Milken to Madoff: Villains who changed the world

On April 7, 1989, Michael R. Milken strode confidently up the steps of the federal courthouse at 40 Centre St. in Manhattan, federal marshals having cleared a path for his arrival. Lining the path were dozens of young men, each doing his best Charlie Sheen from the movie "Wall Street."

In their slicked-back hair, pin-striped suits, suspenders and power ties, they all broke into applause — an act of defiance as their hero, who as a Drexel Burnham Lambert executive had pioneered the use of junk-bond financing that powered the 1980s boom, prepared to face his reckoning in the highest-profile white collar crime case of its day.

Bernard Madoff, money manager and accused mastermind of a $50 billion investment fraud, walks toward his home after appearing in court in New York on Dec. 17, 2008.
Daniel Acker | Bloomberg | Getty Images
Bernard Madoff, money manager and accused mastermind of a $50 billion investment fraud, walks toward his home after appearing in court in New York on Dec. 17, 2008.

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CNBC was still ten days away from its debut, but we covered Milken's arraignment anyway because we knew the footage would come in handy. The case against him was historic after all — the high water mark in the largest and most complex securities-fraud investigation the government had ever undertaken. Milken eventually pleaded guilty to securities and tax violations, serving 22 months in prison. But on that day at his arraignment, our 25 years covering the wolves of Wall Street along with the bulls and the bears began.

As CNBC seeks to identify our "First 25" — the icons, leaders and rebels who had the greatest influence on business in our first 25 years — it makes sense to include a villain or two, since they sometimes can have the greatest impact of all. Our esteemed panel of experts puts Milken on its list of 200 contenders, but others also warrant consideration. Some are on the list, others are not.

Think Enron. Think WorldCom. Think Bernie Madoff. Some you may have forgotten about — and some you never knew.

The same year as Milken's indictment, federal authorities in Chicago sought to raise the bar for white-collar crime fighting even higher, at least in terms of complexity and scope. They unveiled dozens of indictments against floor traders at the Chicago Board of Trade and the Chicago Mercantile Exchange, alleging the defendants conspired to rig some of the most lucrative and important financial markets in the world. For three years prior, the FBI had infiltrated Chicago's infamous trading pits. Agents wearing hidden microphones posed as traders in an audacious government sting. Of the 48 people indicted, 22 pleaded guilty and 13 were convicted at trial.

None of the prosecutors, agents or traders in "Operation Sour Mash" and "Operation Hedge Clipper" (code names for the operations at the CBOT and CME) would become household names, but they did help change the nature of trading. The scandal hastened the adoption of computer technology in markets that had been run on pencil, paper and obscure hand signals — and thus easily manipulated — for 150 years.

The trading scandal helped lead prosecutors to another notorious 1990s white-collar case involving widespread price-fixing at self-proclaimed "supermarket to the world" Archer Daniels Midland. Three former executives — Michael Andreas, Terrance Wilson and Mark Whitacre, whose character was immortalized in the book and movie, "The Informant!" — were convicted in what was then the largest anti-trust case in U.S. history. While he was not directly implicated, the case also permanently tarnished the legacy of former CEO and agri-business icon Dwayne O. Andreas, who otherwise would have been a shoo-in for the CNBC First 25 list — in a good way.

The 90s were also the Golden Age of the bucket shop. "Wolf of Wall Street" Jordan Belfort is getting enough attention these days without being considered for a list of top movers and shakers, but it is true that he and his band of criminals at Stratton Oakmont typified the pump-and-dump 90s. Their prosecution brought badly needed scrutiny to the freewheeling world of penny stocks.

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The 21st century rang in the era of accounting scandals, none more notorious than the one at Enron. It is hard to argue with the inclusion of founder and Chairman Kenneth Lay on the list. Former CEO Jeffrey Skilling deserves consideration too, though not necessarily for his role at Enron, which is still debated to this day.

Skilling's appeal of his 2006 conviction for conspiracy, fraud and insider trading fundamentally changed the way white-collar fraud is prosecuted. In 2010, the Supreme Court significantly narrowed prosecutors' ability to use the government's central theory in Skilling's case and countless cases like it: that a corporation has "an intangible right of honest services" from its employees.

Skilling's attorneys argued essentially that the theory could make calling in sick to work a federal offense. The high court agreed, limiting honest services prosecutions to cases involving bribery or embezzlement, which Skilling's was not. A federal appeals court upheld his convictions anyway, and in 2013 Skilling dropped his remaining appeals in exchange for a reduction in his sentence. But depending on your point of view, Jeff Skilling either gave future corporate executives a fairer shake, or hamstrung future prosecutors' efforts to fight fraud.

Is it right to include WorldCom's "Telecom Cowboy" Bernard Ebbers on the CNBC list of contenders? WorldCom's accounting fraud was woefully unimaginative. Besides, it wasn't Ebbers but Chief Financial Officer Scott Sullivan who came up with it at the boss' urging. Nonetheless, Ebbers' influence on business is profound not because of the fraud itself, but because of what the fraud caused.

Competitors saw WorldCom's bold projections for Internet growth and struggled to match them, not knowing the numbers were built on lies. The result was an unprecedented telecom expansion, as well as cheap bandwidth for decades to come.

The collapse of the bubble that Ebbers helped inflate led to a new bubble, this one in real estate.

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Countrywide CEO Angelo Mozilo kept it going by aggressively pushing the nation's largest mortgage lender into subprime lending. The rest of the industry followed, and Wall Street, credit-rating agencies and borrowers happily played along until it all exploded in the worst financial crisis of CNBC's first 25 years — maybe any 25 years for that matter.

Bank of America eventually purchased what was left of Countrywide. Mozilo, Countrywide and Bank of America paid $67.5 million to settle civil charges by the Securities and Exchange Commission. Mozilo avoided criminal charges, but nonetheless easily earns a prominent place on the list of influential bad guys. (Dishonorable mention here to ex-Lehman CEO Richard Fuld. While never formally implicated, no Wall Street CEO glommed on to the subprime phenomenon with more gusto, or a more disastrous outcome for his firm.)

And that brings us to Bernie Madoff.

The 2008 financial crisis finally unmasked his decades-long, $65 billion fraud, shocking the world.

Yet the CNBC panel chose not to include him on the list of 200 contenders for our First 25.

"He was quite simply a mega-Ponzi scheme," said panelist and Pro Publica Executive Chairman Paul Steiger on CNBC's "Closing Bell." "There have been a million Ponzi schemes, and there will probably be more."

With great respect to Mr. Steiger, that's really not the point.

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Madoff's fraud — not just its size but its duration — exposed once and for all the sheer fecklessness of the SEC, which missed clear signs of the scam for decades. (A nod here as well to R. Allen Stanford, whose Ponzi scheme was infinitely more colorful than Madoff's, but at a mere $7 billion suffers by comparison. The SEC missed Stanford's fraud too, though not for quite as long as it did Madoff's).

The Madoff scandal transformed the SEC. Not only were there massive personnel changes, the entire agency was restructured in a way it had not been in its first 75 years.

But that's not all. Bernie Madoff altered the investing public's basic view of risk. Quick: what is the first thing you would think of today were someone to suggest you invest your money with a stock-picking genius who consistently beats the market?

In our first 25 years, we have covered a regular rogues' parade, from Milken to insider traders like Raj Rajaratnam and Rajat Gupta and the employees of hedge fund magnate Steven A. Cohen. We even saw domestic diva Martha Stewart get her day in court.

But talk about transformative white-collar crooks, and no one since Charles Ponzi himself comes close to Bernie Madoff.

And in the next 25 years, it's hard to imagine anyone coming close either.

(Cast your vote: Who makes YOUR top 25 list?)

— By Scott Cohn. Follow him on Twitter @ScottCohnCNBC.