Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  And what about the victims who had withdrawn millions of dollars more than they had put in, thinking they were only drawing out their legitimate profits? Could the trustee sue them to get that money back? If so, would he base his decision on how much they had taken out? On how much they had left? Or, somehow, on how much they might have known about what Madoff was doing?

  Someone was going to have to play King Solomon with these questions, and every possible answer would leave someone enraged or bereft. And, as with the biblical precedent, getting the “right” answer would require wisdom about the human heart, not just knowledge about the rules of justice. The imperfect search for answers to these questions would impede the liquidation of the Madoff firm for more than two years and inflict bruises on everyone involved.

  Picard and Sheehan believed that the law that applied to Ponzi schemes was clear: victims could recover only the cash they had put in, not the fictional profits allegedly generated by the fraud itself. Their view was shared by SIPC’s lawyers, senior officials at the SEC, and a large number of bankruptcy lawyers.

  It was also supported by rulings already coming out of the pending bankruptcy of the Bayou hedge fund, the Ponzi scheme whose collapse in mid-2005 nearly capsized Madoff’s own fraud. As early as 2007, the judge in the Bayou case ruled that if a victim had withdrawn cash in excess of his original investment, those fictional profits had to be returned to the estate. Almost all of the Bayou fund investors who had withdrawn money within six years of the fraud’s collapse—the statute of limitations under New York State’s creditor protection laws—were ordered to return their fictional profits.

  But in adopting this view of how to calculate losses in the world’s biggest Ponzi scheme, Picard and Sheehan became the lonely champions of some of Madoff’s victims (those who had taken out none, or only some, of the cash they put in) and the bitterly despised adversaries of the others (those who had withdrawn all of their original cash stake and perhaps much more).

  The Madoff investors who opposed Picard would soon argue that Bayou was different because it was not a SIPC case—and that SIPC was required to honour customers’ “legitimate expectations”, as reflected on their final account statements before the fraud collapsed. As they saw it, to do anything less was simply illegal.

  Soon it was a sincerely held article of faith for some of them that Picard and Sheehan were deliberately, heartlessly breaking the law to protect SIPC at the expense of thousands of devastated Madoff victims. As they saw it, anyone who argued otherwise had crossed over into the enemy camp.

  At a little past 2:30 PM on Monday, January 5, 2009, magistrate judge Ronald Ellis leaned forward on the bench and said, “Mr Litt, why don’t you tell me exactly what we’re here for.”

  Federal prosecutor Marc Litt was there to try, once again, to get Bernie Madoff locked up.

  By now, the public outcry against Madoff and his family had become a relentless, reverberating roar. Madoff’s sons could not leave their homes without being dogged by photographers. Shana Madoff and her husband, former SEC lawyer Eric Swanson, expecting their first child, were under fierce scrutiny after the Wall Street Journal published an article suggesting that their relationship might have helped deflect the SEC’s attention away from her uncle’s hidden fraud.

  As for Ruth Madoff, the consensus of the city’s tabloids and the virulent Internet chatter was that she was the new Marie Antoinette, her husband’s foolish pampered queen and, most likely, his outright accomplice. She could not leave the apartment for groceries without a paparazzi posse on her heels. The outcry against Madoff and his family was at a fever pitch.

  At the hearing, Litt did his best to persuade Judge Ellis to change his mind about Madoff’s bail. But he was pushing against the bedrock legal principle that all defendants are initially presumed innocent until their cases are adjudicated. Even if an accused person has confessed, he is still considered innocent in the eyes of the law, and it will be the prosecutor’s burden to prove his guilt beyond a reasonable doubt. Because of this presumption, all defendants are entitled to bail unless they are a danger to the community or themselves or are likely to flee.

  Litt argued that circumstances had changed since the magistrate’s colleague, Judge Eaton, first approved bail for Madoff on December 11. The government’s investigation was moving forward, and the extraordinary scale of the crime had been confirmed. Madoff would be facing a “very, very lengthy” jail term, Litt continued in his soft classroom voice. He concluded, “Given the defendant’s age, the length of the likely sentence, the strength of the proof against the defendant, including his confessions—these facts present a clear risk of flight.”

  Judge Ellis mildly pointed out that all of those facts were known to the government when it last agreed to Madoff’s bail conditions, those approved by Judge Gorenstein a week after Madoff’s arrest. Moreover, Madoff had already surrendered his passport. So what had really changed?

  What had changed, Litt explained, was that the Madoffs had posted Christmas Eve, in defiance of an asset freeze imposed in the civil case filed by the SEC. Though the items had all been quickly recovered, the episode was proof that Madoff “is not able to respect the limits imposed by the court.”

  When it was Ike Sorkin’s turn for rebuttal, he pointed out that, even now, Litt was not claiming that Madoff had violated any of the bail conditions that had been imposed in the criminal case against him. Rather, Sorkin said, Litt was complaining that Madoff had violated an asset freeze that had been imposed by a different judge in a different case—a freeze that did not even apply to Ruth.

  And how did Madoff do that? By sending out what “can best be described as some heirlooms,” Sorkin said. Yes, some items had material value, but others had mostly sentimental value—some mittens, some cuff links. He portrayed the incident as an innocent mistake prompted by Madoff’s awkward longing to make some gesture of reconciliation and connection towards his estranged sons, his brother, and his friends.

  As close to visible anger as he had ever been in court, Litt protested: “The government is not here because of some mittens and cuff links.” He continued, more calmly, “We’re here because of hundreds of thousands of dollars, and perhaps millions of dollars worth of very expensive watches and other jewellery.” The defendant violated a court order by posting those gifts, and “that is a change of circumstances. That’s what brings us here.”

  Once again, Litt failed to persuade the court that Madoff should be locked up in advance of his trial. Judge Ellis ruled that the defendant those packages of valuable holiday gifts to their family and friends on could remain free on bail, confined around the clock to his penthouse apartment.

  A month later, in a different courtroom with a different mandate, Judge Burton R. Lifland was getting worried.

  One of the longest-serving judges on the federal bankruptcy court in Manhattan, Lifland, who was overseeing the liquidation of Madoff’s assets, was also an expert on the complicated interplay between American bankruptcy laws and the rules that applied in other countries. When it came to the Madoff case, which spanned the globe, it was becoming evident that there were far too many cooks in this heated kitchen.

  The Serious Fraud Office in London was investigating Madoff’s British affiliate after receiving a confidential report from the accountants liquidating the firm under British law. But Lee Richards, the receiver whom the SEC had put in charge of the London affiliate, was not getting the cooperation he had expected from the London liquidators. Meanwhile, several other European governments had opened their own Madoff investigations. French prosecutors had begun a preliminary inquiry and were eyeing Madoff’s property there—the town house, the $7 million yacht, and the $1.5 million slip where it was moored—as a source of compensation for local victims. Spanish regulators were examining losses in the Optimal funds. Austrian officials had begun an emergency examination of Bank Medici. Irving Picard had already sought Judge Lifland’s permission to hire British counsel, and he was preparing
requests for additional legal help in more than a half-dozen additional countries.

  There were vague hints of conflicts closer to home. David Sheehan was locking horns with federal prosecutors over subpoenas Sheehan wanted to serve on dozens of individuals the prosecutors did not want him to approach yet. Some forfeited Madoff property that Picard could sell on behalf of the victims was being earmarked for sale by the US Marshals Service—which, unlike SIPC, would deduct its own expenses from the proceeds available for victims, irritating Picard and Sheehan. The SEC was trying to investigate the Madoff case while being investigated itself by its own inspector general.

  And so on Wednesday, February 4, after a routine hearing in the case, Judge Lifland gestured for Picard and Sheehan to stay a moment.

  “I think things are moving a little bit slower than some people would anticipate, at least on the public front,” he said mildly. “I don’t really know what is going on behind the scenes.” But with “so many agents and agencies and units of government that are charged with maximizing recovery,” Lifland was beginning to feel that “agencies are not pulling together.”

  He added, “I would like the word to get out for all parties to start working in harmony and not in disharmony.”

  He did not sound optimistic—for good reason. Disharmony was winning, hands down. A prime example was taking place that same day in Washington, DC, where the House Financial Services Committee of the US Congress was holding its second public hearing on the Madoff scandal since the new year.

  The Madoff victims had hoped to find justice in the halls of Congress, but this would prove to be a dead end for those seeking immediate practical help or swift legislative changes. For those demanding that the SEC be held accountable for its catastrophic failures, however, Congress was eager to oblige. On this day the star witness was Harry Markopolos, the oft-ignored whistle-blower from Boston. His testimony was spiced with folksy insults and energized by righteous anger towards the SEC that perfectly reflected the rage of Madoff’s victims.

  “ ‘Denial’ is not just a river in Egypt; it’s the mindset that the SEC has adopted,” he said.

  “The SEC is a group of 3,500 chickens tasked to chase down and catch foxes,” he observed. “Bernie Madoff, like too many other securities fraudsters, had to turn himself in because the chickens couldn’t catch him, even when told exactly where to look.”

  There were plenty of spy thriller flourishes. “In order to minimize the risk of discovery of our activities and the potential threat of harm to me and to my team, I submitted reports to the SEC without signing them,” Markopolos told the committee members. “My team and I surmised that if Mr Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us.”

  Since Madoff already faced life in prison, “there was little to no downside for him” to simply kill his accusers, Markopolos asserted. He added, “At various points throughout these nine years, each of us feared for our lives.”

  These dramatic disclosures simply reinforced the questions Markopolos was not being asked: Since he was convinced that Madoff was a dangerous criminal, why didn’t he report him to the criminal authorities? Why had he persisted in sending his tips about this potentially murderous con artist to a civil agency—and always the same civil agency? Since the Boston SEC office saw Markopolos as a credible source, couldn’t they have vouched for him at the FBI’s New York office or at the US Justice Department, and not just at the SEC? He never addressed these mysteries.

  A few members of Congress looked a little uneasy, particularly when Markopolos described wearing latex gloves to prepare an anonymous package of information that he unsuccessfully tried to slip to Eliot Spitzer, who was then the New York State attorney general, during a speaking engagement at Harvard. No one asked the obvious question: Why not just put the package in the post?

  Mostly, however, Markopolos was lionized and applauded, after which came the public flogging of the SEC.

  A panel of regulators filed up to the witness table, led by Linda Chatman Thomsen, the national director of enforcement for the SEC. The SEC team had apparently misread the occasion completely; they came armed only with legal technicalities and vague hints of executive privilege.

  The congressional panel did not want to hear that an ongoing criminal investigation and an internal probe by the SEC inspector general made it legally impossible for these witnesses to give the candid details the committee demanded—although this was arguably true. Instead the committee members fired rhetorical questions at the SEC team, getting angrier with each inadequate answer. Their insults revealed a stunning degree of hostility.

  The most merciless observation came from Representative Gary L. Ackerman, a Democrat from New York: “We thought the enemy was Mr Madoff,” he told the SEC officials lined up before him. “I think it is you.”

  Later that afternoon, the newly installed SEC chairwoman, Mary Schapiro, sent an apologetic letter to the committee’s Democratic chairman and its senior Republican member, promising to work with them in a collegial way going forward.

  But the damage was done. The Congress was taking up the issue of massive regulatory reform in the wake of the financial crisis of September 2008. The SEC’s failure in the Madoff case could erase all the other accomplishments it might offer to justify its continued independent existence. The contempt and impatience on display at the hearing certainly made this seem like an ominous possibility.

  In his effort to speed the claims process along, Irving Picard needed to locate as many Madoff investors as quickly as possible. SIPC had already set up a Web site and a helpline, and now Picard decided to take a more proactive approach, seeking out the victims himself, rather than waiting for them to come to him. He instructed his forensic consultants to file a public exhibit in bankruptcy court on February 6 that consisted of more than thirteen thousand names found on account statements in Madoff’s files. As a public document, the list was available to anyone who wanted a copy, and it was soon posted online.

  The “Madoff names” became an instant sensation, a road map to the stars and titans who had been swindled and also a roster of the ordinary people who had—or might possibly once have had—a Madoff account. In France, it was dubbed la liste de pigeons. In England, the Guardian featured it prominently. The Wall Street Journal built a map that showed the geographic concentrations of victims. The New York Times created an online database that could be searched by name, town, state, and postal code; it immediately attracted a nearly staggering number of visitors. Virtually every regional publication in the US had a feature story on the local “names” that had shown up on “the list”. Some accounts were active, some were not. Some people named on the list insisted that they had never invested with Madoff, and some had already disclosed that they had.

  Among the surprises to be found on the list were the names of Nathan and Rosalie Sorkin of Boca Raton, Florida—Ike Sorkin’s deceased parents. The list also contained the name “Squadron, Ellenoff, Plesent & Sheinfeld”, the vanished law firm where Sorkin had once been a partner.

  It seemed outlandish: Ike Sorkin’s client had enticed Sorkin’s parents and former law partners into his Ponzi scheme. But it was true.

  In such a closely watched case, prosecutors had to be sure that everything was done strictly by the book. And, by the book, a defendant’s lawyer should not have such a close connection to the defendant’s alleged victims. It was a conflict that might cast doubt on how committed Sorkin was to his client’s defence—and that could cause problems for the government if Madoff should appeal his conviction or sentence. Behind the scenes, prosecutors began to insist that Madoff waive any right to invoke these conflicts of interest on appeal; within a few weeks, he would publicly do so.

  The list may have served its purpose. It certainly got the attention of the people whose names appeared on it, and it enabled Picard to quickly sift out the long-defunct or simply erroneous accounts. But for many shell-shocked Madoff victims, the publication
of the list felt like a bruising invasion of their privacy—one more injury to blame on Irving Picard.

  The list captured only direct customers, not those who had invested through feeder funds. So there was no record on the list of a Herald fund account in the name of William Foxton, a ruddy, ginger-haired man who was a retired major in the British army.

  As his son Willard Foxton later recounted in a moving BBC documentary, Major Foxton spent his life serving bravely in dangerous places. He lost a hand in combat and earned the Order of the British Empire. He later joined humanitarian aid missions and testified against war criminals. By all accounts, Major Foxton was a courageous, ethical, and very private man.

  His family’s research indicated that Foxton invested roughly $3 million in the Herald USA fund and the Herald Luxembourg fund, both sponsored by Bank Medici in Vienna, sometime in late 2004 or early 2005. He had expected to live on those investments after his civilian retirement in November 2008.

  Willard Foxton would later say that his father had no idea he was a Madoff investor—he believed that his money was invested in a safe, diversified fund at an established Austrian bank.

  In early February, Major Foxton told his son he was having disagreements with the bank about his investments. Then his son received an erratically punctuated e-mail message:

  Dear Will, I will be brief. I had some in fact all my money in two funds Herald USA Fund and Herald Luxembourg Fund invested in Austria. I have now found out that the office is closed and the money was invested in Hedge funds of Madoff of the Ponzi scheme. I have lost everything. I am now considering whether or not to get myself declared bankrupt. Feeling pretty low and depressed. Thats about it for the moment.

  On February 10, Foxton carried his military handgun to a small enclosed park near his home in Southampton. He lay down on a long wooden bench under some leafless trees and, sometime later, shot himself.