Bernie Madoff, The Wizard of Lies

by Diana B. Henriques

  105 Monica Noel had her own wealthy family connections: Kristina Stewart, “Golden in Greenwich,” Vanity Fair, October 2002; Sarah Medford, “Easy in the Islands,” Town & Country, May 2005, p. 207.

  109 “Mustique is the antithesis of Palm Beach”: Medford, “Easy in the Islands.”

  109 it probably totalled more than $45 million in 1998: The estimate is based on comparisons of the fees collected on total Sentry fund assets of $4 billion in 2002, which Madoff trustee, Sentry fund investors, and Massachusetts securities regulators. Since the Sentry fund’s assets were just under $2 billion in 1998—about half the 2002 level—it is reasonable to conclude that the firm’s fee income was likewise about half the 2002 level.

  109 the firm would collect nearly $920 million between 2002 and 2008: For example, see Picard v. Fairfield Sentry Amended Complaint, p. 34.

  110 J. Ezra Merkin was to the intimate, fraternal world of Jewish philanthropy: Steve Fishman, “The Monster Mensch,” New York, Mar. 2, 2009, p. 18. Fishman noted that “Ezra took Bernard L. Madoff Investment Securities places Bernie couldn’t have dreamed of going by himself. The list of people and institutions that Ezra Merkin put with Bernie Madoff is a kind of Jewish social register. There was Mort Zuckerman, the media and real-estate mogul, and Ira Rennert, chairman of Fifth Avenue Synagogue and owner of a 68-acre oceanfront Hamptons estate. Over 30 charities invested with Ezra, many of them with a Jewish affiliation” (p. 77).

  110 One of them recalled the ritual of lunching with Hermann Merkin: Confidential interview with a former business associate of BLM.

  111 the synagogue became the spiritual home of a number of wealthy congregants: Reporting notes contributed to the author by Alison Leigh Cowan, a reporter at the New York Times, based on her extensive coverage of Merkin’s role in the Madoff affair.

  111 “a voracious reader”: Ibid. totalled $87 million, according to exhibits filed in connection with lawsuits by the

  111 “pious, prayerful and profound”: Douglas Feiden, “Famed for Piety, Jacob Merkin Put Faith and Funds in Bernie Madoff,” New York Daily News, Jan. 18, 2009, quoting Rafi Weiss, “a retired investor who worshiped with Merkin at Orthodox synagogues in Manhattan and Long Island.” The same quote was included in Fishman, “Monster Mensch,” p. 20, attributed to “a fellow congregant.”

  111 his sometimes harsh dismissal of those he considered his intellectual inferiors: Fish-man, “Monster Mensch,” p. 24.

  111 After briefly practicing law at an elite New York firm: In re: J. Ezra Merkin and BDO Seidman (hereafter NYLS v. Merkin), filed in U.S. District Court for the Southern District of New York as 08-Civ.-10922 (DAB), p. 23 of the Amended Complaint. An identical chronology is laid out in The People of the State of New York, by Andrew M. Cuomo, Attorney General v. J. Ezra Merkin and Gabriel Capital Corp. (hereafter Cuomo-Merkin Summons), filed as Index No. 450879/09 in Supreme Court of the State of New York, County of New York, on Apr. 6, 2009, p. 24, based on testimony by Merkin and others involved.

  111 far less involved in actually managing the money: NYLS v. Merkin, pp. 4, 12–18, 25–32. Again, these allegations were echoed in Cuomo-Merkin Summons, notably on p. 29.

  111 almost exclusively by a young man named Victor Teicher: Cuomo-Merkin Summons, pp. 26–27.

  111 According to Teicher, he continued to advise the two Merkin funds: Ibid.

  112 Merkin started thinking about putting a portion of the Ariel and Gabriel money: Excerpts from deposition of J. Ezra Merkin on Jan. 30, 2009 (hereafter Merkin Transcript), filed as Exhibit 1 in Cuomo-Merkin Summons, p. 8.

  112 “a kind, haimish sort of guy compared to my father”: Fishman, “Monster Mensch,” p. 77.

  112 One of Merkin’s associates would later theorize: Ibid.

  112 Merkin would later argue in court that many investors were aware: Cuomo-Merkin Summons, Opinion Denying Defendants’ Motion to Dismiss by Justice Richard B. Lowe III (hereafter Lowe MTD Opinion), Feb. 8, 2010, p. 11.

  112 According to Merkin, his father first introduced him to Madoff: Merkin Transcript, p. 8.

  113 it apparently carried great weight with his eldest son that he spoke well of Madoff: Ibid.

  113 “described Madoff in terms of what he was doing”: Deposition of Victor Teicher, filed in Cuomo-Merkin Summons, pp. 39–45.

  113 Merkin got similar warnings from John Nash: Arvedlund, Too Good to Be True, pp. 252–53, 258–59.

  113 Later lawsuits would calculate that Merkin collected nearly $170 million: Lowe MTD Opinion, p. 3.

  114 “We did not speak about markets”: Author’s notes of Portfolio seminar featuring Wiesel.

  114 “Everybody we knew told us we could do so much more”: Ibid.

  114 It was widely known that prospective members had to demonstrate: Confidential interview with a person in Palm Beach familiar with the club’s membership rosters and practices since the late 1980s. This person said that the club’s initiation fee was $125,000 in 1990–91 and was about $400,000 in 2010. Assuming that the $275,000 increase had been spread evenly across the nineteen-year period, the fee in 1996 would have been $197,500.

  7. WARNING SIGNS

  117 a lengthy article by writer Michael Ocrant: The article is reproduced in Markopolos, No One Would Listen, p. 288.

  117 “considered somewhat high for the strategy”: Ibid.

  117 “experienced far greater volatility and lower returns”: Ibid., p. 289. The Gateway fund actually tracked the Fairfield Sentry fund fairly closely from 1993 until about 1997; thereafter the disparity between the two funds widened sharply as Gateway became more volatile and less profitable.

  118 “Never in my wildest dreams did I think I would have partners like these”: Michael Carroll, Hal Lux, and Justin Schack, “Trading Meets the Millennium,” Institutional Investor, January 2000, pp. 36–53.

  118 “Market timing and stock picking are both important for the strategy to work”: The Ocrant article in Markopolos, No One Would Listen, p. 292.

  119 The following week, a similarly sceptical view: Erin Arvedlund, “Don’t Ask, Don’t Tell,” Barron’s, May 7, 2001.

  119 “Much of it I thought was, frankly, just irresponsible journalism”: Galvin Fairfield Greenwich Complaint, transcript excerpts from interview with Jeffrey Tucker, Mar. 12, 2009, p. 97. (Excerpts were also cited as Exhibit 85 in Picard v. Fairfield Greenwich Amended Complaint.)

  119 “Come up this afternoon”: According to Tucker’s testimony, Madoff extended a similar invitation that day to Carlo Grosso, a principal of the Kingate funds based in London, who was visiting New York.

  119 Wall Street’s central clearinghouse, the Depository Trust & Clearing Corporation: Originally named the Depository Trust Company, the clearinghouse later combined with a separate clearinghouse called the National Securities Clearing Corporation, on whose board Madoff served in the late 1980s, and was renamed the Depository Trust & Clearing Corporation, or DTCC. According to the official DTCC history, the clearinghouses were “both created in response to the paperwork crisis that developed in the securities industry in the late 1960s and early 1970s. At that time, brokers still exchanged paper certificates and checks for each trade, sending hundreds of messengers scurrying throughout Wall Street clutching bags of checks and securities.”

  120 Tucker later told regulators about this pivotal visit: Galvin Fairfield Greenwich Complaint, transcript excerpts from interview with Jeffrey Tucker, Mar. 12, 2009, pp. 97–100.

  121 “This is a great exam for us!”: Kotz Report, p. 89.

  121 Congress broadened the loophole: Previously, hedge funds restricted themselves to fewer than one hundred partners; the National Securities Markets Improvement Act of 1996 allowed them to have an unlimited number of partners, provided each was a “qualified purchaser” with at least $5 million in invested assets.

  121 In a 2001 report: The General Accounting Office issued three reports and provided congressional testimony on SEC staffing issues: GAO-01-947, GAO-02-302, GAO-03-120 and GAO-02-662T. None r
eported any meaningful progress toward resolving the agency’s profound personnel problems.

  121 left the agency between 1998 and 2000: General Accounting Office, “Securities and Exchange Commission: Human Capital Challenges Require Management Attention,” Report No. GAO-01-947, p. 1.

  122 Markopolos had become interested in Madoff’s returns a few years earlier: Harry Markopolos, Testimony Before the House Committee on Financial Services, Feb. 4, 2009, p. 5

  122 The son of immigrant Greek restaurant owners in Erie, Pennsylvania: These personal and career details are drawn from Markopolos, No One Would Listen.

  122 “We settled for a carat and a half”: Ibid., pp. 65–66.

  123 “Sometimes Harry is not too smooth”: Kotz Report, Exhibit 18, pp. 18–19.

  123 “could count to 21”: Markopolos, No One Would Listen, p. 161.

  123 “That would be equivalent to a major league baseball player batting .966”: Markopolos testimony, p. 9.

  123 only fourteen losing months in the same period: Morningstar data compiled for the author, analysed over the same period Markopolos used in his 2000 submission to the SEC. See Kotz Report, Exhibit 134.

  124 “And Harry would say: See, there it is, you know”: Kotz Report, transcript of interview with Ed Manion, Exhibit 18, p. 24.

  124 could tell that Ward’s eyes had glazed over: Kotz Report, p. 64.

  124 “Returns can’t be coming from net long exposure to the market”: Ibid., Markopolos 2000 Submission, Exhibit 134, p. 2.

  124 the official report concluded that this, too, was untrue: See Kotz Report, p. 67: “Based on [then-Boston regional administrator Juan] Marcelino’s testimony and [Ward’s predecessor Jim] Adelman’s corroborating statement, Ward’s testimony to the OIG was not credible regarding: (1) whether he recalled meeting with Markopolos or hearing concerns about Madoff’s hedge fund in 2000; and (2) the substance of his February 4, 2009 conversation with Marcelino. Accordingly, the OIG concludes that, based upon the preponderance of the evidence, Ward met with Markopolos in 2000 and told Manion that he had referred the complaint to NERO, but never actually did.”

  124 “These numbers really are too good to be true”: Kotz Report, p. 67.

  125 “I don’t think we should pursue this matter further”: Ibid., p. 27.

  125 “My impressions are that this is a document”: Ibid., pp. 72–73.

  126 A fund of hedge funds was the same idea: Funds of hedge funds that were not publicly registered as mutual funds had been available in the international market since at least 1990, when there were approximately four dozen of them, according to Van Hedge Fund Advisors International. By August 2005 the advisory firm estimated that there were three thousand such funds, constituting about 40 percent of the industry’s assets.

  126 “Funds of hedge funds raise special concerns”: William H. Donaldson, “Testimony Concerning Investor Protection Implications of Hedge Funds,” U.S. Senate Committee on Banking, Housing and Urban Affairs, Apr. 10, 2003.

  126 had already moved their “self-directed” IRAs into the hands of Bernie Madoff: Diana B. Henriques, “Questions for a Custodian After Scams Hit IRAs,” New York Times, July 24, 2009.

  127 a small firm called Retirement Accounts Inc: In 2008, the unit handling self-directed IRAs was spun off from Fiserv and divided, with the self-directed services going to a private company set up by the unit’s former president and the rest going to TD Ameritrade. Fiserv was sued on behalf of its customers in 2009 for “facilitating” Madoff’s fraud, and the case was still moving slowly through the courts more than eighteen months later.

  127 By 2008 it would be handling roughly eight hundred self-directed IRAs: Henriques, “Questions for a Custodian.” Three other convicted Ponzi schemers steered their IRA investors to Fiserv for support services. Regulatory gaps and inconsistent court rulings about the duties of support firms left the legal landscape fairly foggy; litigation arising from the Madoff case may clarify their responsibilities.

  127 they maintained a relationship with him for more than a decade: Cuomo v. Ivy Complaint, p. 12.

  127 Some new limited partnerships were formed solely to invest with Madoff via the Ivy firm: Ibid., pp. 1–4.

  127 By 1991 some Ivy partners had heard disquieting rumours: These details and the ones that follow are drawn from several sections of the Cuomo v. Ivy Complaint, which cites contemporaneous e-mails and letters from Ivy’s files.

  128 “compensation for the use of their money”: Cuomo v. Ivy Complaint, p. 23.

  128 The Ivy executive described the conversation in an internal memo: Ibid., p. 36.

  129 “You omitted one other possibility—he’s a fraud”: Ibid., p. 42. The Ivy case is pending, but the partner filed a formal answer in court contesting the attorney general’s accusations and denying that he suspected Madoff was running a Ponzi scheme during these years. See Cuomo v. Ivy, Answer and Affirmative Defenses of Howard Wohl, Aug. 28, 2010.

  129 In the early 1970s she developed methods for measuring fund performance: Official biography in Maxam fund prospectus; Greg Newton, “A Talented Talent Scout,” Barron’s, Aug. 2, 2006.

  130 legendary fund managers such as Peter Lynch, Fred Alger, and Mario Gabelli: Newton, “Talented Talent Scout.”

  130 Madoff himself identified Kingate as one of the first hedge funds to invest with him: First BLM Interview.

  131 a public forum in 2003: The transcript for this session, held May 14–15, 2003, at SEC headquarters in Washington, D.C. (hereafter May 2003 Hedge Fund Forum), is posted on the SEC’s Web site without page numbers but in a form that can be searched. In February 2011, it could be found at www.sec.gov/spotlight/hedgefunds/hedge2trans.txt.

  131 “It’s very difficult to get answers out of managers”: Ibid.

  132 warned its clients away: Kevin E. Lynch, Charles Colfer, and Tomas Kukla, “Flash: Rogerscasey’s Buy-Rated Hedge Fund Managers Have No Exposure to Madoff Investment Securities LLC,” Rogerscasey Inc. internal publication, December 2008.

  132 Rogerscasey’s rating for the Madoff-related Tremont funds was “sell”: The warnings surfaced in the course of lawsuits filed in Colorado by Madoff victims against units of Fiserv that provided IRA custodial services to more than eight hundred retirement savings accounts invested with Madoff.

  132 “The Madoff exposure is a potential disaster”: Lynch, Colfer, and Kukla, “Flash,” p. 2.

  133 he invested about $620 million: Diana B. Henriques, “Deal Recovers $7.2 Billion for Madoff Fraud Victims,” New York Times, Dec. 17, 2010.

  133 the model for the Gordon Gekko character in Oliver Stone’s 1987 film Wall Street: James B. Stewart, Den of Thieves (New York: Simon & Schuster, 1991), pp. 202–3. Stewart noted that a Boesky aide, Reid Nagle, “had no idea where Picower’s money came from; he occupied an unmarked office suite in an anonymous Manhattan tower.”

  133 Picower’s trading account at Goldman Sachs: Henriques, “Deal Recovers $7.2 Billion,” and reporting notes made available to the author by her colleague Peter Lattman.

  133 Available records show that Picower and his wife withdrew $390 million: Jake Bernstein, “Madoff Client Jeffry Picower Netted $5 Billion—Likely More Than Madoff Himself,” ProPublica.org, June 23, 2009 (subsequently updated), and the accompanying graphic, Dan Nguyen and Jake Bernstein, “Chart: The Picower-Madoff Transfers, from 1995–2008.”

  135 a posthumous memoir called Leukemia for Chickens: Roger Madoff, Leukemia for Chickens: One Wimp’s Tale About Living Through Cancer (New York: privately published, 2007).

  135 One hospital staff member would poignantly recall Peter gently rubbing ointment: Ibid., pp. 273–74. The scene, two days before Roger’s death, was described in Roger’s book by counselor Larry Dyche of Albert Einstein College of Medicine: “I wound my way through long corridors to Roger’s area. Through the door of his room, I could see a man putting ointment on Roger’s feet. . . . He was Roger’s father, a man renowned on Wall Street. Apologizing for not taking my hand, he rose to l
et us have the room to ourselves. He looked as if he would give all he owned to keep his son.”

  138 twice the value reported just five years earlier: Based on self-reporting to the Securities Industry Yearbook for those years.

  138 had written him off and warned their clients to get out: In one lawsuit against a Madoff feeder fund, the bankruptcy trustee noted: “Based on all of the foregoing factors, many banks, industry advisors and insiders who made an effort to conduct reasonable due diligence flatly refused to deal with BLMIS and Madoff because they had serious concerns that their [investment advisory] business operations were not legitimate. On information and belief, included among these were Société Générale, Goldman Sachs, CitiGroup, Morgan Stanley, Merrill Lynch, Bear Stearns, and Credit Suisse.” See In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Thybo Asset Management Ltd. (hereafter Picard v. Thybo), filed as Adversary Proceeding No. 09-01365 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, p. 18.