Diana Henriques on Scandal, Madoff and Investigative Journalism

​Diana B. Henriques, an award-winning financial journalist, is the author of The Wizard of Lies, a New York Times bestseller about the Bernie Madoff scandal, and three other books on business history. As a writer for The New York Times, she has largely specialized in investigative reporting on white-collar crime, market regulation and corporate governance.

Richard Torrenzano: Why did you decide to go into journalism — and then investigative journalism — which is a real specialty? ​

Diana Henriques: I got hooked on journalism very young. I was 13 years old. I was participating in a Junior Achievement program in my hometown of Roanoke, Virginia. The local newspaper sponsored a teen page. A bunch of us high school kids put together a page of the paper every Saturday. We sold the ads, we took the pictures, we wrote the stories. That got me interested in writing.

Before that point, I thought I would be a psychologist or a lawyer. The old guy who was our overseer – the TV listings editor – found a spot for me in the newsroom to do some revisions on a story I was working on. It was right in the slump between the afternoon paper being put to bed and the morning paper starting to gear up. As I was working at this big old oak desk with one of those huge typewriters that rolled up out of the desk, the newsroom came alive around me. The teletype machine was dinging. The pneumatic tubes were thumping. Kids in newsrooms today have no idea what I am talking about when I describe these things. I fell in love. I just fell in love with that environment. It seemed like the most exciting place I could possibly spend time.

RT: Those exciting sounds are all gone now.

DH: I know. Newsrooms now sound like insurance company offices. It is grim! But you know, I did a fun thing with a kindergarten class once to show them what old newsrooms were like. I had them tap on chair backs to mimic the typewriters. We rang little bells to make it sound like the teletypes. It was a symphony, really — the symphony of the newsroom.

Once I got into newspapering, it was just really serendipity that led me into the investigative side. I had a very supportive editor at the Trenton Times in New Jersey. We received a news tip that none of us could understand…about a local revenue bond authority and perhaps some political skullduggery going on there. That editor encouraged me to pursue it. I was hooked. That more or less became my brief for the rest of my life. Really, that was my first taste of what I did not even know at the time to call white-collar crime. Now white-collar crime is really my franchise.

RT: Let’s stay with investigative journalism just a tad longer. When you began a lifetime ago, how has investigative journalism changed during that time?

DH: That is a great question. It was created very self-consciously. That kind of enterprise reporting obviously has been done for 150 years. Ida Tarbell and her groundbreaking work on Standard Oil back at the beginning of the twentieth century was investigative reporting.

There was a time in the ‘70s when investigating bad guys began to seem really dangerous. In fact, Don Bolles, a reporter out in Arizona, was killed while working on an investigative story that appeared to have links to organized crime. In the aftermath of that, reporters and editors across the country decided quite self-consciously that if we did not step in and continue Bolles’s work that we were all vulnerable.

It would seem like all you have to do is eliminate the reporter and you have eliminated the story. We were determined not to have that happen. The organization Investigative Reporters and Editors, IRE, was formed in the aftermath of that. While not a charter member, I think I was a second year member. I have been active in it ever since.

It started with a very utilitarian self-protective idea. In one way, it has become much easier. The Internet, for all the damage it has done to the organizations that sponsor and pay for investigative journalism, has really made it so much easier.

When I first started out in this business, if you wanted to get the goods on a publicly traded company, the New York Times was rich enough to have an account with one of the vendors who could deliver boxes of paper financial statements to you. I would spend about $5000 a month on my NYT column just ordering documents.

Most organizations could not do that. They could not afford it. It was a rich paper’s game. It really required an investigation effort that was expensive and time-consuming. Now that playing field has been totally leveled. That has made it easier.

RT: You see the personal pressure – the violence – on investigative reporters, but also in smaller cities, smaller newspapers are under financial pressure publications in today’s economic climate. ​

DH: That is true. The financial pressures that hit the industry have hit especially hard at investigative reporting. It would be easy. Believe me, for several years we all were on the brink of despair about what would happen to this crucial watchdog function of journalism. I am somewhat encouraged, Rich, to see what is happening. The emergence of non-profit organizations, foundation-sponsored research, organizations that are partnering with existing news organizations do really top flight investigative reporting. One of them, ProPublica, was honored with a Pulitzer Prize. If you told me ten years ago that there would be a website – a nonprofit investigative website that did not even have a regular place to publish its stuff – that would win a Pulitzer Prize. I would have said, oh you are dreaming. That is ridiculous. We are there. We have gotten there very quickly.

The Center for Investigative Journalism, work that Lowell Bergman is doing out at UCLA Berkeley’s Journalism School, I could rattle off a whole number of them. This is likely to be the future of investigative journalism. It is going to be a coalition of the willing. It is going to be a coalition of people who are determined to keep it alive, and who are going to work with the mainstream legacy press and television to find an audience for it.

RT: What is the biggest story you’ve chased in your career?

DH: I think the Bernie Madoff case obviously has to rank near the top just because of the sheer scale of the betrayal … the emotional impact it had on the country, and really, the world.
It came at a time when everyone was feeling betrayed by Wall Street. Wall Street is an abstraction. Then this guy betrayed everyone he knew and everyone who loved and trusted him. He is the poster child for what seemed like a whole era of betrayal on the Street.

RT: Let us talk about The Wizard of Lies, your best-selling book on the subject. When you tackle a book you have to be inspired. You have to have something inside you, which is saying “I have to do this.” What was your “I have to do this”?

DH: From the very day that story broke, by nightfall we knew that Bernie Madoff had betrayed everyone who trusted him and was turned in by his own two sons. He had trusted them to sit quietly until he executed some more chores, and then would quietly turn himself in through his lawyer. That was Shakespearian. It really was almost biblical the level of personal betrayal. I think it was the family drama from the very first moment that hooked me.

I could see that this fraud was different. I covered dozens of Ponzi schemes. I mean one of the fun parts of my business is I get to meet a lot of Ponzi schemers. This was different.

RT: Is it scale and magnitude?

DH: It is partly that. Obviously, it was the largest Ponzi scheme in history – a billion in paper wealth wiped away. It was the first “global” Ponzi scheme. Victims spread all around the world, which had never happened before. In many ways, it was a historic marker in terms of fraud.

It was an unusual Ponzi scheme in that it did not promise sky-high returns, which is what we always think of as a Ponzi scheme. Double your money in 20 days. They were nice steady returns. But most of Madoff’s victims would have done better in the Magellan Fund. It was not one of those red-flag-waving Ponzi schemes. In many ways, it was intellectually interesting as a fraud and as a Ponzi scheme. It broke new ground. But it was the personal story that held me.

It was the personal art of this man who had been so respected on Wall Street. I had known him. I quoted him. I interviewed him on stories about the changing market structure back in the eighties and the nineties. He was a key advocate of the modernization forces that helped reshape NASDAQ. He was a regular consultant to regulators. I had interviewed him or his brother, Peter, two or three times over those years. He was in my Rolodex.

When I saw that he had been arrested and that the fraud was of enormous magnitude, it was just a total disconnect for me. Then the personal pieces began to fall into place: His sons turning him in; his wife standing by his side and thereby becoming estranged from her sons.

The sons and the wife becoming these utter pariahs in the social setting…that typically did not happen to white-collar criminals. In the past, you left the family alone. Even the families of organized crime figures were generally left alone by the media. This was, again, new ground but new ground in a very personal and very dramatic way.

RT: If you take a step back, what effect do you think this had on the American culture and the American scene? What effect did it have on Wall Street? Most importantly, did it have any effect on regulators? ​

DH: I wish I could be more sanguine about its effect. I hope that it has had the effect on the country…of making people more skeptical. Certainly in the talks I have given over the past two years – there have been more than 100 of them around the country – that is what I hammer away at. You think you know what a Ponzi schemer looks like, but you do not. You think you know what a Ponzi scheme sounds like, but you do not. I am hoping that the average investor is a little bit savvier about avoiding Ponzi schemes.

For Wall Street, my hope would have been that they would have emerged from this experience with a better understanding of the need to blow the whistle on their own members. After Madoff’s arrest, countless private fund managers, business consultants, and private bankers came forward. They said, “Oh, I knew all along about Bernie. I kept my clients out. I never believed in him.” I am saying, “And you kept quiet? You got your clients out and let everybody else’s clients go down?”

That failure to police itself, that failure to blow the whistle not just on Madoff suspicions, but for Heaven’s sake, on ridiculously risky mortgage-backed securities, on sloppy foreclosure practices and on dubious accounting. People all knew these things were going on. There was no big secret about what was happening in the lead-up to the financial crisis of 2008. Yet, Wall Street felt no obligation.

RT: If you go back 20 years, a generation to the mid-eighties, we saw similar issues with Boesky and Levine, with Drexel Burnham going down. It was a tragedy then. Madoff being the head of a firm was the same kind of tragedy in some ways.

DH: It was a tragedy certainly for the Madoff family, for all of the employees who worked there and had built their careers around that organization, as with Drexel and as with the Boesky shop.

What is troubling to me is not that you have these outliers. You always have. There have always been the people on Wall Street who are going to push the envelope. They are going to figure that that particular law does not apply exactly to this specific circumstance and to me.

It’s the cultural climate that scares me. What we saw in the decade before the crash of 2008 seems to me far more systemic. It is far more structural. There was a culture that took over…one that valued market share and profit above morality and ethics to a degree that I had never seen before in my personal career or read about in modern history. You have to go back to the Gilded Age, the Robber Barons, to see the kind of structural misbehavior that has emerged today. ​

RT: Wall Street seems to have its scandal du jour each decade. What should people be looking at? What should people be concerned with about this decade?

DH: One of my concerns is that despite the obvious failures of deregulation, the lunacy of thinking that sophisticated institutional investors could look out for themselves and regulators could focus on other things. That idea was blown out of the water in 2008. But it still raises its ugly head. I mean it is like you need to drive a stake in the heart of this notion that the markets will police themselves. The markets apparently think that that is somebody else’s job. I tend to agree with them. I think it is somebody else’s job. It is the regulator’s job.

What I see regulators doing as they have just done is making fraud easier. It is just that simple. The JOBS Act, for example, supposedly “jump-starts” our small businesses … That invites small flimsy companies that may exist nowhere but on paper to use the Internet — oh, man, the powerful Internet, the global worldwide web — to raise money. From whom? It is from people who surf the net. It is fraught with opportunities for mischief. Frankly, I am waiting for the frauds to evolve. I will be looking closely for them.

RT: The fraud, like our society, has gone global.

DH: It has gone global, and it has gone high-tech. I mean, the penny stock frauds – Heavens, we have had those since the 1950s. They cycle in and out. You have the boiler rooms and those pump and dump schemes. I have covered dozens and dozens of those. Take that out of the old cold calling, phone bank, boiler rooms out on Long Island or out in Denver. Now, turn that into an internet-driven sales pitch. It puts penny stock fraud on steroids. I am afraid that is what we are going to see with these new changes.

RT: Could you see this happening in another industry?

DH: Do not forget how interconnected Wall Street and Main Street have become. I mean we are all our own pension fund managers now with our 401K plans. The idea that investing on Wall Street is an elite activity, an activity for specialists like brain surgery or nuclear physics, is gone. We all have to find our way around the markets. To me, that means the markets must be more intelligently regulated. It is not that they should be less regulated.

The fact is that the average middle-class saver who hopes for a retirement, the working class employee who works for a retirement, has to be involved in the market. To me, it is the perfect storm. You have a market that demonstrated in 2008 a massive failure of not just self-regulation but self-control and self-restraint.

Then you have millions, hundreds of millions of people around the world – the emerging middle classes in the UK and China – you have people who are desperate to save and put their money to work for them just as they are working hard. They encounter this culture. We have to do something about that.

I wish I could be more cheerful about where we go post-Madoff and post-2008. But it amazes me, frankly, how quickly the demand for investor protection and the political concern about investor protection has evaporated. All you hear now in Washington is cut the budget. Cut the budget. De-regulate. I saw that movie. I know how it ends. It does not end well. I think we really need to change the conversation and change the script so that individual investor protection has a much higher priority and a much bigger share of the conversation.

RT: Tell me about your next book?

DH: I am “not at liberty to divulge” yet! There are actually a number of issues that have emerged out of my Madoff research that intrigue me. One of them is this “blowing the whistle” idea. This is the reluctance of Wall Street to blow the whistle, the role of whistle-blowers, and how it is changing. I find myself fascinated by the whistle-blower world and some of the issues it poses for society. Do not be surprised if you see me looking around in that area. ​