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March 10, 2009

Before the Fall

Bernard L. Madoff

By Peter Chapman

The abrupt closure of Bernard L. Madoff Investment Securities in December marked an ignominious end for a firm that, after nearly 50 years in business, enjoyed near universal respect on Wall Street, as well as major financial success. That its founder could be charged with defrauding its customers out of billions of dollars, as two arms of the federal government have alleged, shocked and dismayed those who know the man.

He was considered a leader in the stock trading business who almost single-handedly created the modern-day Third Market for retail orders by attracting order flow destined for the New York Stock Exchange.

His ability to anticipate punishing regulatory changes designed to sideline market makers, coupled with a commitment to spending on technology and sophisticated inventory management techniques, enabled him to survive and prosper whilst many competitors fell by the wayside.

His knowledge of the intricacies of market structure and his openness with regulators, legislators, journalists, academics and industry executives served to boost his profile and influence. Those relationships also didn't hurt his market-making business.

In 1982, after more than 20 years in business, Madoff reported $5.5 million in net capital, making his the 153rd-largest brokerage house. He had 35 employees. By January 2007, he reported $613 million in net capital, making his firm one of the 40 largest. He employed 146 people.

His close ties to Nasdaq from its early days and their shared interest in wresting market share from the Big Board translated into a win-win for both parties as Madoff's Third Market business grew. His participation on NASD committees and his unwavering support for many of Nasdaq's often dealer-unfriendly initiatives through the years only cemented the bond.



By the 1990s, Bernie had become something of a senior statesman in the industry, serving on the NASD board, as non-executive chairman of Nasdaq and as head of the Securities Industry Association's influential trading committee. For a while, he was spending one-third of his time in Washington as an unofficial lobbyist for the dealer community. Madoff was often quoted in the press.

On a personal level, he was almost universally liked. He was open. He was helpful. He was willing to share his knowledge of market structure with almost anyone. The same could be said of all four Madoff principals, including Bernie's younger brother Peter (his number two) and sons Mark and Andy. "You couldn't say enough nice things about them," Jack Hughes, a former head of trading at Madoff customer Janney Montgomery Scott, said in a typical response. "They were just great, great people who would do anything for you. And if you had a question, they would always take the time to answer it."