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Read Bernie Madoff’s Christmas Eve Letter to CNBC

Dec. 26, 2012 7:24am Guest Post

Bernie Madoff Letter to CNBC on Christmas Eve

(Source: U.S. Dept of Justice)

This is a cross post from Scott Cohn that originally appeared on CNBC.com.

The recent rash of insider trading cases may be a shock to some on Wall Street, but not to one long-time market player: Bernie Madoff.

In a Christmas Eve letter from the medium security federal prison in North Carolina where he is serving a 150-year sentence for running a massive Ponzi scheme, Madoff tells CNBC that insider trading has been around “forever.”

He also rails against what he calls a lack of transparency in the financial markets, and says the growth of hedge funds is forcing market players to take outsized risks in order to earn decent returns.

Madoff has granted only a handful of interviews since he went to prison in 2009. More recently, he has declined to speak on the record about his case. But he was willing to share some views about the financial markets in the e-mail, which he sent to CNBC and a handful of attorneys and academics he has been communicating with.

Before confessing four years ago this month to the largest investment scam in U.S. history, Madoff was prominent in the financial community. He served as a non-executive chairman of the NASDAQ, and his firm was once among the largest market makers on Wall Street.

“(O)ne would be led to believe that with the recent spate of insider trading prosecution that insider trading is a new development,” Madoff writes. “This is false. It has been present in the market forever, but rarely prosecuted. The same can be said of front running of orders.”

Front running refers to the illegal practice of brokers using knowledge of their customers’ pending orders to trade for their own accounts first.

Madoff says markets are suffering from what he calls a “lack of transparency” created by the growth of so-called “dark pools”—arrangements outside the established stock exchanges that allow parties to trade stocks privately, with trades and prices only disclosed after the fact.

“Institutions have always attempted to guard this buy and sell information from exposure to the market for fear of being front run,” Madoff writes. “Certainly they are entitled to have this right of confidentiality. That being said, the more secret this information, the more valuable this information is to those that can obtain it. Therein lies the problem. It is nave to think that there will be no leakage of this information.”

(Watch Now: American Greed Special: Bernie Madoff Behind Bars)

Madoff built his fraud on one of the largest hedge funds on Wall Street, which attracted investments from individuals as well as a series of so-called “feeder funds.” But Madoff now says the rapid growth of hedge funds and feeder funds—and their commissions and fees—have created a problem for investors and regulators.

“It has been this additional layer of costs that have created the need for more risk to be taken to earn worthwhile returns. This has created a minefield of regulatory problems involving the very reasons that the desire for a lack of transparency has grown. Both of these areas are going to be the greatest challenge that both the industry and the regulators are going to face.”

Here is the full text of Madoff’s letter:

A number of you have been asking my views on a couple of subjects that I am comfortable in going on the record, because they are not related to my case. there for(sic) the following are remarks that you are free to use for whatever value you feel are appropriate.

The issue of electronic trading has recently been focusing on the lack of transparency of the markets with the emergence of DARK POOLS.

This has now spread to the recent acquisition of the NYSE . While I have always been an advocate of electronic trading due to the efficiency the lower costs they bring o the markets, I am nit (sic) a fan of the lack of transparency the DARK POOLS create.

It is important to examine why there has been this growing interest in the use of dark pools. Markets have always focused on the speed with which information becomes available. Of course this information can be composed of various types.

It could be corporate developments like earnings or mergers or it can be information regarding the placements of buy and sell orders and who is placing these orders. It is the latter information that has created the interest in the dark pools.

Institutions have always attempted to guard this buy and sell information from exposure to the market for fear of being FRONT RUN. Certainly they are entitled to have this right of confidentiality.

This being said, the more secret this information. The more valuable this information is to those that can obtain it. Therein lies the problem. It is naive to think that there will be no leakage of this information.

Although one would be lead to believe that with the recent spate of Insider trading prosecutions, that insider trading is a new development. This is false. It has been present in the market forever, but rarely been prosecuted. The same can be said for front running of orders.

The other area of discussion involves the growth of hedge funds, particularly feeder funds. In spite of the early held belief. of which I was of this opinion, that the extra layer of costs related to commissions and profit sharing that went along with feeder funds.

They have continued to grow. It has been this additional layer of costs that have created the need for more risk to be taken to earn worthwhile returns. This has created a minefield of regulatory problems involving the very reasons that the desire for a lack of transparency has grown.

Both of these areas are going to be the greatest challenge that both the industry and the regulators are going to face .

—By CNBC’s Scott Cohn; Follow him on Twitter: @ScottCohnCNBC

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Comments (38)

RSHLUVER
Posted on December 27, 2012 at 2:54pm
If the actor Matt Boomer looked like Bernie Madoff on the USA TV show White Collar, how long would the show be on the air?

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term limits for congress
Posted on December 26, 2012 at 2:15pm
If you are afraid of being caught doing insider trading, get elected to Congress where it is perfectly legal. I think staffers and family members are exempt, too.

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- Stone Cold Truth
  Posted on December 26, 2012 at 3:00pm
  You”re right. Bernie would’ve made a great Senator or Representative. It’s too bad 50+% of the country is too stupid to ever connect those dots.
  
  Report this comment
- turkey13
  Posted on December 26, 2012 at 8:12pm
  Many congress persons are elected with their reputation as being an honest hard working person. Look at Charlie Rangel – he was a guy that just got out of the Army and was living on a seargents paycheck.Back when Obama was elected Nancy Polisi was going to drain the swamp. It was found that Rangel owed almost $800,000 to the IRS on his condos and foreign investments. Charlie is now worth amost 5 million bucks. This is why we need Term Limits. All Congress folks get to use insider trading to get rich and we need a law right now to stop it. We might then get honest folks in DC.
  
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haveimissedsomething
Posted on December 26, 2012 at 2:13pm
You think this is bad? In the Congress this (insider trading and front running) is common practice and legal! Boehner’s done it. Pelosi does it – in a very BIG way, as does John (who by the way served in Vietnam) Kerry. In case any of you were wondering why people of average means, elected to Congress, leave Congress wealthy. Madoff didn’t steal 16 trillion dollars (the national debt). Madoff also didn’t write legislation to enrich himself to the detriment of the entire country.

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- Bob Barney-The Plain Truth
  Posted on December 26, 2012 at 3:30pm
  You haven’t missed much! Great points, and if we don’t stop these traitors, we are living in the last days of the USA.
  
  Report this comment
republic2011
Posted on December 26, 2012 at 2:09pm
Couple of questions for thought… “Why do most 401K’s force you to invest in the stock market?”.. seems self serving (middle class should be able to invest their money where ever they want…. and… “Why is insider trading legal for those in Congress and our government but not for the private sector?”.. “Why is Madoff in jail and not most of Congress?”. Double standard, after double standard. And there is a lot of favoritism played in the Billionaires boyz club. Maydoff only pissed off the wrong group of people, or, he was chosen as a fall guy to convince the public at large that the new regulations are working (all a ploy).

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OUTLAW_WEALTH
Posted on December 26, 2012 at 1:27pm
There’s no such thing as insider trading. People act on the information they have, and they SHOULD. There is no immorality in acting on your information, and there is no immorality in having access to information. The only immorality, is when GOVERNMENT starts determining (Pre-Emptively) what information you should and should not have, and how you should act upon it.

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- Gavinwcaf
  Posted on December 26, 2012 at 1:54pm
  You could not be more wrong if you worked for Baracko Clause. Middle class Americans invest Trillions of dollars in their retirement accounts. If wall Street can not protect the information distribution where all investors (not just the inside major companies that work wall street) get equal access to this information, the middle class will withdraw their money and find other ways to gurantee their investments, Mabey this is what should happen to wall street, Americans medium income workers have to find an honest, fair, and moral place to invest their retirement funds.
  
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- smokeysmoke
  Posted on December 26, 2012 at 2:31pm
  Thru the govt is how most insider trading happens.. I work for myself at a major exchange… There are other forms of insider trading.. Some funds and brokers use their clients as a hedge against risk… This means that some not all, give themselves the best fills, lowest buys highest sells to themselves, while giving their customers the worst…
  
  The markets already make any form of prearranged trade is already illegal…
  
  So why to you think ICE just bought the NYSE… Or goldman who has people in republican and democrat administrations.. So they have the information first legally…
  
  Anti trust laws need to b employed to break up golden from the govt… And anti trust laws are needed to break up the mass media.. NBC CNN fox etc all need to b broken up into smaller organizations that do not push agenda but news fact
  
  Report this comment
- dlanod
  Posted on December 26, 2012 at 7:13pm
  Wrong
  
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- dlanod
  Posted on December 26, 2012 at 7:15pm
  Wrong wrong wrong
  
  Report this comment
MrKnowItAll
Posted on December 26, 2012 at 12:22pm
40′s Years of Personally knowing people who buy and sell stocks. I even knew a Floor Broker that went insane from the stress of that job at the New York Stock Exchange. I can tell you with 100% Confidence. They ALL CHEAT! Everyone of them are as Greedy as the word can be.

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- smokeysmoke
  Posted on December 26, 2012 at 2:36pm
  That is a totally ignorant statement… Not everyone cheats on wall st.. I trade for myself, and yes it is stressful, but I never have had the opportunity to cheat… I buy what I think is cheap and sell what I think is expensive and when I’m wrong I lose my own money… It is stressful but the markets are a price finding mechanism, the problem is the FED broke the markets with QE. Infinity And pumping cash into the markets to prop them up
  
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tckid17
Posted on December 26, 2012 at 11:43am
White Collar prison for Bernie, I bet he accesses more information in the can than the average citizen.
Maybe he could start a business called P-Trade.

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Jenny Lind
Posted on December 26, 2012 at 10:15am
What is the old saying-Takes a theif to catch a thief? Instead of him behind bars doing nothing, he should work for the feds-for free.

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- DABIGRAGU
  Posted on December 26, 2012 at 1:13pm
  Work for the Feds? They’re the crooks allowing it to happen to fatten their pockets, I’m sure they would rather him stay right where he is.
  
  Report this comment
jackact
Posted on December 26, 2012 at 9:52am
‘Guest Posts’ on the Blaze suck worse than Bernie Madoff.

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- Walkabout
  Posted on December 26, 2012 at 10:36am
  I liked the guest post. I got the definition of front running & dark pool.
  
  As much as I hate what Bernie Madoff did, I think his letter is useful.
  
  I also hate the Bernie Maddoff scam because it sucked the oxygen out of the news cycle. We should have spent more time of TARP, Paulsen scare tactics & Government Sachs. Government Sachs is orders of magnitude more damaging tot the economy than what Bernie Madoff did. Yes Bernie deserves to be in jail. but the whole circus took too much attention away from government in ineptitude & the large trading houses like Sachs..
  
  Report this comment
- tckid17
  Posted on December 26, 2012 at 11:46am
  So when they continued asking him, he lifted himself up, and said unto them, He
  that is without sin among you, let him first cast a stone at her. John 8:7
  
  Report this comment
tboltdon
Posted on December 26, 2012 at 9:20am
Merry Christmas

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crackerone
Posted on December 26, 2012 at 8:53am
Maybe a visit from David Gregory would cheer him up?

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- Gavinwcaf
  Posted on December 26, 2012 at 1:43pm
  Only if he carries his illegal 30 round magazine with him. Of course it will end up only being illegal for us not him.
  
  Report this comment
Bobolinsky
Posted on December 26, 2012 at 8:33am
Tell us something we don’t already intuitively know.

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americathebankrupt
Posted on December 26, 2012 at 8:25am
The Irony of it ALL.IN DC its LEGAL!Who makes the laws again?

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myptofvu
Posted on December 26, 2012 at 8:20am
Dark Pools are insignificant compared to HFT (high frequency trading). The more sophisticated these algorithms get the more it becomes stealing versus trading.

As far as Hedge Funds go their participation in Shadow Banking is far more destructive than their 2 and 20 fees.

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izukiddin
Posted on December 26, 2012 at 8:02am
Could this be about buying gold? Hmmmmm …

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RJJinGadsden
Posted on December 26, 2012 at 7:41am
Yes JERK, we honestly do know that Bernie Madoff is Jewish, and that all of his family members who worked for and with him are Jewish. So, do yourself and all of us a favor and save your fingertips rather than type all of your usual lectures promoting your agenda. We already know your stance and you should by now know and understand that the largest percentage of us disagree.

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- loneindividual
  Posted on December 26, 2012 at 10:14am
  Who are you talking to?
  
  JERK hasn’t posted anything….
  
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- SovereignSoul
  Posted on December 26, 2012 at 11:15am
  Loner – II think that RJ is heading The Jerk off at the pass, so to speak.
  
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- TIME_2_END_THE_PAUL_CAMPAIGN_IN_12
  Posted on December 26, 2012 at 11:21am
  RJJ. The best defense is a good offense… lol.
  
  Report this comment
- SingerGuy
  Posted on December 26, 2012 at 11:56am
  …or JERK’s racist post was pulled by The Blaze staff after this retort was posted.
  
  Report this comment
- RJJinGadsden
  Posted on December 26, 2012 at 12:25pm
  SINGERGUY, Dang, I missed it then while I was looking at other stories.
  LONEINDIVIDUAL, You were likely right when you posted your question. Its just that most of here have observed stories like this totally awash with THE_JERK’s massive attempts to lecture us as to just how wrong we are regarding our not treating the Jewish people as he does, or how he hates anything Israeli. He constantly blames Jews for practically every single thing that has gone wrong on the face of this planet. He also not kind to blacks either.
  TIME, Yep, you got that right.
  
  Report this comment
- RJJinGadsden
  Posted on December 26, 2012 at 12:27pm
  LONEINDIVIDUAL, Okay, now I understand your sentiment after reading your profile page.
  http://www.theblaze.com/users/loneindividual/
  
  Report this comment
BehindBlueEyes
Posted on December 26, 2012 at 7:38am
“lack of transparency” created by the growth of so-called “dark pools”
Sounds like the what’s going on the Washington.

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- Snowleopard {gallery of cat folks}
  Posted on December 26, 2012 at 7:48am
  Only difference is that in DC, it is many times worse.
  
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- cemerius
  Posted on December 26, 2012 at 9:48am
  It’s what is going on in ALL government levels…..
  
  Who is John Galt?
  
  Report this comment
- Max jones
  Posted on December 26, 2012 at 10:06am
  John Galt is a trucker from New Orleans. Drives a 2006 Peterbuilt with a Volvo engine. Big tipper.
  
  Report this comment

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