Certainly at one point Picower believed that Madoff was legitimate—more than a decade earlier, he had put hundreds of millions of dollars’ worth of cash and securities into his Madoff accounts, and he left money in those accounts through several market storms that might well have toppled a Ponzi scheme. His lawyers and family insisted later that these actions proved that he did not know Madoff was a crook.
As with everyone who stayed at this party until the bitter end, it comes down to separating the villains from the victims, the knaves from the fools. If Picower was numbered among the fools, he became one of the richest fools in the crowd—richer, by far, than the people who were certainly villains, including Madoff himself.
Besides the hidden pain that Picower’s cash demands were inflicting on Madoff’s Ponzi scheme, the new century also brought unexpected pain to the Madoff family and the legitimate family business, Bernard L. Madoff Investment Securities.
In September 2002, Madoff’s nephew and employee, Charlie Wiener, learned that his young daughter had cancer. As she was being treated, Peter Madoff, who had already been treated for bladder cancer, learned in November that his son, Roger, had a vicious form of leukemia. In the early spring of 2003, after Roger had begun the debilitating treatments he would record in a posthumous memoir called Leukemia for Chickens, Bernie’s son Andrew went in for tests. He, too, had cancer—a tentative diagnosis was mantle cell lymphoma, another very nasty adversary.
As the new decade advanced, Peter Madoff’s focus of attention telescoped down to a single hospital bed. One hospital staff member would poignantly recall Peter gently rubbing ointment into his son’s feet to comfort him just a few days before his death. Ruth and Bernie used their family foundation to support research into the disease and other cancers of the circulatory system; Roger’s sister, Shana, was active in various fund-raising efforts but was deeply bruised by her grief. It was a difficult time that strained family ties in every direction.
He would later deny it, but Madoff’s prized market-making business was sick, too. The computerization and competition he had long championed with regulators had indeed reduced the cost of trading stocks—but they had also reduced the trading profits of firms like his. Reconstructed records suggested that the visible Wall Street business run by Bernie Madoff and his family lost almost $160 million between 2001 and 2003, losses that Madoff insisted were offset by the capital he had retained over the years. But those losses added greatly to the complexity of the Ponzi scheme.
Madoff’s growing roster of hedge fund clients—most likely unwitting but doubtlessly gullible—were raking in enough money from an ever-broader field of investors to allow Madoff to accommodate Jeffry Picower’s unwelcome withdrawals. And Frank DiPascali was finding ways to launder the stolen proceeds into streams of revenue that would look legitimate on the faltering brokerage firm’s books, revenues that would raise no eyebrows inside or outside the firm.
To do so, DiPascali painstakingly calculated what the commissions would have been if Madoff actually had been doing the stated volume of trading for his clients. He then swept the appropriate sum of money out of the Ponzi scheme’s bank account and into the London affiliate’s bank accounts, and then moved it back to New York, to show up on the New York firm’s ledgers as legitimate commission income supposedly generated from trading in European markets—which meshed with Madoff’s cover story about why his brother and sons didn’t see his hedge fund trades going through their own trading desk in New York.
Despite the personal heartaches of those years, Madoff and DiPascali had both grown pretty smug about keeping their secrets—and pulling in the cash.
There always seemed to be enough fresh money to cover the intraoffice bailouts, the fat pay cheques for DiPascali and some of his busy staff members on the seventeenth floor, the executive suite salaries and bonuses, and the loans for the Madoff family on the nineteenth floor. There was always money for the first-class travel, first-class shopping, first-class living, and, of course, the first-class philanthropy. It was a style of living that mirrored the lives of Madoff’s largest investors, the trusting people who had accompanied him on his journey to the land of almost unimaginable wealth.
Carl Shapiro was still one of Boston’s most respected philanthropists, and he was also a prominent but less active figure in the glittery country club life of Palm Beach, where he and his wife, Ruth, lived in a full-service suite at the luxurious Breakers Hotel. Their elegantly gowned daughters and his dapper son-in-law Robert Jaffe showed up at a host of expensive charity events every year, and their names and faces popped up frequently in the local society pages.
Sonny Cohn, the cofounder of Cohmad Securities, still lived comfortably on Long Island, where he and his brother had become notable donors to the North Shore Long Island Jewish hospital system. But he was spending more time with a group of congenial fellow multimillionaires in the Miami area and entrusting Cohmad’s operations to his daughter Marcia Beth, who had known Madoff since she was a child and trusted him completely.
Stanley Chais and his wife, a successful screenwriter, lived with almost ostentatious simplicity in Beverly Hills—his car was an ageing Japanese import, and their home was far from elaborate by neighbour-hood standards. Life was becoming harder for Chais, who was beginning to suffer from the rare blood disorder that ultimately would claim his life in 2010. But his family and clients seemed to be prospering from the Madoff accounts he managed, and his philanthropic gifts earned him praise and attention in Los Angeles and Israel.
Madoff’s old friend and representative in Minneapolis, Mike Engler, had died in 1994, but his widow and adult children remained in Madoff’s orbit, joining his family for ski trips and golf outings for years and entrusting their wealth to his genius. Their close ties to Madoff were reassuring to the many other Madoff investors among their circle of friends.
Ezra Merkin had become a lion of Wall Street, admired for his eloquent quarterly letters to his investors and surrounded by the obvious trappings of success: museum-quality art, a trophy apartment in one of Park Avenue’s legendary buildings, and a seat on the board at a host of prestigious schools, universities, and charities. The president of the Fifth Avenue Synagogue his father had helped establish, he was widely seen as a pious, generous man of great wealth and wisdom.
To the outside world, Madoff’s brokerage firm seemed to be prospering, too. By 2004 it had nearly two hundred employees and a reported net worth of $440 million—a fivefold increase over the previous decade, and twice the value reported just five years earlier. This put it firmly in the ranks of the fifty largest firms on Wall Street.
Nobody seemed to ever poke too seriously into what was going on there. There had been a few bumbling queries from the SEC in the past few years, but Madoff had easily deflected them. A few clever consultants and a few private banking teams had come across the same inconsistencies that worried the Ivy Asset Management team in the late 1990s and had quietly blacklisted Madoff. Even some very influential people—prominent hedge fund managers, some senior people at Credit Suisse, all of whom would have carried weight with regulators—had written him off and warned their clients to get out. Fortunately for Madoff, none of these influential people seem to have picked up the phone and shared a few forceful warnings with Madoff’s regulators or with any law enforcement agency.
It was as if these sceptics had seen that his operation was a firetrap that could ignite at any moment. But their response was simply to usher their own clients to the exits and quietly walk away. If the crowded building ultimately went up in flames, it wouldn’t be their fault that the fire marshals and building inspectors hadn’t been clever enough to figure it out on their own, would it?
So, amid the anxiety and personal anguish in the Madoff family and his billion-dollar headache over the Picower accounts, at least something was going right for Bernie: his Wall Street reputation was brighter than ever, his secret fraud was safe from regulators, and boatloads of new cash were arriving almost d
aily.
8
A NEAR-DEATH EXPERIENCE
“What are you looking for?”
On April 20, 2005, Bernie Madoff confronted the two SEC examiners who had been occupying a glass-walled office on the nineteenth floor for three weeks. He was no longer the charming host who had entertained them recently with tales about the old days on Wall Street. He was an angry, streetwise bouncer who was itching to kick them out. “Tell me what you’re looking for,” he insisted.
The SEC staffers, William David Ostrow and Peter Lamore, were surprised at this outburst of temper—but not as surprised as they had been when Madoff, the chairman of the firm, insisted on being their only contact in the office. They’d both been around long enough to know how odd that was, especially at a firm this size. They should have been dealing with someone lower in the food chain.
But Madoff was handling this examination personally; he always dealt with regulatory examiners personally. He had too much to hide, and there were only a few people he trusted to help him do that. Frank DiPascali on the seventeenth floor had been busy ever since the call came in about this exam. DiPascali had been checking the fake paper and computer records they had created to obscure the Ponzi scheme. The elaborate records backed up Madoff’s lies and supported his cover story: that he was just a hired hand who executed hedge fund trades for less
It had worked with the SEC before.
On December 18, 2003, Madoff was walking through the Lipstick than five pennies a pop. Building lobby when his mobile phone rang. He recognized the caller as Lori Richards, a high-level SEC staffer in Washington. It was Richards who had flagged the Barron’s magazine article about Madoff in 2001 as “a great exam for us.” Nothing had been done back then, but in 2003 someone on her staff got a detailed tip from a hedge fund manager questioning Madoff’s returns, and she was following up.
“Bernie, it’s Lori,” she said.
“Hi, Lori.”
“I need you to help me out. Can you tell me about your hedge funds?”
Madoff stood still. “I don’t have a hedge fund,” he answered.
“I didn’t think so,” she replied.
Madoff quickly added, “I execute trades for hedge funds.”
The distinction he made seemed to satisfy the SEC official, although she indicated that there would be a follow-up examination. When her staff came up with more questions, Madoff easily deflected them. The inquiry then just rolled to a halt without even a final report closing the file. The records from that exam were piled into a pair of boxes and forgotten.
Although Madoff was ready for the visit from Ostrow and Lamore in 2005, this exam had been particularly annoying. Lamore was okay, a clever kid, but Madoff thought Ostrow was obnoxious. He had gritted his teeth as Ostrow paged through e-mail records, expense account records, telephone bills—an aimless fishing expedition, as far as he could see. He’d kept his temper when Lamore asked for yet another computer run, in a different format this time.
So far, the examiners hadn’t asked about the hedge funds—or about custody accounts, or trading records, or third-party confirmations for all the options and blue chips that Madoff was supposedly buying and selling. What on earth were they looking for, if not for that?
Ostrow and Lamore tried to calm Madoff. It was just a routine examination of the brokerage firm’s books and records, they said, the kind of thing that happens all the time.
This was not entirely true; the examination was not routine. It was a belated response to a set of e-mails that an alert SEC staffer had found in the files of a prominent hedge fund firm during a truly routine examination nearly a year earlier. The fund manager, Renaissance Technologies, had an indirect stake in Madoff through its Meritor hedge fund. The Renaissance e-mails, written in late 2003, expressed the same mystification about Madoff’s performance and practices as the Barron’s and Ocrant articles had in the spring of 2001.
In one of the e-mails, a senior executive shared his doubts with his investment committee. “First of all, we spoke to an ex-Madoff trader,” the executive said. “He said Madoff is pretty tight-lipped and therefore he didn’t know much about it, but he didn’t really know how they made money.” Then, a respected hedge fund consultant “told us in confidence that he believes Madoff will have a serious problem within a year. We are going to be speaking to [the consultant] in 11 days to see if we can get more specifics.”
But this executive already had pretty much made up his mind. “The point is that as we don’t know why he does what he does we have no idea if there are conflicts in his business that could come to some regulator’s attention.” It just didn’t make sense to risk a scandal for the relatively modest return they expected. “The risk-reward on this bet is not in our favor,” he concluded, adding, “please keep this confidential.”
The SEC examiner showed the intriguing e-mails to his supervisor, who took them seriously and asked him to learn more from the hedge fund. But when the SEC staffer returned, the Renaissance executive was dismissive. The author of the e-mail had been at a conference “where there was some chatter about Madoff,” the executive said, but it was all unsubstantiated, as far as he knew. True, the hedge fund had cut its stake in the Madoff deal, but that was simply because of mediocre returns.
It was an odd explanation. The doubts expressed in the extensive e-mail chain were cogent, well researched, and unequivocal. As early as 2003, these men had stopped trusting Madoff’s game and started cashing in their chips. And they knew other intelligent people on Wall Street who had done the same. They surely could have helped the young SEC examiner who was trying to figure out what Madoff was doing.
But apparently the people at Renaissance—like those at Credit Suisse and Rogerscasey, who had quietly blacklisted Madoff by early 2004—didn’t want to get involved. A top Renaissance executive, Nat Simons, later explained that he felt that all the information Renaissance had was readily available to the SEC. “Despite the fact that we are kind of smart people, we were just looking at matters of public record. . . . It’s not like we needed a PhD in mathematics,” Simons said.
Besides, he said, the information they relied on wasn’t that hard to get. Indeed, although Simons didn’t know it, the SEC had already gotten this information without any help from elite players such as Renaissance. Although it dismissed Harry Markopolos’s accusations in 2000 and 2001, it received similar warnings in May 2003, the very tip that prompted Lori Richards to call Madoff on his mobile phone that December and ask about his hedge fund business.
The tip came in to the SEC’s Washington office as a result of a 2002 survey of the hedge fund industry by the SEC’s Investment Management Office. At that time, the agency encouraged executives to report any suspicious activity—and on May 20, 2003, a hedge fund managing director actually did. He told the SEC, in confidence, that his firm had considered investing in two different Madoff feeder funds but backed off both times. There were all kinds of red flags, he said, but the most worrisome was the fact that nobody he talked with in the options trading community confirmed doing any business with Madoff. Of course, that community of traders was supposed to keep customer information confidential, but it still seemed strange not to confirm even a general business relationship with someone who should have been one of their biggest customers.
The tip was sent along to the SEC office that handled brokerage firms, where it sat unexamined for months. When it was finally dusted off, the inquiry that followed did not focus on the mysterious lack of options trading—but it still came agonizingly close to uncovering Madoff’s fraud. Someone on the exam team had the idea of getting two years’ worth of Madoff trading records from the industry regulators at the NASD—which would immediately have shown that he was not trading billions of dollars’ worth of blue-chip stocks and options.
But the request was never sent, for reasons no one involved could later recall.
An official study would later conclude that the staffers decided it was easier to request the tradin
g records from Madoff himself, not from the NASD—and with Frank DiPascali’s help, Madoff came up with fake records, of course. Questions were left hanging, but in early 2004 the shorthanded SEC staff members were told to shift their attention to a wide-ranging investigation of the mutual funds industry, which seemed more important because mutual funds were mainstream America’s primary investment vehicle.
No one logged the tip from Harry Markopolos in 2001, or the nearly identical one from the hedge fund manager in 2003, into the agency’s internal data base of investigative information. So there were no records of those earlier, unexamined warnings when the e-mails from Renaissance Technologies were found in 2004.
At least the Renaissance e-mails were taken seriously at the SEC—albeit at a glacial pace. In fact, they were the reason William David Ostrow and Peter Lamore were sitting in an office in the Lipstick Building in April 2005 watching Bernie Madoff lose his temper.
Almost shouting, Madoff repeated his original question: “What are you looking for?”
Lamore shot back, “Well, what do you want us to look for? What do you think we’re looking for?”
Madoff answered immediately: “Front-running—aren’t you looking for front-running?”
Front-running was a form of insider trading. Any trader who could see his firm’s incoming orders could anticipate which ones were big or numerous enough to move a stock’s price up or down. By inserting his own trades in front of those large, market-changing orders, he could profit on his insider’s knowledge.
Bernie Madoff, The Wizard of Lies Page 19