Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  Normally there are no “creditor meetings” in a SIPC bankruptcy case. But there was nothing normal about this case, and the bankruptcy code allowed such informational meetings. So Irving Picard and David Sheehan decided they would hold one—not a “creditors” meeting, exactly, but a “customers” meeting. It was scheduled for Friday, February 20.

  Investors began to queue up early at the Old Customs House, the classic-columned building that houses the federal bankruptcy courts in Lower Manhattan. Some victims still hoped that a remnant of the $64.8 billion they thought they had a few short months ago had been found.

  Shortly after 10:00 AM, Picard and Sheehan walked onto the bare stage in the building’s auditorium and sat at a metal folding table with a senior SIPC lawyer named Kevin Bell, a tall, taciturn man with a distinctive steel grey crew cut. Microphones were set up on the table and on both sides of the auditorium near the stage.

  The audience, clustered near the front of the room, was a diverse crowd—some in sweaters or flannel shirts, others in suits and expensive ties. Many of them spoke to reporters about the hardships they or their family members were suffering since Madoff’s arrest and expressed fury at the federal regulators who had failed to protect them from Madoff’s crime.

  Opening the meeting, Picard explained that he and Sheehan would brief investors and then field their questions.

  “There are a couple of ground rules,” Picard said. “Number one, this case—as you well know—involves a crime, so we are operating out of a crime scene.” Although he and his team were working closely with federal prosecutors, FBI agents, and SEC investigators, he said, “there is a limit to what we can say.” He asked investors “to respect the judicial system so that it can play out.”

  His briefing was detailed and legally precise, but possibly a little dense for the less sophisticated investors in the audience. He explained that victims would be paid from two sources of funds: cash advances from SIPC and whatever assets he could recover for the estate, which would take “some period of time. We can’t, at this point, speculate how long.”

  He discussed the possibility of selling Madoff’s market-making operation for the investors’ benefit. He said he had hired a consultant to advise him about the sale of the Roy Lichtenstein prints and other artwork found on the premises. He had hired other consultants to reconstruct and digitize the account statements, an enormous task that had to be accomplished before customer claims could be paid. There was so much to be done.

  Indeed, in the next four months, a hurricane of legal activity would spin out from the heirloom burl wood desk in Picard’s office in Rockefeller Center.

  He would serve more than 230 subpoenas as part of investigations being pursued in the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, France, Gibraltar, Great Britain, Ireland, Luxembourg, Spain, and Switzerland.

  He would grasp for assets anywhere he could find them, starting with the low-hanging fruit. He would cut a complicated deal to sell the Madoff market-making business. He would close all the firm’s brokerage or banking accounts, taking in just over $37 million, and settle the pending securities trades for just over $297 million. His team would sell the firm’s small stake in a charter airline. He would sell the firm’s remaining tickets to New York Knicks basketball and New York Rangers hockey games and auction off its New York Mets tickets for the 2009 season.

  Nothing would be too trivial. Picard would cancel insurance policies, collecting nearly $234,000 in premiums. He would suggest that politicians and charities return the almost $145,000 in contributions they’d received from the now-toxic donor. He would cash out the firm’s stake in DTCC, Wall Street’s cooperatively owned clearing corporation, for more than $200,000. As soon as the FBI permitted it, he would cancel the leases on all but the seventeenth floor of the Lipstick Building. He would even cancel the firm’s magazine subscriptions, club memberships, and vehicle leases, netting another $54,000.

  He only hinted at these plans as he briefed the Madoff victims. But he emphasized at the February 20 meeting that SIPC, financed by Wall Street, would pay all the expenses involved—including his and his law firm’s bills. Despite widespread reports to the contrary, he explained, none of the trustee’s bills were being paid with assets earmarked for the victims, as would have been the case in a normal bankruptcy. All of the legal bills and other expenses in the liquidation were paid by SIPC, at no cost to the victims.

  There had been erroneous news reports a month earlier that Picard, as trustee, was entitled to be paid 3 percent of the assets he recovered through litigation. That arrangement was built into the federal bankruptcy code, but it did not apply in SIPC cases. Instead, Picard and his law firm submitted their bills to SIPC, which haggled a bit and sent them on to the presiding judge, who had the final say. Then SIPC paid them out of the membership assessments levied on Wall Street firms. The amount involved had nothing to do with how much Picard recovered from those he sued.

  But it was too late to stamp out the misunderstandings. More than a year later, some angry victims would still rail against Picard’s “3 percent fee” and oppose every bill he submitted on the grounds that he was getting money that would otherwise have gone to them.

  In perhaps the first sign of how tangled the lines of communication with the victims would become, Picard presented the most stunning revelation of the meeting as a parenthetical aside during his arcane discussion about the appropriate deadline for filing claims.

  Some lawyers were telling their clients that their claims had to be filed by March 4, while Picard said that the only meaningful deadline was July 2, 2009, six months after the official notice of the bankruptcy had been sent to investors. The March 4 deadline, he explained, applied only in SIPC cases where investors wanted the option of being reimbursed with actual shares of stock, rather than the cash value of the securities in their account.

  The March 4 deadline did not apply to the Madoff victims, he continued, because—as far his team could tell, going back at least thirteen years—no securities had ever been purchased for their accounts. So the only relevant deadline for them was July 2.

  It was almost like that painful old joke about how a drill sergeant broke the news of a family bereavement to a private under his command: “Everyone with parents living, take a step forward. Not so fast, Private Jones.”

  Everyone who thinks that at least a few blue chips, some US Treasury bills, a little cash might be left in their Madoff accounts, take a step forward. Not so fast, everybody . . .

  “That means that for claims purposes, the November 30th statement that said you had various securities is not what we are going to rely on,” Picard said. “This is going to be a case in which we’re going to be looking at cash in and cash out.”

  The headlines the next day spread the news that Picard’s team had searched all available records going back to 1995 and some records dating to 1993 and had found no evidence that Madoff had ever purchased any securities for his clients.

  It had been a Ponzi scheme, pure and simple, the largest and most far-flung fraud in financial history—but, at heart, a classic Ponzi scheme, where Peter was robbed to pay Paul. And, as Picard saw it, there were clear rules for dealing with a Ponzi scheme, rules that had absolutely nothing to do with the calculations on the final account statements tucked hopefully into the handbags and briefcases propped beside seats in this bristling auditorium.

  Many of the victims disagreed—and would disagree forever.

  Two and a half weeks later, on Tuesday, March 10, a silver sedan pulled up outside the north entrance to the federal courthouse on Worth Street in Manhattan. The side street off Foley Square was thickly lined with satellite trucks and television cameras. Photographers pushed against the metal barriers that created a walkway between the car and the building’s entrance.

  A security guard helped Bernie Madoff climb out of the rear of the car and hurried him towards the courthouse. US marshals watched from the perimeter, their eyes darti
ng, alert for danger, as Madoff’s eyes remained fixed on the pavement five feet ahead of him. He was a study in grey—a soft charcoal suit, a dove-coloured knit tie, his silver hair brushed back in wings framing his temples, his face ashen and empty.

  A few minutes before 3:00 PM, he was ushered through a side door into the courtroom of Judge Denny Chin, a boyish-looking man in his mid-fifties. Born in Hong Kong but raised in New York, Judge Chin was the first Chinese American to have been named to the federal bench in Manhattan. He had drawn the Madoff case by lottery, and this was Madoff’s first appearance before him.

  Prosecutor Marc Litt, his colleague Lisa Baroni, and FBI special agent Ted Cacioppi, who had arrested Madoff three months earlier, were waiting at the table nearest Judge Chin’s elevated bench.

  At the crowded table behind them, Madoff’s legal team was joined by a new attorney, Peter Chavkin. Wiry and alert, Chavkin bore a strong resemblance to the Las Vegas tycoon Steve Wynn—except that today, he was somber and unsmiling.

  Chavkin was there to assure Judge Chin that Madoff had been independently advised about the conflicts facing Ike Sorkin, which included not only Sorkin’s parents’ investments with Madoff and his old law firm’s ties, but also his representation of Avellino & Bienes in 1992.

  Sorkin had been negotiating with prosecutors on Madoff’s behalf since the day of the arrest. The previous Friday, March 6, the judge had been notified that Madoff had waived indictment and would be confronted only with a less detailed document called a “criminal information”. The waiver was the first hint that Madoff would likely plead guilty at some point rather than stand trial.

  But first Judge Chin had to be sure that Sorkin’s conflicts of interest would not taint the plea process, which could hand Madoff a trump card for a successful appeal.

  Madoff was sworn in, and Judge Chin began questioning him about the conflicts, repeatedly asking the same question with slight variations: Does Mr Madoff understand that he is entitled to a lawyer free of any conflicts or divided loyalties? He does. And does he nevertheless wish to continue with Mr Sorkin as his lawyer? He does. And does he understand that he is thereby waiving his right to cite these conflicts in appealing any aspect of his case? He understands.

  Judge Chin was satisfied that Madoff had knowingly waived his right to change lawyers. He then quickly walked the defendant through the steps involved in waiving indictment and determining the amount of restitution that would be imposed.

  Finally, he dropped the day’s firecracker.

  “Now, I gather that the expectation is that Mr Madoff will plead guilty to the information on Thursday?” the judge said.

  “I think that’s a fair expectation, Your Honor,” Ike Sorkin answered softly.

  “And that would be to all eleven counts of the information?”

  “Yes, Your Honor.”

  No one on the crowded courtroom benches had seen the charges or knew that a guilty plea was imminent. Judge Chin asked Marc Litt to review the felony counts in detail.

  “Yes, Your Honor, I’m happy to do so,” Litt said. “They are securities fraud, investment advisor fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan.” He added, “There is no plea agreement with the defendant.”

  Judge Chin quickly pressed him: “And that means that if Mr Madoff wishes to plead guilty on Thursday, as far as the government is concerned, he would have to plead guilty to the entire information?”

  Litt answered, “That’s correct.”

  The judge leaned back, still looking at Litt. “All right, would you tell us what the exposure is in terms of the maximum possible sentence of imprisonment, taking the eleven counts together?” he asked.

  The prosecutor responded, “In total, it’s 150 years.”

  Two days later, hundreds of victims gathered outside the federal courthouse well before dawn, waiting for seats in Judge Chin’s courtroom on the twenty-fourth floor. A large overflow room had been set up on the first floor, where TV screens would display the proceedings live.

  Security was tight. The streets and pavements were a circus of television cameras, satellite trucks, reporters, and photographers. Helicopters hovered above, tracking the progress of Madoff’s 4x4 from his apartment.

  When the courtroom was finally unlocked, several newspaper sketch artists, smudged with coloured chalk and gripping giant clipboards, claimed the first row of the jury box. Reporters squeezed in behind them.

  At 9:36 AM, prosecutors Marc Litt and Lisa Baroni arrived and took their seats at the table nearest Judge Chin’s bench. Litt was wearing a navy suit and white shirt, with a dotted burgundy tie. Baroni wore a black skirt and jacket, her lanky dark blond hair pulled back from her face. Ted Cacioppi, his boss Keith Kelly (the head of the FBI’s Madoff task force), and two other FBI agents in business suits joined the prosecutors at the table.

  At 9:47 AM, Bernie Madoff and Ike Sorkin entered the well of the courtroom from a side door opposite the jury box. As on Tuesday, Madoff was dressed in grey. Unlike Tuesday, he wore no watch or wedding band.

  The whole defence team was in attendance. At the centre of the table, Madoff sat between the white-haired Sorkin and the young dark-haired Mauro Wolfe, who leaned over to pat his back softly. Madoff sat quiet and still, his hands clasped in his lap. Sorkin positioned a microphone in front of his client and leaned over to show him how to turn it on and off.

  At 10:00 AM, Judge Chin swept in and took his seat. Introductions were made, and then Madoff was sworn in.

  “Mr Madoff,” Judge Chin asked, “do you understand that you are now under oath and that if you answer my questions falsely, your untrue answers may later be used against you in another prosecution for perjury or making false statements?”

  Madoff answered softly, “Yes, I do.”

  “Try to keep your voice up so that I can hear you, please,” Judge Chin said.

  In a stronger voice, Madoff repeated, “Yes, I do, Your Honor.”

  Sorkin asked if a court attendant could provide some water. Some was fetched and put within reach.

  After a few preliminaries, Judge Chin reminded Madoff that he was waiving his right to be confronted with a formal indictment and had agreed to respond to the less detailed criminal information, laying out the government’s case against him. “Correct?” the judge asked.

  “Yes.”

  “And how do you now plead to the information, guilty or not guilty?”

  Madoff answered, “Guilty.”

  The government lawyers described the charges, which took some time.

  Finally, Judge Chin said, “Mr Madoff, tell me what you did.”

  With Ike Sorkin standing by him, Madoff unfolded a typewritten statement and began to read it, fumbling slightly on the legal name of his firm: “Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC. . . .

  “I am actually grateful for this opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest, and this day, would inevitably come.”

  His voice was flat, controlled. “I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done. I am here today to accept responsibility for my crimes by pleading guilty.”

  Although Madoff claimed to be explaining how he had carried out and concealed his fraud, parts of his statement were far from the truth.

  “I want to emphasize today t
hat while my investment advisory business, the vehicle of my wrongdoing, was part of my firm, Bernard L. Madoff Securities, the other businesses my firm engaged in, proprietary trading and market making, were legitimate, profitable, and successful in all respects. . . .

  “To the best of my recollection, my fraud began in the early 1990s. . . .”

  He alone had caused false documents to be created and posted to clients and had wired money between New York and London to give the illusion of trading activity, he said.

  Some of those statements—about the financial health of his firm, the starting date for his crime—would always be clouded by doubt. Others—such as the assertion that he had acted alone—would soon be revealed as outright lies.

  When Madoff had completed his fanciful description of his crime and sat down, Judge Chin turned to Litt.

  “Does the government believe that Mr Madoff’s admissions cover the elements of the crime of each count?”

  “Yes, Your Honor,” Litt answered. “The government does not entirely agree with all of the defendant’s description of his conduct. However, the government does believe that his allocution does cover each of the elements of the charged offences.”

  The government knew that Frank DiPascali was already in negotiations to plead guilty and to name names. Still, Litt was not yet free to dispute publicly Madoff’s claim that he had carried out this crime alone. And, despite the obvious lies, it would be silly to waste resources prosecuting Madoff for perjury, given all the other work that needed to be done.

  Madoff’s version of his crime was clearly aimed at protecting his employees and preserving as much of his family’s wealth as possible, since the government could not claim assets accumulated before the fraud began. His story was not the whole truth he swore he would tell. It was, instead, a clear declaration that he did not intend to finger anybody in this crime except himself.

  Given a chance to speak, a Madoff victim named George Nierenberg insisted that the government should have charged Madoff with conspiracy, since it was obvious that Madoff could not have produced all the paperwork by himself. Maureen Ebel, a widow who had lost all her savings, urged the judge to reject Madoff’s guilty plea and force him to stand trial so that “we have more of a chance to comprehend the global scope of this tremendous crime.”