(watch ticking) >> you know, in today's regulatory environment, it's virtually impossible to--to violate rules. and this is something that the public really doesn't understand, but you--it's impossible for you to go unde-- for a violation to go undetected... >> kroft: yes, that's bernie madoff saying it was impossible to do exactly what he did. but one man did try to tell the government what madoff was up to. how long did it take you to figure out that there was something wrong? >> it took me five minutes to know that it was a fraud. it took me another almost four hours of mathematical modeling to prove that it was a fraud.

(watch ticking) >> safer: so this was the scene of the crime. irving picard gave us a tour of bernie madoff's 19th-floor offices, an impressive landscape of emptiness. >> his desk was here. >> safer: picard has the thankless task of finding the money, the billions that madoff scammed. (watch ticking) arlan galbraith who called himself "the pigeon king" convinced hundreds of american and canadian farmers there was good money to be made raising the birds for food. >> and everybody we talked to said this guy was--he was on the up and up. nobody had a bad word to say about him. (watch ticking) >> stahl: welcome to "60 minutes" on cnbc. i'm leslie stahl. in march 2009, bernard madoff pleaded guilty to perpetrating what's believed to be the largest financial fraud in history. he received the maximum sentence for his crime, 150 years in prison. but while madoff is behind bars, there's still much we

don't know about the scam which involved, by some accounts, a fraud of more than $50 billion. investigators are still trying to figure out who was involved and where the money went. this edition features some of the people most intimately familiar with madoff's schemes: irving picard, the court-appointed trustee charged with finding the missing money, some of the crooked financier's victims and the man who figured out madoff's crimes out before anyone else, harry markopolos. plus, morley safer examines why, even today, investors are so susceptible to con men. we begin with markopolos. at the beginning of 2009, he sat down with steve kroft for his first television interview. >> kroft: until the end of 2008, harry markopolos was an obscure financial analyst and mildly eccentric fraud investigator from boston who most people would never notice on the

street. >> my modern greek hero. how you doing? >> kroft: but today he enjoys an almost heroic status, pursued by journalists and movie producers and honored by colleagues as the man who went to the securities and exchange commission and blew the whistle on bernie madoff and his $50 billion fraud. >> (blows whistle) thank you. thank you. please take your seats. >> kroft: but he seems uncomfortable with all the attention, and knows that he is no hero. >> i stand before you a $50 billion failure. (laughter) >> kroft: how many times did you send material to the sec? >> may 2000, october 2001, october, november, and december of 2005, then again june 2007, and finally april 2008. >> kroft: hmm. >> so five separate sec submissions. >> kroft: and in spite of all of the things that you did, it still ended up in disaster.

>> there's nothing to be proud about in this case. i feel horrible about the result. it's been a total disaster for the victims. >> kroft: it began markopolos was working for a boston investment firm. his boss told him that bernard madoff, a former chairman of the nasdaq stock exchange, was running a huge unregistered hedge fund that was producing incredible returns. he wanted harry to reverse-engineer its trading strategy and revenue streams so that the firm could duplicate madoff's results. >> he had the patina of being a respected citizen, one of the most successful businessmen in new york and certainly one of the most powerful men on wall street. you would never suspect him of fraud unless you knew the math. >> kroft: so i mean, you're like a math guy, right? >> i've taken all the calculus courses from integral calculus to differential calculus as well as linear algebra and statistics, both normal and non-normal. >> kroft: how long did it take you to figure out that there was something wrong? >> it took me five minutes to know that it was a fraud.

it took me another almost four hours of mathematical modeling to prove that it was a fraud. >> kroft: what were the things that caught your attention? >> it was the performance line. as we know, markets go up and down, and his only went up. he had very few down months. only 4% of the months were down months, and that would be equivalent to a baseball player in the major leagues batting .960 for a year. clearly impossible. you would expect cheating immediately. >> kroft: maybe he was just good? >> no one's that good. >> kroft: harry said there were only two plausible explanations: either madoff was using insider information to rack up huge profits or he was running a giant ponzi scheme. so either way, he was doing something illegal? >> either way, i knew he was gonna go to prison. >> kroft: in may of 2000, markopolos took his suspicions about bernie madoff to the boston office of the securities and exchange commission. did you have any financial motive? >> yes. he was a competitor of mine in 2000 to 2004 while i was still

in the industry, and when someone's competing on your playing field who's a dirty player, you want him tossed off the field. >> kroft: he also thought he might be eligible for a sizable reward if the fraud involved insider trading, but that turned out not to be the case. in your first letter to the sec back in 2000, you're a little tentative. you say, "look, i have no smoking gun." >> in 2000, it was more theoretical. in 2001, it was a little bit more real. by 2005, i had 29 red flags that you just couldn't miss on. by 2005, the degree of certainty was approaching 100%. >> kroft: over time, and with some simple math calculations, markopolos concluded that for madoff to execute the trading strategy he said he was using, he would have had to buy more options on the chicago options exchange than actually existed. yet, he says no one he spoke to there remembered making a single

trade with bernie madoff's fund. >> i would talk to the people i had trading relationships with and ask, "did you have a trading relationship with mr. bernard madoff?" and they all said, "no. we don't think he's for real." >> kroft: could you find anybody? >> i found no one that ever traded with mr. madoff, and i traded with the largest equity derivative service in the world. >> kroft: and that's because madoff's investment fund never actually made any trades, at least going back to 1993 and probably further, a fact confirmed at a meeting of madoff investors by the trustee charged with liquidating his assets. no one knew the depth of the fraud, but a lot of people had questions. who else figured this out besides you? >> i would say that hundreds of people suspected something was amiss with the madoff operation. if you look at who the victims were not, you'll notice that the major firms on wall street had no money with mr. madoff. >> kroft: i mean, you write-- this is the letter. i'm quoting from the letter to the securities and exchange commission, red flag number

20: "madoff is suspected of being a fraud by some of the world's largest, most sophisticated financial services firms," and then you list some of the firms. >> yes, i do. >> kroft: the biggest firms on wall street and conversations with people high up in those firms. >> that is correct. and the sec ignored that. >> kroft: did they call any of these people? >> all the sec had to do was pick up the phone. they never did. >> kroft: if you had executives that's--at the biggest investment houses on wall street that knew something was wrong, why do you think they didn't go to the sec? >> because people in glass houses don't throw stones. and self-regulation on wall street doesn't work. >> kroft: in january 2006, the new york office of the securities and exchange commission finally opened a case file to look into harry's allegations about bernie madoff. despite uncovering evidence that madoff had misled them about his investment activities, the sec closed the case 11 months later without ever opening a formal investigation. the staff said there was "no

evidence of fraud." >> what i found out from my dealings with the sec over eight and a half years is that their people are totally untrained in finance. they're unschooled. most of them are just merely lawyers without any financial industry experience. >> kroft: well, if the people there aren't trained in securities work, what are they trained in? >> how to look at pieces of paper that the securities laws require. they can check every piece of paper perfectly and find misdemeanors, and they'll miss all the financial felonies that are occurring because they never look there. even when pointed to fraud, they're incapable of finding fraud. (watch ticking) >> stahl: bernie madoff was committing a massive fraud, one leaving a trail of ruined victims in its wake. >> probably the thing that tears me up more than anything is the fact that i recommended madoff to a number of people. >> kroft: when "60 minutes" on cnbc returns in a moment. >> kroft: when "60 minutes" on cnbc returns in a moment. (watch ticking)

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>> kroft: no one at the sec would talk to us on the record about harry markopolos' allegations, but one person who seemed to have had a high opinion of the agency was bernie madoff. >> i'm very close with the regulators. i'm not trying to say that they cant--you know, that what they do is bad. as a matter of fact, my niece just married one. >> kroft: besides his niece's husband, who no longer works at the sec, madoff has had longstanding ties to the agency and has been called upon to give advice. at this 2007 meeting of a non-profit group called "the philoctetes center," madoff seemed to think the sec was doing a great job. >> you know, in today's regulatory environment, it's virtually impossible to--to violate rules, and this is something that the public really doesn't understand. but you--it's impossible for you to go unde--for a violation to go undetected, certainly not for a considerable period of time. >> kroft: but don't try and tell that to the philoctetes center. its main benefactor, the betty and norman levy foundation, was

fully invested in madoff, one of dozens of charitable organizations that have been devastated or wiped out. madoff's customer list, single- spaced with small type, is 162 pages long, with victims running the gamut from hollywood royalty to a carpenters' pension fund in syracuse, new york. shelly ludlow has been forced to put her mother in a medicaid-assisted living facility while she packed up their apartment to move in with a friend, all because of bernie madoff. >> our whole lives were turned upside down by this man that sits in his penthouse and smirks. (sighs) >> kroft: 70 miles away, len and marge forrest were leaving their house that they'd just sold in setauket, long island, and were preparing to drive to south florida to sell their home there. they had their money with bernie madoff for 30 years and lost an 8-figure family fortune two

days before his 80 birthday. do you have any money to live on? >> enough, i would say, for 60 days. >> kroft: do you know other people who are in the same situation? >> oh, yes, we have a lot, unfortunately, and i think probably the thing that tears me up more than anything is the fact that i recommended madoff to a number of people, and they lost their money, and i'll never stop feeling responsible for that. they were all close family and friends. >> kroft: len forrest and his friends thought they were part of a small exclusive group of investors lucky enough to have a connection with bernie madoff, and because they thought they were making 12% a year, they weren't inclined to ask a lot of questions. harry markopolos called it the classic affinity scam. >> an affinity scam is when you prey on groups that are similar in nature to yourself. so i'm greek. if i was gonna run an affinity scam, i would run it on the greek-american community here.

bernie was jewish, so he ran it on the jewish community in the united states. but that didn't--that wouldn't get him enough customers because he always needed new money to keep the scheme going. >> kroft: over time, madoff extended his reach from new york to palm beach, where he enlisted hundreds of wealthy clients, many of them recruited from his own country clubs. and he also made connections that gave him entree to europe, and the hedge funds capital of america, greenwich, connecticut. it was here that bernie madoff made some of his biggest deals with large investment firms that were willing to feed him billions of dollars of their clients' money to manage. and in return, bernie madoff agreed to pay these so-called feeder funds a fortune in annual fees. the largest of the feeder funds was the fairfield greenwich group. how much money did fairfield make off bernie madoff every year? >> hundreds of millions of dollars. >> kroft: if you're a feeder fund, what are you supposed to do for those hundreds of millions of dollars? >> you're supposed to identify the world's best hedge fund managers and invest only in

them, and you're supposed to make sure they're not running ponzi schemes. >> the real steroids here were the feeder funds. that's what made it an international ponzi scheme. >> kroft: attorney david boies is one of the most prominent lawyers in the country and is representing fairfield greenwich investors, who lost nearly $7 billon when madoff went under. they're suing the firm for gross negligence, claiming it failed to investigate madoff thoroughly or monitor his activities as it promised to do in its marketing materials. analysis of portfolio composition, portfolio stress testing, risk management, asset verification. do you think that really happened? >> no. we know it didn't happen because we know all they did was turn the money over to bernie madoff. and they did that for 20 years. >> kroft: they did nothing? >> they essentially did nothing except lose their investors' money and enjoy very luxurious lifestyles from the money they took out. >> kroft: walter noel, one of the founding partners of fairfield greenwich, declined to

talk to us and has reportedly been lying low with his wife at their compound on the private island of mustique. but in a statement to "60 minutes," his firm said that it too was a victim of bernie madoff, that it had placed too much trust in his "then-impeccable reputation" and in the fact that there had been "multiple reviews of madoff by the sec." >> mr. madoff, what do you have to say for yourself? >> kroft: in the end, harry markopolos had been right about bernie madoff. he will be going to prison, but not because of anything that harry or the sec did. in a bad economy, madoff's lies simply collapsed under their own weight. >> no one was investigating mr. madoff at the end. >> kroft: so he turned himself in before anybody in a position of authority began a serious investigation? >> that's typically how the sec does it. they come in after the crime has been committed, they toe-tag the victims, count the bodies, and try to figure out who the crooks

were after the fact, which does none of us any good. >> stahl: the mastermind of the ponzi scheme of all ponzi schemes, bernard madoff, may be in prison, but he is hardly forgotten. his untidy little business that bilked thousands of people out of billions of dollars is no more, but the big question, "where did all the money go?" remains unanswered. irving picard is the court-appointed trustee assigned to find that money and return as much of it as possible to madoff's investors. it's a daunting and thankless task, for while he's suing whoever he can on behalf of the victims, he's also suing many of the victims, those, who he says, benefitted and should have known they were investing in a house of cards. in june, 2010, picard and his chief counsel david sheehan sat down with morley safer to update

us on the legal battle. >> safer: just before the whole thing collapsed, bernard madoff sent out statements to his clients. how much were they told they were worth? >> about $64.8 billion. >> safer: so the statements were total lies? >> yes, absolutely. >> safer: the 64.8 billion that investors thought they had was just an illusion, designed by madoff to keep investors investing. then the roof fell in. >> mr. madoff, what would you say to all those people that lost... >> safer: mr. madoff has no say in the matter. if the victims want money back, they'll have to go through mr. picard, the decider, and his bloodhound, mr. sheehan. how much real money do you think went into the whole scheme? >> i'd say about 36 billion, and about 18 of it went out before the collapse, and 18 of it's just missing. and that $18 billion is what

we're trying to get back. >> safer: picard and his team have been on a global treasure hunt. the first step: liquidation, madoff's boats, his art, even his season tickets to the new york mets, plus bernie's various homes, all sold with a u.s. marshal as real estate pitchman. >> your eyes are drawn directly to the chandelier, which is probably worth a pretty penny. >> safer: they didn't exactly hide their wealth, did they? >> they did have the house in palm beach. they had a place in montauk. they had, you know, an apartment here on park avenue in the city, all of which are the accoutrements of great wealth. but it wasn't an extraordinary lifestyle. >> safer: how much does all that total? >> according to the government, it's over $50 million. >> safer: just a drop in an oversized bucket, nothing close to what investors lost. so picard and his team continued to follow the money. they started here. so this was the scene of the crime... madoff's new york offices, an

impressive landscape of emptiness. >> his desk was here... >> safer: and close by, perhaps a work of art that sums up the entire story. >> it's called the soft screw. and it was about 4--i guess 4 to 6 feet high, and it was sitting right here. >> safer: and sitting on top of the world was madoff himself. >> he was much like the wizard of oz, just hiding behind this wall. and no one could quite penetrate it, but they sort of really liked the results. (watch ticking) >> stahl: coming up, an unexpected twist in the hunt for the madoff investors' missing money. >> safer: most people assume that everyone lost money. >> we've found that there have been quite a few people who have gotten out more than they put in. >> stahl" next, when "60 minutes" on cnbc returns. (watch ticking)

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(watch ticking) >> safer: as far as you've been able to find out, was he ever legitimate? >> no, it was never legitimate. and i think if he told the truth, which he's not capable of, he would then say, "yes, i started out as a crook, and i ended up as a crook." >> safer: and a crook who looked after his family. picard's team unearthed records showing madoff's sons mark and andrew, who ran a legitimate trading operation, and madoff's brother peter, the chief compliance officer, took $80 million in compensation over the past seven years. plus, millions more in personal expenses charged to the company, private jet rentals, ski vacations and country club dues. even ruth, madoff's wife, had a company credit card, and she

charged millions, too, on everything from shopping sprees in paris to movie rentals, all courtesy of bernard l. madoff's securities, thank you very much. >> they used the bank account at b.l.m.i.s. like a personal piggy bank. >> safer: of all the people that should have known, his brother and his sons who worked under the same roof with him should have known. >> one would think so. yes. >> safer: did they know? >> my belief is, yes, they knew. and the reason i believe that is they were officers of these companies and directors in certain instances as well and also compliance officers in a very highly regulated environment. so i think clearly they would have to have known what was going on given their own personal transactions, the longevity of what was happening, and the responsibilities as officers of the company. >> safer: madoff's sons and brother also had accounts with bernie, and their returns were simply spectacular.

>> there is sort of an extraordinary event with peter, his brother. after 1995, we only see him putting $14 in and he took out over 16 million. we have to take a hard look at that. >> safer: picard says mark and andrew madoff withdrew over $35 million from accounts that were opened with little or no original investment. if they turn out to be untouchable criminally, do you intend to bankrupt them civilly? >> whether or not they have a criminal problem, we will pursue them as far as we can pursue them. and if that leads to bankrupting them, then that's what will happen. >> safer: picard and sheehan filed suit against madoff's sons mark and andrew, his brother peter, and niece shana, accusing them of negligence and breach of fiduciary duty in their roles at the company. they'll seeking the return of

$198 million that was paid out, loaned or transferred to them. >> when his brother took out money or his sons took out money, they took customer money. >> safer: can you lay claim to the sons' real estate, for example? >> i believe that we can. the money that went to buy these houses under the law is called fraudulent transfers. >> safer: maybe. but the madoff sons are claiming they're still owed nearly $90 million by their father's bankrupt company. >> mr. madoff? >> safer: mark madoff and the other family members maintain their innocence and declined our request for an interview. >> i have no comment. i'm sorry, i told you. >> safer: but in a statement, the madoff sons say picard's allegations are baseless, that they had no prior knowledge of bernard madoff's crimes. >> if you were those sons, and you knew what you knew today about where all that money came from, wouldn't you be embarrassed to keep that money?

they should give it all back. and if they don't give it all back, i think we have an obligation to go get it and take it all back. >> safer: and that includes mother madoff ruth. though, she's already agreed to forfeit about 80 million in assets, picard has sued to keep her on a very short leash. any time she spends over a $100, she has to check in with you, correct? >> she reports it to us at the end of a month. >> safer: and how is she living now? >> very modestly. >> and the most significant amount of money that ruth is currently spending is on lawyers. >> safer: there is an assumption in this case that there is this stash out there, whether in swiss banks or under the mattress. are you assuming there is? >> yes, we are. >> yes. >> safer: what kind of money we talking about? >> we'd assume millions and millions of dollars. >> safer: millions and millions isn't nearly enough to cover the billions stolen by bernie madoff. but here's where the story takes an odd twist. most of the money for victims will not come from the madoff

family but from some of the victims themselves. most people assume that everyone lost money-- >> mm-hm. >> safer: who dealt with madoff? >> right. >> safer: not true? >> we've found that there have been quite a few people who have gotten out more than they put in. >> safer: in fact, about half o+ madoff's thousands of victims are what picard calls net winners, people who took out more money than they ever invested with madoff. >> we can tell that if morley put in a $100 and he got out $200, he got a $100 of somebody else's money. >> safer: so, the guy who's been happily taking $25,000 a year out over, say, ten years, he's not gonna get a dime out of this. >> no. >> not if he took out more than he put in. >> safer: well, say, if he put in an initial $100,000? >> then he's already got more than he put in. he's been overpaid. >> safer: and are you you gonna try and get the difference? >> perhaps. >> safer: and he's entitled by law to get that difference back.

it goes by the nicely nasty name of a clawback. if any investor took out more than they've put in over the past six years, picard can legally demand it back to help victims who didn't take money out. for now, picard says madoff's small-time winners are not his priority. he's focusing on the big winners who claim to be innocent victims. >> i think, as everyone, you know, was participating in this and just feeding at this trough of greed, at the end of it, what they were looking for was it to continue. they were hoping it was never going to end. >> safer: so far, the trustee and his counsel have filed fifteen lawsuits seeking the return of nearly $15 billion from the biggest madoff investors. in addition, 233 clawback notices have gone out to madoff's friends and family who may have profited from the scheme. >> this is a human tragedy...

>> safer: thousands of smaller investors who were living off what they believed were legitimate profits now fear that on top of their lost nest egg, they may end up owing even more. >> i open my mailbox wondering if this will be the day when the letter arrives. >> safer: sheehan is sympathetic, but... >> at the end of the day, they were in a ponzi scheme, unfortunately for them. so all they get, at best, is what they put in. and to claim that they should be getting something other than that is to suggest that some other resource should exist. i'm talking about the taxpayers coming in and funding this. >> safer: so far, picard has found nearly a billion and a half dollars for the victims' fund, and he's expecting to get several billion dollars more. but even then, victims will collect only a tiny fraction of what they lost. >> we don't know how much is there, but it's going to be, not necessarily pennies on the dollar, but it's only, you know, a little bit more than that. we're not going to be able to

repay everyone, not anything close to what they lost. >> stahl: since our report, irving picard has filed over 1,000 civil lawsuits in an attempt to recover more than $50 billion for the victims of bernard madoff's ponzi scheme. included among those lawsuits is a claim for $3.6 billion in damages from fairfield greenwich which named walter noel as one of the defendants. on december 17, 2010, there was some good news for the victims. in what has been described as a game-changer, the estate of jeffrey picower, the largest beneficiary of the madoff fraud, agreed to return $7.2 billion to the trustee. but just before the picower settlement, the madoff story took another tragic turn. on the second anniversary of his arrest, december 11, 2010, the disgraced financier's older son mark committed suicide in his

new york apartment. he was 46 years old. david sheehan, the counsel for picard, says that mark madoff's death would not affect the complaints against him, his brother andrew, and other relatives. (watch ticking) >> stahl: coming up... >> we just didn't find the red flags popping up. so we tried it, and... and we lost. >> stahl: why gullible investors still catch pigeon fever next when "60 minutes" on cnbc returns. (watch ticking)

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>> stahl: the ancient wisdom that there's a sucker born every

minute has been especially pertinent given the financial disasters of the past few years. so it's time for a short and painless test. are you sometimes just too trusting? do you invest in things you don't really understand? are you also a bit greedy? then you, too, could be suffering from pigeon fever. pigeons, just so you know, are what conmen call their victims. in the wake of bernard madoff's massive fraud, where the former financier cheated investors out of billions, you might think that investors would be less gullible. if so, think again. prosecutors and regulators tell us that even in this age of skepticism, ponzi schemes like madoff's are thriving. one regulator even calls it ponzimonium. why are there so many pigeons around? in february of 2010, morley safer asked a few people who should know.

>> safer: as a student of con games and deception, were you at all surprised by the bernie madoff scam? >> would you be surprised if i told you that i predicted it? >> safer: for starters we approached ricky jay, america's foremost card shark, actor, sleight of hand artist, a man with an encyclopedic knowledge of conmen past and present. he told us of a talk he gave seven years before madoff's fall... >> beware of someone well established in the industry... >> safer: a lecture on financial fraud to a gathering of police officers in 2001. >> i would also beware of someone who will rely heavily on an affiliation with an investor group, be it religious, ethnic, or geographic. >> safer: he was describing madoff to a "t." >> i think these elements will make the market right for any sort of pyramid or ponzi scam, ricky jay. >> safer: and that is pure bernard madoff. >> it's pure bernie madoff. but can i tell you another element of the con?

that i actually made this page on photoshop last night and put it into this bulletin. >> safer: (laughs) >> and i did that to prove a point. and the point is-- >> safer: you got me. >> good. you set it up by saying that i was a student of cons and that i'm knowledgeable in that area. and so you allowed my supposed expertise to make you believe this is true. this magazine is true. i really have lectured to this group of police against confidence crime. everything is true except for this page which i slipped in last night. >> safer: so what's--what's the moral--trust no one? >> we wouldn't want to live in a world where we couldn't be conned, because in effect we would then be living in a world where we mistrusted or refused to trust anyone. so this is the price we pay. >> safer: and pay we have. in the wake of the madoff scandal, ponzi perp walks have become a marathon. texas financier allen stanford, accused of a $7 billion ponzi

scheme, minnesota businessman tom petters, convicted of a $3 billion scam, and park avenue lawyer marc dreier, mastermind of a mere $400 million ponzi scheme that landed him first on "60 minutes" and then in federal prison. >> i thought if somebody would ever interview me on a program such as yours, it'd be for something good i've done, not something humiliating i've done. >> safer: despite the downfall of the dreiers and the madoffs, ponzi operators large and small are busier than ever knowing we're all capable of greed, misplaced trust, and something else. >> i think it's anxiety. it's anxiety that you're losing out, that other people are doing better than you are. >> safer: stephen greenspan is a university of colorado professor who writes and lectures on gullibility, warning audiences that not reading the fine print or buying something on a tip from your brother-in-law are

bad ideas and that older people are particularly vulnerable to a friendly pitch from a conman. in most of the great moments of gullibility in history, the perpetrator seems to target a particular group, correct? >> yes. there have been mormon ponzi schemes targeting mormons or fundamentalist christians. madoff mostly was aimed at jews 'cause he was a prominent jewish philanthropist. so, yes, there is this affiliation aspect of it because we tend to trust our own kind. >> here in 1919 as charles ponzi self-styled financial wizard loafing at his boston mansion with his lovely wife and proud and adoring mother. >> safer: mr. ponzi himself promised fellow italian immigrants he could make them rich trading in postal reply coupons, sort of the pre-paid phone cards of the day. ponzi went to prison and died a pauper. >> i went out looking for trouble. i found it.

>> safer: but his name lives on for the fraud he made famous. >> the basic concept is robbing peter to pay paul. you have a fund of new money coming in, and you use the new money to pay the old investors. but at a certain point, that has to stop. >> safer: gullibility is at the very core of this, correct? >> absolutely. i mean, history is filled with examples. >> safer: mister jay's library is replete with documents about cons, scams, and hoaxes of all kinds. amazing animals... >> and the cynocephalus was often featured on circus lots. and then, eventually people realized that the cynocephalus was a baboon wearing lederhosen. >> safer: (laughs) celebrated conmen, including count victor lustig... >> this is an original wanted poster of the count. one of the things he did in france was he was able to sell the eiffel tower for scrap metal. and he was able to do it twice, which is sort of wonderful. >> safer: mr. jay reports that over the years, people really have tried to sell the brooklyn

bridge as well as nelson's column in trafalgar square in london. and in another cautionary tale, pigeons were both the investors and the investment. (watch ticking) >> stahl: coming up... >> i've have such tremendous for the live birds. >> stahl: the pigeon king next when "60 minutes" on cnbc returns. when "60 minutes" on cnbc returns. (watch ticking) ♪

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>> safer: arlan galbraith, who called himself the pigeon king, convinced hundreds of american and canadian farmers there was good money to be made raising the birds for food. >> safer: how did you first hear about this whole pigeon business? >> i went to canada and met him. they had an open house up there. i mean, seemed--seemed like a nice guy. and everybody we talked to said this guy was--he was on the up and up. nobody had a bad word to say about him anywhere that we could find. >> safer: so aaron and joline humbert, ohio farmers, signed up. where were you gonna make money out of this? that's what i don't quite understand. >> we was kind of getting in on the ground floor of this, and all his plans was, you know, to raise pigeons for food consumption. >> they've had such tremendous demand for the live birds. >> safer: the pigeon king assured investors that pigeons would replace chickens in every pot in america and the world.

he'd sell you breeding stock and buy back the offspring. soon, barns across the midwest and canada were filled to the rafters with birds and high hopes. >> he was building his herd, building the flock, you know, as you would say. >> he had to have so many hundreds of thousands of birds a week to supply his production. >> safer: but to some, including the attorney general of iowa, it sounded like a ponzi scheme. iowa and three other states barred the pigeon king from doing business. and shortly after the humberts bought in, pigeon king international declared bankruptcy. the humberts lost $300,000, most of it borrowed money. >> we've contacted everybody in the states we could think of, and--you know, from elected officials to fbi to our local prosecutor. and everybody says, "yeah, obviously there's something wrong here. it was a scam, but to prove it is gonna be very difficult." >> safer: galbraith declined our request for an interview.

canadian police now say he was running a ponzi scheme. do you blame yourselves at all? >> to a point. we just didn't find the--the red flags popping up. so we tried it, and then we lost. a lot. >> might as well went to vegas and put it all on red. >> (laughs) we would have a lot more fun. >> safer: at least in vegas, you know the odds always favor the house. elsewhere, even the most sophisticated among us can be had. for instance, our gullibility expert, stephen greenspan, who, after writing a book on the subject, discovered he'd lost $400,000 dollars of his retirement money to who else? bernie madoff. was it embarrassing for you? >> two days after i had the first book copy in my hand, i found that out. well, it was painful, obviously. >> safer: and the fact was, greenspan had never even heard of madoff. the hedge fund managing his

retirement money had simply reinvested the $400,000 with madoff. >> i don't even think i read the prospectus. (laughs) i trusted the people i was turning my money over to, and i've always done that, and it's usually worked well except in this one case. >> safer: what did your wife say to you when you confessed that you'd lost part of your nest egg? >> "i told you so," 'cause i had tried to talk her into it, and she said, "i don't think so." (laughs) >> safer: what made her suspicious? >> maybe it was the word "hedge fund." >> safer: which brings us to wall street and the financial meltdown of 2008. poking through the wreckage, many experts believe the root cause was a perfect storm, a monsoon of gullibility colliding with a tidal wave of greed. >> this was a massive ponzi scheme, and it's the biggest crime against the american economy in our lifetimes, in fact, ever. >> safer: janet tavakoli is an analyst specializing in

derivatives, the exotic financial instruments at the heart of the meltdown. she argues that the bad mortgage loans that fueled the crisis were repackaged by investment banks, sliced into increasingly complex derivatives, and resold to other investors, even though the underlying mortgages were often virtually worthless. >> you had various traders buying each other's products to artificially keep the prices up so that the bubble didn't collapse. >> safer: not only that, but the mortgage derivatives being traded were so mind-numbingly complicated, nobody understood them fully, certainly not the pigeons, the buyers at banks, mutual funds, pension funds and insurance companies who wound up holding a bag full of worthless paper. these guys are smart guys. they're all graduates of the finest business schools in the country, correct? >> yes. if they were gullible, they're

sophisticated investors. so they can't really go back to the investment banks that sold them this product and say, "we've been had," because they held themselves out to be experts in these kinds of securities. >> safer: all of which proves that whether you're on wall street or main street, brain power is no defense against conmen. in fact, smart guys may be the biggest suckers of all. >> as someone who does sleight of hand for a living, to me, the ideal audience would be scientists or nobel prize winners who are incredibly smart in their one area, and often-- often, not always--have an ego with them which says, "i am really smart so i can't be fooled." no one is easier to fool. so, morley, i'm gonna play you one hand of blackjack with certain propositions that make it too good to be true. >> safer: and so, determined not to be conned by him again, i sat down for a friendly card game with mister jay. >> you win all ties. >> safer: the rules were all

stacked in my favor. i got 20. he showed a 9, meaning, i thought, it was impossible for him to win. >> and, god, the only thing that could beat you would be is if i had a 12 or something. which i do--see? i have--i have a 12 of clubs. so i have 21 to your 20. >> safer: but there's no such thing as a 12 of clubs, right? wrong. not only did mister jay manipulate the cards somehow to get the ones he wanted, he was also dealing from a deck used in certain rummy games that includes 11s, 12s, and 13s. this pigeon had been had again. >> and the other real element of a con is that i told you this was too good to be true. anyone should stand clear of something that's too good to be true. >> safer: 'cause it never is. >> it never is. >> stahl: investors in arlan galbraith's pigeon breeding scheme reportedly suffered as

much as $40 million in losses. with the unraveling of his operation, the so-called pigeon king declared personal bankruptcy. on december 3, 2010, he was arrested by canadian authorities and charged with fraud and violation of bankruptcy law. well, that's this edition of "60 minutes" on cnbc. i'm leslie stahl. thank you for joining us. i'm leslie stahl. thank you for joining us. (watch ticking) captioned by elrom, inc. www.elrom.tv small business owners are using tools like email and social media marketing from constant contact to grow their business. they're getting customers coming back.

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