Madoff with the Money

by Jerry Oppenheimer

  Carol Lieberbaum doesn’t dispute her father-in-law’s ostentatiousness.

  “He was flashy. He was nouveau, and definitely showy,” she says, but with love. She adds:

  He never had and all of a sudden he got and he just flaunted it—big homes, big parties, drivers, cooks, the magnificent place on the water in Hewlett Harbor with tennis courts, swimming pools, spas, a gym. It was amazing. And because of that Polaroid money, Shelley was able to loan that money to Bernie for his sprinkler business. Shelley, Michael, and my father-in-law had money. Bernie didn’t have anything.

  He also brought his two sons, Mike and Shelley, Bernie’s pals, into the business. Shelley served as an officer of the company from 1960 to 1971.

  Lieberbaum & Company was a family affair, just like Bernard L. Madoff Investment Securities became when Bernie brought his two sons, Mark and Andy, into the business, along with their mother, Ruth, and Bernie’s brother, Peter, among others.

  Not long after Lieberbaum & Company got rolling, Bernie Madoff entered the picture.

  Around 1962, he moved from his small office on Exchange Place to a small suite at 39 Broadway.

  Recalls Bill Nasi, who worked there as Bernie’s runner:

  It had a tiny reception room the size of maybe three large closets, a back office that was the size of three closets, and a trading room with an oversize blackboard. Bernie had a girl standing on a three-foot-high carpeted bench, and as the stock prices would change she would erase the old quotes and put in the new ones with a piece of chalk.

  The layout, though, wasn’t as important as the location. Bernie was now directly across the street from 50 Broadway, the headquarters of Lieberbaum & Company.

  And instantly, new and bigger business was flowing his way courtesy of the Lieberbaums.

  Whereas Lieberbaum & Company was known as a New York Stock Exchange-registered brokerage house, Bernard L. Madoff Investment Securities was not. According to Zaphiris, who worked at Lieberbaum at the time, an arrangement appeared to have been worked out between Bernie and Lieberbaum whereby all orders given to Lieberbaum for over-the-counter stocks were “walked across the street” for Bernie to handle.

  Zaphiris, who worked at Lieberbaum as a 25-year-old broker trainee in 1963 after being recruited by Eddie Rochelle, another Far Rockaway graduate from Bernie’s class of 1956, continues:

  The over-the-counter trades were all spooned to Bernie. He was handling all of that Lieberbaum over-the-counter business so far as I knew. That was the way Bernie made his living at the time. About 95 percent of his over-the-counter business was coming from Lieberbaum.

  Lieberbaum had 50 brokers churning out orders and talking to customers. I don’t know how much volume they produced in over-the-counter, but it had to be significant and every drop of it was going to Bernie.

  Each side made out on the deal.

  Bernie made a commission for making the actual buy or sell, and Lieberbaum marked up the trade “an eighth or a sixteenth” above and beyond its usual commission (commissions back then were significant, much more than they later became). The customer was never the wiser, thinking he or she was doing business strictly with Lieberbaum when, in fact, it was all being funneled to Bernie.

  Looking back, Zaphiris says he “thought” what was going on was “unethical. I don’t know if it was illegal.”

  Carol Lieberbaum asserts she didn’t get involved in the family business, and says she “can’t remember” whether Bernie ever worked with the family brokerage. “I don’t think Bernie and Shelley and my father-in-law were ever in business together, but of course they all were in the same business. I don’t know the business aspects of their connection.”

  But Zaphiris emphasizes:

  Bernie was like another facet of the Lieberbaum business. They definitely were in business together, whether it was official or unofficial. If a customer bought a stock that was not listed, and the customer bought it from Lieberbaum, the customer had no idea that Bernie was involved in any way, shape, or form.

  Michael Lieberbaum, the only surviving member of the family troika that ran Lieberbaum & Company before its demise, declined requests by the author for an interview through his wife, the former Cynthia Greenberger.

  “The Lieberbaum thing was the genesis of Bernie’s career,” Zaphiris believes.

  Yet, it should be noted that at the same time, Bernie’s investment advisory business—which was helped along by his father-in-law—was going strong, too.

  That being said, the arrangement between Lieberbaum and Madoff back in the 1960s appears to have been a prototype for the future of how much of Bernie’s investment advisory business-cum-Ponzi scheme operated: So-called feeder funds recruited investors for Bernie and fed billions of their dollars to him. The investors were unaware that their money was actually being passed on to Bernie. In exchange, Bernie gave the feeder fund operators hundreds of millions of dollars in commissions, simply for being middlemen. It was only after Bernie was arrested and his scheme revealed that many investors first heard the Madoff name, and by then it was too late.

  The Lieberbaums and the Madoffs were a close-knit group, almost like family. As young couples, the Lieberbaums and the Madoffs often socialized, and had playdates for one another’s children. Mike and Cynthia Lieberbaum lived in Roslyn Heights, near Bernie and Ruth, and Shelley and Carol Lieberbaum lived in nearby Woodmere.

  Because of their friendship—and because he was handling all of Lieberbaum & Company’s over-the-counter trades—Bernie was a constant presence in the Lieberbaum offices, “bullshitting with Shelley, Mike, and Louie,” recalls Zaphiris. “Bernie and the Lieberbaums were really, really, really tight together, and they did a lot of business together. The Lieberbaums at that time were kingpins. Across the street Bernie had a little dinky office with a couple of machines and a girl working for him.”

  Working together with him at that time was his father, Ralph Madoff, with the fake middle initial Z. This was in the same time frame that Bernie’s mother, Sylvia, got into trouble with the SEC for operating questionable Gibralter Securities out of the family home in Laurelton, and was suspected of fronting for her husband.

  During the time Peter Zaphiris worked at Lieberbaum & Company, he noticed other curious activity along with the firm’s close Bernie connection and the shuttling of over-the-counter trades to him. This included clients who were “clearly gangsters” and were believed to be from the Rockford, Illinois, family of La Cosa Nostra, which was a faction of the Chicago mob.

  “The boys from Rockford were calling all the time, and I suspected that there was some sort of money laundering going on, something crazy going on,” says Zaphiris. “There was a broker who was trading a company for these guys. He’d get a phone call before the close and they would tell him what to close it at and he would buy 30,000 shares and sell 30,000 shares. They would manipulate the stock like crazy, and that was one of about 300 deals going on, and they were all pretty much the same bullshit.”

  One day word spread through the office to expect visitors. The Rockford boys were coming to town to pay a visit. Remembers Zaphiris:

  Three guys came into the office and they were like five by five, the guys that wear expensive Italian suits, and they look cheap.

  A couple of my acquaintances in the office—the guys who did business with them and who were in the hierarchy of the 50 or 60 brokers working at Lieberbaum—were literally shaking. They weren’t looking forward to this visit because they had either just lost a great deal of money for them, or they had put them in some sort of situation they didn’t want to be in.

  A private meeting was held between the mobsters and the brokers in a conference room.“It was a poof,” says Zaphiris. No shots were fired.

  No horse’s head was left behind, and after a couple of hours the boys left and everyone was relieved.

  But the fact that mobsters did business with the firm to which Bernie had close connections raised a red flag. However, during the time Zaphiris he w
orked there he never was aware of any questions of illegalities being raised or investigated by the SEC, the agency that years later gave Bernie a free parking card when presented with hard facts that he was running a Ponzi operation.

  “We weren’t dealing with customers coming in and bringing in presents from Tiffany’s,” he observes. “Most of the people who showed up were screaming at the brokers. They were people who were really wounded.”

  Zaphiris believes the wounding occurred because of what he suspected or witnessed—stocks that were being pumped and dumped and manipulated. “They ran one stock from seven bucks up to around $140 and they manipulated it. They put all sorts of people in it, and then they dumped it out. Most of the brokers there were fast and loose. They scoffed at the investors. They thought they were idiots.”

  On another pump-and-dump stock, Canadian Javelin, two brokers who acted as partners within Lieberbaum had a deal under which they received one dollar in cash for every share that they placed. The SEC eventually halted trading by all brokers in the stock, and the case went to the U.S. Supreme Court to decide on the agency’s action. It became a landmark securities case, and existing certificates of the stock later became collector’s items.

  After the two brokers left Lieberbaum, they were caught in a stock scheme. Federal court papers called them “New York stock manipulators,” and one of them pleaded guilty to a conspiracy count. One of the federal prosecutors in the case was Ira Lee Sorkin—Bernie’s attorney. One of the two former Lieberbaum brokers later was involved in another fraudulent scheme involving the writing of a questionable newsletter promoting the stock of a California firm. The ex-Lieberbaum broker was sentenced to six months in prison. One of the big-name investors in the company was then New Hampshire congressman and later the state’s U.S. senator, John E. Sununu, son of John H. Sununu, former chief of staff in the George H. W. Bush White House.

  Besides the mob boys, loan sharks appeared one day to deal with another Lieberbaum broker who was a compulsive gambler, an East Side playboy who was an heir to a fortune that he wouldn’t inherit for a few years, and who had been hired at Lieberbaum mainly to bring in rich friends and family as clients. He was betting as much as $5,000 a day from his trading floor desk, studying the Racing News rather than the Wall Street Journal.

  Says Zaphiris:

  One time these torpedoes came up and they threw him over the desk backwards in the Lieberbaum office.

  They were sitting on him and saying, “You pay up or we’re gonna break your fuckin’ legs.” He said, “If you break my legs you’re not going to get the money any faster. Your boss knows I’m good for it.” So they pushed him around and they actually pushed him over his freaking desk and his ass hit the back of the desk and he went overboard. It was frightening.

  Prospective Lieberbaum clients with big money were usually given the grand tour of the offices by either Shelley or Lou Lieberbaum himself—a short, unassuming man who dressed to the nines, rarely talked to his brokers, and didn’t spend a lot of time in the office—much the way Bernie operated when he got into the big time.

  Visitors to Lieberbaum & Company saw brokers busy working the phones, ticker tape machines spewing buys and sells, world time zone clocks ticking away—it all looked very official and heady.

  “When you walked in there,” recalls Zaphiris, “it looked like the place was popping. Today they call it a boiler room, but it was only nicer.”

  Lou Lieberbaum always saved his tour’s big Hollywood ending for last, literally and figuratively. Shelley would call Bernie at his office across the street and he’d come running over to watch the maestro’s’s closing act, the pièce de résistance.

  “And now,” he’d proclaim as if to a drumroll, “How would you like to meet . . . ta-da . . . Buster Crabbe?!”

  Seated right up front, handsome as ever, dressed like a movie star-turned-stockbroker in a pin-striped suit, starched white shirt, and subdued tie, was one of Hollywood’s one-time biggest box office attractions—the actor who thrilled millions of kids playing comic strip heroes like Tarzan, Flash Gordon, Billy the Kid, and Buck Rogers on the big screen in films and in serials, and who later starred in television.

  Then in his mid-50s, Crabbe was hustling stocks for Lou Lieberbaum. Like Bernie, Crabbe also was a swimmer—but big-time, winning a bronze medal in the 1928 Olympic Games and a gold medal in 1932. When his Hollywood career waned, he became a stockbroker and a businessman—hawking Buster Crabbe swimming pools for a New Jersey company. And like Bernie, he was swimming with sharks in the frenzied waters of Wall Street.

  “Buster was a nice guy,” says Zaphiris, who sat in the trading room near him. “He was handsome as hell and dressed like Douglas Fairbanks. Everybody who was coming into Lieberbaum knew who Buster Crabbe was. He was Tarzan and Flash Gordon.”

  In 1983, at the age of 75, Crabbe suffered a fatal heart attack.

  After less than a year, Peter Zaphiris decided to leave Lieberbaum & Company. He had seen enough.

  I don’t want to make myself sound like I’m some kind of an angel, which I’m not. I couldn’t see it. There was nothing in that business that I would have been happy doing, because it was a bunch of manipulation.

  I didn’t go there and find out how to research a stock, or how you develop clients, or how you recommend a portfolio to them. I never learned any of that. I learned—how do you find a guy and churn him. Part of my training was to tell half of the customers to buy and half to sell. Then 50 percent of your customers love you. They think you’re a genius. It was definitely not for me.

  I can’t say that Louie was a crook. I know that a lot of people praised him up and down. He made a lot of money for people and he also ruined a lot of people—exactly the same as Bernie, but in Lou’s case it wasn’t a Ponzi scheme. They were putting customers into stock and taking them out of stock. They were doing crazy shit.

  Lou Lieberbaum retired to “God’s waiting room,” Pompano Beach, Florida, where the state bird is jokingly referred to as “the early bird,” and a home bordering the exclusive Palm-Aire Country Club. He died in the 1980s of a type of leukemia, his daughter-in-law says.

  In 1985, Carol and Shelley got divorced.

  Mike Lieberbaum had gone off on his own, settling in Westport, Connecticut, and Sarasota, Florida, where his in-laws, the Greenbergers, had a home. But Mike and his wife, Cynthia, continued a “very close relationship” with Bernie and Ruth, and lived the good life like them. In a June 2003 letter to the New York Times, Cynthia Lieberbaum wrote about how she and her family vacationed in Positano, Italy, every year for more than three decades “and finding no travel experience more rewarding than being welcomed with open arms . . . by people who have known us since we were in our early 30’s.”

  By the 1990s, as Bernie was in full Ponzi mode, his close friend and investor, Shelley Lieberbaum, began getting into some serious trouble himself.

  The National Association of Securities Dealers (NASD) alleged that he and some others “engaged in market manipulation, inaccurately maintained books and records and failed to adequately supervise the activities of employees” in connection with a public offering of a stock, according to SEC records. In 1995, Lieberbaum and the others “voluntarily entered into a Letter of Acceptance, Waiver and Consent” with the NASD. He was censured and fined by the association, agreed to pay with the others restitution to customers, and was suspended from associating with any NASD member for a month.

  That same year, after a decade-long divorce, Shelley and Carol Lieberbaum remarried.

  By then the original Lieberbaum & Company, founded by Shelley’s father, had morphed in 1990 into one called Lew Lieberbaum & Co., a stock brokerage headquartered in Garden City, on Long Island, with an office in lower Manhattan. It had a customer base made up of thousands of affluent people in five states.

  Starting in 1992, the new Lieberbaum company, with more than 200 employees and over $20 million in revenue, had been censured by the NASD four times, and ordered t
o pay fines and restitution to customers of more than $1.2 million. But none of the principals ever admitted guilt.

  Now money and sex and racism seemed intermingled.

  Shelley Lieberbaum became a key figure in a full-blown, headline-making case in the mid-1990s—a sensational sexual and racial harassment scandal in which his company became a “brokerage firm-turned-animal house, ” as the New York Daily News called it, where top executives were accused of groping women, holding lesbian stripper parties, and mistreating minorities.

  All of it was revealed in shocking lawsuits against Lew Lieberbaum & Co., of which Shelley was one of the founders, filed by three former white female employees and the U.S. Equal Employment Opportunity Commission (EEOC). The probe began in April 1996, when the women complained of widespread and routine sexual harassment in a $100 million lawsuit against the company and nine executives, including Shelley Lieberbaum.

  One young woman claimed that two Lieberbaum executives demanded oral sex from her. “I felt like nothing but a shell when I left,” she was quoted in a press report as saying. Another said she was forced to give an executive back rubs, watch lesbian strippers perform, and “run a gauntlet” in the trading room, known as “The Pit.” Relevant evidence in their case included photos of a Lieberbaum executive celebrating his birthday at the office with his face between a stripper’s bare breasts, with his head between her legs, holding a banana near her crotch.

  Several months later the charges of racial discrimination were added by the EEOC involving at least nine women. About 40 percent of Lieberbaum’s employees were female.

  One of the women, identified as Keiser L. Williams, who had worked as a receptionist in the New York office of Lieberbaum, maintained she was “sickened” by the behavior, pointing directly at Shelley Lieberbaum. She alleged that he made racist slurs and told jokes of a racial and sexual nature. Mark Lew, the company’s chief executive—the Lew in Lew Lieberbaum—consistently denied all the charges. He was quoted in the New York Times as saying that Shelley “was known for telling such jokes” and that Williams had “encouraged” him to do so. Lew said the allegations of racial discrimination were “outrageously untrue.”