8. A NEAR-DEATH EXPERIENCE
139 “What are you looking for?”: Kotz Report. These details are drawn from transcripts of Kotz’s interviews with Lamore, Exhibit 48, and Ostrow, Exhibits 36 and 37, and his report on his interview with Madoff himself, Exhibit 104, and from confidential interviews with people familiar with SEC operations. Where direct quotes are used in this passage, they are the phrases recalled in official transcripts by the participants.
139 insisted on being their only contact in the office: Kotz Report, Ostrow Transcript, Exhibit 36, pp. 22, 34.
139 Frank DiPascali on the seventeenth floor had been busy: Securities and Exchange Commission v. Frank DiPascali Jr. (hereafter SEC v. DiPascali), filed as 09-cv-7085 in U.S. District Court in the Southern District of New York on Aug. 11, 2009, p. 16; and DiPascali Criminal Information, pp. 14–15.
139 On December 18, 2003, Madoff was walking through the Lipstick Building lobby: Kotz Report, Exhibit 104, Madoff interview, p. 3.
140 “Bernie, it’s Lori”: According to the Kotz Report, Richards recalled talking with Madoff in advance of a 2003 examination and agreed that it might have developed along the lines Madoff described, but she could not confirm the exact dialogue. See Kotz Report, p. 87.
140 The records from that exam were piled into a pair of boxes and forgotten: Kotz Report, pp. 136–37.
140 Lamore was okay, a smart kid: Kotz Report, Exhibit 104, Madoff Interview, pp. 1–3, 6.
140 Ostrow and Lamore tried to calm Madoff: Kotz Report, e-mail on Apr. 20, 2005, Exhibit 233.
140 a belated response to a set of e-mails: Kotz Report, p. 145.
140 an indirect stake in Madoff through its Meritor hedge fund: Meritor had entered into a total return swap with another party, who promised to pay Meritor a rate of return equal to the performance of one of the Madoff-linked hedge funds. See Kotz Report, p. 145.
140 The Renaissance e-mails, written in late 2003: Kotz Report, internal Renaissance executive e-mails contained in Exhibits 211, 212, and 213.
141 “First of all, we spoke to an ex-Madoff trader”: Ibid., Exhibit 211.
141 “where there was some chatter about Madoff”: Ibid., Exhibit 215, p. 2.
141 “Despite the fact that we are kind of smart people”: Ibid., p. 151.
142 on May 20, 2003, a hedge fund managing director: Ibid., pp. 77–78.
142 But the request was never sent: Ibid., pp. 97–98.
143 “Front-running—aren’t you looking for front-running?”: Ibid., Lamore Transcript, Exhibit 48, p. 77.
143 reassuring to those who thought they knew Bernie best: Confidential interviews with people familiar with Madoff’s trading desk operations.
144 “the possibility that Madoff is using”: Kotz Report, p. 131.
144 they would later vehemently deny this allegation: This argument was made in numerous lawsuits against various feeder funds, based on Affidavit of Edward H. Siedle, filed Mar. 26, 2009, in Retirement Program for Employees of the Town of Fairfield, et al. v. Bernard L. Madoff; Tremont Partners, Inc., et al. (hereafter Town of Fairfield Complaint), filed in Connecticut State Superior Court, Judicial District of Fairfield at Bridgeport, p. 6. Siedle was a financial consultant offered by plaintiffs as an expert witness in the case.
144 one Italian money manager said market intelligence was the code word: Confidential interview.
144 an illegal practice known as “cherry-picking”: Kotz Report, p. 146.
144 The supervisor did not share the response with Lamore or Ostrow: Ibid., pp. 189–90.
145 “We do a few trades on behalf of brokerage firms and institutions”: Ibid., Exhibit 104, p. 2; Exhibit 244; and Exhibit 245.
145 The news was a shock: Kotz Report, Exhibit 36, p. 24.
145 Recovering, Ostrow said something about the SEC being a large organization: Kotz Report, Exhibit 104, p. 4.
145 Madoff conceded that perhaps there were as many as fifteen entities: Kotz Report, Exhibit 245. In the e-mail that opens the exhibit, Lamore writes his colleagues that “Bernie’s fessing up.” His supervisor would later say that the obvious lies Madoff was telling did not overly concern him: “it’s hard to get inside someone’s head about why they’re saying what they’re saying” (Ibid., pp. 194–95).
145 But the model stopped using options about a year ago: Kotz Report, Exhibit 104, p. 4.
146 They’d cleared up the whole thing back in 2003: Kotz Report, Exhibit 48, p. 103.
146 “We are hoping that if what he is saying has any truth at all to it”: Kotz Report, Exhibit 247, p. 2.
146 they were stacked in a hallway, heading for the archives: Kotz Report, p. 136.
146 the staff had never even drafted a closing report: Ibid., p. 137.
146 he told the two examiners that they needed to wrap things up: Ibid., pp. 222–23.
146 She expected some of her clients would leave Tremont: Newton, “Talented Talent Scout.”
146 $175 million in redemptions in April, another $85 million in July, and $30 million in early September: Confidential “Fairfield Greenwich Group: Firm Profile” dated Nov. 15, 2007, and apparently prepared as part of the partners’ effort to find a buyer or major investor for the firm (hereafter FGG 2007 Profile), pp. 13–14.
147 not willing to accept profits of less than 7 percent a year: Ibid.
147 The Bayou Group was founded in the mid-1990s: Letter from Samuel Israel III to U.S. District Court Judge Colleen McMahon, Apr. 9, 2008, p. 1.
147 assets totalling $411 million: Gretchen Morgenson, Jenny Anderson, Geraldine Fabrikant, and Riva D. Atlas, “What Really Happened at Bayou,” New York Times, Sept. 17, 2005.
147 In mid-August the sceptical investor arrived at Bayou’s offices: Ibid.
147 accused of running a $400 million Ponzi scheme: Gretchen Morgenson, “U.S. Sues Bayou; Fraud Cited,” New York Times, Sept. 2, 2005.
147 He and Israel would subsequently plead guilty: Both Samuel Israel III and the CFO, Daniel E. Marino, were charged, pleaded guilty, and were sentenced in the U.S. District Court, Southern District of New York. Each was sentenced to twenty years in prison. The case is number 1:05-cr-01036-CM-1.
148 One of his last calls from his deathbed: Confidential interview with a longtime friend of the Levy family.
148 “Bernie Madoff, trust Bernie Madoff”: Fox Business News interview with Francis Levy, “Bulls and Bears,” January 2009, from a transcript of Money for Breakfast, Jan. 9, 2009, posted on CEOWire and retrieved from BNET.
148 He had named Madoff as the executor: SIPC v. Bernard L. Madoff Investment Securities, Debtor; In re: Bernard L. Madoff, Debtor (hereafter Main Madoff Liquidation), case number 08-01789-BRL in U.S. Bankruptcy Court, Southern District of New York, “Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Jeanne Levy-Church and Francis N. Levy,” dated Jan. 27, 2010, p. 4.
148 some of the people defrauded in the Bayou scam also had money with Madoff: These connections were identified and documented by the author, matching investor claims in the Bayou Group LLC bankruptcy case, filed as case number 06-22306 (ASH) in U.S. Bankruptcy Court in the Southern District of New York, with the records in the Madoff case.
148 e-mailed the firm after the Bayou scandal to ask explicit questions: Picard v. Fairfield Sentry Amended Complaint, pp. 100–102; actual e-mail exchanges are Exhibit 18 in Galvin Fairfield Greenwich Complaint.
149 had most, if not all, of their money with Bernie: Transcript, Plea Hearing in U.S.A. v. David Friehling (hereafter Friehling Plea Transcript), filed as Case No. 09-cr-700 (AKH), U.S. District Court, Southern District of New York, Nov. 3, 2009, pp. 34–35.
149 “We would question Bayou’s obscure auditing firm”: Picard v. Fairfield Sentry Amended Complaint, Exhibit 56, “Fairfield Greenwich Group Investment Team Presentation, November 2, 2005,” p. 15.
150 “250 hours in a year-long proce
ss”: July 2006 memo by Jonathan Clark, filed as an exhibit in the case In re: Optimal Strategic U.S. Equity Fund Securities Litigation, Multi-District Case No. 2073, U.S. District Court, Southern District of Florida, pp. 6–7.
150 “David seemed surprised to hear Madoff Securities described”: Ibid.
150 coached DiPascali in the role: U.S.A. v. Daniel Bonventre, Sealed Complaint, sworn by Special Agent Keith D. Kelly before Magistrate Judge Theodore H. Katz and filed as Case No. 10-MAG-385 on Feb. 24, 2010, p. 22. The complaint, the basis for the arrest warrant in the case, was replaced a month later by a formal indictment that combined the case against Bonventre with an indictment already pending against two other Madoff employees, Jerome O’Hara and George Perez, as noted below. Bonventre denied all charges filed against him.
151 the amount of custom-designed software serving the Ponzi scheme: There is no legal dispute that these computer programs existed and were used to deceive regulators, accountants, and investors. The dispute is over who created them and why. DiPascali admitted ordering that they be designed and putting them to use; the two computer programmers he accused of creating them, George Perez and Jerome O’Hara, have denied any wrongdoing and demanded a jury trial. Details of the charges against them are contained in a civil complaint, SEC v. Jerome O’Hara and George Perez (hereafter SEC v. O’Hara and Perez), filed in U.S. District Court for the Southern District of New York, Nov. 13, 2009, and a related criminal indictment against Perez and O’Hara made public the same day. As noted hereafter, a superseding indictment adding Daniel Bonventre as a defendant was filed Mar. 24, 2010; Bonventre also denied the charges and demanded a jury trial.
151 There were programs that generated random numbers: SEC v. O’Hara and Perez.
151 the balance in Madoff’s slush fund account: U.S.A. v. Daniel Bonventre, Jerome O’Hara and George Perez (hereafter First Superseding Bonventre Indictment), filed on Mar. 24, 2010, as S1-10-cr-228 (LTS), U.S. District Court, Southern District of New York, p. 29.
152 the firm’s proprietary trading desk: In re: Bernard L. Madoff, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC. v. Peter B. Madoff, Mark D. Madoff, Andrew H. Madoff and Shana D. Madoff (hereafter Picard v. Madoff Family), filed as Adversary Proceeding No. 09-01503 (BRL) in U.S. Bankruptcy Court, Southern District of New York, “Declaration of Martin Flumenbaum in Support of Mark and Andrew Madoff’s Reply Memorandum of Law in Further Support of Their Motion to Dismiss,” Exhibit A: Memorandum by Lazard Freres & Co., dated Dec. 23, 2008, p. 1.
152 A subsequent criminal indictment asserted that it was Dan Bonventre: Bonventre was arrested on a criminal complaint by the U.S. Attorney’s Office for the Southern District of New York on Feb. 25, 2010, three months after the indictment of two computer programmers who allegedly helped DiPascali construct phoney records for the fraud. The reference here is to the formal charges that were filed against Bonventre in the First Superseding Bonventre Indictment, pp. 28–30.
153 Prosecutors and regulators at the SEC later claimed: On the same date as Bonventre’s arrest, the SEC filed related civil fraud charges against him, SEC v. Daniel Bonventre (hereafter SEC v. Bonventre), in U.S. District Court, Southern District of New York, providing additional details about his alleged role in the Ponzi scheme.
153 making the cash look like legal profits: Ibid., p. 14.
153 phoney ledger entries were created: Ibid., p. 2.
153 “The World’s Largest Hedge Fund Is a Fraud”: Kotz Report, Exhibit 268, p. 1.
154 “Very few people in the world have the mathematical background needed”: Ibid.
154 They were impressed—indeed, alarmed: Kotz Report, p. 240.
154 the SEC office in New York would have to investigate him: Kotz Report, p. 242.
154 “The informant believes that Madoff may be running one giant Ponzi scheme”: Ibid., p. 243.
154 had virtually no experience investigating Ponzi schemes: Ibid., pp. 245–46.
155 she had been “hamstrung by a lack of resources and personnel”: Ibid., Exhibit 281, p. 4.
155 “she thought he was kind of condescending to the SEC”: Kotz Preport, pp. 250–51.
155 He said later that she seemed “offended” by this: Ibid., p. 251, note 174. In a statement on Cheung’s behalf, her lawyers argued to Kotz that, while the failure to uncover Madoff’s crime “is a burden Ms. Cheung carries daily and will continue to carry for years to come,” she and her colleagues conducted “a meaningful and good faith investigation” of Madoff that was “consistent with SEC rules, policies, and practices.” The lawyers complained that she was being unfairly blamed for “what appears to be a systemic failure.” See ibid., Exhibit 281, pp. 1–2.
156 he approached John Wilke in the Washington bureau of the Wall Street Journal: Markopolos, No One Would Listen, p. 152.
156 where he wrote about corrupt congressmen and the companies that corrupted them: Joe Holley, “John Wilke, 54: Acclaimed Investigative Reporter,” Washington Post, May 4, 2009.
156 Some of Markopolos’s allies urged him to approach other reporters: E-mails Markopolos submitted as part of his congressional testimony in 2009 included several messages in which friends urged him to contact other reporters.
156 Markopolos wanted to work only with Wilke: Markopolos, No One Would Listen, p. 154.
156 “that someone high up at the Journal had decided”: Ibid.
156 flatly denied that anything was behind Wilke’s decision: Joe Strupp, “Former ‘WSJ’ Editor Does Not Recall Madoff Tip,” the Market Rap blog, Feb. 5, 2009. See also Richard J. Tofel, “Bookshelf: Shadowing a Swindler,” Wall Street Journal, Mar. 8, 2010.
156 “basically some of the same issues”: Kotz Report, p. 255.
156 “I think he is on a fishing expedition”: Ibid., p. 256.
157 “There is still a little mystery as to what Madoff does”: Ibid.
157 There did not seem to be any explanation: Ibid., pp. 271–72.
158 “any real reason to suspect some kind of wrongdoing”: Ibid., p. 292.
158 conducted after the SEC gave him permission to consult with Madoff before testifying: The conversation the witness had with Madoff hit the headlines when a partial transcript of it was released as Exhibit 1 in the Galvin Fairfield Greenwich Complaint. According to the transcript, Madoff opened the conversation by saying to Fairfield Greenwich general counsel Mark McKeefry: “Obviously, first of all, this conversation never took place, Mark, okay?” (See Exhibit 1, p. 30.) Lawyers for Fairfield Greenwich responded that the call, however Madoff described it, was made with the SEC’s permission and was disclosed to the SEC after it took place.
158 using another $54 million in government bonds from Carl Shapiro’s account: SEC v. Bonventre, pp. 18–19.
158 On January 30, 2006, they interviewed Jeffrey Tucker: Kotz Report, p. 293.
158 Two days later they sent a letter to Tremont Partners: Ibid., p. 269, note 189.
159 Madoff . . . produced a six-page list of the financial entities: The list included Madoff’s own firm; the DTCC; the Bank of New York; Barclays Capital of London; forty-two overseas broker-dealers, thirty-six in the United Kingdom, two in Ireland, and one each in Belgium, Germany, the Netherlands, and Spain; and twelve counterparties for his options trades, including UBS and one other institution in Switzerland, the Royal Bank of Scotland (RBS), the Bank of Bermuda in London, four entities in Germany, and one each in Austria, France, the Netherlands, and Spain. See Kotz Report, Exhibit 334.
9. MADOFF’S WORLD
160 nearly 20 percent of its assets: FGG 2007 Profile, p. 13.
160 emptied their Madoff accounts in the spring of 2006: SEC v. Bonventre, p. 22. All three men denied government allegations that these withdrawals reflected knowledge of the Ponzi scheme.
161 They simply continued to tap Bernie’s piggybank: Ibid., p. 17. The SEC calculated that Madoff made $50 million in loans to family members between 2001 and 2008.
; 162 decided to delay sending the letters: Kotz Report, p. 304.
Bernie Madoff, The Wizard of Lies Page 49