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Business Law Today

February 2023

Netflix Accurately Portrays Bernie Madoff, But There Are Some Misses

Stuart J Kaswell


  • This article reviews the Netflix series Madoff: The Monster of Wall Street. The article states that the series is a compelling and largely accurate portrayal of the Madoff Ponzi scheme. But the author takes issue with some aspects of the series.
  • The series does not explain how Madoff curried favor with the SEC by helping it modernize securities trading and satisfy a congressional mandate.
  • It characterizes Madoff’s business as a hedge fund. It was not. It was a fraud. Moreover, Madoff purportedly offered individual accounts to investors, not a pooled investment vehicle.
  • Congress did not repeatedly cut the SEC’s budget. On the contrary, Congress materially increased the SEC’s budget nearly every year between 1983 and 2021.
Netflix Accurately Portrays Bernie Madoff, But There Are Some Misses

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The Netflix series Madoff: The Monster of Wall Street is a compelling and largely accurate portrayal of Bernie Madoff’s Ponzi scheme. Unlike some other depictions of the fraud, it discusses how Madoff created the image of a statesman for himself to distract regulators. Unfortunately, it glosses over some things and is incorrect about some other parts of the story.

To its credit, the series does not focus exclusively on how Madoff enticed investors and institutions to entrust their money with him. It discusses his role in fulfilling his market-making responsibilities during the 1987 stock market crash. The series explains that when other market makers were not answering their phones, Madoff continued to buy stock at a loss. That earned him credibility on Wall Street and in Washington. Episode 1 (38:43).

Unfortunately, the series does not explain how Madoff’s legitimate broker-dealer and his advice to the Securities and Exchange Commission (SEC or Commission) helped the Commission meet a major challenge to modernize stock trading. The series makes a passing reference to Madoff’s role in helping computerize the over-the-counter market for stocks. Madoff’s firm helped drive the illiquid and opaque “pink sheet” market to become the liquid and transparent Nasdaq Stock Market. Episode 1 (25:18). But Madoff played a much bigger role in reshaping the structure of American securities markets.

In 1975, Congress enacted legislation granting the SEC new authority to facilitate the establishment of a national market system for securities. Among the legislation’s goals was to link securities markets to foster efficiency, enhance competition, and contribute to best execution of customer orders. Congress left the details up to the SEC. This mandate was fraught with political and technical challenges. Of course, Madoff furthered his own economic interests with the advice he gave to the SEC. Nonetheless, he provided meaningful input to help the agency achieve its goals.

There are some other elements in the series with which I disagree. I discuss those below:

1. Madoff was not running a purported hedge fund.

Speakers in the series frequently refer to Madoff as a hedge fund. To the best of my knowledge, it was not a hedge fund. Here’s why:

A hedge fund is a pooled investment vehicle, similar to a mutual fund. If you invest in a hedge fund, you own shares in the fund, not in the portfolio companies that the fund owns. In Episode 2 (46:48) an investor wants to see trading records to prove that he has shares in the stocks that Madoff said he was buying. If Madoff had been running a legitimate hedge fund, the investors would not have had an account with individual positions.

Furthermore, Depository Trust Company (DTC) (discussed below) does not hold positions for individual customers. A broker-dealer that is a participant in DTC will hold all of its positions together. The broker-dealer will have records showing how many shares each customer owns. For example, if XYZ broker-dealer holds 10,000 shares of ABC stock, DTC’s records will show only the 10,000 shares. XYZ broker-dealer’s records will show that Customer 1 owns 5,000 shares, Customer 2 owns 3,000 shares, and Customer 3 owns 2,000 shares. The episode implies that an investor would have been able to see his own positions at DTC. DTC records only would show an aggregate position.

Madoff was running a Ponzi scheme purporting to be an unregistered investment adviser. The irony is that had Madoff been running a real hedge fund, he would not have had to register with the SEC as an investment adviser under the Investment Advisers Act of 1940 (the Advisers Act).

At that time, the Advisers Act had a de minimis exemption from registration. It provided an exemption for “any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under [the Investment Company Act of 1940]….” A money manager’s client is the fund, not the investors in the fund. If a money manager only managed a single fund, it would have qualified for the de minimis exemption. Legitimate hedge fund managers relied on this exemption and did not have to register with the SEC.

The SEC tried to circumvent the de minimis exemption by adopting a rule requiring the adviser to count the investors in the fund as clients, rather than the fund itself. That change would have required most hedge fund managers to register with the SEC. In Goldstein v. SEC, the Court of Appeals for the District of Columbia Circuit said that the SEC rule was “arbitrary” and vacated it. 451 F.3d 873 (2006).

Congress addressed this issue when it enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Section 403 of Dodd-Frank amended Section 203(b) of the Investment Advisers Act to require managers of hedge funds to register with the SEC as investment advisers.

Some of the investors in Madoff’s fraud probably were hedge funds—pooled investment vehicles. The fact that funds invested in Madoff did not make Madoff a hedge fund. More importantly, even if Madoff did not have to register as an investment adviser, it would not have shielded him from civil and criminal fraud charges.

2. DTC is not a regulator.

At the end of Episode 2 (46:05), Erin Arvedland refers to the Depository Trust Company as a “regulator.” It is not. It is a clearing agency registered under Section 17A of the Securities Exchange Act of 1934 (the Exchange Act). A clearing agency is a self-regulatory organization (SRO), meaning that it has some quasi-governmental authority. SROs are not government agencies and are not full-fledged regulators.

Unlike other SROs, the Exchange Act does not require a clearing agency to enforce its participants’ compliance with the Exchange Act. As a condition of registration as a clearing agency, Section 17A(b)(3)(A) of the Exchange Act requires a clearing agency “to enforce … compliance by its participants with the rules of the clearing agency….” By comparison, a registered securities association, such as FINRA, must have the capacity to enforce compliance by its members and persons associated with its members, with the provisions of this title, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board, and the rules of the association. “With the provisions of this title” means that a registered securities association must enforce the Exchange Act with respect to its members. That language is conspicuous by its absence in the clearing agency provision. Accordingly, a clearing agency, such as DTC, is not a regulator and its self-regulatory authorities are less extensive than other types of SROs.

Further as noted above, DTC keeps records of its participants’ positions, not the individual positions of the participant’s customers. The SEC’s Office of Investigations Report (“OIR”) on Madoff explains that Madoff’s total positions at DTC were substantially less than the amount that a single customer thought it had. The OIR notes:

We reviewed a January 2005 statement for one Madoff feeder fund account, which alone indicated that it held approximately $2.5 billion of S&P 100 equities as of January 31, 2005. On the contrary, on January 31, 2005, DTC records show that Madoff held less than $18 million worth of S&P 100 equities in his DTC account.

3. Congress did not cut the SEC’s budget.

Diana B. Henriques says in Episode 3 (19:43) that the SEC budgets had been “cut and cut again.” At the same time, the episode shows a clip of Ronald Reagan saying that “government is the problem.” There also are voiceovers of scenes from the aftermath of 9/11, stating that the SEC was not a priority. I do not agree with this portrayal of events.

The record as to when Madoff began his fraud is not clear, but it stretched for decades. The court records and press accounts are either vague or cite inconsistencies as to when Madoff or others said they began the Ponzi scheme. The SEC’s Office of Investigations Report noted that investors first complained to the SEC about Avellino & Bienes, a feeder fund, in June 1992. The SEC received complaints about Madoff during multiple chairmanships across several presidencies. President Reagan’s last day in office was January 20, 1989. Following the tradition of former presidents, he largely stayed out the political fray and retired to his California ranch. After a battle with dementia, President Reagan died on June 5, 2004. Showing a film clip of President Reagan sheds no light on the SEC’s failure to investigate Madoff. In my view, the film clip simply invokes a stereotype to inflame the audience.

President Reagan appointed John Shad, a former investment banker, as SEC chairman. Chairman Shad famously said that he was going to “come down on insider trading with hobnail boots.” During his tenure, the SEC brought landmark insider trading cases against Dennis Levine and Ivan Boesky.

The Reagan Administration did not cut the SEC’s budget. According to the New York Times, during Shad’s tenure, by 1986 “the [SEC’s] budget ha[d] grown a modest 35%.” An increase is not a cut.

Initially, Shad did not favor increasing the SEC’s budget significantly, a position consistent with the Reagan Administration’s views. After the Levine and Boesky cases, Shad said he would seek a major increase in SEC funding from Congress. Republican members of the Committee on Energy & Commerce of the U.S. House of Representatives supported an increase. The SEC’s 1988 Budget Request urged Congress to increase the SEC’s budget by 27% over the 1987 appropriation. The request sought additional increases for two subsequent years.

Congress increased the SEC’s budget every year between FY 1983 and 2021, with the exception of three years when the budget was essentially flat. In FY 2002, i.e., after the 9/11 terrorist attack damaged the SEC’s New York Regional Office, Congress added $20.7 million for disaster recovery. For the FYs 1983 to 1994, the median increase in funding was 12.9%, and the average increase was 10.78%. For the FYs 1995 to 2021, the median increase in Budget Authority was 6.09%, and the median increase in Actual Obligations was 7.34%.

There is no question that after 9/11, the country focused new attention on terrorism and devoted substantial resources to that effort. But there is no evidence to show that Congress cut the SEC’s budget to help pay for those antiterrorism efforts.

I also disagree with Henriques’s statement “that the laws that they [presumably the SEC] could rely on to pursue investigations had been tightened.” Episode 3 (20:03). I do not know which laws she has in mind.

President Reagan did sign into law two tough insider trading bills:

  • Insider Trading Sanctions Act of 1984 (P. L. 98-376, Aug. 10, 1984)—among other things, the legislation authorized the SEC to seek a civil penalty against insider traders for as much as three times the profit gained or loss avoided; and
  • Insider Trading and Securities Fraud Enforcement Act of 1988 (P.L. 100-704, Nov. 19, 1988)—among other things, the legislation:
    • allowed the SEC to impose a similar penalty against a person who controlled the insider trader;
    • authorized the SEC to award bounties to informants; and
    • required broker-dealers and investment advisers to have policies and procedures reasonably designed to prevent insider trading.

There is plenty of blame to go around for the SEC’s failure to uncover Madoff sooner. Did Congress give the SEC all the money that it wanted? Of course not. Congress almost never gives any agency the full amount of funding that it seeks. The SEC has to compete for resources with all other agencies. Nonetheless, Congress materially increased the SEC’s funding regardless of which party controlled the White House or Congress.

4. SEC staff do not wear metal badges.

I have never seen an SEC staffer with a metal badge. Episode 3 (43:15). They had laminated identification cards that many wore with chains around their necks. In my day, SEC lawyers kept their IDs handy in their purses or wallets, but avoided wearing them on chains.


Bernie Madoff’s crimes were hideous. He caused suffering to many people around the world. This series is a useful reminder of Madoff’s horrific acts; there is no need to bend the truth for dramatic effect.