The Madoff Chronicles
Page 12
Had he ever seen a DTC screen before? “No.”
“And because he was telling you that—because Madoff told you that—”
“Yeah, of course.”
“Have you ever seen a DTC screen since then?”
“No.”
“And did you get a printout of the DTC screen?”
“No.”
“Did you repeat that review with any other equity or option, or was it just the AOL shares?”
“I think just the AOL.”
Once was enough. There was no need for any more of Madoff’s magic.
Over the years, as clients raised a number of questions about Madoff, Fairfield Greenwich repeatedly gave them short shrift. They thought they had seen the proof, and they were reassured when, over the years, Madoff was able to honor some $3 billion in redemption requests.
In 2005, one of Fairfield Greenwich’s Sentry Fund customers asked a pointed question about Madoff’s accountant, Friehling & Horowitz. “Bernard L. Madoff Securities LLC has employed a small accounting firm,” the customer wrote. “Is that accounting firm checked and approved by Fairfield Greenwich Group?” As noted earlier, Friehling & Horowitz was a three-person operation working out of a strip mall in a small town north of New York City. No one at Fairfield Greenwich had ever spoken to Friehling, the lead accountant, or done any background checks on him until the customer’s inquiry.
Fairfield’s chief financial officer, Dan Lipton, picked up the phone and called the Friehling offices. He does not remember the name of the “partner” he talked with, but it must have been Friehling because he was the only full-time partner at Friehling & Horowitz. Horowitz, Friehling’s father-in-law, was in retirement in Florida. Lipton recalls he was told the firm had “hundreds of clients” and was “well respected in the community.”
Other than checking on the Internet to see that the firm was in good standing with its certified public accounting license and was a member of the local chapters of the CPA, Lipton made no effort to corroborate what Friehling told him. Fairfield’s chief risk officer also was satisfied that Friehling & Horowitz were independent auditors, because, he later testified, “on the front of the report it said ‘independent auditor.’”
No one ever traveled to New York’s Rockland County to inspect the office. If they had, they would have discovered that it was an eighteen-by-thirteen-foot space. The firm’s total revenues were $180,000, hardly in keeping with the fees that would have been earned by conducting a full, independent audit of a $65 billion hedge fund.
Nevertheless, Fairfield Greenwich assured its anxious customer that there was no problem with the accountant. Based on a statement provided by his chief financial officer, Lipton, Jeff Tucker wrote to his suspicious client on September 12, 2005, that “Friehling & Horowitz CPAs are a small- to medium-sized financial services audit and tax firm specializing in broker/dealers and other financial services firms….
They have hundreds of clients and are well-respected in the local community,” Tucker said, passing on as truth the lies Friehling had told to cover for Bernie Madoff.
Two days later, Tucker, Lipton, and the firm’s general counsel, Mark McKeefrey, received a disturbing e-mail from Gordon McKenzie, the Fairfield controller. He had done some more checking on Friehling & Horowitz and reported, “It appears Friehling is the only employee.” So how could they have hundreds of clients in the financial services industry? One accountant could never handle such a workload. Tucker’s only response to the e-mail was, “Thank you.” Fairfield Greenwich took no further steps to answer some very obvious discrepancies and questions. They continued to cite the Friehling & Horowitz audits as proof that Madoff was indeed all he said he was.
An SEC investigation of Madoff was launched only a few months after Fairfield Greenwich had dealt with the questions about the accountant. Now there were allegations that Madoff might be running a Ponzi scheme, and SEC investigators considered Fairfield Greenwich an important source of information. As Madoff’s single biggest customer, Fairfield Greenwich, with its “robust due diligence,” would certainly know if there was anything to be concerned about.
But the fact was that Fairfield Greenwich knew very little about Madoff. That ignorance would have become very troubling for them if it became known to the SEC. It also could have been a violation of securities law to promise clients “due diligence” and then not perform it. So Fairfield Greenwich had plenty of reasons to allow its chief risk officer, Amit Vijayvergiya, to be “briefed” by Madoff on what to say to the SEC.
Noel’s partner Jeff Tucker was also “voluntarily” interviewed by the SEC. Fairfield Greenwich gave Madoff high marks. In the view of the Massachusetts secretary of state, Madoff’s ability to coach the witness “likely helped him evade SEC detection.”
In the second half of 2008, when the financial system and the market were on the edge of collapse, a number of Fairfield Greenwich clients wanted to take money out of Madoff’s company. Some needed the money to make up margin calls and losses elsewhere. Others began to have concerns about Madoff himself.
Fairfield Greenwich tried to stop the withdrawals. The chief risk officer, Vijayvergiya, also had a role in marketing Madoff to Sentry Fund clients. He was working on a plan to persuade Fairfield Greenwich customers not to withdraw their money from Madoff. One of the firm’s partners, David Horn, the chief global strategist, warned him about a prospective client who was considering an investment of $50 million to $100 million. “She has heard about Madoff but hears things that scare her,” read the e-mail Vijayvergiya received. “So neutralize the scare with our transparency. This will be a piece of cake,” Horn wrote.
Yet the withdrawals and concerns continued. There had been discussion and serious concern inside Fairfield Greenwich that Madoff would “blow up.”
As the markets dried up, how did Madoff continue to do so well? Who was buying and selling him the options that were critical to his “split strike conversion” strategy that no one else really understood? Nobody else was able to do what Madoff said he was doing in this tight market. DiPascali had told them about “twenty derivatives dealers and international banks, primarily European,” who were the “counterparties,” but he would not provide specific names. Only Bernie could reveal those secrets. Vijayvergiya had a meeting scheduled with Madoff on October 2. “If anyone feels we should urgently contact Bernie in advance of this meeting, we can do so,” he wrote.
Although its customers had no idea there was any concern about Madoff, Fairfield Greenwich was beginning to feel the twinges of panic. When some of its clients raised the same questions it had about who was buying and selling Madoff’s vital options and puts, the “counterparties,” Fairfield Greenwich answered, “We do not give out the names of the counterparties used [,] but they are all well established financial institutions. All counterparties are rated A or better and they are not affiliated with Madoff.” In fact, Fairfield Greenwich still had no idea who Madoff used as counterparties. Madoff would not tell them because the truth was that there were no counterparties. If he had made up names, they could have been too easily checked.
Fairfield Greenwich made another feeble attempt at due diligence in Madoff’s office at the October 2 meeting. Walter Noel and Jeff Tucker attended, as did their general counsel, Mark McKeefrey. Vijayvergiya was on the phone, listening. Madoff had been given a list of “priority” questions to close some of the “gaps” in Fairfield Greenwich’s knowledge of his operation. After nineteen years in which they had invested billions of dollars with Madoff, Noel and Tucker still had barely a clue of what Madoff was doing to earn such huge returns.
Yet Madoff continued to dodge and hedge on the written questionnaire. “Please provide a list of key personnel involved in the split strike conversion strategy. Provide a description of their roles.” Madoff answered, “The people involved in the SSC (split strike conversation) strategy are traders, analysts, programmers, and operations people. No names given.”
The evasions w
ere getting more obvious, yet no one at the meeting pushed for answers. When he was again asked for the names of the counterparties, Madoff’s response, recorded in the meeting notes, was “BLM will not disclose the names of the c/p’s ‘for obvious reasons’ (i.e. confidentiality).” Vijayvergiya later told investigators from the Massachusetts secretary of state’s office, “I don’t recall if anyone at this meeting pushed back and asked for a specific response.”
Madoff had always played hard to get with his investors, even with Fairfield Greenwich. In October 2008, however, he abruptly reversed his “long-standing policy” of limiting how much money Fairfield Greenwich could put into his firm. In fact, he showed flashes of anger when informed of the growing number of Fairfield Greenwich clients who wanted to pull their money out. Madoff had dropped the “hard-to-get” pose.
Fairfield Greenwich came to his defense, passing on tales such as the assurances about the mystery counterparties that they later admitted to investigators they knew nothing about. Vijayvergiya also sent investors a notice that as of mid-September, Madoff had put all of the money into safe U.S. Treasury notes. Madoff, the genius, was out of the market. It seemed he had once again predicted the future and acted accordingly.
Remarkably, Madoff told Fairfield Greenwich that one of his cash holdings was with the Fidelity Spartan U.S. Treasury Money Market Fund. The Fidelity Spartan Fund no longer existed. It had been renamed the Fidelity Fund in 2005. No one noticed Madoff’s error.
Still, with the market in crisis and questions about Madoff swirling, the redemptions from Fairfield Greenwich clients continued and Madoff was uncharacteristically furious. Mr. Cool was no longer so calm and uncaring. He was no longer playing hard to get. He scolded and berated Jeff Tucker and threatened to cut him off. It was December 8, three days before Madoff’s arrest. “Just got off the phone with a very angry Bernie, who said if we can’t replace the redemptions for 12/31 he is going to close the account,” Tucker reported to the firm’s executive committee and Walter Noel.
The golden goose was making threats. “His traders are ‘tired of dealing with these hedge funds’ and there are plenty of institutions who can replace the money. They have been offered this all along but ‘remained loyal to us,’” Tucker wrote of his conversation. Madoff was bluffing, but Tucker believed him. “I think he is sincere,” he wrote.
Fairfield set up new funds in the last months of 2008 to try to pump additional money into Madoff’s operation. “We tried to help stem things,” Noel said. “We thought, well, we can help him a bit if we give him some more money.” They raised almost $15 million for what was called the Greenwich Emerald Fund, which the Massachusetts secretary of state said was formed without any of the legally required offering documents. There was no time to waste if the angry Madoff had to be appeased. Fairfield Greenwich was desperate. The small amount in the Sentry Fund that was not already invested with Madoff was also sent his way. Several hundred million dollars from other funds was sent to Madoff as well, and the firm covered another $150 million in client redemptions by taking over their investments with Madoff. Tucker and his wife had invested some of their own money in one of the new funds, as a vote of confidence and because he believed it was a “good investment.” Noel and Tucker pushed hard.
On December 10, the day Madoff would admit to his sons that he was a fraud, Tucker wrote a letter to Madoff detailing all the steps Fairfield Greenwich was taking to avoid being cut off from the huge fees they had earned over the years. On the morning of December 11, the day Madoff was arrested, Vijayvergiya was still pushing investments to Madoff and marketing the “superior due diligence” that had been conducted on him. The news of the arrest came only a few hours later.
People at Fairfield Greenwich immediately understood that they were in serious trouble. The chief financial officer, Lipton, sent an e-mail trying to shift his personal assets out of his name. “My wife needs to open a brokerage account today in only her name. And I would like to transfer my munis and Treasuries into it.” Elsewhere, one of Fairfield Greenwich’s account executives in London also sensed big trouble. It was obvious that lots of questions were going to be asked about who knew what when. And the London executive desperately sought any paperwork that could be used as proof that he had confirmed Madoff’s supposed trades for a Fairfield Greenwich fund called Sigma that had sent money to Madoff. “In order to cover my ass, can I get some copies of those trades? I need to show to people who invested in Sigma that I was doing due diligence in what is the largest scam in financial history.”
CHAPTER
NINE
The Victims
TWELVE DAYS AFTER BERNARD MADOFF ADMITTED TO THE FBI that he had cheated thousands of people out of billions of dollars, one of his victims committed suicide.
Rene-Thierry Magon de la Villehuchet, a sixty-five-year-old French aristocrat who lived and worked in New York as an investment adviser for Access International Advisors, was found dead in his office in Manhattan on December 23. He had taken sleeping pills and then slit his wrists.
Madoff was at the kitchen table of his penthouse apartment, under luxurious house arrest, when he learned of the suicide. He sneered.
“That guy couldn’t pick a stock if his life depended on it,” Madoff said to a stunned visitor about the dead Mr. de la Villehuchet.
There was no emotion, no regret that his crimes had led to a death, the visitor said. Only contempt for a man whom Madoff dismissed as unable to pick a stock. Of course, Madoff’s own legendary ability to pick stocks was based on cheating. His fraud scheme depended on picking stocks after the market had closed, when he already knew the winners and losers. Madoff never actually traded any stocks for his investors, and his picks were just a fiction to persuade his investors that they were making huge returns.
De la Villehuchet, the gentlemanly French financial adviser, had invested $1.4 billion of his and his clients’ money with Madoff over the years because of Madoff’s supposed brilliance with the market. In the weeks before the arrest, executives from de la Villehuchet’s investment firm had met with Madoff. The independent fraud investigator, Harry Markopolos, apparently had tried to warn de la Villehuchet’s firm but said that their risk manager “refused to meet with me to discuss my proof that Bernie was a fraud.” De la Villehuchet had lost his life savings in the Ponzi scheme, but worried more about what he had done to his clients. “He felt, as we say in French, guilty but not responsible,” said his brother, Bertrand.
Madoff felt neither guilt nor responsibility.
“Madoff wouldn’t understand the reaction of my brother. It was his honor, a word that’s not in his [Madoff’s] vocabulary,” said Bertrand de la Villehuchet.
According to former FBI agent Brad Garrett, Madoff’s reaction to the suicide of one of his victims was a classic manifestation of an antisocial personality. “An antisocial personality basically is a person with no conscience,” said Garrett. “I call them boomerang personalities. Everything I throw at you, you throw back at me. It’s always the other person’s fault.” In the case of de la Villehuchet, Madoff blamed the Frenchman. “He’s weak, he committed suicide,” Garrett imagined Madoff thinking.
Garrett knows Madoff’s type well from dealing with serial killers and other criminals. “They are just monsters to deal with because they will not accept responsibility. If they admit anything, they’re going to make some comment about how that person had it coming to them. ‘They wouldn’t be shit without me.’”
Police call Ponzi schemes affinity scams because they almost always involve groups of people who know one another. Madoff’s victims all knew someone who knew someone who knew Bernie. Madoff did not have to put advertisements in the Wall Street Journal to recruit clients. Given his reputation for steady returns of 12 to 20 percent, customers were banging on the door to get in.
“We felt like we were the luckiest people in the world because we certainly weren’t millionaires,” said Laura Stein, a nutrition specialist who wrote The Bloomingdale�
��s Eat Healthy Diet book. “We thought he would never bother with small potatoes like us.”
When the market collapsed in the fall of 2008, Stein and her husband moved all of their other investments into the Madoff account because he continued to make profits—or so their monthly statements indicated.
“Our accountant called and spoke to my husband,” Laura said, “who walked up the stairs very slowly and he said, ‘I have very bad news.’ And I thought someone had died and then he said Bernie Madoff had been arrested.” They lost everything.
On December 11, 2008, thousands of people received similarly bad news. Madoff’s actual number of accounts totaled only 4,903, but many of the accounts belonged to investment firms or hedge funds, the “feeders,” who had invested money on behalf of their own set of clients.
The early headlines focused on the well-known names that showed up on Madoff’s victim list. The acting couple of Kevin Bacon and Kyra Sedgwick were among the famous losers. Director Steven Spielberg and DreamWorks executive Jeffrey Katzenberg, steered to Madoff by famed Hollywood accountant Gerald Breslauer, had invested money with Madoff for their charitable foundations. Oscar-winning screenwriter Eric Roth lost several million dollars as he was celebrating the opening of his latest film, The Curious Case of Benjamin Button. While their losses were large, the A-list victims did not face the loss of their homes or imminent bankruptcy like so many others who had invested with Madoff but did not have names that get boldface type in the papers.
“I heard about Spielberg and those people, naturally. It’s a write-off for them. But for us, ten million is a lot,” said the husband of Zsa Zsa Gabor, the ninety-eight-year-old actress whose A-list, gossip column days were long over.