Madoff with the Money Page 17

  The article pointed out that the day-to-day Madoff business “found its way to the dinner table at home.”

  Mark Madoff, who joined the firm in 1986 after graduating from the University of Michigan, was quoted in the article as saying, “All of his [Bernie’s] family members grew up with this being our lives. When it is a family-operated business you don’t go home at night and shut everything off, so you take things home with you, which is how all of us grew up. . . . What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there. That’s a good feeling to have. To Bernie and Peter, that’s what it’s all about.”

  Affirming Mark’s statement, Kenner recalls a wide-eyed Roger telling her that his cousins “all could remember 14 different stocks, and keep all the prices in their heads.”

  But less than a decade after the Madoff profile appeared, Mark had to change his tune, since it was Mark and his brother Andy who turned in their father to authorities. Andy Madoff melodramatically told a friend that what their father did was “a father-son betrayal of biblical proportions.” While the sons consistently maintained through intermediaries that they were hoodwinked just like all of Bernie’s other victims, their dealings with their crooked father came under investigation.

  “I’m unemployed, I don’t have any money, and I’m just trying to stay out of jail—my name is mud,” Andy whined to a friend, according to Vanity Fair.

  The brothers cut off all communication with their mother, likely because of legal advice, and refrained from visiting their father in the slammer.

  But before the fall of Bernie, it all looked so perfect to outsiders like the business reporters, and even to family insiders like the innocent Roger Madoff. But a longtime family friend, veteran Madoff employee, and eyewitness asserts, “There were massive fights between Bernie and Peter, and between Mark and Andy—but no long-term feuds.”

  With Bernie behind bars, and with a number of the Madoff family business principals being scrutinized by authorities after the patriarch’s arrest, the reporter who wrote the “Madoff Dynasty” story almost a decade earlier, Anthony Guerra, observes, “It’s very difficult to know somebody from the level of the stories that we do in journalism when you’re looking at their business life. That’s a surface-level snapshot. You would have probably had to dig so, so, so deep, and you’re talking about a situation where family members may not have known.”

  He adds, “It’s a sad story to me that you can have so much, and it not be enough. That’s the larger human drama in the Madoff story.”

  Red flags, however, soon started to be furiously waved.

  In May 2001, Barron’s, under a headline “Don’t Ask, Don’t Tell: Bernie Madoff Is So Secretive, He Even Asks Investors to Keep Mum,” reported, “Some folks on Wall Street think there’s more to how Madoff generates his enviable stream of investment returns than meets the eye. . . . Even adoring investors can’t explain his enviable steady gains.” The report by Erin Arvedlund noted that “few on the Street” were aware that Bernie was managing billions of dollars for rich clients, enough to rank Madoff among the three largest hedge funds in the world.

  Bernie called the Wall Street speculation “ridiculous.” And when asked by Barron’s to explain how his money-management operation “never had a down year,” he responded, “It’s a proprietary strategy. I can’t go into it in great detail.”

  Bernie said it was called a “split-strike conversion,” which was gobbledygook to most.

  His real strategy had been conceived some eight decades earlier by the man whom Bernie would surpass as the greatest swindler of his time, Charles Ponzi, from whom the term Ponzi scheme was derived—whereby early investors are paid with ill-gotten funds from later investors.

  As it turned out, the Jewish guy from Queens had out-Ponzied the Ponzi guy from Italy who came to America to commit his crimes.

  Like Bernie, Ponzi had a respectable-sounding firm, Securities Exchange Company, to hustle his fraud. And like Bernie, Ponzi was a dapper schmoozer, a macher, a Mr. Outside.

  Ponzi’s scheme began shortly after the end of the Great War and at the start of the Roaring Twenties.

  As with the reporter from Barron’s, a business writer raised the first red flag that questioned Ponzi’s high returns. With incredible chutzpah, Ponzi sued and won a $500,000 libel suit. But his scheme soon ran out of steam. With revelations that he was robbing Peter to pay Paul, there was a run on his company with investors seeking their money—millions of dollars back then, not anywhere close to Bernie’s billions.

  In the end Ponzi was charged with 88 counts of mail fraud. He pleaded guilty to one and spent three and a half years of a five-year sentence in a federal prison. He was later charged with larceny by the state of Massachusetts. It took three trials before he was found guilty and sentenced to a maximum of nine years in prison. He was eventually deported to his native Italy, where he pulled off more scams. He died in a charity hospital in 1949.

  And it was expected that the biggest Ponzi artist of all, Bernie Madoff, would die in prison.

  Around the time Barron’s ran its probing story about Bernie (which received scant public attention, especially from investors in Madoff, who were happy enough with the returns they were getting), a genuine financial wizard, mild-mannered and studious Harry Markopolos, was assigned by his employers at Rampart Investment Management, a Boston options trading firm, to determine if there was any way they could come close to matching Madoff’s steady returns—incredible double-digit returns—in both up and down markets.

  Markopolos attempted to reverse engineer Madoff numbers using data from Madoff ’s trades in options and stocks, but all efforts at simulation failed. A math whiz, Markopolos was stymied. As he later observed in a newspaper interview, “You can’t dominate all markets. You have to have some losses.” He finally came to the conclusion that what he was trying to match was, in fact, a genuine, full-blown, red-blooded, all-American Ponzi scheme.

  Suspecting that a major crime was taking place at BLMIS, Markopolos contacted the New York office of the SEC, expressed his concern, and began supplying the agency with memos and data. There had been little, if any, response by the time he left his job at Rampart in 2004 to start a financial fraud investigation business. Initially, he had hoped to make some money himself from the evidence he had gathered—a reward the SEC and other government agencies pay to whistle-blowers if a prosecution is successful. But with no action on the SEC’s part and no financial reward forthcoming, he decided to pursue the case he had gathered with even more gusto; his goal now was simple: He wanted legendary Wall Street titan Bernie Madoff ’s ass in a sling.

  In 2005, the tenacious Markopolos sent the SEC a scrupulously researched memo with the straightforward title: “The World’s Largest Hedge Fund Is a Fraud.”

  Still no immediate action was taken.

  Markopolos later revealed that in taking on Bernie, he feared for his life and the lives of his family members because Bernie “was one of the most powerful men on Wall Street and in a position to easily end our careers, or worse.” He said he initially acted anonymously with regulators because of this fear.

  Was Markopolos afraid of a Madoff-dispatched hit man?

  Did he fear Bernie was the Tony Soprano of the Madoff family—the Godfather?

  Indeed he did. He had started checking his car for bombs.

  It was not out of the realm of possibility, since the Mob had gotten into Bernie’s kind of business. While Bernie was operating his Ponzi scheme, a real-life soldier in the Luchese crime family had set up a bogus hedge fund in the early 2000s with the confidence-inducing name America’s Hedge Fund, conned investors from the Midwest, and, like Bernie, sent them bogus statements showing generous returns. The crew made millions before they were busted.

  Markopolos asserted that Bernie’s fund “posed great danger” to anyone who investigated it. While there was an industry self-regulatory agency called the Financial Industry
Regulatory Authority (FINRA), Markopolos said he never took his allegations there because the Madoff brothers—Bernie and Peter—had power and influence within the organization.

  Because no action was taken by the SEC, Markopolos declared, “I became fearful for the safety of my family until the SEC finally acknowledged, after Madoff had been arrested, that it had received credible evidence of Madoff ’s Ponzi scheme. . . . ”

  Just as Markopolos feared Bernie, Bernie feared the SEC, and as the world came to know, he had good reason.

  Whenever SEC representatives announced even a routine inspection visit to Madoff headquarters every three or four months, the boss went ballistic. “Bernie was like a chicken with his head cut off,” recalls eyewitness Bill Nasi. “He freaked out in the sense that his voice became high-pitched and he was running around the office and was very agitated. My supervisor told me, ‘Keep out of Bernie’s way today, because he’s having conniptions—the SEC is coming in today, and when that happens he’s super-agitated like the Energizer Bunny on high speed.’”

  Bernie instructed everyone to dress up, be on their best behavior, and just keep working with their heads down.

  “A small army [of SEC people] would come in,” says Nasi. “I’d see them scrutinize everything, and everyone had to look hard at work. It’s as if someone had thrown a switch on Bernie. He was having a shit fit.”

  Curiously, Bernie never asked anyone for receipts, except when documents had to be delivered to the SEC offices in lower Manhattan, according to Nasi.

  Then he was on pins and needles. I had to bring the receipt back. If I was late he would be beat me up, page me—“Where’s Bill Nasi? Get Bill Nasi in here!” I’d go back to his office and he’d be in a frenzy. He’d ask me was I sure I delivered it to the SEC and not some other office. I told him I had to sign in and go up on a special elevator. “You got it? You got the receipt? Gimme it!” He was just like that.

  The other odd quirk Madoff employees like Nasi noted was that Bernie would never give up his Social Security number to anyone. In a world where identity theft is prevalent, that’s not a surprise. But in Bernie’s case, he went to extremes. “When a vendor wanted to open an account with Bernie, they’d ask for his Social [Security number],” says Nasi.“But Bernie would rather send them a check for $250,000 and tell them that ‘at the end of the year, if you haven’t used up all the money you can always return it.’ But he wouldn’t turn over the number. Those vendors, like the ones who serviced the backup computer systems, had to break their own protocols about Social Security numbers or face losing the business.” (Ironically, Bernie’s SSN has been released in publicly filed court records as 069-30-9552.)

  Meanwhile, it appeared authorities were finally going to take a hard look at what was going on inside the walls of Madoff.

  Finally, in January 2006, based on Markopolos’s allegations, the SEC opened an investigation, and then quickly blew another opportunity to nail Bernie and expose his crimes. The agency learned that he had given it questionable information about how he managed the money of his customers. The SEC asked for documents, and even interviewed Bernie. The investigators appeared to be getting close to the case laid out by Markopolos. But in the end the SEC gave Bernie an easy out—it asked him to register as an investment adviser, and he quickly did so.

  Case closed.

  The SEC’s final report on the matter said the investigation was terminated because the discovered Madoff violations “were not so serious as to warrant an enforcement action,” the Wall Street Journal reported.

  It was shades of the SEC’s decision to end its probe of unregistered Madoff feeder fund principals Frank Avellino and Michael Bienes almost two decades earlier when they quickly agreed to return investors’ money, thus keeping agency probers from looking more closely at Bernie’s operation.

  In early February 2009, with Bernie under penthouse arrest after admitting his fraud, the SEC came under scathing attack in a fiery hearing held by the House Financial Services subcommittee.

  The key witness was the man who had started nosing around nine years earlier—52-year-old Harry Markopolos, now vindicated and hailed as a hero. He hammered the agency as incompetent, declaring that it “roars like a lion and bites like a flea. . . . I’m saying that if you flew the entire SEC staff to Boston, [and] sat them in Fenway Park for an afternoon, they could not find first base. . . . The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion.... It took me five minutes to figure out he was a fraud.”

  SEC officials such as Linda Chatman Thomsen, the agency’s enforcement director, were placed on the hot seat and attacked by legislators for their investigative and regulatory failure. Typical were the sarcastic and caustic words of furious New York Congressman Gary L. Ackerman, a Democrat, who declared: “We thought the enemy was Mr. Madoff. I think it is you.”

  The New York Post’s headline blared: “How SEC Bozos Blew It.”

  A week later the embattled 54-year-old Thomsen, who had headed enforcement since 2005, resigned after being blasted by critics for “turning a blind eye” to tips that could have caught Bernie earlier.

  Markopolos also claimed that he had tipped off the Wall Street Journal about Madoff ’s scam in December 2005, and evidenced e-mail correspondence with a Journal reporter who wanted to investigate. But Markopolos said the story was never done because the reporter couldn’t get approval from upstairs to pursue the lead. The journalism trade publication Editor & Publisher contacted Paul Steiger, who was the Journal’s managing editor at the time, but he claimed he never heard of the paper getting such a tip. He said that any “assertion that we were afraid of Madoff is just preposterous; it is silly.”

  As the Madoff investigation dragged on through 2009, agency officials promised reforms in order to restore shattered investor confidence. It even went so far as to hire a government-funded research organization, the Center for Enterprise Modernization, to examine and come up with better ways for the SEC to deal with Markopolos-like tips about bad guys in the financial sector.

  A new sheriff was put in place to police Wall Street—it was hoped. Her name was Mary Schapiro, chairman of the SEC. But she was quickly criticized.

  In a lead editorial, the Wall Street Journal in early February 2009 declared:

  Judging by her first public address . . . Mary Schapiro had developed a novel response to Bernard Madoff ’s alleged fraud [alleged because he had still not pleaded guilty]. In Friday’s speech to the Practicing Law Institute, the new SEC boss never uttered the word “Madoff.” Odder still . . . [she] had decided that what her enforcement staff really needs is less supervision from the top.

  However, the walls were closing on Bernie Madoff. The fall of the Madoff dynasty was at hand.

  Chapter 12

  Life inside the Madoff Piggy Bank, Flashing the Plastic, and Losing the Farm

  Not long before Bernie was arrested he and Ruth had visited their multimillion-dollar abode in Palm Beach, the wealthy, somewhat Jewish enclave where investors in Madoff would lose hundreds of millions of dollars. One of Bernie and Ruth’s favorite men’s shops that also sold some women’s wear was the chic Trillion boutique under the palms on ritzy Worth Avenue, an amalgam of trendy Rodeo Drive in Beverly Hills, Paris’s glamorous Avenue Montaigne, London’s tony Oxford Street, and Milan’s stylish Via della Spiga.

  The Madoffs had shopped at Trillion for some three decades.

  Bernie, whose mother wouldn’t buy him Keds sneakers when he was a kid, which made him feel like a Laurelton outcast, spent money like a kid in a candy store at Trillion.

  The store offered a very special $7,400 unconstructed, handmade vicuna and cashmere, cream-and-brown herringbone jacket that took a very special buyer to see it for what it was—and afford to pay for it. Bernie was that kind of guy, says Trillion’s owner, David Neff, who personally served the Madoffs, and bonded with Bernie.

  That jacket was unique and it was really expensive, and not everybody could app
reciate it for a multitude of reasons. It takes a certain attitude; it’s not for everybody. But when Bernie saw it he just lit up, and said, “Yeah, yeah, yeah—I like that.” There are two reasons he liked it. First of all it really is very special, but secondly he has every kind of sport coat that he could want—so this was a step up, and he recognized it. Not many people did.

  Bernie also favored Trillion’s navy crewneck wool sweater that he bought at $1,200 a pop, and it wasn’t even cashmere. The $2,000-a-pair conservative charcoal flannel pants went well with the sweater. Bernie bought those, too. Observes Neff, “The guy that’s wearing those says, ‘Holy smokes, am I a lucky boy.’” Bernie also liked the cotton and cashmere corduroy trousers—the ones that “don’t wrinkle, are a pleasure to wear,” came in 18 “unique” colors, and cost him (or probably his bilked investors) $1,200 a pair.

  Speaking of Bernie, Neff observes:

  There are people that trust their own taste and are hedonistic enough to appreciate these very expensive items. Just those three items, two pairs of pants and a sweater, cost $4,400. If somebody didn’t care about money, it didn’t matter. But Bernie didn’t throw it around and he didn’t just come in and make big stacks—he was discerning, conservative. His closet wasn’t jam-packed with all the purchases he made every other Sunday—but just with the good stuff.

  Bernie certainly was discerning in apparel and in people. He cleverly chose the investors who became victims in his Ponzi scheme very carefully. For the most part they had to invest multiples of seven figures, and they had to be the kind who didn’t ask too many questions. Most of them who actually knew Bernie felt he was conservative—to them he was low-key and he didn’t flaunt all the goodies he had. He saved his brashness, of which there was plenty, for those in his inner circle.

  As David Neff rightfully perceived, Bernie was proud of the contents of the enormous custom-built walk-in closet in the dramatic mahogany-paneled master bedroom of the Madoffs’ East 64th Street co-op apartment—Penthouse 12A (and for a time Bernie’s Big House before he pleaded guilty and was put into a real prison cell). Even though Bernie amazingly banned Ruth from sitting on the antique furniture, the penthouse was in her name—a legal dodge, they both hoped, against possible seizure.