Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  When the judge prompted Marc Litt to respond to the victims’ statements, he asked for a moment to consider and then answered. “I think the only thing the government would say,” he responded, “is that the government’s investigation continues. It is continuing. A lot of resources and effort are being expended, both to find assets and to find anyone else who may be responsible for this fraud.”

  The man who could answer the government’s questions was sitting silently at the defence table.

  What then followed was a one-sided dialogue about bail. When Ike Sorkin described the security cordon set up around Madoff “at his wife’s expense,” victims in the courtroom laughed bitterly at the notion that Ruth had any money but theirs. Judge Chin called for order.

  After Sorkin’s long entreaty, Litt rose to his feet to respond. Judge Chin waved to him to remain seated.

  “I don’t need to hear from the government,” he said. “It is my intention to remand Mr Madoff.”

  A cheer erupted. “Ladies and gentlemen, please,” Judge Chin said, with a sharp glance at the crowded courtroom. Silence returned, but it had a different quality now, no longer anxious and hostile but patient and relieved. The judge continued: “He has incentive to flee, he has the means to flee, and thus he presents the risk of flight. Bail is revoked.”

  After a few more procedural arrangements, he looked at the defendant and said, “Mr Madoff, I will see you at sentencing. We are adjourned.”

  Madoff stood at the defence table, looking straight ahead as a US marshal in a business suit approached him. At a soft word, Madoff brought his hands together behind his back. With a barely audible click, the handcuffs were snapped in place.

  Bernie Madoff was led silently through a side door opening into the white-tiled corridor that led to a life behind bars.

  13

  NET WINNERS AND NET LOSERS

  On Wednesday, March 18, a week after the Madoff media circus, David Friehling and his lawyer arrived quietly and unnoticed at the federal courthouse in Manhattan.

  Tall and trim in a pale taupe suit, Bernie Madoff’s accountant was turning himself in to face the criminal fraud charges that had been made public that morning. After the usual processing by the FBI and the US Marshals, Friehling was brought before a federal magistrate, where he pleaded not guilty and was released promptly on $2.5 million bail.

  The previous Thursday, the day Madoff pleaded guilty, David Friehling’s father-in-law and retired partner, Jerry Horowitz, died in Palm Beach Gardens, Florida, after a long battle with cancer. Horowitz had been Madoff’s auditor as far back as the 1960s, when he worked in Manhattan alongside Saul Alpern, Frank Avellino, and Michael Bienes. Even after he set up his own practice, Horowitz continued to handle the independent audits that Madoff’s firm submitted to the SEC each year. And he regularly invested a substantial portion of his own wealth, and that of many family members and friends, with Madoff.

  It wasn’t a strictly kosher arrangement. An accountant cannot be considered “independent” if he invests his money with the firm he audits. But everyone at Alpern’s firm invested with Madoff.

  In the early 1990s, as Jerry Horowitz focused more on retirement, Friehling took over the practice and moved it to a small office in New City, New York, about thirty miles north of Manhattan, where he and his wife had moved in 1986. He also took over as the independent auditor for Madoff’s brokerage firm—and continued to invest his own and his family’s savings with Madoff, as his father-in-law had done.

  Released on bail, Friehling strode quickly from the courthouse towards the black 4x4 waiting at the kerb, ignoring questions shouted at him by several reporters. His defence lawyer, Andrew Lankler, platinum-haired and silent, climbed into the backseat with him, and the car sped away. Lankler had worked hard to avoid the media spectacle of an arrest at home by the FBI and a “perp walk” at the courthouse. But his negotiations with the prosecutors remained unsettled, as it was still unclear how much Friehling could help them in their search for Madoff’s accomplices. The charges brought against Friehling on March 18 were just the first hand in this poker game.

  The arrest, the first public development in the criminal investigation in three months, did not answer many questions about the fraud. Indeed, the prosecutors did not clearly assert that the forty-nine-year-old Friehling even knew about the Ponzi scheme. He was accused only of aiding and abetting Madoff’s fraud by falsely certifying that he had done independent professional audits of the Madoff firm when he hadn’t.

  Neither the prosecutors’ charges nor an SEC lawsuit filed the same day mentioned Friehling’s curious meeting in November 2005 with the due-diligence team from the Optimal funds—the meeting, at the height of that near-death cash crisis, when he implausibly claimed to have verified Madoff’s account balances with the DTCC.

  But the SEC attorneys and the federal prosecutors said that their investigations were continuing.

  Meanwhile, at SIPC, the question was still hanging in the air, confronting Irving Picard everywhere he went: “Where did the money go?”

  It was a constant refrain on Web sites and talk show discussions, with participants firmly rejecting the notion that all those billions of dollars had just vanished. Wall Street sources would occasionally phone reporters with intriguing tips and theories: Madoff had converted the billions into small-carat diamonds and stashed them in safe-deposit boxes around Europe; or he’d bought luxury properties around the world through shell companies based in Panama; or he’d been blackmailed by Russian mobsters; or he’d been part of an illicit plot to secretly finance “black ops” missions by the Mossad, Israel’s national intelligence agency. How else could one person consume so much money?

  Even ignoring the fictional $64.8 billion on the final account statements, most of which had never actually existed in the first place, there still was an enormous amount of actual currency to be accounted for. Picard’s experts estimated that the sum of all the out-of-pocket cash losses among Madoff’s victims—money those victims paid in but never withdrew—was about $20 billion.

  But Picard knew where most of that money had gone.

  Aside from the hundreds of millions that Madoff diverted for his own use over the years, the cash handed over by investors had been paid out to other investors as bogus investment earnings. Picard had the bank records showing when the cash was withdrawn and by whom; and he knew whose account in which country received the money. By his estimate, more than $6 billion was withdrawn from the Ponzi scheme between the collapse of Lehman Brothers in September 2008 and Madoff’s arrest in December. In the scheme’s final year, withdrawals totalled nearly $13 billion—most of which had flowed in since early 2006.

  Still, knowing where the money went was one thing, and getting it back was another.

  While the federal bankruptcy code allowed Picard to seek the return of cash withdrawn within two years of the Madoff firm’s bankruptcy filing, New York State law extended that window to six years. (The bankruptcy filing was actually made on December 15, 2008, but the court ruled that the official filing date would be December 11, the day of Madoff’s arrest.) Withdrawals in the scheme’s final three months were called “preference” payments, and those were relatively straightforward to recover. Withdrawals made in the preceding five years and nine months were generally known in bankruptcy court as “fraudulent conveyances”, and recovering them usually involved a court fight.

  As those who were well versed in bankruptcy law knew, the term fraudulent conveyance referred to Madoff’s own fraudulent motives for conveying the cash to other people—namely, he did so to perpetuate his Ponzi scheme. The word fraudulent did not refer to the motives of the people to whom the cash was conveyed, those who had simply withdrawn what they thought was their own money. But many investors were not familiar with the legalese, and they were outraged when Picard’s letters to them referred to their good-faith withdrawals as “fraudulent conveyances” and directed them to contact his office to discuss returning the money. />
  Under bankruptcy law, it didn’t matter how pure an investor’s motives were. Picard was allowed to sue to recover all “preference payments” and any money “fraudulently conveyed” to others by Madoff in that six-year window. In bankruptcy jargon, these lawsuits are known as “clawbacks”, and for the small Madoff investors, they were just as frightening as they sounded.

  Picard hated the term clawback suits, but by the end of June he would file eight of them against the giant investors and feeder funds whose individual withdrawals totalled hundreds of millions and, in some cases, billions of dollars.

  He sued the Kingate funds, run by Carlo Grosso, for the return of $395 million, including nearly $260 million withdrawn in the last ninety days of the Ponzi scheme’s life.

  He sued to recover about $1 billion from dozens of accounts set up by Stanley Chais, who was now eighty-three years old. The first Madoff feeder fund entrepreneur had relocated from Los Angeles to New York, where he was undergoing medical treatment. Even after the Madoff scandal broke, Chais had been honoured in absentia for his lifetime of generosity to a host of major Israeli nonprofits, including the Weizmann Institute of Science, Technion–Israel Institute of Technology, and the Hebrew University of Jerusalem.

  Picard sought about $250 million from Cohmad Securities; its cofounder Maurice “Sonny” Cohn; his daughter and the firm’s president, Marcia Beth Cohn; and a long roster of brokers who had worked there. He claimed that the brokerage firm had knowingly served as the sales force for Madoff’s Ponzi scheme, allegations that the shattered firm and the Cohns themselves adamantly denied.

  Picard sought another $3.5 billion from the Fairfield Sentry funds, operated by Walter Noel, Jeffrey Tucker, and their partners at the Fairfield Greenwich Group. With other smaller funds to operate, Fairfield Greenwich had not been completely wiped out by its Madoff losses. But the entire firm had denied any knowledge of Madoff’s crime, and it had armed itself with lawyers, who were digging in for a long fight.

  And on May 12, in the most ambitious of these initial lawsuits, Picard sued Jeffry and Barbara Picower for more than $6.7 billion—a staggering sum that, on further investigation by Picard’s team, would be raised to $7.2 billion a few months later. No one else—not even Madoff and his entire family—had withdrawn anything remotely close to that sum of money from the Ponzi scheme.

  The revelations in the Picower lawsuit were catnip for conspiracy theorists. Had Picower been pulling money out to hide it for the Madoff family? Madoff denied this—if it were true, surely he would have reclaimed the money to help keep his scheme afloat in those final months. Moreover, Madoff would have realized that his family’s future sources of income would be scrutinized with a microscope by law enforcement for the rest of their lives. Others speculated that perhaps Picower was the actual mastermind of the Ponzi scheme all along and that Madoff was just his bagman. Madoff denied this, too—if it were true, certainly Madoff would have exposed Picower in exchange for leniency once he was confronted with that deadly 150-year jail term. There was simply no explanation that made much sense—except, as Madoff himself suspected, that Jeffry Picower was shrewd enough to know that he shouldn’t leave his possibly fictional profits in Madoff’s hands for very long.

  By law, Picard had until December 11, 2010, to file his clawback suits. Before the end of the summer of 2009, he had gone to court to demand the return of $13.7 billion, all of it from giant feeder funds or enormously wealthy individuals whose lawyers were prepared for a long siege of motions and objections that would end either with a verdict in court or with a negotiated settlement. They could run out the clock and increase the cost of litigation, but actually filing the lawsuits cost Picard about the same whether he sued a giant or a midget. So it made no sense to start suing midgets when there were still so many giants walking around with so much Madoff money in their pockets.

  Nevertheless, many small investors said they were terrified that he would come after them. Their fear was a signal of just how adversarial their relationship with Picard had become in the months since the February 20 meeting. The increasing hostility saddened him and frustrated his colleague David Sheehan. As they saw it, Picard was being as accessible, flexible, and sympathetic as the law allowed. He replied to thousands of e-mails and phone calls, or referred them to someone on his staff. It was a fiercely complicated international bankruptcy case, but Picard felt he was doing his best to explain those complexities to the people most grievously affected by them. He rarely lost his temper, despite the ugly accusations flung at him almost daily.

  However, there were two bones of contention that he simply could not take off his plate: the slow pace at which claims were being paid and the way he was calculating losses.

  By the end of June, after more than six months of work, fewer than 600 of 13,705 claims had been fully processed. It was an infuriatingly small number, and Madoff’s more desperate victims were outraged by it.

  This situation was not entirely the trustee’s fault. Since most of Madoff’s records were antiquated, Picard’s team had spent hundreds of hours and tens of thousands of dollars converting millions of pages of paper and filmy microfiche into digital records that could be examined and distributed by computer. The FBI was carefully screening the records for possible accomplices hiding behind fictitious account names and had put a hold on payments to some claimants. The Justice Department had prohibited Picard’s team from interviewing more than four dozen people, including nearly two dozen employees of the firm. Moreover, bankruptcy is not a speedy process in the best of times.

  Yet Picard’s adversaries blamed him personally for the slow pace of payment because they believed it was a direct result of how he was calculating investor losses. They argued that the costly and time-consuming reconstruction of customer accounts would not be necessary if he simply accepted the final account statements as the basis for SIPC claims, as they believed he was required to do by law. The best way for Picard to speed up the claims process, as they saw it, was to drop his insistence on the “cash in, cash out” approach.

  Picard’s team eventually would speed up the claims-paying process, creating a computer network that lawyers at several different locations could work on simultaneously. But the trustee and his adversaries were simply at an impasse over how he was calculating losses. He believed he was correctly interpreting the law, and thousands of investors believed he was dead wrong.

  SIPC acknowledged that the delays were creating severe distress for some nearly destitute investors. Pressed by several investors’ lawyers to craft some sort of interim relief, the organization established a novel “hardship” programme in May that was supposed to fast-track especially urgent claims—the first time it had ever done this, or ever needed to. But the unfamiliar and cumbersome rules that applied to this new programme only further infuriated some elderly investors who needed help.

  Picard stuck to his guns. Claims were going to be calculated on a “money in, money out” basis. Under that approach, several thousand accounts, affecting unknown thousands of people, had no “net equity” because the owners of the accounts had already taken out more cash than they had put in. In the painful idiom of the bankruptcy court, they were “net winners” and were not entitled to get anything from the estate until after all the other investors had recovered their initial cash investment—which, in this case, seemed like legal shorthand for “never”. More significantly for those in acute need, the net winners were not eligible for the cash advances of up to $500,000 from SIPC.

  Many bankruptcy law experts had expected this outcome. In their view, it was the only court-tested way to calculate Ponzi scheme losses. But some Madoff investors were convinced that SIPC’s involvement changed those established rules of Ponzi scheme liquidations, and a few were willing to ride into battle to prove it. One of them was a New Jersey attorney named Helen Davis Chaitman.

  From her CV, Helen Chaitman seemed an unlikely candidate for the role of Joan of Arc in this war over how to calculate n
et equity. She was a graduate of exclusive Bryn Mawr College who decided to go to law school in the mid-1970s. She was in private practice with the firm of Phillips Nizer, and she divided her time between its Manhattan offices and a small outpost in suburban New Jersey. Her specialty was lender liability, a substratum of bankruptcy law as arcane as SIPC liquidations; she had even written a respected textbook on the topic.

  Tall, thin, and pale, with a short bob of strawberry blond hair, Chaitman looked much younger than her years and spoke in a soft, calming voice. But she was a tireless and fiercely tenacious advocate for her clients. In her pro bono work, she stood firmly with the underdog, and in all her legal battles she had a talent for powerful, persuasive language—inside the courtroom and out.

  And, in this battle, she had “skin in the game”. On the recommendation of a friend, she had invested all her savings in 2004 with Madoff. The strategy looked “safe and conservative,” she later wrote. “I told my friend the only risk was that Madoff was a fraud,” she continued. “My friend laughed and said that Madoff had an impeccable reputation in the industry, had been chairman of the Nasdaq.”

  From the day of Madoff’s arrest, Chaitman was determined to salvage whatever she could from the rubble and to hold somebody accountable. She focused her arguments on a knotty appellate case called In re New Times Security Services, which dealt with a much smaller Ponzi scheme liquidated by SIPC years earlier. It was a complex, muddled case that featured three sets of victims, each with distinctive circumstances; an internecine dispute between SIPC and its own trustee; and two separate visits to the appeals court.