Bernie Madoff's Dummy Data Center
Information Management Online, November 3, 2009
Two years ago, Bob McMahon wondered why antiquated systems at Bernard L. Madoff Investment Services weren't replaced with more modern and efficient off-the-shelf systems.
The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon's job: To organize and document projects that would create custom technology for the firm's trading operations.
On Dec. 11, 2008, he got his answer.
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That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients' money over decades. McMahon knew if "technologists" replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.
Over the past six weeks, Securities Industry News has dug into and beyond the court records to construct the most extensive report yet on how Madoff actually operated: The systems and technology he and underlings used to create-or fake-the most detailed set of customer accounts underlying a fraud in the history of the securities industry.
Included are the first details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, which describes how the real and the fake trading floors worked. And why the securities investors believed they owned are never going to be declared "missing." The answer: Because they never existed in the first place.
On the eve of the first anniversary of Madoff's arrest, this then is the story of how the legitimacy of his House 5 was turned into the bastard product of House 17-used solely to create and maintain an alternate reality of trades never made.
But it's more than that. It's also a cautionary tale to information technology managers and executives at shops up and down Wall Street. If you think something is amiss, don't let it rest. Do your own investigation. Before the company you work for turns out to be missing as well.
LEGITIMATE AND ILLEGITIMATE
"I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was done because he had proprietary and legacy systems. And he relied on IT people he hired and paid," to not upset the status quo, says McMahon.
As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and (now Fiserv, Inc.) CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.
"I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation," says McMahon, today an operational performance consultant for Standard & Poors.
McMahon lasted less than a year at Madoff's firm. He was hired in February 2007, by long-time BLMIS chief information officer Elizabeth Weintraub. She died in September of that year.
Differences over updating the systems and formalizing procedures with Weintraub's two successors led to his dismissal the following January, by McMahon's account.
Nader Ibrahim, who was on the support desk from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department was often tense and unusual.
"We did not have titles, which was definitely suspicious to me. We all knew who each other worked for, but nobody knew what the other person was doing," he said. "Everything was on a need-to-know basis. There was a lot of secrecy."
But there were no real secrets about Madoff's purported trading for thousands of investment advisory clients because investigators say they have discovered it never happened.
It's not as if Madoff didn't have a real trading floor. Madoff's legitimate market-making business was located on the 19th floor of 885 Third Ave., in New York, using one IBM Application System/400 computer IBM Application System/400 computer, known within the firm as "House 5.'' BLMIS' information technology operation was located on the 18th floor, where McMahon had his cube and was supposed to organize and document projects involving custom technology for the trading operation.
On the 17th floor? The fake trading floor where a second IBM AS/400 known internally as "House 17" processed historical price information on securities allegedly bought for clients. The end result was phony trade confirmations and wholly manufactured - but official-looking - statements for 4,903 investment advisory clients.
OPEN AND CLOSED
Madoff's legitimate traders used a mix of green-screen and "M2" Windows-based desktop computers. These ran in-house trading software referred to as MISS, which McMahon recalled standing for something like Madoff Investment Systems and Services. The internally-named and developed M2s ran MISS as a Windows application and were used by younger traders who wanted familiar software instead of the rigid green screen system, developed around 1985, where only text appeared on screen and instructions were in almost cryptic codes entered into command lines.
Support for House 5 was almost like that of a large investment bank's support of its trading operations. Nothing was too good, in theory, for the Madoff trading operation on the 19th floor. Even if it was not necessary.
"Madoff did not buy anything off the shelf. The IT team was doing proprietary software development. Maybe J.P. Morgan Chase needs all this heavy technology, but a hedge fund with 120 people doesn't have to be in systems development," said McMahon, adding that a similarly-sized firm might have a half dozen IT people. Both McMahon and Ibrahim pegged the number of people actively supporting technology at BLMIS at between 40 and 50.
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