But all the earlier lawsuits and settlements were eclipsed by a case filed on Friday evening, December 10. In an ambitious 161-page complaint, Sheehan’s team sued the Austrian banker Sonja Kohn, members of her family, her flagship firm Bank Medici, her major European banking partners, and a battalion of trusts, partnerships, shell companies, and individuals—more than three dozen defendants in all. Those defendants who chose to comment denied the allegations. Uniquely among the lawsuits filed on Picard’s behalf, this case asserted civil racketeering charges against the defendants, claiming that Kohn had knowingly helped steer $9 billion into Madoff’s hands, introducing him to new sources of cash for his Ponzi scheme in exchange for tens of millions of dollars in secret fees.
The lawsuit sought nearly $20 billion in recovered cash and damages. But since the court could order the losing defendants in a racketeering case to pay triple damages, the Kohn case had the potential to produce up to $60 billion for Madoff’s victims. Lawyers for Kohn promptly denied that she had ever known, or even suspected, that Madoff was operating a Ponzi scheme and said that she and her family would vigorously contest the trustee’s claims in court.
Later that night, just hours before midnight, the last big case was filed—a case rooted in the first days of Madoff’s fame as a market wizard. Its primary defendants were Frank Avellino and Michael Bienes, the two accountants whose lives had intersected in the accounting firm run by Madoff’s father-in-law. Picard now sought $900 million from them, their wives, and a host of family partnerships and trust funds. The lawsuit accused the two accountants of knowingly pocketing millions of stolen dollars that Madoff had paid as their reward for bringing investors back to him after the SEC shut down the Avellino & Bienes operation in 1992. Their lawyers did not comment but prepared to battle the accusations in court.
One tiny flake in the blizzard of litigation that week was a case seeking money from various trust accounts set up for the benefit of Bernie Madoff’s grandchildren, the children of his sons, Mark and Andrew.
The lawsuit had not been unexpected, a person close to Mark Madoff said later. It came as the renewed publicity about the December 11 litigation deadline and the approach of the scandal’s second anniversary were shoving the Madoff sons back into the spotlight.
It was not a place where Mark Madoff had ever felt comfortable.
By this time he was a defendant in at least nine federal lawsuits, including several others filed by Picard—who had publicly characterized him as negligent, derelict, and incompetent. Picard’s scorn hadn’t hurt as much as the enforced silence of those former Wall Street colleagues who might have publicly defended him, a friend said. Others recalled that Mark had always been sensitive to criticism and inclined to brood over his grievances, to visibly fret over problems. “That’s why I never believed he knew about the fraud,” one family friend and former business associate said. “He was always a nervous wreck. He could never have stood it—keeping a secret like that would have torn him apart.”
Neither he nor his brother, Andrew, had spoken to their parents since the day of their father’s arrest. Still, Mark’s estrangement from his gilded past seemed to cut deeper than his brother’s. Within a short time, Andrew was unfazed by the inevitable raised eyebrows of waiters looking at his credit card and airport security guards examining his driving licence; yes, he would shrug, he was that Andrew Madoff. He told friends he had never met anything but courteous sympathy. But Mark did not seem willing to risk the ill will of strangers; he had agreed with his wife’s decision to change her own and their children’s last name from Madoff to Morgan.
“He had always been so proud of his name and being the guy who was Bernie Madoff’s son,” another friend recalled. “And then afterwards all anyone ever saw in him was that he was Bernie Madoff’s son.”
By the autumn of 2010, however, it seemed to friends that he had gotten his bearings at last. Accepting that he could not openly work on Wall Street, he was maintaining a network of friends in the financial industry. One of them provided free desk space when he needed it, and many were happy to see him at lunch to talk about the business. Picard held his purse strings—his assets were frozen, and his spending was subject to the trustee’s supervision—but he was looking for new ways to support his family.
His primary focus was a new business, an online property newsletter called Sonar Report, which he hoped would be the first in a fleet of specialty online financial publications. Each day he would rise at 4:00 AM to scour the Internet for relevant news items, assemble the newsletter, and, at around 9:00 AM, send it out electronically. It was a clever and useful service, and some of its regular readers were willing to sign up for paid subscriptions. But most of his readers had no idea there was a Madoff involved—he felt he had to purge his name from the newsletter’s pages and incorporation records.
The issue for Friday, December 10, was sent out a few minutes past 9:00 AM, as usual. Mark’s wife, Stephanie, and their four-year-old daughter were in Florida with his mother-in-law, visiting Disney World, leaving him to care for their twenty-two-month-old son and the family dog, an engaging Labradoodle named Grouper. As the day went on, Mark talked with friends and kept scheduled appointments. He seemed fine—or, at least, no more upset than usual about the fresh media attention focused on him that week. He nodded graciously when an employee at the garage that housed his family cars thanked him for his annual Christmas gratuity. He walked the dog for about ten minutes that evening, his doorman later said, and returned to the apartment for the night.
Awake at 4:00 AM, as usual, on Saturday—the second anniversary of his father’s arrest—he sent a series of e-mails. One went to his lawyer, Marty Flumenbaum: “Nobody wants to believe the truth. Please take care of my family.” He wrote his wife, telling her, “I love you,” and urging her to “please send someone” to take care of their son.
When Stephanie saw the notes several hours later, she called her step-father in New York and asked him to go to the apartment immediately. He arrived to find Mark’s body hanging from a black dog leash attached to a metal beam in the living room ceiling.
It clearly was suicide—an autopsy would later confirm it, but evidence at the scene was proof that Mark had been determined to end his life. Police found a snapped vacuum cleaner cable suspended from the same metal beam, and a discarded noose fashioned from that cable was on a table nearby. Mark’s son and the family pet were found in another room in the apartment—“unharmed”, in the vocabulary of police reports.
A person who had remained close to Mark since childhood said he believed that the approaching anniversary, and the attendant surge in speculation about Mark’s guilt or innocence, had “reopened the wounds. It must have just been more than he could bear.”
Mark Madoff’s suicide, at age forty-six, was another blow for a shattered family. Ruth was heartbroken, her lawyer said. Bernie wept at the news, his lawyer said later. Neither could attend a funeral—even if they had been welcome, the fierce media clamour made it impossible to hold one. Mark’s cousin Shana and uncle Peter would have been welcome, but their lawyers still advised against any contact. Mark’s wife and brother arranged a private cremation and a quiet gathering with their families and a few friends; Ruth was not included.
Still standing in the rubble was Andrew Madoff, a cancer survivor at age forty-four who seemed to be less haunted by the past than his brother had been. Just a few weeks before his brother’s death, Andrew and his fiancée, Catherine Hooper, had gathered friends for a Thanksgiving dinner at their apartment on the Upper East Side of Manhattan. Music had always been part of his life, and he spent more time at the piano, working with his longtime instructor. Hooper had launched a new business advising families on strategies for dealing with disastrous disruptions in their lives. As she described it, she and Andrew were determined to deal wisely with the disastrous disruption called the Madoff scandal. “When all of this happened, we decided that we weren’t going to sit around all of the time with our la
ptops on our laps reading blogs,” Hooper later told a reporter. “We were not going to sit around talking about how horrible this is.”
Perhaps it all came down to the habits of mind revealed in that first searing confrontation two years earlier. When Bernie Madoff confessed, as he recalled in one prison interview, Andrew wept and gave his father a last embrace, but Mark’s almost inarticulate anger burned white hot from that moment on. While Andrew’s lawyers dealt with lawsuits and weighed settlement negotiations with Picard, Andrew seemed to get on with his life—still willing to be a Madoff, but not willing to be defined by his father’s crime.
By the time the litigation deadline arrived, Picard had filed claims seeking more than $90 billion—although it could take years of litigation to collect even some fraction of that amount. That formidable pursuit of assets was encouraging to the net losers in the case—and the occasional Wall Street speculator who had bought up valid claims for twenty or thirty cents on the dollar, hoping to recover more when the case was finally settled. But the blizzard of big-ticket lawsuits brought a bitter chill to the net winners, who, under prevailing law and court decisions, seemed unlikely to share in a penny that Picard might retrieve. Unless and until all the net losers recovered all their lost cash, the net winners simply had no place at the table.
With their claims denied by Picard, and his action upheld in the bankruptcy court and not yet reviewed in the Court of Appeals, some net winners turned to the US Congress for help. Since early in the year, they had been seeking legislation to require SIPC to accept the final account statements of Ponzi scheme victims as proof of the amount they had lost, regardless of how much cash they had paid in or had taken out.
By summer, some net winners were lining up, reluctantly, behind a bill called “The Ponzi Victims Bill of Rights”. The bill was, at best, half a loaf for them because it did not include the “final account statement” rule that was at the heart of their demands. But the leaders of one organized group of victims argued that it would at least spur hearings and an investigation that, “combined with our extensive lobbying efforts, will enable us to pursue necessary modifications.”
Despite their lobbying, the bill did not emerge from committee before the end of the congressional term. But, in late December, a few supportive members of the Congress promised to introduce a stronger replacement for the bill after the new legislative term began in January 2011.
As written, this new bill would prohibit a SIPC trustee from filing any clawback cases against innocent Ponzi victims and require him to honour the investors’ final account statements, unless they were Wall Street professionals who “knew . . . or should have known” about the fraud but did not warn regulators about it.
This proposed “Equitable Treatment of Investors Act” did not prohibit all clawback lawsuits. But the bill, submitted in February 2011, would bar a trustee from trying to recover money that an innocent investor withdrew from a Ponzi scheme before it collapsed. The ban would shrink the universe of investors from whom the trustee could recover cash, thereby reducing the odds that net losers could be made whole. Most intriguingly, the bill codified the notion that only brokers and investment advisers belonged in the category of those who “should have known” that Madoff was a crook.
Under the bill, Picard would have been barred from suing some of Madoff’s richest and most sophisticated investors, who were neither brokers nor money managers. Moreover, these “civilian” investors had final account statements showing huge balances; they could have filed claims for hundreds of millions of dollars, further reducing the cash available for net losers. Picard would have had to honour those claims unless he could prove the individuals actually knew about Madoff’s fraud. By contrast, if a newly licenced mutual fund salesman was a net winner in a Ponzi scheme, the bill seemed to offer him little protection against claw-backs, no matter how unsophisticated he might be.
Some of the net winners could justifiably argue that Picard should not try to recover money they didn’t have or could not repay without beggaring themselves. But if a net winner qualified under SIPC’s hardship programme, Picard left him alone. Within weeks of the litigation deadline, more needy net winners had applied and qualified, and the cases against them were dismissed. By December, Picard had foregone his claims against more than two hundred net winners who could not afford to repay their fictional profits.
This anti-clawback bill, however, did not seek to extend SIPC protection to indirect investors in a Ponzi scheme. The thousands of people who had invested through Madoff feeder funds were as frustrated with SIPC as the net winners. Their claims, too, had been denied by the trustee, not because they had received fictional profits but because they hadn’t had accounts in their own name at Madoff’s brokerage firm. The feeder fund that took their money was the “customer” eligible for SIPC relief. To recover any money from the bankruptcy, they would have to get it from their feeder fund, assuming the feeder fund had a valid claim.
More than ten thousand indirect investors filed claims with Picard and were turned down. Whether Picard was entitled by law to deny their claims was one of the knotty problems that remained before the courts two years after Madoff’s arrest. Indirect investors had trusted the feeder funds with their initial investments—and, under prevailing law, would have to trust them, or some corporate parent standing behind them, for any recovery from the Madoff bankruptcy. In the case of many small or bankrupt feeder funds, unfortunately, that was a bleak hope that assured investors of little except years of litigation.
In the days and weeks after Madoff’s arrest, the search for his accomplices dominated the public’s attention. By the second anniversary of that arrest, he and two other men—the indispensable Frank DiPascali and the negligent accountant David Friehling—had confessed. Five other people stood accused of sustaining the Ponzi scheme, but all had proclaimed their innocence and were preparing to fight the accusations in court. Prosecutors insisted at every opportunity that the criminal investigation was continuing, but they also explained that the burden of proving guilt “beyond a reasonable doubt” was far heavier than the burden of proof required in civil cases filed in bankruptcy court, no matter how conclusive and dramatic the allegations in those cases seemed.
The days and weeks after Madoff’s arrest also ignited angry demands for reform—at the SEC, at SIPC, and in the courts where the two agencies’ work was carried out. Under Mary Schapiro’s chairmanship, the SEC had undergone one of the most sweeping reorganizations in its history. Its enforcement branch was given new tools—an expanded bounty system for whistle-blowers, a streamlined process for serving subpoenas, a simpler management structure that put more boots on the ground in the fight against fraud, improved training programmes for its lawyers and investigators—and more money to deploy them. Future budget cuts could undermine these gains, but there was clearly a new fearlessness in the agency’s enforcement agenda and broader support for its mission in Congress—where, just two years earlier, one congressman had condemned the SEC as “the enemy”.
Schapiro sat on a Fordham Law School panel in late September 2010 with two former SEC chairmen—both Republican appointees—who publicly praised her for almost single-handedly preserving the commission’s independence when it was most at risk. “If you didn’t do anything else but save the agency, it’s a pretty good start,” said Richard Breeden, who headed the commission from 1989 to 1993. Harvey Pitt, the chairman from 2001 to 2003, seconded the compliment, saying that Schapiro had stepped in “at a time of real crisis.”
At SIPC, change came far more slowly but seemed inevitable. Prodded by congressional committees weighing various legislative proposals, some wiser than others, the organization itself set up a task force to study and address the many weaknesses the Madoff scandal exposed. As for the bankruptcy and litigation process, the questions posed by the Madoff case would take years to resolve. How should losses be calculated? Who had the right to file claims? What responsibility, if any, did hedge fund managers,
accountants, bankers, and financial advisers have for failing to detect this massive fraud? Could the SEC itself be held accountable in the courts?
Finally, in the days and weeks immediately after Madoff’s arrest, recovering anything for his victims looked like something only a real wizard could achieve.
Just over 16,500 claims had been filed by the end of 2010. About two-thirds of those were from indirect investors who could not collect anything unless the courts ultimately decided otherwise. About 120 of the claims were withdrawn. More than 500 claims remained in the pipe-line—these were the largest net losers, with combined losses that Picard estimated at $14 billion, although he knew that this figure could change as disputes were resolved. About half of those thorny cases were already in litigation, and many more probably would be.
Of the remaining claims, by year end Picard had denied more than 2,700 claims from net winners and approved just over 2,400 claims from net losers, whose verified cash losses totalled just under $6 billion.
So, on the second anniversary of Madoff’s arrest, Picard had about $2.5 billion to cover losses he estimated conservatively at $20 billion—a dime on the dollar. He had hopes of paying more, of course, but you can’t put hope in the bank and write cheques on it. Sheehan’s indefatigable legal team had sued various defendants for $90 billion, but actually collecting more than a modest fraction of that would take another act of wizardry.
Bernie Madoff, The Wizard of Lies Page 41