48 he and Sylvia would sometimes help Bernie by riding out to inspect some company: Confidential interview with a person familiar with the Madoff family history.
48 She was just weeks shy of her sixty-third birthday: First BLM Interview.
49 “Bernard (who founded the firm) and Peter (the company’s computer genius)”: Marshall E. Blume, Jeremy J. Siegel, and Dan Rottenberg, Revolution on Wall Street: The Rise and Decline of the New York Stock Exchange (New York: W. W. Norton, 1993), p. 221.
49 credited Peter with developing the trading technology: The Lautenberg Foundation, Joshua S. Lautenberg and Ellen Lautenberg v. Peter Madoff (hereafter Lautenberg v. Madoff), filed in U.S. District Court for the District of New Jersey on Feb. 24, 2009, p. 4.
49 “And it was that decision”: Chapman, “Before the Fall.”
50 had gotten far too cumbersome, according to Bienes: Bienes Frontline interview.
51 “Four words: Let’s pay them interest”: Ibid.
52 the accounting firm “always stood behind it”: Ibid.
52 “If the first crash was a dramatic leap from a sixty-story building”: Adam Smith (George J. W. Goodman), Paper Money (New York: Summit Books, 1981), pp. 271–72.
52 “Inflation this high during peace time was unprecedented in American history”: Carl E. Walsh, Visiting Scholar, Federal Reserve Bank of San Francisco Economic Letter, Number 2004-35, Dec. 3, 2004, p. 1.
55 the Madoff investment operation made up more than a third of the accounting firm’s business: Bienes Frontline interview.
55 Four people in the firm’s New York office handled calls and applications: The testimony of Avellino and Bienes before the SEC on July 7, 1992 (hereafter Avellino-Bienes SEC Transcript) was part of the file “In the Matter of King Arthur, MNY-1490.” See U.S. Securities and Exchange Commission Inspector General H. David Kotz, “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version,” Case No. OIG-509, Aug. 31, 2009 (hereafter Kotz Report), Exhibit 117, pp. 33–34.
55 “never advertised, we never promoted, we never sent out a Christmas card”: Bienes Frontline interview.
55 “That’s all we’d say. We were very tough”: Ibid.
55 “We had medium-sized, small clients, individual clients”: Ibid.
55 “All I could say to you is, at one point in time”: Avellino-Bienes SEC Transcript, p. 53.
56 “I don’t like to give out financial statements”: Ibid.
56 “Michael Bienes and Frank Avellino . . . have their own assets”: Ibid.
4. THE BIG FOUR
57 typically did no better than a portfolio of stocks chosen utterly at random: See Burton G. Malkiel, A Random Walk Down Wall Street (New York: W. W. Norton, 1973).
57 Chais was a courtly gentleman: Picard v. Chais Complaint, Declaration of Stanley Chais in support of his request for a temporary restraining order, p. 3.
57 her “peaches-and-cream complexion” and “tidily coiffed” blond hair: Lewis Funke, “News of the Rialto: Inside Musicals,” New York Times, Apr. 27, 1969.
57 the daughter of a Broadway playwright and was a promising playwright herself: Louis Calta, “News of the Rialto: A Guest Shot Back Home,” New York Times, July 24, 1966.
58 decided to invest some of his own money in arbitrage: First BLM Interview.
58 including his father-in-law, Saul Alpern: The retired Saul Alpern set up a shell business in 1983 in Florida called the Onondaga Investment Company. The unusual “Onondaga” name is one that Stanley Chais applied to a few of his Madoff accounts—and both names echo the title of the campus yearbook at Syracuse, Chais’s alma mater. Alpern had no known relationship with the school or with Onandaga County, in which it is located. That shell was one of three that Alpern created at the time, all of them terminated in 1986. All three had the same corporate officers: Saul Alpern as president, treasurer, and director, and a prominent Los Angeles tax lawyer named Bruce M. Stiglitz of the firm Loeb & Loeb as the second director. Stiglitz, who died in 2004, was an entertainment law specialist and a tax expert catering to the creative community in Hollywood. There is no evidence, aside from the Florida business records, that Stiglitz even knew Saul Alpern, but he certainly knew Stanley Chais; they were neighbours and close friends. And Stiglitz clearly knew Madoff: one of the trustees for his family’s trust funds was Irwin Lipkin, Madoff’s longtime employee, and Stiglitz was an indirect Madoff investor, through Chais. It is possible that Alpern, like Madoff, met Chais directly through Marty Joel, who was a client of Alpern’s accounting firm.
58 It was called the Lambeth Company: The Securities and Exchange Commission v. Stanley Chais (hereafter SEC Chais Complaint), filed in U.S. District Court for the Southern District of New York on June 22, 2009, pp. 4–5. The case against Chais himself was dismissed after his death in September 2010.
58 He did not believe he needed to: Confidential interviews.
59 matches the memories of a few early Madoff investors and other sources familiar with the accounts: A state senator in New Jersey recalled that her family called its Chais account “the arbitrage partnerships,” and had always believed that Chais himself was making the investment decisions that were producing the steady 10 percent to 14 percent returns, according to an account of her experience in “Victims of Scandal Reflect on a Shocking Turnabout,” Wall Street Journal, Dec. 20, 2008.
59 “He supposedly had come up with this computerized system”: Confidential interview with a longtime Madoff investor.
59 disappeared quickly if too much money was thrown at them too fast: Consider the example described earlier involving a convertible bond that should have traded at $150 that actually traded for just $130. If a lot of people tried to buy up those convertible bonds at $130, the increased demand would push their price back to the appropriate level of $150 and the arbitrage profits would disappear.
60 that he directed Madoff to backdate trades: First BLM Interview; confidential interviews with several people familiar with interviews with Madoff by bankruptcy trustee Irving Picard’s legal team.
61 “When Kay Windsor was formed”: Carl Spielvogel, “‘Work Horse’ Dress Builds a $22,000,000 Business,” New York Times, Jan. 27, 1957.
62 Mike Lieberbaum’s brother, Sheldon, worked for a larger brokerage firm: Although regulatory records show Sheldon Lieberbaum’s employment going back only to 1967, Madoff recalled that he worked at the time for D.H. Blair, which was a member of the New York Stock Exchange but which underwrote a number of OTC stocks.
62 “was interested in doing arbitrage”: First BLM Interview.
62 “In those days, it took three weeks to complete a sale”: Kirtzman, Betrayal, p. 41.
62 he staked Bernie Madoff at the arbitrage table: Ibid., p. 42.
63 within two years, he had scraped together enough: Dee Wedemeyer, “At 12% Rates, a Housing Boom,” New York Times, Aug. 29, 1982.
63 a country club friend of Levy’s named Arthur Schlichter: Schlichter may have become a Madoff investor himself, as his estate showed up on the list of accounts filed by the Madoff bankruptcy trustee. More significantly, he was a close friend of Gladys Luria, a steel industry heiress whose family became substantial Madoff investors.
63 Madoff seemed to bask in the warmth: Mark Seal, “Madoff’s World,” Vanity Fair, April 2009; confidential interview with a longtime Levy family friend.
63 Levy’s “close friend and trader”: Confidential documentation provided to the author.
63 his balance would grow to $1.5 billion: Ibid.
63 a stunning $35 billion: Letter from Stephen P. Harbeck, president and chief executive officer of SIPC, to the Honorable Scott Garrett, chairman, Subcommittee on Capital Markets and Government-Sponsored Enterprises, House Financial Services Committee (hereafter SIPC-Garrett Letter), Jan. 24, 2011, pp. 14–15. In his second prison interview, Madoff hinted that Levy was “kiting” money between his various bank accounts and his Madoff account to make his cash flow look more impressive to cre
ditors.
64 Madoff recalled that Alpern was Picower’s personal accountant: First BLM Interview.
64 Picower’s father was a Polish immigrant: Nathan Ward, “Madoff’s Mystery Man,” Forbes, Oct. 11, 2010, corrected in confidential interviews.
64 wound up at Laventhol & Horwath: Michael Amon, “The Jeffry Picower File,” Newsday, Oct. 25, 2009.
64 a brassy and persuasive Broadway theatre producer: Ward, “Madoff’s Mystery Man.” The producer was Adela Holzer, a producer of the musical Hair, who was convicted on fraud charges in 1979. See Charles Kaiser, “Adela Holzer Is Given 2-to-6-Year Sentence for Investment Fraud,” New York Times, May 4, 1979.
64 “started out as a professional relationship”: Responses from Jeffry and Barbara Picower to questions submitted by the author in the summer of 2009.
65 building up a big stake in the Shopwell supermarket chain: “French Investor May Seek Shopwell,” New York Times, May 5, 1979. Amsellem’s stock plays were also documented in various SEC News Digest issues in the late 1970s.
65 Igoin had a remarkable CV: These details were provided by BLM and confirmed by an excellent French account, “Les discrets amis français de Bernard Madoff,” published on the Web site Eco89, June 12, 2009, accessible at eco.rue89.com/2009/06/12/les-discrets-amis-francais-de-bernard-madoff.
66 Peter Madoff travelled around the country: Specifically, Peter Madoff was selling the Madoff firm’s services as “corresponding broker” to these smaller firms, offering to process their New York Stock Exchange trades for a small commission.
66 Engler’s business partner liked Peter and agreed to shift the firm’s business to Madoff: Telephone interview in 2010 with Steven Engler, Mike Engler’s son and former employee.
67 Engler himself had founded a liquor store: Obituary of Mike Engler, Minneapolis Star Tribune, Dec. 20, 1994.
67 Madoff invited him to sign on: Telephone interview with Steven Engler.
67 more and more of Engler’s country club friends: Dave Kansas, “Madoff Does Minneapolis,” Fortune/CNNMoney.com, Jan. 16, 2009.
67 “I called it my ‘steady Eddie’ investment”: Telephone interview in 2010 with Madoff investor Renee Soskin.
69 the Madoffs bought a handsome weekend house: Many sources date this purchase to 1980, but an inventory of assets Madoff filed with the court after his arrest dated the purchase to 1979.
69 He was part of a group of adventurous Wall Street executives: The saga of the Cessna seaplane has been cited in various sources, including Arvedlund, Too Good to Be True, pp. 51–52. These details were confirmed with three confidential sources familiar with the Madoff family during the years when the seaplane was in use.
5. THE CASH SPIGOT
71 a bright red phone in the rear window: Confidential interview with a former Roslyn neighbour.
71 “never had a losing day”: Confidential interviews.
71 He grew increasingly restless: In the Matter of: Cohmad Securities Corporation, administrative complaint filed Feb. 11, 2009, by the Commonwealth of Massachusetts, Office of the Secretary of the Commonwealth Securities Division (hereafter Galvin Cohmad Complaint), Exhibit 3.
72 the historic Harmonie Club: The private social club, at 4 East Sixtieth Street, was founded in 1854 by New York’s German-Jewish aristocracy, and for years German ancestry was a requirement for membership. Over time, it became a choice venue for Jewish weddings, receptions, and charitable events. When the Wall Street division of the American Jewish Committee honored Bernie Madoff in 1999, the reception was held at the Harmonie Club.
72 after six years at Cowen & Company: Central Registration Depository (CRD) records for Marcia Beth Cohn, maintained by FINRA.
72 The remaining 25 percent was lopsidedly split: SEC v. Cohmad Securities Corporation, et al. (hereafter SEC v. Cohmad), filed as Case No. 09-cv-5680 (LLS) in U.S. District Court for the Southern District of New York, p. 6.
72 He began his Wall Street career in 1969: CRD record of Robert M. Jaffe, maintained by FINRA.
72 More significantly, he was married to Ellen Shapiro: In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Cohmad Securities Corporation, et al. (hereafter Picard v. Cohmad), filed as Adversary Proceeding No. 09-01305 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, p. 15.
73 subsequent lawsuits would claim that the firm’s compliance officer was Peter Madoff’s daughter, Shana: Ibid., p. 14.
73 several hundred clients with traditional brokerage accounts: It cleared those customer trades through Bear Stearns until that firm was taken over in early 2008.
75 Some options traders called his new strategy a “bull spread”: Harry Markopolos, No One Would Listen: A True Financial Thriller (Hoboken, N.J.: John Wiley & Sons, 2010), p. 27.
75 the right (the “option”) to buy or sell that stock at a specific price: The right to buy a stock was called a “call option.” The seller of a call option is promising to let the buyer purchase the shares at a specified price for the term of the option. The right to sell a stock is called a “put option.” The seller of a put option is promising to let the buyer sell him a stock at a specified price for the term of the option. Traders typically shorten these terms to “puts” and “calls,” and Madoff used both forms of options in his strategy.
76 Madoff’s new strategy was to buy a broad portfolio of stocks: Madoff was supposedly buying a representative sample of thirty to thirty-five blue chips in the S&P 100 index and then selling call options that entitled the buyer of the options to purchase the stocks from him if they rose to a specified price. (Essentially, this was a “covered call,” a strategy familiar to many individual investors.) The call option limited his potential profit, but he supposedly used the money he got from selling that option to buy a put option giving him the right to sell the portfolio at a specified price a bit below its current value. The put option established a floor under his potential losses if the value of the stocks declined sharply. Thus, both his upside profits and downside losses were limited by the use of options.
76 its monthly returns bounced around: Morningstar data, compiled for the author with the help of New York Times chief financial correspondent Floyd Norris.
77 “a simplistic, and most important, a very conservative strategy”: Galvin Cohmad Complaint exhibits, letter from Maurice J. Cohn dated Nov. 21, 1991.
77 a scorching courtroom battle over some audits they had done: The case, In re: M. Frenville, was cited in bankruptcy court battles for years.
77 Bienes later said the litigation was an enormous expense and distraction: Bienes Frontline interview.
77 Frank Avellino felt utterly burned out: Avellino-Bienes SEC Transcript, p. 36.
77 devote themselves exclusively to their Madoff business: Bienes Frontline interview.
78 But they were still remarkably casual about maintaining the paperwork: An affidavit filed by Frank Avellino in his 1993 bankruptcy court dispute over the accounting fees he had to pay as part of the SEC’s 1992 investigation.
79 the SEC’s fabled Enforcement Division director, Stanley Sporkin: David A. Vise and Steven Coll, Eagle on the Street (New York: Charles Scribner’s Sons, 1991), pp. 1–20.
79 John Shad, a lifelong veteran of Wall Street: Shad, who was vice chairman of E.F. Hutton at the time of his appointment, was the first Wall Street executive to head the commission since President Franklin Roosevelt tapped Joseph P. Kennedy, the father of President John F. Kennedy, as the first SEC chairman in 1934. Reagan moved Sporkin to the post of general counsel at the Central Intelligence Agency, and four years later appointed him to the federal bench.
79 Shad was less hostile to the SEC’s mission: Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston: Northeastern University Press, 1995), p. 576.
79 “was essentially an honest place”: Vise and Coll, Eagl
e on the Street, p. 128.
79 a general view in Congress that the NASD had fallen down: See Senate Report No. 94-75, at 2 (1975), as reprinted in 1975 U.S.C.C.A.N. 179, 181: “The Committee believes . . . the self-regulatory organizations must display a greater responsiveness to their statutory obligations and to the need to coordinate their functions and activities. In the new regulatory environment created by this bill, self-regulation would be continued, but the SEC would be expected to play a much larger role than it has in the past to ensure that there is no gap between self-regulatory performance and regulatory need.”
79 “a competent but cautious commission”: Seligman, The Transformation of Wall Street, p. 577.
81 a quiet prestige: The building, designed by Kenneth Murchison, “has most of the trademark elements of the type: an elegantly finished lobby of very modest dimensions, a sun-washed site—well away from the blocky ranges of tall apartment buildings to the west—and an elegant run of bronze storefronts,” wrote Christopher Gray in “Streetscapes: 133 East 64th Street: If a Building Could Blush,” New York Times, Sept. 16, 2009.
Bernie Madoff, The Wizard of Lies Page 46