Well, not of JEHT, actually, but of the Levy-Churches. JEHT actually is not an endowed foundation. It was a foundation that received its money on a yearly basis from the Levy-Churches. And so, our money came in as we needed it, in effect. And we had a —- we’d establish a budget at the beginning of every year, and we used that money over the course of the year, but it would come in through the family.
AMY GOODMAN: And you’re closing now.
ROBERT CRANE: We are closing.
AMY GOODMAN: When did you get word?
ROBERT CRANE: We learned of this Thursday night, the same time the family learned of it. And we heard about it -—
AMY GOODMAN: The day that Madoff was arrested.
ROBERT CRANE: Exactly. And it was on actually the online newscast from the Wall Street Journal that the family heard about, and then they called me immediately. And we sprung into action, because we knew that it was a crisis of, for us, monumental impact.
AMY GOODMAN: Talk about who JEHT funds, who’s going to lose this funding now —-
ROBERT CRANE: OK.
AMY GOODMAN: —- because this is immediate. You’ve closed — the final closing of the doors is the end of January.
ROBERT CRANE: End of January.
AMY GOODMAN: But you’ve stopped all funding right now.
ROBERT CRANE: We’ve stopped all funding at this point. Let me first say the areas we fund, I think because it kind of puts a context on who we fund. The foundation funds in four program areas. We have, I think, the largest program in the country funding criminal justice reform. So, even though we’re a foundation of not — you know, we’re not the size of a Ford Foundation or some of the better-known household names in philanthropy, we are a foundation in the areas we fund in that has a very significant impact in those areas. So, in the criminal justice area is one. Juvenile justice is another. International justice, particularly the role of the US as a player in the world and trying to uphold the US’s role as a country that supports international norms and standards of rights. And then, lastly, election reform work, we have a significant program in that area.
And in each case, we’re one of the largest funders, if not the largest funder in the country, funding that particular issue. So the impacts will be enormous for our grantees. We also tend to make rather large grants. We tend to — when we believe an organization is doing good work, we take very high stake in that organization. Because we think the — because there are so few funders in this area, we’ve always felt that if we believe the work is good, we should really be supporting it and not assume that they can get the money from elsewhere, because there isn’t a lot of places for them to go. And so, it has, you know, an even greater impact on these groups than it might otherwise have if we were funding in an area where there are hundreds of funders.
AMY GOODMAN: Well, groups like the Innocence Project, I see here you’ve given two — well, over $5 million committed.
ROBERT CRANE: Correct.
AMY GOODMAN: Now they’re dealing with the more than $2 million for the next three years. Can they make it outside of you?
ROBERT CRANE: They will survive. I mean, the Innocence Project is really one of the wonderful success stories that we’ve had in working with them. And one of the things we were able to do with the Innocence Project from the onset is — you know, in every group, we try to help them really diversify their funding, because it’s in their self-interest, and more than even in ours at the time. So we worked very closely with the leadership of the Innocence Project over the last four to five years, with making major grants to them but also pushing them to, you know, raise money from other sources.
AMY GOODMAN: Human Rights Watch, more than $1 million?
ROBERT CRANE: Right. Human Rights Watch is — you know, we’re a major funder of Human Rights Watch. But again, Human Rights Watch is an organization that will survive, but the loss is — for example, we funded their international justice work. Well, Human Rights Watch is a huge institution and has a multi-million-dollar yearly budget, but their international justice program has a budget that we were fully probably at least half of, in terms of our funding. And so, it gives you a sense of the impact on that program, as opposed to the institution as a whole.
AMY GOODMAN: Did ProPublica, the investigative news website, get money from JEHT?
ROBERT CRANE: They did, a modest grant from us when they were starting up, because we felt investigative reporting is kind of central to all the work we do. In all the areas we work in, we’re interested in the kind of work ProPublica does. And, of course, investigative reporting in this country is increasingly diminishing.
AMY GOODMAN: Stop Prisoner Rape — these are organizations that are probably not going to get a lot of money elsewhere.
ROBERT CRANE: Right.
AMY GOODMAN: You gave $300,000, massive hit for them.
ROBERT CRANE: Right. And that is an interesting story, because Stop Prisoner Rape is an organization we funded in conjunction with the Department of Corrections in Oregon, and we funded both the Department and Stop Prisoner Rape to jointly work together on a program. And that program, I hope, will survive, because the state of Oregon is very committed, and the head of Corrections there is very committed, to do that work.
AMY GOODMAN: Kansas Department of Corrections, over four-and-a-half million dollars.
ROBERT CRANE: Yeah, a huge amount, huge amount of money. And with great results, I might add. And so, this is a situation where JEHT’s been unique in the field in many ways, because we’ve been willing to fund a broad range of players, from advocates in the field to academics to, in fact, government itself, Kansas being a good example, Oregon being another good example. When they were doing creative, innovative work in the field, we were providing state government with the money they didn’t have to do the innovation. We don’t fund them for direct service work, because we don’t feel that’s a good role for a foundation. But often, state government doesn’t have the kind of money to do the innovations they need to do to make their programs work effectively. State of Michigan, similarly, we have a huge program there, a reentry program, and it’s also beginning now to show results. So these are tragedies not only for our grantees, but for the people they serve.
AMY GOODMAN: Finally, Paul Kiel, what next? What happens next? This now being talked about as bigger than Enron.
PAUL KIEL: Right. Well, I mean, people — I mean, as far as I can tell, the SEC has been spending, you know, every waking hour since Thursday night trying to unwind, you know, exactly how this happened. So, you know, that $50 billion number comes from Madoff himself. It’s what, apparently, he told the feds when they knocked on his door on Thursday.
I think, you know, one big thing that’s to come is people are going to be taking a real hard look at the SEC, which I think Christopher Cox knows, so that’s why he’s helped — he’s called for this investigation. But, you know, for instance, he was an — Madoff was an investment adviser, and, you know, along with hedge funds, they are fairly loosely regulated. He only registered with the SEC in about September of 2006. The way it’s supposed to work, the SEC is supposed to occasionally, you know, open up the books, do an inspection, to sort of — you know, a good — seal of good housekeeping type of thing. But they never looked at the firm, because they’re very understaffed, so they can only look at about ten percent of these investment advisers.
So I think, you know, there was already a lot of talk of maybe, you know, the SEC doesn’t survive, you know, when we finally do this regulatory overhaul that most people think is inevitable after the financial crisis. I mean, at the very least, you know, you have to look at the staffing issue, you know, all these loopholes that investment advisers and hedge funds have in terms of how loosely regulated they are. Those sorts of things are definitely going to be issues.
AMY GOODMAN: Well, Paul Kiel, I want to thank you for being with us, reporter with ProPublica, news investigative website, and Robert Crane, the president of the JEHT Foundation, which is now closing its doors.