Bernard “Bernie” L. Madoff’s massive Ponzi scheme has had devastating consequences for countless victims, and several initiatives have recently cropped up as a result. These include the U.S. Securities and Exchange Commission’s centralized TCR Database for tips, complaints and referrals, and the Securities Investors Protection Corporation, designed to help restore. But Diana B. Henriques, a New York Times reporter and author of The Wizard of Lies: Bernie Madoff and the Death of Trust, argues there is still more “this epic crime might teach us.”

At the recent Knowledge at Wharton annual advisory board meeting, Henriques discussed her book, Madoff, his victims and the lessons learned and not learned from the scandal. Click here to read the Q&A session that followed her remarks.

Below is an edited transcript of her presentation.

Diana B. Henriques: I spent the last two and a half years learning all I could about Bernie Madoff and his enormous fraud. I learned about his father’s business failures and the insecurity, trauma and distress that this created in the Madoff family when Bernie was a youngster. I learned about Madoff’s creative reinvention of a very old crime, the Ponzi scheme, and the remarkable camouflage that he and his henchman Frank DiPascali [set up] to conceal this very simple fraud. I learned more than I ever wanted to know about the devastating side effects [of] this fraud [that has affected] somewhere around three million people….

[The victims included] charities that were forced to close their doors [because they] could not find replacement funding. They were laborers, iron workers, carpenters and pension beneficiaries whose pensions were wiped out because they were invested with Bernie Madoff. There were many, many, many middle class families. More than 1,000 of the 5,000 direct accounts with Bernie Madoff’s firm were half a million dollars or less. These were the savings of middle income families who had sold a business or sold a home and entrusted all their liquid assets to Bernie Madoff and lost it in one day, virtually overnight.

Madoff had a gift for seduction unlike any I have ever seen in a Ponzi scheme, and at my age, I have seen a lot of Ponzi schemers. Unlike the classic con artists that I have met who always portray themselves as the smartest, most charming people in the room, Madoff made you feel like you were the smartest and most charming person in the room. It was quite a remarkable gift. As he held up this mirror to you so you could see this very sophisticated, very intelligent person, why would you ever second guess your own decision to trust him? If I am so smart, I must be right about investing with Bernie Madoff.

I had a personal experience with this seductive gift when I first interviewed Madoff in prison. I did two in-person interviews with Madoff at the federal prison in Butner, N.C.: one in August 2010 and a second in February 2011. We exchanged e-mails and letters in the interval. There was one little incident in the first interview that will give you an idea of how this charm worked. Madoff was describing the investment strategies that he was allegedly using to make money for his clients early in his career, including “shorting the box.” He stopped so he could explain to me what shorting against the box was. But I had my eye on the clock. I had only two hours with him, and I had requested four, so I didn’t need that education. I said, “I know what that is.” He paused. He glanced over at his lawyer and he said, “It’s so wonderful to talk with someone who knows what she is doing.” Just that nice little drop of flattery, right? Clearly the most intelligent reporter he had ever met.

He had that ability to get under everyone’s bullfeathers’ detector because [he convinced people] he was not trying to impress them: He did not even want their money; he would rather not have it; it was just a lot of trouble for him. He completely disarmed the natural defenses that so many of his most sophisticated investors had. He persuaded them that since he really wasn’t looking for anything from them and since he thought they were so brilliant and charming all on their own, perhaps they should just give him everything they had.

After a session at the New York City Bar Association, I was approached by a lawyer who said that he was friendly with an investment guru now retired on Wall Street who advised several wealthy families. The guru had gotten a call from one of the patriarchs of one of those families one day saying, “Listen, I’ve got a chance to invest with Bernie Madoff. Met him at the club. But maybe you should check it out a little first.” The guru checked just the basics of Madoff. He saw that he handled all his own trades and maintained custody of all the stocks and bonds he was supposedly buying from you, instead of leading them to a third-party custodian. He wasn’t a licensed money manager at that point. He used a black box investment strategy that wasn’t very transparent. The guru called the guy back and said, “This isn’t for you. This isn’t for you.” He said, “Well, are you sure? Check again. I mean check him out a little further because I think we could just move all our investments to him.”

The guru then called a legend on Wall Street, Jack Nash, co-founder of Odyssey Partners and one of the fabled names in the hedge fund industry. Nash said, “Don’t touch him with a 10-foot pole. I have invested some money with Madoff and couldn’t replicate his results. I don’t know how he’s doing it. But I’m suspicious. I wouldn’t have anything to do with him.” Well, the guru figures, this is it. He knows he can call the patriarch back and say, “Jack Nash says ‘no’.” So he called him back and said, “Jack Nash says ‘no’.” Long pause. The guy on the other end says, “Well, maybe we’ll only invest half with Madoff. Half of our assets.” Which he did. Which he lost.

I look around and I find myself wondering whether we as a society have learned anything from Madoff and his fraud. There was a wonderful cartoon recently in the New Yorker that suggests to me something about where we are. A small family is surrounded by a dense jungle. The father, holding the map, says, “Okay, I admit it, we’re lost. But the important thing is to remain focused on whose fault it is.” While we have remained focused on whose fault it was, I think we have lost sight of what this epic crime might teach us. I wonder, did we learn anything post-Madoff about the limits of deregulation?

In the years that whistleblower Harry Markopolos was trying frantically, forcefully, although not very diplomatically, to educate the U.S. Securities and Exchange Commission (SEC) about his doubts about Madoff, the turnover rate at the agency was so high that it was the subject of no fewer than three alarming U.S. Government Accountability Office (GAO) reports. It was the highest of any financial regulator in the system. One GAO report said, in so many words, that it was so high that it was likely to impair the agency’s ability to carry out its mandate of protecting investors. But nothing was done. Now budget increases have been promised post-Madoff. But will those promises be kept? As soon as the talk in Washington turned to deficit reduction and budget cuts, what was right in the crosshairs? The SEC budget’s promised increase. Well, at least we’ll know who to blame.

Did we learn anything about the risks of putting glamorously tempting investments within the reach of middle-income investors, but almost beyond the reach of regulators? I look at all those hedge fund-like feeder funds that willingly or negligently fed Madoff’s fraud. Think about it: Even if Madoff had been honest, what was he doing? What business was he running? He was running a secret, jury-rigged investment advisory business out of the back door of his wholesale stock trading company. It offered no prospectus, no third-party custodian, no independent clearing firm.

I have talked with many Madoff victims whose risk tolerance should have kept them well within the four corners of tightly regulated public mutual funds and bank CDs. Why? Because they were investing money they could not possibly afford to lose. Cast your mind back to those golden days before the meltdown of 2008 — this was an age when even respected academics, hopefully not at Wharton, were seriously urging hedge funds for everybody and condemning as elitist any suggestion that there were some of us for whom those lightly regulated investments were not suitable. Have we learned anything from that lesson?

Did we learn anything about the limits of Wall Street’s flimsy safety net? The experience of the Madoff victims with the Securities Investor Protection Corporation (SIPC), a nonprofit organization financed by Wall Street to handle liquidation of broker dealers, has been almost as bruising for some of them as their collision with Madoff’s fraud. The court cases are piling up. There is a very significant case pending before the second circuit court of appeals in Manhattan relating to the way the losses of Ponzi scheme victims should be calculated by this Wall Street safety net.

Two years out, there is a fledgling movement toward reform, both in Congress and within the agency itself. But is that process being guided by Wall Street, which pays SIPC’s bills, or by the people it is supposed to protect? I’ll let you guess. And you’re right.

Did we learn yet that it is foolish to trust in some sort of Wall Street honor code, some unwritten commitment to neither lie, cheat, nor steal nor tolerate those who do? Just imagine how differently this story would have turned out if all the brilliant hedge fund managers, private bankers, investment advisors and industry consultants who privately expressed doubts about Bernie Madoff — and believe me, their numbers are legion based on the numbers who come and tell me that they suspected Bernie all along — had shared their doubts emphatically and repeatedly with Madoff’s regulators …  and with the Federal Bureau of Investigation (FBI). But they didn’t. They just quietly escorted their own clients out of this teetering house of cards and sat down and sat by doing nothing until the whole terrible fraud came down on someone else’s clients’ heads.

Nobody broke any laws doing that. In very rare cases, it is not a crime to observe and yet fail to report a crime. If it were, we might have caught Madoff in a heck of a lot of other Wall Street misbehavior a lot earlier. But it isn’t, so why do we persist in acting like it is?

Finally, did we learn anything about the human heart from the Madoff story? I certainly did. I learned that we were wrong about what lured people into this extraordinary Ponzi scheme. The classic Ponzi scheme is different from this in so many ways, but primarily it exploits investors’ greed. That’s how they run out of cash so fast and why they get stumbled across by regulators so often. They are the ones that promise to double your money in six months, 10% monthly returns. They are the ones that promise that you can get rich quick. That’s the classic Ponzi scheme. Madoff didn’t exploit his victims’ greed. He exploited their fear.

Through most of the life of the Madoff fraud, his investors would have made far more money investing [elsewhere]. They were far underperforming every competitive hedge fund in the great hedge fund bazaar. What Madoff offered was not sky-high profits. So what attracted people to him was not rapacious greed. What he offered was safety and simplicity. What he exploited was people’s fear and anxiety about a market that had become so complex, a market that had gone mad with derivatives and complex structured securities and gobbledygook prospectuses, that nobody could understand it anymore. A market that meanwhile began to gyrate like a rollercoaster.

I would also [argue there is] no such thing as a sophisticated investor. Everyone from hedge fund geniuses to retired school teachers simply invested primarily as a leap of faith. Blind faith in someone they decided to trust for reasons that had nothing to do with the full disclosure and the fine print that our regulators think will keep us safe from people like Bernie Madoff. I learned that we are apparently hardwired to trust one another and that this trait, which no doubt gave us a leg up when we were forming hunting teams to go after the woolly mammoth, leaves us perpetually vulnerable to anyone willing to exploit that trust to steal from us. The only sure immunity from a Ponzi scheme is clinical paranoia, a world totally devoid of trust. I can create a world for you where a Ponzi scheme is impossible, but I guarantee you, you will not want to live in it because not only is modern commerce impossible without trust — all that direct deposit, all that online retail, all that trusting one another — but so are a few other priceless things like marriage and loyalty and leadership.

So our post-Madoff dilemma. The questions we haven’t asked yet, much yet answered, seem to have been captured perfectly by that wonderful observation from Bertrand Russell who said, “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.” So being somewhat intelligent, I am full of doubt that we have learned as much as we need to about Madoff and its timeless lessons. My hope is that the Wizard of Lies will help change that a little bit.