With the sudden spike in the bank’s redemption requests and these questions about Madoff, something is obviously wrong. What’s happened?
Yanko Della Schiava, Walter Noel’s Italian son-in-law and one of the primary sales agents for the funds in Europe, tries to find out. He makes calls to some of his contacts at the bank, without success.
JPMorgan Chase is revving up to pull $250 million out of the Fairfield Sentry fund, virtually its entire investment. It is also pulling cash from a few other Madoff-managed funds involved in its derivatives deals, including the Herald fund. It clearly is worried about more than just counterparty risk.
THURSDAY, OCTOBER 23, 2008
Maurice E. Maertens, the chief investment officer for New York University’s endowment, and his assistant are ushered into J. Ezra Merkin’s office in the black granite tower at 450 Park Avenue. The thirty-three-storey building caters to hedge funds, and Merkin’s thirty-second-floor suite is prime property in that community.
Maertens, the longtime head of Ford Motor Company’s pension fund, was wooed out of early retirement in 1997 by the NYU investment committee. By then, NYU was already an investor in Merkin’s Ariel fund, having bought its first $20 million stake in January 1994. Now its investment—which the committee assumes is being managed by Merkin—has supposedly grown to more than $85 million.
At today’s routine meeting, Merkin recommends that NYU invest directly in a fund run by Bernie Madoff. True, Madoff clears his own trades—there is no third-party custodian holding the assets—but he has offered a good steady return year after year, Merkin says.
Maertens and his assistant are instantly dismissive. As an institutional investor, NYU would never invest with any fund that “self-clears”. Without equivocation, Maertens tells Merkin that an investment with Madoff would not be suitable.
For some reason, Ezra Merkin does not say, “But you are already invested with Bernie Madoff through the Ariel fund.” Merkin has invested about a third of the Ariel fund’s assets, more than $300 million, with Madoff. It is part of roughly $2 billion that Merkin thinks his three hedge funds have in their accounts with Bernie. Indeed, Merkin’s trust is so solid that he has added another $10 million to his Madoff accounts this month.
Maertens will later recall that they simply moved on to other topics. When their routine business is done, the NYU executives exchange handshakes with Merkin and leave.
TUESDAY, OCTOBER 28, 2008
A senior JPMorgan Chase executive in London signs and dates a startling confidential report to the Serious Organised Crime Agency, a national law enforcement body for Britain. In the section of the form entitled “Reason for Suspicion”, the report describes the bank’s complex derivatives deals involving three funds that all invest with Bernard L. Madoff Investment Securities.
The bank is concerned about Madoff’s performance, “which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true—meaning that it probably is”, the banker writes. On top of that, Madoff refuses to shed any light on how he achieves those results. So the bank has sent out a redemption notice to one of the funds and is preparing to pull its money out of the other two.
After that first notice went out, a bank executive talked with a fund manager in Geneva whose firm sold its clients the Madoff-linked derivatives affected by the redemptions. In the taped conversation, conducted in French, the Swiss fund manager made references to “Colombian interests who will not be happy” with JPMorgan Chase’s actions, “statements that the value of the funds in question must not fall and thinly veiled threats to the security of bank staff,” the banker reports.
A transcript of that telephone call, disclosed later in the French press, picks up with the London banker insisting that he’s always been clear about how risky the complex derivatives were.
“I can see the price you want,” the banker says, “but in reality this is not the price you can get. . . .”
The man in Geneva asks, “You hear that the price would be lower?”
“Right now, yes,” the banker replies.
Still protesting, the man in Geneva sputters a bit: “If we really had to get there—and we wanted to be friends, I also insist on the second point—you know we have friends in Colombia that can cause damage when they are getting in—when they get angry, and it almost seems that someone is trying to upset [them] just now.”
The banker seems taken aback. “Is that a threat or—?”
Laughter from Geneva interrupts his question. “No, it’s just information,” the man says. “You know, we are simple people from Switzerland.”
On the same day that the JPMorgan Chase executive in London is reporting these suspicions about Madoff, a worried businessman in Dubai arrives for a meeting with his private banker. Meetings like this are occurring all around the globe, as everyone seeks safety from the turbulence sweeping the financial markets. No place is immune, not even this booming city on the Persian Gulf.
Since 2004 the wealthy businessman and four partners have been invested in the Fairfield Sentry fund. He recalls his banker recommending the fund as a “cash substitute”, a hedge fund with a long track record of small but safe and steady returns. Indeed, he remembers being impressed when the banker said the fund had achieved “mythical status” for its consistency. He was impressed and flattered that, although the Sentry fund was supposedly closed to new investors, the bank could get him in. The investment that he and his partners made in the account has supposedly grown to more than $5.3 million.
However, now the businessman wants out. He directs his banker to redeem all the Sentry shares he and his partners hold. He takes the formal paperwork required for a redemption request with him and returns it to the bank the next day, expecting the money to be returned to him and his partners by the end of November.
TUESDAY, NOVEMBER 4, 2008
Today America goes to the polls to decide whether Senator Barack Obama or Senator John McCain will be the next president of the United States, and the stock market stages a roaring Election Day rally that pushes the S&P 500 index up more than 4 percent and adds more than three hundred points to the Dow.
Today is also when Bernie Madoff almost certainly begins to wonder if he will survive the panic of 2008—or if he even wants to.
On the seventeenth floor, Frank DiPascali gets the news first: the Fairfield Sentry fund has filed two redemption requests for next month totalling a staggering $850 million. This brings the Fairfield Sentry withdrawals since September to $1.25 billion, not counting millions withdrawn from some of the smaller Fairfield Greenwich funds.
The other big hedge funds are pulling money out, too. But for more than a decade, the Sentry fund has been Madoff’s biggest source of cash. Perhaps it’s only fitting that it is now his biggest source of worry.
For days, he has been on the phone to Palm Beach, gently imploring his old friend Carl Shapiro to hurry and make a $250 million investment in his Madoff account. The money is on its way, Shapiro tells him, and it is. When it arrives, it will make a splash in the increasingly shallow pool of cash in Madoff’s bank account.
That may be all he needs—just enough money to build a bridge between today and that future day when Wall Street will finally calm down and the cash will start to flow into the Ponzi scheme again.
Of course, any realist can see that, this time, Shapiro’s money is far too little and far too late. But that realist would not be Bernie Madoff. Even now, Madoff is sure he can forestall disaster. Prospective clients still want to meet with him. He can push Jeffry Picower to put some fresh cash into his accounts—he’s got the dollars, billions of them. Maybe some other faithful clients will add to their accounts, too.
He can get enough money to stay afloat, he tells himself. He will not acknowledge failure or defeat—only fatigue. He has been doing this tap dance for so long, juggling the bank accounts, whispering the reassuring lies, dazzling everyone with his fancy
footwork. But now he asks himself: Do I really want to keep dancing any longer, even if I can?
Increasingly, he is inclined to say no.
THURSDAY, NOVEMBER 27, 2008
It is Thanksgiving Day, and on the West Side of Manhattan the Macy’s parade is producing happy squeals, snare drum flourishes, and traffic snarls. On the East Side, Third Avenue is quiet, its stores and businesses mostly closed for the holiday. In the lobby of the Lipstick Building, the newsstand is shuttered and a few building security staffers are at the reception desk when the men from Banco Santander arrive. They are directed to the south bank of elevators and ride up through the silent building to the nineteenth floor.
The most important person in the lift is Rodrigo Echenique Gordillo, a distinguished-looking man in his early sixties who has been on the board of the giant Spanish banking company for twenty years. Echenique Gordillo has flown in from Madrid solely to keep this appointment with Bernie Madoff. He is surprised that Madoff scheduled it on the holiday, but Madoff said it was the only day available, and the meeting is important.
A lawyer by training, Echenique Gordillo is here at the request of the CEO of the holding company that owns Banco Santander. The bank’s Optimal hedge fund unit has more than $3 billion invested with Madoff—or thinks it has.
At least twice in the past six years, Optimal’s analysts have written memos citing weaknesses in Madoff’s financial and audit controls. Nevertheless, the unit’s due-diligence team and senior executives always managed to persuade themselves that Madoff was still safe—after all, he’d been managing money for years, he was regulated by the SEC, he owned a well-established and respected wholesale brokerage business, and he was a senior statesman on Wall Street with an excellent reputation.
But that was before the death of Bear Stearns, the bankruptcy of Lehman Brothers, and the bailouts of Fannie Mae, Freddie Mac, and AIG. Times are different. Risk weighs more on the scale than it once did, and reputation weighs less.
Echenique Gordillo and his colleagues step out of the stone-panelled elevator. Madoff himself is standing at the glass doors leading into his executive office suite. The floor seems otherwise deserted; not even Madoff’s private secretary is there. Madoff settles into his chair and, after some pleasantries, Echenique Gordillo unpacks his questions.
To his surprise, Madoff is not conciliatory; he does not try to cajole or persuade. When the issue of redemptions comes up, the mood becomes tense, maybe even threatening.
Later there will be conflicting whispers back in Madrid about what happened next. According to one account, Madoff warned the Spaniards: Take your money out now and you will never be allowed back in. The door to Madoff—the door to the $77 million in annual management fees the bank has been booking in its hedge fund unit in recent years—will be closed to Santander forever. It is certainly a threat that Madoff has made to others before.
If there are threats made today, they are ineffective. The meeting is quickly concluded, and the bankers ride the lift back down to the silent lobby. There definitely will be redemptions from Santander’s accounts with Madoff.
WEDNESDAY, DECEMBER 3, 2008
Sometime today, Bernie Madoff sits down for a talk with Frank DiPascali, to make sure his faithful lieutenant knows where they stand. The Ponzi scheme’s bank account at JPMorgan Chase, which held more than $5.5 billion just six months ago, is down to a few hundred million dollars, nowhere near enough to cover the billions in pending and threatened redemptions.
And when the money in the bank is gone, Madoff tells DiPascali, there will be nothing left for investors. He’s tired of trying to scrape new money together. It’s over.
DiPascali has long known that Madoff was conducting a massive fraud—how could he not have? He created the counterfeit paper trail and bogus computer verification that sustained the scheme through a half-dozen investigations over the years. He has lied to regulators, accountants, and clients for at least fifteen years, if not longer.
He will later claim that he lied to himself, too, comforting himself with the outlandish belief that Bernie had “other assets”, oceans of wealth hidden beyond DiPascali’s limited horizon, enough to make good on all the promises reflected in those account statements.
If that comforting delusion ever existed in Frank DiPascali’s mind, it dies today. If there were a hidden pool of wealth stashed away some-where, Madoff would surely tap into it now to keep them afloat. The markets cannot stay this terrified forever. If he had just a few billion more, maybe it would be enough to see them through.
But there is only the money left in that nearly depleted bank account, and Madoff is tired of the relentless struggle to replenish it. He wants to use this money to cash out the accounts of favoured friends and family members, not to cover the cheques he’s supposed to write to a bunch of hedge funds. He asks DiPascali to start preparing a list of those favoured accounts and their current balances, so he can divvy up the remaining money among them.
Sometime after this conversation, DiPascali allegedly slips down in the elevator to meet with one of his staff members, JoAnn “Jodi” Crupi, on a windy street corner near the Lipstick Building. Prosecutors will later claim that this is when he breaks the news to Crupi that Madoff is out of money, that there are no assets available to cover the billions he owes to his customers.
Did DiPascali ever really believe that delusion? If so, he copes with its destruction well enough. He does not grab whatever assets he can and flee the country. He does not report his mentor to the FBI to seek leniency for his own crimes. He returns from his street corner meeting and starts following orders. The cheques will be ready for Madoff’s signature by the middle of next week.
THURSDAY, DECEMBER 4, 2008
Jodi Crupi, an angular woman with olive skin and thick dark hair, has worked for Bernie Madoff since 1983, and allegedly has been handling the account statements for at least one of his big individual investors since about 2000. Prosecutors, relying on DiPascali’s confidential testimony, will later assert that her duties also include providing Madoff with “the daily report”, a running tabulation of the amount of cash flowing in and out of the bank accounts for his investment advisory business, along with redemption requests that have been received but not yet honoured.
If so, disaster is written on the page in front of her today. There is less than $300 million in the bank account, and the pending requests for redemptions now total just under $1.5 billion—the withdrawal requests have doubled in just the last ten days.
SUNDAY, DECEMBER 7, 2008
According to federal prosecutors, Frank DiPascali leaves his spacious hilltop home in suburban New Jersey on this bitter and blustery day and drives to a nearby Panera Bread cafe to meet with Jodi Crupi, who lives in Westfield, New Jersey, but purchased a deluxe beachfront home on the Jersey Shore last month.
DiPascali will claim that, in recent days, he and Crupi have repeatedly discussed how they will explain their work at the Madoff firm to law enforcement authorities when the fraud finally unravels. This is allegedly the topic they tackle today. According to DiPascali’s account, reflected in a subsequent federal indictment, Crupi tells him she plans on “sticking to my story,” that she always thought Madoff was conducting legitimate trading abroad.
Crupi will subsequently deny that she ever knowingly assisted DiPascali in sustaining Madoff’s epic fraud. She will plead not guilty to a federal indictment and insist that she was duped by her so-plausible boss, like everyone else.
Nothing that happens later can change what happens next. Before the coming week is over, the world that DiPascali and Crupi live in will shatter into a thousand pieces. The firm they have served for decades will be under federal control; their unflappable leader, Bernie Madoff, will be under arrest; and they will both be under suspicion for allegedly helping him maintain the largest Ponzi scheme in history.
11
WAKING UP IN THE RUBBLE
The day after the music stopped for Bernie Madoff, the long mar
ch began for his victims. Like a major earthquake or a devastating cyclone, the collapse of the Ponzi scheme left his victims bereft, betrayed, and emotionally homeless. The world they knew had been destroyed; they could not stay in that world, and yet they could only guess at the path that would carry them into a less precarious future.
The humiliated regulators and the harried lawyers who had to sift through the debris faced journeys of their own—towards redemption, out of chaos.
Everyone in this ruined landscape had been forced to set out on an expedition of discovery, gruelling and uncertain but just possibly heroic. The men and women of the SEC would seek to restore their honour. The lawyers hired to unravel Madoff’s fraud in bankruptcy court would try to find any hidden treasure and bring it back to those he ruined. But the individual fraud victims, who had believed for too long in this wizard of lies, were on a quest to find the most elusive prize of all: justice.
Most of them began their trek with only the vaguest idea of the terrain ahead. They did not know that some bridges had already been washed out. Most tragically, they could not see the crossroads around the bend where at least half of them would be detoured into a labyrinth of bitter fury and frustration.
At first, there was no way to know even how many victims there were, much less where they were going and what they would find when they got there. The only clue was that staggering number from Madoff himself: $50 billion.
Within hours of Madoff’s arrest, self-proclaimed financial experts on the Internet had dismissed the figure as grandiose and implausible. Others accepted it as possibly true but argued that it probably represented only paper profits, not cash losses—as if a paper loss that wiped out everything you owned was somehow less damaging than a cash loss. In fact, Madoff’s estimate was low. It would soon be established that $64.8 billion in paper wealth vanished when Madoff was arrested, including cash losses of about $20 billion.
Bernie Madoff, The Wizard of Lies Page 27