81 made some minor renovations: Ibid. Howard R. Goldin, who was the architect for the work, “said some clients were so prominent that he was asked not to list their names on the building permit, but the Madoffs had no such worries at the time. As the clients were not demanding, and paid promptly, ‘it went without a hitch,’ Mr. Goldin remembered.”
82 Bernie Madoff became a go-to figure for the industry press when international issues arose: In December 1986, for example, he talked with Securities Week about a two-day meeting he attended in Washington between officials of the Singapore Stock Exchange and other NASD leaders. The topic was the possibility of building an electronic link between their markets similar to the one the NASD maintained with the London Stock Exchange.
82 “Madoff’s sole proprietorship, founded 26 years ago”: The article also reported, incorrectly, that Madoff “did, however, found North Shore Hospital in Manhasset, Long Island, near one of his three homes.” According to the hospital’s successor institution, he played no role in the hospital’s founding, although his friend Sonny Cohn was a substantial benefactor to the hospital for many years.
83 The OTC market was “in shambles”: Tim Metz, Black Monday: The Catastrophe of October 19, 1987 . . . and Beyond (New York: William Morrow, 1988), p. 198.
83 “This added to the confusion and panic in the markets”: General Accounting Office, “Financial Markets: Preliminary Observations on the October 1987 Crash,” GAO/GGD-88–38, p. 6.
83 “We’re scared. Of course we’re scared”: As quoted in Metz, Black Monday, p. 199. In fairness, the computer technology at the New York Stock Exchange had broken down, too. Later, NASD leaders would argue that NASDAQ’s technology failures were overstated in a government study of the 1987 crash.
84 Mike Engler, Madoff’s friend and associate in Minneapolis, would tell his son later: Telephone interview in 2010 with Steven Engler.
85 only seven losing months: Morningstar data compiled for the author.
85 the expectation that they would be rolled over year after year: Second BLM Interview.
85 “I felt they weren’t sham transactions”: First BLM Interview.
86 an influential voice in putting NASDAQ back together: As chairman of one of the key committees looking at automated order flow, Bernie Madoff was one of the men the media sought out for comment. On Nov. 16, 1987, the newsletter Securities Week headlined the news that the NASD board was ready to vote on four items to improve market making. The story noted: “The first item on the plate will require all OTC market makers to participate in the NASD’s small order execution system (SOES), according to Bernard Madoff, chairman of the SOES committee and founder of the New York broker/dealer bearing his name.”
86 the consequences of the NASD’s flabby discipline: The NASDAQ market’s own official history later acknowledged that traders soon learned how to use the rhythm of posting and boosting their quotes on the newfangled automated system to manipulate stock prices in old-fashioned ways.
86 a new standard for speed in handling customer orders: In its issue of July 10, 1989, Forbes took note of how revolutionary the Madoff system was by describing the system’s automatic purchase of some proffered shares of IBM: “Once the computer has that IBM stock it just bought, it shows the trader various ways of hedging his position and the costs. It even shows the carrying costs for not hedging. That hedging is done by Peter Madoff’s software. The Madoffs’ computer hedging is far ahead of anything that the specialists [on the New York Stock Exchange’s trading floor] have.”
87 “although the Madoff firm isn’t technically a stock exchange”: Blume, Siegel, and Rottenberg, Revolution on Wall Street, p. 221.
88 By one popular measure: The measure is the S&P 500 index, adjusted for inflation and dividends.
88 Squadron had once been the boy wonder: Hedy Shulman, “Prominent Attorney Howard M. Squadron to Be Honored on June 10 at Benjamin N. Cardozo School of Law Dinner,” Yeshiva University press release, May 10, 1999. Madoff cochaired the event with the media mogul Rupert Murdoch, a Squadron law partner named Stanley Plesent, and an owner of the New York Mets, Fred Wilpon.
88 Squadron was instrumental in the rescue of the New York City Center: Ibid. See also a paid death notice placed under Squadron’s name by the City Center board in the New York Times, Dec. 28, 2001.
89 a former SEC lawyer named Jeffrey Tucker: Tucker’s original connection with investment management was through a client, an options trader named Fred Kolber, with whom he formed an options trading fund. Tucker became a general partner in Fred Kolber & Company, which formed the Greenwich Options fund.
89 Noel thought Tucker’s new fund might have promise for his foreign investors: Picard v. Fairfield Sentry Complaint, p. 80.
89 “Walter was very impressed with their trading”: Interview with former Fairfield Greenwich employee Sherry Shameer Cohen.
89 Tucker’s father-in-law, a retired knitwear manufacturer: Picard v. Fairfield Sentry Complaint, pp. 81–82.
89 One associate called it “an aura”: Bienes Frontline interview. Bienes said: “He had an aura about him. Not charisma, an aura about him—a confidence, the way he was set up, the way he looked, the way he spoke, the self-confidence. He just evoked confidence in you, that he knew that he was in control and if he was around, everything was fine.”
90 almost literally “the world”, as it turned out: The worldwide distribution of the firm’s clients is documented in “Fairfield Greenwich Group: Firm Profile,” a confidential document provided to the author, dated Nov. 15, 2007, p. 5.
90 Madoff had caught the attention of a few other young offshore hedge funds: First BLM Interview. Madoff recalled that Fairfield Greenwich was the first hedge fund to invest with him, and he identified the Kingate funds, run by Carlo Grosso and Federico Ceretti in London, and the Thema fund, guided by the Austrian-born banker Sonja Kohn, as the other earliest investors. But his relationship with Kohn dated to 1985, and she was allegedly instrumental in steering several other European hedge funds to him in these early years, so Madoff’s version may be less than accurate. See Irving H. Picard v. Sonja Kohn, et al., filed as Adversary Proceeding No. 10-05411 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, Dec. 10, 2010 (hereafter Picard v. Kohn), pp. 6, 9, and 65.
91 he wrote in an e-mail from prison: E-mail from BLM, Dec. 26, 2010.
6. WHAT THEY WANTED TO BELIEVE
92 a legitimate and apparently successful brokerage firm: National Association of Securities Dealers comment letter on an oversight examination of Madoff’s firm for the period ending Sept. 30, 1994, dated Jan. 26, 1995. The exam showed that by mid-1994, the Madoff firm’s annual income was just under $125 million a year, so this estimate seems likely.
92 a remarkable 10 percent of the total daily trading volume: Ibid.
92 considered among the best on Wall Street: Chapman, “Before the Fall.” According to Chapman, Dennis Green, former head trader at Legg Mason, gave this assessment of the Madoff firm: “They always had the best technology. They always did. Even when none of us could afford that technology. . . . They always had the best systems.”
92 whose accounts now totalled at least $8 billion: Letter from BLM, Oct. 3, 2010. Madoff estimated that client account balances totaled $5 billion in 1987; if so, the annual investment returns he claimed to be producing would have pushed that number, conservatively, to about $8 billion by the early 1990s.
93 the harder it would be for savvy investors to believe: Indeed, as early as 1991, the pioneering quantitative analyst Edward Thorp looked at the results Madoff was producing for a pension fund client and found some red flags, including a day in April 1991 when Madoff’s reported trades in Procter & Gamble options were more than ten times the total number of P&G options traded that day. See Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (New York: Crown Business, 2010), p. 63.
94 a pair of sceptical investors had sent two documents:
Kotz Report, pp. 42–44, and Kotz Report, Exhibit 113, p. 1.
94 The fact sheet was on the letterhead of a financial adviser in San Francisco: Ibid., p. 43.
95 “relatives, friends and former clients”: Ibid.
95 he had received a call from his friend Richard Glantz: Avellino-Bienes SEC Transcript, pp. 12–14.
95 one of the earliest subcontractors: The elder Glantz was a partner with accountant Steven Mendelow in the Telfran fund, an indirect Madoff feeder fund that invested through Avellino & Bienes. Since at least 1985, Mendelow had been a principal in Paul Konigsberg’s accounting firm, Konigsberg Wolf.
95 The younger Glantz had shared in that business and steered others to it: Richard Halstead, “San Rafael Lawyer Helped Friends and Family Invest Money with Madoff,” Marin Independent Journal, Feb. 12, 2009, and interviews with Glantz investors. Glantz did not deny that he set up funds through which people invested with Madoff, but noted that he was as victimized as they were, having lost all his wealth in the Ponzi scheme.
95 Glantz explained why he had called: Avellino-Bienes SEC Transcript, p. 14.
95 Avellino promptly phoned Michael Bienes, who recalled the conversation years later: Bienes described the conversation in Bienes Frontline interview.
96 he called his friend and longtime investor Howard Squadron: Bienes recalled that Madoff himself recommended Ike Sorkin, but Sorkin disputes this, saying the request came through Squadron.
96 In 1992, Ike Sorkin knew Bernie Madoff only slightly: Interview in 2009 with Ira Lee Sorkin.
96 “When asked what he does with the money borrowed”: Kotz Report, Exhibit 112, p. 1.
96 “We do not deal in real estate or anything other than securities”: Ibid.
96 someone from the SEC team got a call from Ike Sorkin: Kotz Report, p. 45.
97 They listened patiently and directed more questions at Frank Avellino: Avellino-Bienes SEC Transcript, p. 35.
97 Eventually, he explained how the “very private group”: Ibid., p. 67.
98 “$400 million”: Ibid., pp. 61–62.
98 One of those creditors was Telfran Associates: See SEC v. Telfran Associates Ltd., Telfran Associates Corp., Steven Mendelow, and Edward Glantz, filed as 92-cv-8564 in the U.S. District Court for the Southern District of New York, included in Kotz Report, as Exhibit 126.
98 “in the late ’80s or early ’90s”: Transcript of DiPascali Plea Hearing before U.S. District Court Judge Richard J. Sullivan, Aug. 11, 2009, p. 46.
99 it was almost $30 million short: In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Frank J. Avellino, et al. (hereafter Picard v. A&B), filed as Adversary Proceeding No. 10-05421 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, pp. 3, 39. Specifically, the lawsuit claimed that Avellino & Bienes gave the SEC a list showing that investors were owed $399,819,455, but Madoff’s account statements reported that their six accounts held only about $364 million. As of publication, lawyers for Avellino and Bienes were contesting the trustee’s allegations in court.
99 the fraudulent use of the investors’ money: Ibid., p. 40.
99 elaborately concealed hush money: Ibid., pp. 51–54.
99 assisted by other close associates on the small staff devoted to Madoff’s investment clients: The criminal charges to which DiPascali pleaded guilty in 2009 acknowledged that others were involved in the effort and knew it was fraudulent. The government subsequently filed criminal charges against Annette Bongiorno, JoAnn Crupi, Daniel Bonventre, George Perez, and Jerome O’Hara, accusing them of helping Madoff and DiPascali carry out and cover up the elaborate fraud. All denied the charges. Similar accusations were made in civil suits filed by the Madoff trustee in bankruptcy court against Bongiorno, Crupi, Bonventre, Eric Lipkin, Lipkin’s father and mother, and David Kugel, a longtime arbitrage trader for the Madoff firm. Those allegations, too, were denied by the defendants.
99 A footnote showed that Madoff had fluently explained it all to them: Specifically, the SEC memo in the Kotz Report’s Exhibit 114 noted in footnote 10 on page 9 that “Madoff hedges A&B’s portfolio primarily by purchasing long-term equity anticipation securities (‘LEAPS’), which are essentially long-term options (two year expiration) on underlying stocks or stock indexes. During the time period reviewed by the staff (i.e., May through October 1992), Madoff purchased puts on the S&P 100 Index and utilized a ‘short [against] the box’ trading strategy designed to lock in trading profits.” A “short against the box” is a short sale of stock that an investor already owns—a way of reaping profits on the stock’s current selling price without actually selling the shares and incurring capital gains taxes.
100 “I was actually doing the trades”: First BLM Interview.
100 “Shapiro, Picower, and Levy all sent in actual money, new money”: Ibid.
101 “I am not a cash cow and I will not be milked”: Affidavit of Frank J. Avellino dated Mar. 10, 1993, filed in SEC v. Avellino & Bienes, Frank J. Avellino and Michael S. Bienes (hereafter “the 1992 SEC Case”), filed as 92-cv-8314 (JES) in U.S. District Court for the Southern District of New York, p. 1.
101 “I personally oversaw Avellino & Bienes’ books and records”: Ibid., p. 2.
101 “I don’t believe your client”: Transcript of a hearing in the 1992 SEC Case, held before federal district judge John E. Sprizzo on April 21, 1993, p. 147.
102 They denied that they were involved at all: Bienes Frontline interview.
102 laid out a very different scenario: Picard v. A&B Complaint, p. 51.
102 the “schupt” payments: Ibid., p. 55. In a separate complaint, the trustee would assert that Steven Mendelow of Konigsberg Wolf profited to a lesser degree from both the guaranteed profits and the “schupt” payments for allegedly steering his former Telfran investors back to Madoff. See In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Steven B. Mendelow, et al. (hereafter Picard v. Mendelow), filed as Adversary Proceeding No. 10-04283 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, p. 25. In a telephone interview in January 2011, Stanley Arkin, a lawyer for Mendelow, denied the allegations and said his client “was a victim like many others, and had no idea that Mr. Madoff was conducting a Ponzi scheme.”
103 DiPascali, in turn, allegedly relied on two computer programmers: As of February 2011, the programmers, Jerome O’Hara and George Perez, had denied the allegations and were awaiting trial.
103 “I could not have operated in view”: E-mail from BLM, dated Dec. 27, 2010. In the e-mail, Madoff insists the move occurred when “the problems started with crime,” denying again that his Ponzi scheme started before the SEC investigation. What is more likely is that the scale of his fraudulent operation was compact enough to be hidden on the eighteenth floor until the enormous increase in the number of individual accounts that followed the SEC’s action against Avellino & Bienes.
104 The theory behind hedge funds: As one scholar noted: “High leverage, management expertise, performance fees, and absolute return strategies are the hallmarks of the industry. [Hedge fund managers] share a belief that markets are not strongly efficient, and that adroit managers can take advantage of superior information, analysis, and minimization of trading cost to achieve absolute returns under any market conditions.” J. W. Verret, “Dr. Jones and the Raiders of Lost Capital: Hedge Fund Regulation, Part II, a Self-Regulation Proposal,” Delaware Journal of Corporate Law 32, no. 3 (2007): 803.
104 The hedge fund was pioneered: Carol Loomis, “Personal Investing: The Jones Nobody Keeps Up With,” Fortune, April 1966, p. 237.
104 even the fabled Jones fund: Carol Loomis, “Hard Times Come to the Hedge Funds,” Fortune, January 1970, p. 134.
104 its partners “aren’t rocket scientists”: Kotz Report, Exhibit 104, p. 5.
105 Born in Nashville and educated at Vander
bilt University: These and other personal details, unless otherwise noted, are drawn from his engagement announcement, “Monica Haegler Will Be Married to an Economist,” New York Times, Apr. 8, 1962. As in all society page announcements, the details were provided by the engaged couple and were not independently verified by the newspaper.
105 He later helped develop an international private banking operation: Official biography for Walter Noel contained in promotional material from Fairfield Greenwich Group.
105 four of them would marry into influential European and Latin American families: Lisina Noel’s husband, Yanko Della Schiava, was the son of a prominent Italian textile executive active in the fashion industry and his wife, the editor of the Italian edition of Cosmopolitan magazine. Daughter Alix’s husband, Philip J. Toub, had family ties to a major shipping company in Switzerland, where he was raised. Andrés Piedrahita, Corina’s husband, was the ambitious Boston-educated son of a commodities trader in Bogotá, Colombia. Ariane Noel married Marco Sodi, an investment banker born in Florence. The fifth Noel daughter, Marisa, was the only one to accept a domestic suitor: she married Matthew Brown, whose father had been an IBM executive and whose mother was briefly the mayor of San Marino, California. These details are all drawn from the daughters’ wedding and/or engagement announcements in the New York Times.
Bernie Madoff, The Wizard of Lies Page 47