by Brian Ross
Zsa Zsa and her husband, Frédéric Prinz von Anhalt, lost their life savings when the Madoff scheme collapsed. They feared they might lose their Bel Air mansion (they were ultimately were able to keep it), their two Rolls-Royce sedans, and—most important of all—what was left of their dignity.
“At her age, you know, she’s very upset. She nearly had a heart attack when she found out,” said von Anhalt in a European accent that matched his wife’s famous Hungarian lilt. They had put their money in Madoff through a Los Angeles investment fund and did not immediately realize they were victims of the Ponzi scheme. Once Zsa Zsa understood what had happened, she blamed her husband. “So now my wife is furious and I have sleepless nights because every evening I go to bed, my wife stalks about: ‘What happened, what happened?’ It’s terrible. It’s a disaster for us.”
As von Anhalt was being interviewed on the first floor of the mansion, Zsa Zsa was upstairs in her bedroom. She has been confined to a wheelchair since suffering an auto accident in 2002 and a stroke in 2005. She would not show her face with the cameras present, but she could be heard shouting at her guilt-ridden husband, still angry about the loss.
“It didn’t happen to Zsa Zsa Gabor, it happened to me, because my wife trusted me,” said von Anhalt. “It’s enough to kill myself, but I’m not going to do it. I’m not doing him the favor. I want my money back. I want to squeeze the bastard. I want him to go down. And I want to see him going down. That is going to satisfy me.”
Only a few of Madoff’s victims had Bel Air mansions, but the personal recriminations and anger and fear that Zsa Zsa and her husband were going through were scenes that played out at kitchen tables around the country and all around the world in homes of all sizes. “It’s your fault. How could you have trusted him?” Like Zsa Zsa, Madoff’s elderly victims no longer had the ability to go back into the job market and make a living. They had counted on him to get them through retirement. Everything was gone. One ninety-year-old investor was told by her nursing home she would have to leave because she no longer had the ability to pay.
Others counted on the money they had with Madoff to pay for their children’s college education or for pressing medical needs. Behind every Madoff account number was a heartbreaking story and a crippling sense of betrayal.
“There are going to be suicides, there is going to be divorce and upheaval,” said psychotherapist Heath King, whose clients include several Madoff victims. “It can be devastating not only financially but mentally and emotionally. There will be a lot of accusations and counter-accusations that will create more of a fissure in relationships that were based on image and money in the first place.”
As such, Palm Beach, Florida, was especially hard hit. With its exclusive clubs, expensive shops, trophy wives, and multimillion-dollar mansions hidden behind tall hedges, the tiny island is an enclave of the wealthy. It’s a place that’s all about image and money.
“Palm Beach is a prototype of what F. Scott Fitzgerald referred to when he said that the wealthy have problems that the poor know not of,” said psychotherapist King, who sees many patients from Palm Beach.
Bernie and Ruth Madoff were among Palm Beach’s most prominent residents, and many of Madoff’s victims were fellow members of the Palm Beach Country Club. The Palm Beach Country Club was founded in the 1950s by a group of wealthy men who could not get into the city’s other prominent clubs because they were Jewish. Madoff listed two of his biggest recruiters, Robert Jaffe and Sonny Cohn of Cohmad, as personal references in his membership application.
Club members vied to have Madoff take them on as investment advisory clients. Many of them sought recommendations from someone who was already lucky enough to be one of Madoff’s clients. Madoff was above it all. His marketing strategy was to play hard to get. “He cultivated an aura of success and secrecy,” the SEC found, “shunning one-on-one meetings with most individual investors and arbitrarily refusing prospective investors for what appeared to be whimsical or snobbish reasons.”
Hundreds of the country-club set found a connection to Bernie through fellow member Robert Jaffe, another member of the club, whose wife, Ellen, was the daughter of Carl Shapiro, one of Madoff’s first and biggest clients. His father-in-law’s longtime connection to Madoff helped Jaffe get the job in the first place.
Jaffe is a debonair former clothing salesman from Boston with a perpetual tan, who could usually be found at the club or driving around town in his Jaguar convertible. He had a mansion just down the street from Bernie’s that was even bigger and grander than Madoff’s. He was well known for his ability to make an introduction or “put in a good word” to Bernie. “He was perceived to be a door opener to Madoff,” said William Galvin, the Massachusetts secretary of state.
Unbeknownst to many, Jaffe was being paid by Madoff to steer customers and their money to him. He had been hired to work at what investigators called a “front” for Madoff. The company, Cohmad, was part-owned by Madoff and used, essentially, as Madoff’s secret sales force. According to investigators, Cohmad conducted no business on its own other than to transfer money to Madoff. This was part of what the SEC later called Madoff’s “shell game” to deceive regulators.
Jaffe took the Fifth Amendment when he was questioned by the Securities and Exchange Commission and Massachusetts secretary of state William Galvin about Cohmad and Madoff. “The amount of fees that Mr. Jaffe made as a result of his interaction with Mr. Madoff has certainly raised some serious questions,” said Galvin. Jaffe’s payments from Madoff were deposited directly in his Madoff account, supposedly accruing interest of up to 46 percent per year. In the last twelve years, he took out more than $150 million. When the scheme collapsed, Jaffe was wiped out, according to the public relations person he later hired. Even Madoff’s salespeople were victims in a certain respect.
Jaffe was not willing to speak about his role in Madoff’s fraud. When an ABC News producer sought to take his picture outside the crowded Bice restaurant in Palm Beach one evening, Jaffe grabbed the camera out of her hands and smashed it onto the concrete pavement. His spokesman said, “He got a little emotional.” The spokesman said Jaffe “never, ever misled anyone” and that he, too, along with his father-in-law, Shapiro, were victims of Madoff.
“We recognize that he’s a piece of the puzzle,” said Galvin as he began his investigation. “He obviously could have provided us with a lot more information about how the Madoff empire worked. He declined to do so.”
In June, 2009, the SEC charged Jaffe and Cohmad with civil fraud, alleging that they “knew or should have known” that they were working for a Ponzi scheme. In a statement, Jaffe’s lawyer, Stanley Arkin, said the SEC action “smacks of impulsiveness and efforts at self-justification. It is unfair, baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe.”
In a settlement with the SEC in November, 2010, Jaffe was barred from association with any broker, dealer, or investment adviser. In a separate settlement with the trustee, Jaffe agreed to turn over $38 million. Jaffe neither admitted nor denied the allegations against him, according to the SEC documents.
With Jaffe’s help, Madoff collected more than a billion dollars from the elite of the Palm Beach Jewish community. When his crime was exposed, they were stunned to learn that Madoff, their nine-handicap golf partner and charming dinner guest, was an outright crook.
“He was stealing from his own crowd,” said psychotherapist King. “There is this sense of betrayal. And with betrayal comes anger.”
After Madoff was safely under house arrest, Jaffe continued to be out and about at the finest restaurants and clubs in Palm Beach. For some, it was too much when he showed up at the grand ballroom of Donald Trump’s country club, Mar-a-Lago, for a society birthday party.
“Unfortunately about forty percent of the people at the party had been ripped off by Madoff,” said Trump, who was also there that night. “When he walked in the door there were a lot of angry eyes, blood pouring out of
the eyes.”
Among those watching Jaffe was seventy-eight-year-old Jerome Fisher, the founder of the Nine West shoe store chain, who reportedly lost $150 million to Madoff. Fisher was furious as he approached Jaffe. “What are you doing here?” he demanded. There was a shoving match as Fisher pushed Jaffe into the wall. “How could you?” he shouted as others moved in to separate the two men.
Trump was completely sympathetic to Fisher. “People went a little bit wild and you know what? They have every right to go wild because some of them lost a large percentage of their net worth. If he did that to me, if he got me to invest with Madoff, and Madoff turned out to be a total phony fraud, I wouldn’t be very happy with Jaffe either.”
The Bernie Madoff scandal rocked the genteel world of Palm Beach. Previous scandals involving then-Congressman Mark Foley and teenage boys, and the sensational divorce trial of the Pulitzers, were juicy tabloid fare. But this was serious. It involved real money. On the famed shopping street Worth Avenue, jewelry stores were doing big business buying up the gold and diamond jewelry of victims desperate to raise cash.
“I’m overwhelmed at the amount of jewelry from all these Madoff victims,” said store owner Patti Esbia. “So much is coming in. I’m sure it had to be a sense of loss for them.”
The Madoff scandal also served to shine a bright light on Palm Beach’s infamous and ugly anti-Semitism. Sitting around the kitchen table in her penthouse apartment, Ruth Madoff seethed about “the gentiles” who were gloating about her husband’s downfall and its implication for the Jewish community.
“It’s the fact that he’s Jewish that is always associated with this,” said Rabbi Michael Resnick at Temple Emanu-El of Palm Beach.
Town officials said they saw no sign of anti-Semitism in Palm Beach, before or after the Madoff arrest, but outside Rabbi Resnick’s temple one Saturday morning, a member of the congregation who did not want to be named said non-Jewish friends had expressed “glee” about the plight of Madoff and his victims “as if we had it coming.” “That’s part of the great tragedy of this,” said Rabbi Resnick, “because it reinforced the prejudice and the hatred that many people have toward Jews. This was a body blow to Judaism, and that’s an equal tragedy in my mind.” Jewish religious and community leaders in New York and Los Angeles expressed similar views, especially in light of the losses by Jewish charities that had invested their endowments with Madoff.
In an open letter to Madoff, published in Newsweek, Los Angeles rabbi Marc Gellman wrote, “You betrayed charities whose good works you have extinguished in an afternoon. These betrayals are epic in their scope and dazzling in their utter lack of remorse or responsibility. There must be some new word invented to describe the way you have redefined betrayal.”
The records show that Madoff stole from Yeshiva University, Hadassah, the American Jewish Congress, Elie Wiesel’s foundation, and a long list of other Jewish charities. By conservative estimates, charities lost almost $160 million.
There was little likelihood that the charities or any of Madoff’s victims would recover anything approaching what they thought they had earned from their years of investment with Madoff. And in the efforts to recover Madoff’s money, some of his customers came to feel they were being victimized twice.
Within days of the arrest, a federal bankruptcy judge put Madoff’s firm into receivership and appointed a trustee, Irving Picard, to administer its affairs, locate any hidden money, and return as much to the victims as possible. Picard had already been chosen to handle the Madoff case for the Securities Investor Protection Corporation (SIPC), the government-backed agency that is supposed to make good on losses from brokerage and investment firms.
Investors are protected up to $500,000 by SIPC, with money that comes from all brokerage and investment firms in the country through a yearly assessment. Given the monumental size of the Madoff fraud, if every client got the maximum amount SIPC could be on the hook for more than $2 billion.
SIPC only had $1.6 billion in its reserve fund, and Picard soon made it clear that he would play hardball with the victims over how much they would receive. If everyone got the maximum, it would have required a short-term government loan and then a huge assessment on the country’s broker-dealers to make up the shortfall.
Given the disarray of Madoff’s records, it was difficult to figure out who was owed how much. The victims all had their monthly and quarterly statements, but those reflected what Picard called “false profits,” the fictional amounts invented by Madoff. While the clients believed that’s how much they had, Picard refused to recognize that number as his baseline. Instead, he decided he would completely discount any of the “false profits” and calculate the amount due victims based only on what each client had actually put into an account. And there was another catch. Picard said any amount that had been taken out of the account would be subtracted. This was a disaster for many of Madoff’s longtime customers.
By Picard’s math, if someone had invested a million dollars ten years ago and taken out a hundred thousand dollars each of those ten years, he would be due nothing. He had put a million in and taken a million out. Even if the fancy-looking monthly account statements indicated there was $2 million or $3 million in the account, the victim would be due nothing from SIPC. And if someone had taken out more than he put in over the years, Picard said he wanted the extra back. This was called a “clawback.”
The victims were furious. Many had followed a prudent, conservative strategy of withdrawing just 10 percent each year as they watched their accounts grow, at least on paper. Many had used their withdrawals to pay income tax on the “false profits.”
“Our clients were withdrawing money not to buy boats or go on vacation but to pay taxes on phony gains,” said Brad Friedman of the Milberg law firm, who represents more than a hundred Madoff clients. “They got a statement that showed they had a gain and they had to pay taxes. They got 1099 IRS forms from Madoff. They took the money out to pay the government.”
Picard’s own lawyers calculated that the single biggest beneficiary of the Madoff scam was probably the IRS, because his victims had paid billions of dollars in tax on their “false profits.”
“If Irv Picard wants to claw back money,” said Friedman, “he should claw it back from the U.S. government.” The IRS urged Madoff’s victims to treat their losses as “theft deductions,” which can be carried back up to five years or spread out over the next twenty years.
Some Madoff investors planned a different approach and intended to amend their previous tax returns so they could recoup what they paid in taxes on the “fake profits.” But Congress has since changed the law to a three-year time limit for amending returns, making it even harder for Madoff’s victims.
In June, 2015, many of the Madoff investors who had been subject to “clawbacks” got good news from the United States Supreme Court. The court let stand a lower court decision that Picard could not touch any of the money investors had withdrawn before December, 2006, or two years from the time the fraud was discovered. Picard calculated the decision would prevent him from collecting about $4.3 billion to distribute among those who were overall losers.
Despite what many thought, SIPC is not exactly the Wall Street version of the FDIC, which insures bank depositors. It does not consider itself to be offering insurance like the FDIC, which makes restitution up to $250,000 even in cases of bank fraud. Picard said the only “fair” way to treat everyone equally was on the “cash in, cash out” basis.
For example, one Madoff customer, Jeffry Picower, put in $1.7 billion but took out $6.7 billion. In other words, he took out $5 billion more in fictitious profits than he put into the twenty-four different Madoff accounts he controlled over a period of thirteen years, according to Picard’s lawyers in a court filing. Picard’s investigators discovered Picower’s annual rates of return “were more than 100 percent, with some annual returns as high as 500 or even 950 percent per year.”
Picower, a former attorney, accountan
t, and tax shelter promoter, was described by Picard as “a sophisticated investor” who was close to Madoff “on both a business and social level” for thirty years. In one account, Picard’s lawyers found fifty-seven trades that “occurred” before the account was even opened. Picard believed Picower knew, or should have known, that Madoff’s operation was a fraud, of which he was a principal beneficiary.
Picower’s lawyer strongly denied the allegation.
For Picard, it was inconceivable that Picower should get a single penny from SIPC. In fact, he wanted the $5 billion that Picower had withdrawn returned so that it could be distributed to fellow investors who did not have the kind of relationship with Madoff that produced such “extraordinary and implausibly high rates of return.”
“If we have to go to the government to get a loan and pay people like Picower and others who took out more than they put in, then, essentially, the American taxpayer is subsidizing all this,” said one Picard lawyer.
Even so, there were a growing number of Madoff clients who were organizing “victims rights” and “victims coalition” groups to fight Picard’s plan.
“People relied on those statements, they ordered their lives around those statements,; the purpose of the statute is to pay people based on those statements,” said Milberg lawyer Brad Friedman. Picard “is trying to keep the payouts as low as possible so the brokerage industry doesn’t have to reimburse the fund too much. He’s acting like every insurance company that anyone has ever had difficulty with in just saying no. Figuring out ways not to pay the claim.”
The government had a difficult time getting a “real number” about how big the Madoff scam had been. Madoff’s first estimate to the FBI was $50 billion. Then a calculation of all the monthly client statements produced the number of more than $64 billion. But those were the inflated figures, based on the magic act that Bernie and others were cooking up on the seventeenth floor.