Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  A few institutional victims surfaced quickly. The Picower Foundation, the Chais family foundation, and Norman Levy’s family foundations closed their doors almost immediately, stunning their employees and grant beneficiaries.

  By Friday, December 12, a few elite hedge funds had sheepishly disclosed to investors that, for all their preening claims about careful due diligence, they had been ripped off.

  Those “Dear Investor” letters started to flutter out of fax machines and arrive as e-mail attachments and urgent FedEx deliveries around the world: “As we are sure you are aware, Bernard L. Madoff was arrested yesterday . . .” (But as you may not be aware, your fund invested substantially all of its assets in another fund that invested in three other funds, all of them entirely invested with Madoff.) “We are shocked . . . are consulting counsel . . . are collecting all pertinent information . . . will keep you informed.” The recipients of these letters were calling lawyers of their own, and those lawyers were getting calls from the media.

  The shock and horrified embarrassment was especially keen for the giant Madoff feeder funds whose managers had taken such pride in their due diligence and yet sustained such enormous losses: Fairfield Greenwich Group, Ezra Merkin, Bank Medici, the Tremont funds. Bloggers immediately branded them as likely accomplices, refusing to accept that such intelligent, sophisticated people could have been fooled for so long by a crime as elementary as a Ponzi scheme.

  Major banks across Europe began issuing press releases: Banco Santander’s Optimal funds were invested with Bernard L. Madoff . . . Funds affiliated with UBS may have been invested . . . HSBC may be exposed through its hedge fund administration unit . . . BNP Paribas has about $500 million at risk through trades and loans to hedge funds.

  Tipsters who had listened for years to their country club companions brag or whisper about their Madoff accounts sent anonymous notes or left voice-mail messages for reporters, naming names.

  Lists were built, expanded, corrected. Naturally, the glittery names surfaced first: Fred Wilpon, an owner of the New York Mets baseball team; Norman Braman, the former owner of the Philadelphia Eagles football team; Baseball Hall-of-Famer Sandy Koufax; Mort Zuckerman, the properties tycoon and owner of the New York Daily News; the actors Kyra Sedgwick, Kevin Bacon, and John Malkovich; the noted screen-writer Eric Roth; the ex-wife of the actor Michael Douglas; the heirs of the singer-songwriter John Denver; a foundation set up by Jeffrey Katzenberg, a cofounder of the DreamWorks studio in Hollywood, where his partners were the star record producer David Geffen and the Oscar-winning director Steven Spielberg, whose foundations were also affected.

  What immediately became apparent was the astonishing geographical reach of Madoff’s crime, a perverse monument to two decades of financial globalization. The lists soon included Swiss private bankers, a Singapore insurance company, a Korean teachers pension fund, an Italian bank holding company, major Japanese banks and insurance companies, trust funds in Hong Kong, Dutch money managers, a sovereign wealth fund in Abu Dhabi, a French cosmetics heiress, minor royalty in England and Monaco, two Catholic schools on St Croix, hedge funds in Luxembourg, and wealthy families in Mexico, Brazil, Argentina, and Dubai. One legal consortium in Europe would later estimate that as many as three million people were touched by the scandal.

  In the United States, the visible victims included trustees of cultural institutions in New York, retired Wall Street executives, wealthy property developers in Chicago, respected academic figures in Boston, a foundation in Seattle, a state legislator in New Jersey, and a cluster of retirees in Aspen, Colorado. Even the International Olympic Committee had a sliver of its assets invested with Madoff.

  Against that cosmopolitan tapestry, a more primitive response began to surface. News sites on the Internet had to regularly scrub away anti-Semitic slurs from the comments posted in response to stories about Madoff and his fraud. When the Nobel laureate and Holocaust memoirist Elie Wiesel, revered for his courage and humanity, confirmed that Madoff had stolen his small foundation’s entire endowment—for some, the ultimate betrayal—many in the Jewish community became alarmed about the backlash that Madoff might inspire in such ugly times.

  At one breakfast panel, held at the “21” Club in Manhattan, Wiesel offered his own explanation for how the scandal could have happened. “It’s almost simplistic,” he said. “The imagination of the criminal exceeds that of the innocent.” His meaning was clear: a criminal can imagine committing his own crimes, while his victims cannot imagine anyone committing such crimes.

  When Wiesel was asked if he could ever forgive Bernie Madoff, there was a long, almost painful silence. Then this man who seemed to have forgiven so many for so much quietly answered, “No.”

  The Institute for Jewish Research in Manhattan organized an evening panel discussion to contemplate “the Madoff enormity”, as the moderator, Martin Peretz, described it. The auditorium was packed to capacity; the panelists were distinguished, thoughtful, and worried. Some feared that Madoff’s betrayal struck at the cords of trust that had allowed the Jews of the Diaspora to survive and succeed in financial centres for centuries. But the historian Simon Schama reminded the audience that an increasingly tolerant America had just elected its first black president, Barack Obama; perhaps such ancient bigotry was no longer in fashion. Besides, he asserted, there was no evident surge in anti-Semitic vitriol in these post-Madoff days.

  Journalists in the audience knew better; they had only to look in their e-mail in-boxes.

  Within a week of Madoff’s arrest, the Anti-Defamation League reported a sharp increase in vicious slurs against Jews on the Internet, most related to Madoff. The fact that Madoff and many of his victims were Jewish created a “perfect storm for the anti-Semites,” warned Abraham Foxman, the longtime head of the organization. The list assembled by the ADL included comments such as these posted on mainstream magazine and newspaper Web sites: “One Jew thief robs another bunch of Jew thieves—I suppose that’s what you’d call a victimless crime”; “Ho hum, another Crooked Wall Street Jew. Find a Jew who isn’t Crooked. Now that would be a story”; and “Just another jew money changer thief. It’s been happening for 3,000 years.”

  In reality, Madoff’s crime had far outstripped its original Jewish connections. Almost all of the hard cash wiped out by the fraud had poured in since Madoff’s cash crisis in late 2005, and it had come from hedge funds around the world, from aristocratic Europeans and shadowy Russians and sovereign wealth funds in the Persian Gulf. If those investors had heard of Bernie Madoff at all, they associated him with the rise of NASDAQ and the automation of Wall Street, not with the Jewish country clubs on Long Island and in Palm Beach or the board of trustees at Yeshiva University.

  But he had been a member of those Jewish country clubs, and hundreds of their members had lost decades of accumulated paper profits. And he had served on Yeshiva’s board, and the university was scrambling to calculate the funds that had been so suddenly erased from its endowment. His earliest sales networks relied on word of mouth, and they had their roots where his Jewish friends and relatives had originally gathered: in the synagogues, at the Jewish clubs and resorts, on the boards of Jewish charities, hospitals, and schools.

  So his crime certainly began as an “affinity fraud”, the pleasant-sounding term criminologists use when one member of a close-knit, trusting community exploits that trust to steal from others in the group. It has happened everywhere, wherever members of a cohesive group have enough faith in one another to blind them to the lies piling up around them. A pastor steals from his devoted congregation. A retired military man exploits the troops. An immigrant from Haiti, or Russia, or China, or Cuba—anywhere, really—steals from countrymen who have settled into new homes.

  At the beginning, Madoff exploited the trust and respect he had earned in a close-knit Jewish community. His reputation in those circles was his original passport to financial credibility in the wider world. He enhanced his reputation with ties to other trusted member
s of the group such as Ezra Merkin and Stanley Chais; his own nonprofit investors included giants such as the American Jewish Congress, the Jewish Community Foundation of Los Angeles, and the women’s group Hadassah. By the end, he was pulling in cash from every corner of the globe, but it was a harvest that had grown from his own Jewish roots.

  So, inevitably, this became a Jewish scandal among Jews themselves. Rabbis reflected on its lessons; a Jewish country club invited speakers to talk about it; a professor at Yeshiva University added it to the syllabus of his religious ethics class. Jewish charities, foundations, and endowments vowed to be less trusting and more rigorous in their investment practices. Some investors wept or raged over what Madoff would mean for the Jews, but many others were sustained by courage and mordant humour. The Jewish Journal’s online news site featured a new blog about the unfolding Madoff case and called it “Swindler’s List”.

  The crucial puzzle of those early days—the one that would shape public reaction for months—was this: Who were Madoff’s victims? Aside from some worthy charitable and cultural institutions, were they just a few movie stars, plutocrats, and hedge funds, each mourning a $100 million loss? Or had tens of thousands of ordinary middle-income families also lost hundreds of thousands of dollars in retirement savings?

  Unfortunately, the second scenario was closer to the truth. For every household name like Steven Spielberg, there were a host of dentists and small-time lawyers and retired teachers and plumbers and small business owners. Roughly a thousand Madoff accounts had fictional balances of less than $500,000. But there was simply no way to know this, not at first.

  There were e-mails and calls to the media from ordinary people such as a housewife in Brooklyn, New York; a property zoning lawyer in Coral Gables, Florida; and a part-time museum curator in Connecticut—all explaining that they or their elderly relatives had been living off the modest nest eggs entrusted to Madoff generations before. Some had nothing left now but Social Security. Soon there were reports that the pension plans for some small medical practices and construction-trade union locals had been wiped out. Yet some of those victims were reluctant to be identified, or had been warned by their lawyers to remain silent. Unfortunately, their star power was feeble compared with that of the founders of DreamWorks and the owners of the New York Mets.

  The public and the media were slow to understand that the key question to ask was not “How much did you lose?” but “How much do you have left?” Many, if not most, of the notable names had lost tens of millions but had plenty left, by any reasonable standard of human comfort. Some of the obscure victims had lost only thousands but had nothing left except their cars, their mortgaged houses, and the cash in their wallets.

  It was perhaps understandable that it took so long for that fundamental question to surface. The first commandment of investing is “Don’t put all your eggs in one basket.” It didn’t seem possible for this rule to have been so widely and so catastrophically ignored, even by nonprofit trustees and pension plans with fiduciary obligations. Typically, the failure of a legitimate midsize brokerage firm like Madoff’s would not wipe out every single penny its customers had. Plenty—or, at least, something—would be left in a company pension plan or a bank account or a money market fund. As for the hedge funds, they supposedly catered only to wealthy, sophisticated people who were, by definition, too smart to hazard their entire fortune on one investment. Indeed, this had been one of the reasons for not regulating hedge funds more tightly over the years.

  Fires, earthquakes, and hurricanes were readily recognized as events that required an emergency response to alleviate human suffering; the Madoff fraud was not. Few people even wondered at first if there were victims who had been totally wiped out overnight by this crime, victims in need of immediate help who could not turn to their relatives because they, too, were suddenly destitute.

  So the public imagination focused on the sequined names of the wealthiest victims, people who would suffer no more than embarrassment from their Madoff losses. Madoff’s crime thus came across as just another overdue comeuppance for the rich and greedy people who had helped drive America and the world economy into a ditch in 2008. Politicians were wary of leaping to the defence of beleaguered victims they suspected were just hapless hedge fund managers and Madoff’s country club cronies.

  Instead of focusing on how to help the neediest victims, they focused on where to put the blame.

  On the day of Bernie Madoff’s arrest, the veteran bankruptcy lawyer Irving H. Picard was in his Manhattan office, located in a grey-trimmed Midtown tower above Madison Square Garden, when he got a call from a senior attorney at the Securities Investor Protection Corporation in Washington, the safety net organization for US brokerage customers.

  “Could you be the Madoff trustee if we needed you?” the attorney asked.

  Picard was the obvious choice: he had handled more SIPC bankruptcy liquidations than any lawyer in the country. He promised to check immediately to see if his law firm had any conflicts that would prevent him from taking the assignment.

  The timing was not ideal. At sixty-seven, Picard had one foot out the door of his old law firm, based in Newark, New Jersey, with a branch office in Manhattan. He was seriously considering a move to the Rockefeller Center offices of Baker & Hostetler, a giant Cleveland, Ohio, law firm expanding its New York presence. His friend and former law partner David J. Sheehan, also in his mid-sixties, was already at Baker and wanted him to come aboard. But nothing had been formalized, and the two men planned to discuss the matter further after the first of the year.

  Soon after Picard hung up from the SIPC call, he found a snag: his firm had long represented US senator Frank Lautenberg of New Jersey, and the senator’s children and family foundation were Madoff investors—now Madoff victims. He discussed the potential conflict with his partners in Newark and thought they had agreed the firm would not handle the Lautenbergs’ claims so that Picard would be free to take on the SIPC case.

  That evening, as Picard and his wife were leaving a diner on West Fifty-seventh Street to attend a Boston Symphony concert at Carnegie Hall, he noticed a phone message from a partner saying that reporters were asking about Lautenberg. Ducking out of the rain, he called back, reminding the partner about the conflict this would pose for the SIPC case.

  In the next morning’s papers, his partner was quoted speaking on the Lautenbergs’ behalf. Picard clearly had to choose: his current law firm, which was growing less congenial, or the Madoff case. Sheehan, who had already been asked by SIPC to be counsel to whoever became the trustee, discussed the move with Picard that night over dinner with their wives at a sleek Belgian bistro near Central Park.

  By Sunday afternoon Sheehan had gathered a team of Baker & Hostetler partners to interview Picard. He was offered a job and was assured that the offer stood regardless of whether he landed the SIPC assignment. Early Monday morning, December 15, he called his law firm to tender his immediate resignation and called Sheehan to accept the Baker & Hostetler offer.

  When SIPC’s lawyers went into federal court that afternoon to seek Picard’s appointment as the Madoff trustee, he was in a short stretch of no-man’s-land between his former job and his future job. More than a year later, his new ninth-floor office in Rockefeller Center—with its astonishing close-up view of the rose window of Saint Patrick’s Cathedral, just across the street—looked as if he had just arrived and had yet to unpack.

  Picard and Sheehan had teamed up on nearly a dozen brokerage firm liquidations over the years, but their personal styles were dramatically different.

  A trim six-footer with thinning hair and a wide smile, Picard was methodical and even-tempered, carefully (perhaps overly) legalistic in his conversations and quietly corporate in his conservative wardrobe. He’d been raised in Fall River, Massachusetts, the son of a well-to-do dermatologist and the grandson of affluent German-Jewish immigrants. He had gone into the law after changing his mind about an accounting career.

  A
fter several years as an in-house lawyer on Wall Street and five years at the SEC, he was appointed in 1979 as the first US trustee for the federal bankruptcy courts in New York, a new position Congress had created in the Justice Department to address rising concern about bankruptcy fraud. He then went into private practice and, in 1984, was hired to handle his first SIPC liquidation. Over the years, this became one of his specialties.

  The other half of this odd couple was David J. Sheehan—small and shaggy, a mercurial, combative litigator with a biting wit, a grizzled beard, a messenger bag to throw over his parka, and impishly chic black-framed glasses.

  Sheehan was the son of a janitor in the urban New Jersey town of Kearny. He worked his way through university and law school. In the face of the Vietnam draft, he enlisted as a lieutenant in the Navy Judge Advocate General’s Corps and spent his tour of duty handling legal matters at the Brooklyn Navy Yard.

  His civilian law practice was eclectic—everything from product liability cases to trademark battles to pro bono work on death penalty cases. The unifying theme was courtroom work. While Picard seemed more at ease in conference rooms, negotiating the out-of-court settlements and litigation strategies that were a staple of his work, Sheehan relished courtroom combat and enjoyed the intellectual and administrative challenges of a complicated trial. He was regularly recognized as one of the top litigators in the city.

  On the other hand, SIPC, the agency Picard and Sheehan would work for during the contentious years of the Madoff liquidation, was a frail and poorly equipped vessel to trust in the rough seas they were sailing into.

  SIPC’s job, defined by the federal statute that created the agency in 1970, had been to make sure customer claims came first in bankruptcy court—ahead of general creditors such as the landlord and the cleaning service—and to maintain a fund to pay cash advances to customers waiting for the court to process their claims. Although SIPC’s procedures were better than the old approach (which treated all claims alike and provided no cash advances), they essentially just moved investors to the front of the line in bankruptcy court. SIPC did little, however, to speed up the tempo at which that line moved through the court system—and this was going to become an enormous problem for the Madoff victims, some of whom did not even have a cushion of cash for daily expenses.