Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  Doing so required him to spend all the $30,000 in capital he had built up in his first two years of business, he said. Unless he could raise fresh cash, he was essentially out of business. To recapitalize his firm, he turned to his father-in-law, Saul Alpern. Madoff said he borrowed some municipal bonds from Alpern and used them as collateral for a $30,000 loan—“a large amount to me in those days.” The cash infusion allowed him to resume his firm’s trading activities. It was a bitter taste of failure, “a humiliating experience,” he said.

  But if Madoff felt “obligated” to erase the losses his recklessness had created in his client accounts, he did not feel obligated to disclose what he had done to his small collection of customers, who continued to think of him as a brilliant money manager who could safely navigate even the rocky market of 1962. “My clients were unaware of my actions due to their lack of experience in the OTC market,” he later acknowledged in a letter from prison. “If they were aware, they certainly didn’t object.”

  Madoff insisted that this early trip across the line between right and wrong—illegally selling unsuitable stocks to his clients and then hiding their losses with phoney prices—was not a Ponzi scheme, which is a form of fraud in which the profits promised to early investors are actually paid with cash raised from later investors, not from any legitimate investing activity. Madoff said that he simply used his firm’s money to erase his clients’ losses and burnish his own reputation as a trading star. That reputation would help him attract and hold the wealthy and influential investors who would become the first to testify to his genius.

  Madoff initially suggested that he encouraged his father-in-law to think that repurchasing the shares was a legitimate business practice permitted by the original underwriting agreements. But, in a subsequent letter from prison, he said that Alpern “was aware of how this happened and understood why I felt obligated to do what I did. I was able to repay the loan within a year, which made both of us happy.” Perhaps Alpern simply believed the young Madoff had learned a valuable lesson and would not violate the rules again. Or possibly—but far less plausibly, to those who knew Alpern—he knew that Madoff was playing fast and loose with investors’ money and went along for the ride.

  In any case, the incident did not visibly shake Alpern’s trust in his ambitious son-in-law, and they remained on good terms for the rest of Alpern’s life.

  Beyond the indisputable facts that Madoff was an OTC trader and the market hit a jolting air pocket in the spring of 1962, one cannot know whether Madoff’s version of his early misbehaviour is even partially true, of course. As he told the tale to prosecutors in the emotional days after his arrest, he mixed in a garbled chronology of confusing details about doing high-risk “short sales” and other strategies for his biggest customers in later years, trades that he said left no clear paper trail. He created the indelible impression in the minds of the government lawyers that his Ponzi scheme began much earlier than he would later admit, possibly as early as this incident in 1962.

  In Madoff’s view, this early blot on his record was soon eclipsed by the increased business—and unbridled admiration—that his legitimate trading success brought him in the years that followed. But one must wonder how willingly new customers would have flocked to Madoff if they had known the truth about his disastrous losses in 1962.

  Bernie Madoff did not enter Wall Street through the burnished gates that were always open to the prep school graduates from Manhattan’s silk-stocking neighbourhoods. He came from a family of modest means and financial disappointments who lived in the farthest reaches of the city, in southeastern Queens.

  His grandparents on both sides were immigrants who left Eastern Europe in the early 1900s. Bernie’s paternal grandfather was Solomon David Madoff, who in 1930 settled his wife, Rose, and their family in the Bronx and worked as a tailor in New York’s garment industry. Bernie’s maternal grandfather was Harry Muntner, who owned and ran a neighbourhood bathhouse on the Lower East Side of Manhattan, where few apartments had the luxury of private plumbing.

  His parents, Ralph Madoff and Sylvia Muntner, married in 1932, when New York City was still in the vicious grip of the Depression. On the marriage licence, Ralph Madoff described his employment as “credit”, but he evidently worked his way up through a series of jobs in retailing and manufacturing. Madoff himself said his father attended university, but he was vague about the details. Clearly, Ralph Madoff was an ambitious scrambler, and at some point he landed a good white-collar job at the Everlast Sporting Goods Manufacturing Company in Manhattan, the nation’s leading source for professional boxing equipment.

  Ralph’s economic position was solid enough that Sylvia and he felt they could start a family; in 1934 their daughter, Sondra, was born. Sometime during these years, Ralph settled his family in the New York borough of Brooklyn. It was there, on April 29, 1938, that Bernie was born. Seven years later, in October 1945, his brother, Peter, arrived.

  Dissatisfied at Everlast and encouraged by the robust economy, Ralph left sometime in the late 1940s to start his own sporting goods manufacturing business, Dodger Sporting Goods Corporation, which made the iconic Joe Palooka punching bag (still sought out by antique toy collectors) and other products tied to the popular “Joe Palooka” comic strip character. He was also able to buy a modest two-storey redbrick home in Laurelton, one of the small communities clustered on the southern edge of Queens near what is now John F. Kennedy International Airport. In April 1946, he and Sylvia and their three children moved into what was then a close-knit, solidly middle-income Jewish community.

  The young Bernie Madoff attended Public School 156 and became a Boy Scout, joining Troop 225. The beaches of Long Island’s South Shore were nearby, and he became a strong swimmer, a skill that he used to get lifeguarding jobs in the summer. Behind this idyllic façade, however, the Madoffs faced serious financial anxieties. In early 1951, when Bernie was not yet thirteen years old, Dodger Sporting Goods filed for bankruptcy. The company had been struggling with rising raw material prices brought on by the onset of the Korean War, and it was nearly $90,000 in debt when it made its bankruptcy court filing. The failure was sufficiently public that some neighbours recalled Bernie’s mother, Sylvia, having to get a clerical job at an area blood bank to help support the family. After a second business effort failed, Ralph’s credit rating was badly damaged, and at one point a tax lien was imposed on the family home.

  Giving up on sporting goods, Ralph Madoff went into the fringes of the financial industry as an independent “finder”, helping fledgling companies find investors in exchange for a fee or a percentage of the money he raised. While finders were not automatically required to register as brokers, Ralph Madoff did register—but in a less than honest way. Late in the 1950s he formed a one-man brokerage firm called Gibraltar Securities and registered it with the US Securities and Exchange Commission. Because of his bad credit and financial problems, though, he put the brokerage business in Sylvia’s name, although it was the firm through which he conducted his sporadic work as a finder. It was an early lesson in deceit for a son determined to be more successful than his father.

  Amid the prosperity of middle-class Laurelton, these serial business failures were traumatic for the Madoff family—Madoff himself later confirmed how upsetting they had been. But, at the time, he wrapped himself in a shell of quiet confidence and reassuring competence. He was a good-looking guy who seemed to fit smoothly into the social scene at PS 156 and, later, at Far Rockaway High School. He certainly was not a brooding loner; nor was he a passive follower. One former schoolmate recalled Bernie and a close friend starting their own school fraternity, a social club called the Ravens, that met in the local synagogue but admitted both Jews and gentiles. It was a ready-made group of admirers, and Bernie was one of the smooth guys in charge.

  In secondary school Bernie joined the swim team and was a decent competitor but not a show-off, his coach recalled. He was an adequate if indifferent student, earning good enough
marks to keep himself out of academic trouble and get into university but never trying too hard to ingratiate himself with teachers or principals. A few schoolmates recounted some reckless pranks, but never anything that crossed the line. In short, Bernie Madoff seemed to be a normal, attractive teenager, using summer jobs and ingenuity to cope with the anxiety of his family’s uncertain finances and making his way to a school diploma in 1956 without much fanfare or attention.

  With the Madoff family missing out on the widening prosperity of the 1950s, Ralph Madoff encouraged his sons to go to law school. For a survivor of the Great Depression unable to get a solid foothold in the postwar economy, this was an understandable wish—no doubt, he wanted his sons to earn degrees that would guarantee them the high-status jobs that eluded him.

  Like everyone of their generation, the elder Madoffs would never have considered the stock market as a source of status or financial security. They had seen the market peak before the crash of 1929 and then fall 90 percent to its nadir in 1932. Fortunes evaporated. Posh homes were suddenly sold, and sleek roadsters were put up for sale at the kerb, their petrol tanks empty. Stock brokers wound up on bread lines. People with those memories found nothing glamorous about Wall Street—many of them saw it as a wicked gamble that promised easy wealth but delivered only anxiety and loss. If you had a little savings, you kept it in the bank, or maybe even in a coffee tin hidden at the top of the wardrobe.

  If investing on Wall Street seemed unwise, working there looked like a remote possibility at best for kids like Bernie Madoff in the 1950s—and not just because it was risky. Nobody made much money as a stock broker in the late 1940s and early 1950s, when government bonds were far more attractive to shell-shocked investors than corporate stocks. Besides, the executives at most of the top WASP firms on Wall Street would have looked right through a Jewish youth from a middle-income address in Queens. The long-established Jewish firms run by the Lehmans or the Loebs might have found room—on a trading desk or in the back office. But, even there, success would have meant climbing a long, unsteady ladder for a long, uncertain period of time.

  Although he had absorbed his father’s prickly preference for being his own boss, Bernie had no desire to become a lawyer. As a child, he expected to join his father’s sporting goods business and eventually run it, but after the bankruptcy filing in 1951, he decided he’d like to sell sports equipment as a “manufacturer’s rep”, a sort of travelling salesman who wouldn’t be tied down to the grey-flannel life of a law firm or corporate office. Most of the schoolmates who have offered their memories of Madoff’s teenage and university years in the 1950s remembered the scrappy lawn-sprinkler installation business he got rolling in secondary school, after his father’s businesses failed. They remembered thinking that he seemed like a young man on the make, who had felt the sting of doing without and dreamed of doing better.

  And, of course, they remembered his romance with Ruthie Alpern.

  Ruth Alpern’s parents, Saul and Sara Alpern, were settled in Laurelton by the early 1950s, but, like Bernie, Ruth had been born in Brooklyn. On paper, their families shared some common history: both she and Bernie had immigrant grandparents who had worked hard to put their children on the road to Laurelton. Both were Jewish, although while Sylvia Madoff kept a kosher home, the Alperns were not particularly observant. And at least one or two rungs of the social ladder separated the newly middle-class Madoffs, beset by business failures, from the firmly professional Alperns.

  Saul Alpern, who would emerge as one of the most puzzling figures in the early Madoff story, was the second son of Benjamin Alpern, a skilled watch repairman who settled in the United States in 1904. Saul was the first of the five Alpern children to go to university, graduating from City College, well known for its accounting courses. By 1948, Saul Alpern and a partner had established a small accounting practice in Manhattan. People who knew him well recalled a quiet, reserved man with “a twinkle in his eye,” but most dominant in their memory was his genial rectitude. If Saul said something was so, it was so, they said. He was man who dotted i’s and crossed t’s.

  Ruth Alpern was born on May 18, 1941, three years after her older sister, Joan. A tiny blonde with enormous blue eyes, Ruth was both popular and pretty. One person who knew her in those years recalled her as a particularly sunny, optimistic person—perhaps a little naïve, but full of resilient humour. “You know the actress Goldie Hawn?” this person asked, recalling the original savvy Laugh-In comedienne typecast as a giggling blonde. “That was Ruth. She woke up every day without a care in the world. She was a lively, bubbly girl.”

  From the moment Ruth met Bernie, there was no one else in the world for her. They met the summer before Ruth started secondary school, when she was thirteen and he was sixteen. One of Ruth’s friends held an informal party in a finished basement fitted out with a jukebox and some tables, like a little nightclub. Bernie came in, and Ruth seemed to be captivated immediately by the tanned, sun-bleached lifeguard. It was mutual; he walked her home from the party, the first steps in their lifelong journey together.

  With Ruth still at school—and with her parents wishing aloud that she would date more widely and not commit herself to one guy while she was so young—Bernie headed off to university in Alabama, a low-cost choice for his cash-strapped parents. But he missed Ruth and returned after a single term to enrol at Hofstra University. As in secondary school, although scholarship was not his focus, he did well enough to appease his father by getting into law school. But before he’d gotten his acceptance letter from Brooklyn Law School, he had lost interest in his father’s ambitions for him. He saw a different life for himself: a life married to Ruth and a career working for himself on Wall Street.

  On November 25, 1959, with him still shy of his university diploma and her enrolled in nearby Queens College, Bernie Madoff and Ruth Alpern were married at the Laurelton Jewish Center. She was eighteen years old. A few days later, according to family lore, he filed the papers to open his own brokerage business, although the official birth date for Bernard L. Madoff Investment Securities in regulatory ledgers is January 19, 1960. He was in his final year of university, just shy of twenty-two. He would later enrol in law school but would drop out after a single year, having spent almost every afternoon trying to drum up business for his newborn brokerage house.

  By Bernie Madoff’s own account, it was not until late in his university years that he seriously considered a life on Wall Street. But he certainly learned about Wall Street life in these early years—one of his close friends, Michael Lieberbaum, was the son of an early stock market success story. While Bernie was in secondary school, Michael’s father—and thousands of other people—started selling shares in Jack Dreyfus’s new mutual fund, one of the red-hot growth funds that revolutionized the postwar retail investment market. According to family accounts, the elder Lieberbaum got more than sales commissions from his association with the legendary Jack Dreyfus; he got the single best investment tip of his life: Buy Polaroid. He did, just as the company was about to go public, and it made him a millionaire.

  Although Madoff said he rarely discussed the stock market with Michael Lieberbaum’s father, it is certainly likely that get-rich-quick tales like this would have made Wall Street seem attractive to someone like him, hungry to make something of himself. But his secondary school and university years were also a turning point in America’s cyclical love-hate relationship with Wall Street, as the fears from the Depression began to dissipate amid strong investment returns and prolonged prosperity. This new excitement about the stock market apparently caught Bernie Madoff’s attention while he was at university. A few people who knew him in those years recall that he was touting stocks to his friends before he had his university degree—or a broker’s licence.

  Madoff’s entry into the world of Wall Street came at a time when federal and state regulators had barely begun to get their arms around the market. Fraud was chronic, like a low-grade fever. Thousands of poorly trained, u
nsupervised brokers were galloping into the boom to grab some of its extraordinary profits. In the early 1960s, regulators began a crackdown on the unruly proliferation of flimsy brokerage firms, many of them consisting of not much more than a self-taught broker and a phone.

  One tiny firm caught in the regulatory crunch was Gibraltar Securities, the firm Ralph Madoff formed in his wife’s name to conduct his work as a financial finder. He had never had much success with that work, and Gibraltar had been essentially dormant for several years, according to Madoff. On August 6, 1963, it was one of forty-eight firms cited for being delinquent in filing the required annual financial statements. In January 1964, the SEC dropped the proceedings after Gibraltar withdrew its registration and officially shut down. In post-2008 hindsight, there would be much speculation about this early run-in with regulators, but its primary significance within the family’s life seems to have been that it was another tacit business failure for Ralph Madoff.

  Even after the hidden losses of 1962, Saul Alpern would continue to tell family members and close friends about how skilfully Bernie Madoff was playing the galloping market of the 1960s. He spoke about that prowess in quiet talks with his older brother, who used Alpern’s firm as the accountant for his jewellery store; with his younger brother, an insurance executive; and with his youngest brother, a prospering lawyer. They would all invest with Madoff and would set up funds for their children with him. They would leave their money with him for decades, in fact, living on the profits he seemed to produce so effortlessly.