Judge Chin accepted Madoff’s plea and revoked his bail. Madoff was handcuffed and led outside to a hallway and the adjacent Metropolitan Correctional Center, the federal prison in lower Manhattan, to await sentencing.
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n December 16, SEC chairman Christopher Cox had announced an internal investigation into the SEC’s failure to detect the Madoff fraud, and referred the matter to David Kotz, the SEC’s inspector general. Kotz, age forty-two, a lawyer and Cornell graduate, had served in a similar capacity for the Peace Corps. He’d joined the SEC a year earlier, well after the investigation of Madoff had been closed. After months of negotiations with Madoff’s lawyers, Madoff had agreed to be interviewed, and on the afternoon of June 17, Kotz and a colleague from the SEC arrived at the Metropolitan Correctional Center. Madoff wore the standard-issue orange jumpsuit and was flanked by his lawyer, Ira Sorkin, and one of Sorkin’s associates. Sorkin warned his client that he was under oath and his only obligation was to tell the truth–not that it mattered much, given the magnitude of the crimes to which Madoff had already confessed.
Madoff was expansive and seemed almost eager to unburden himself of the secrets he had held so long. He complained that the prosecutor “misunderstood” things he’d said, and as a result, there was a lot of misinformation about his case. Still, “I’m not saying I’m not guilty,” he said.
The Ponzi scheme had been going on so long Madoff had trouble remembering exactly how it had started. But as best he could recall, he’d begun in 1992. Originally he pursued a common, low-risk strategy trading convertible securities. But so many hedge funds piled into the strategy that returns soon shrank to practically nothing. “I made commitments for too much money and then I couldn’t put the strategy to work,” he told Kotz. “I had a European bank, I was doing forward conversion, they were doing reverse conversion.” He hadn’t promised any specific returns, but thought he’d equal his typical returns. “When that didn’t happen, I thought, Fine, I’ll just generate those trades and then the market will come back and I’ll make it back . . . and it never happened. It was my mistake not to just be out a couple hundred million dollars and get out if it.” But there were actually trades, albeit money-losing ones. Soon after, Madoff conceived his split-strike conversion strategy, but there were never any trades. Madoff said he simply deposited clients’ money into an account at Chase Manhattan Bank, and his back office on the seventeenth floor generated fake trading statements.
Madoff said he was “astonished” that the SEC’s enforcement investigation hadn’t exposed his fraud, and added there were two times when he “thought the jig was up”: during the on-site exam by Lamore and Ostrow, because he thought they’d check with third parties, and when Suh asked him for his DTC account number, and he assumed the SEC would go to the DTC. “I thought it was the end game, over,” he said. “Monday morning they’ll call DTC and this will be over . . . and it never happened. After all this, I got away lucky.” Still, he knew it was just a matter of time, and if not this time, then the next. “This was the nightmare I lived with,” he said.
Madoff indulged his disdain for Lamore and Ostrow, referring them dismissively as “two young fellows” who “didn’t understand what they were looking for.” He was especially annoyed by Ostrow, who “came in here like Columbo” and wasted his time looking at canceled checks. He said he was “astonished” they didn’t go to either the DTC or his purported trading counterparties. “It would’ve been easy for them to see,” he said. “They didn’t do any of that . . . if you’re looking at a Ponzi scheme it’s the first thing you do.” He readily acknowledged lying to them when he said he didn’t manage money, but said, “At this point I was trying to conceal.” He added, “After two months, they found two or three nitpicky things, and they were wrong about those things.”
As for the enforcement investigation led by Cheung and Suh, he said he thought they asked the right questions, and even got his DTC number. At his deposition, “it was obvious they thought something was amiss.” But they never asked him about his accounting firm, which surprised him. And the idea that he was running a massive Ponzi scheme seemed “inconceivable to them.” He thought this was “probably because of the reputation I had.” They’d think, “Why would this guy do a Ponzi scheme? Of course they’d be shocked it was a Ponzi. They’d be astonished.”
Madoff didn’t hire a lawyer, he said, because “I didn’t think I needed one. I had good answers for everything.” Indeed, he seemed eager yet again to extol the virtues of his split-strike conversion strategy. He said everything he’d told Lamore, Ostrow, and the enforcement lawyers about his computer model was true. Even so, “You still need to have a gut feel. It’s a combination of technology and a trader’s feel, and I was a good trader.” He continued, “Credible people knew it could be done or else they wouldn’t be clients. All you have to do is look at the types of people I was doing this for to know it was a credible strategy. They knew the strategy was doable, and they knew a lot more than this guy Harry,” referring to Markopolos. Madoff was contemptuous of Markopolos, who thought he was some kind of “seer,” Madoff said, when in reality he was a “joke in the industry,” someone who was just “jealous” of Madoff.
It was almost as if Madoff had forgotten he’d never actually executed any such strategy, and that it only produced the returns it did because fake records were generated with benefit of hindsight and perfect market timing. At one point, Madoff even insisted the client statements he generated, copies of which he’d given the SEC, weren’t false, evidently because such trades could have been executed.
“Wait a minute,” Kotz interjected. “Weren’t those documents false?”
“No,” Madoff said.
“If you provided documents that showed trading activity, and you didn’t conduct any, wouldn’t that be false?” Kotz asked.
Madoff paused. “Yes, I guess I can see how you might see it that way,” he conceded.
Kotz had agreed in advance not to ask Madoff questions about who else knew about or participated in the fraud, since investigations into that question were continuing. But Madoff repeatedly volunteered that his wife and family members knew nothing. Kotz did ask if Madoff was worried when DiPascali was subpoenaed to testify, and Madoff said, “No, he didn’t know anything was wrong, either.”
Madoff said he “was worried every time” he heard from the SEC and “it was a nightmare for me,” because “it was very basic stuff. I wish they had caught me six years ago, eight years ago. I got myself into a terrible situation. It’s a nightmare . . . the thing I feel the worst about besides the people losing money is that I set the industry back. I’m very proud of the role I played in the industry,” he said. “Of course I’ve destroyed that now.”
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adoff’s lies hadn’t stopped in prison, despite his lawyer’s admonition that he was under oath. He had not acted alone, as he’d insisted, nor was DiPascali an innocent bystander. DiPascali was intimately involved in nearly every aspect of the Ponzi scheme. He oversaw execution of the fictitious split-strike conversion strategy, made sure the phantom trades and volume–chosen by DiPascali with benefit of hindsight to achieve the desired returns–corresponded to actual prices and trading on exchanges, made sure that the phony returns matched what Madoff had promised his clients, and generated thousands of pages of fake trading records and account statements. The reason it took Madoff “several days” to “execute” the equities trades, which had puzzled Lamore, wasn’t because modern trading platforms couldn’t handle the volume, as Madoff had implied. It was because there wasn’t enough real volume on any given day to cover the massive volume Madoff pretended to be trading, should anyone try to match his purported trades with actual volume. Madoff, who could barely use a computer himself, anxiously called DiPascali several times a day for updates on the fake strategy’s results. Madoff had coached DiPascali before his 2006 testimony, and DiPascali admitted that virtually everything he told the SEC at Madoff’s behest was a lie.
Madoff returned to Judge Chin’s courtroom for sentencing on June 29. Nine of his victims spoke, and it was an extraordinary outpouring of grief, loss, betrayal, and anger. They called Madoff a “monster,” a “beast,” “the most despised person in America,” and tearfully described the devastation he’d inflicted on their lives. But they made clear their anger wasn’t directed only at Madoff. They also felt their government had failed and betrayed them.
Maureen Ebel, a sixty-one-year-old widow: “I have lost all of my life’s hard-earned savings because our government has failed me and thousands and thousands of other victims. . . . The Securities and Exchange Commission, by its total incompetence and criminal negligence, has allowed a psychopath to steal from me and steal from the world.”
Carla Hirschhorn, a physical therapist: “Since December 11, 2008, my life has been a living hell. . . . We were devastated by the SEC failure to uncover Madoff’s fraud and its continued stamp of approval behind Madoff over the decades of his crime.”
Miriam Siegman, sixty-five years old, living on food stamps: “Victims became the byproduct of his greed. We are what is left over, the result of stunning indifference . . . of politicians and bureaucrats.”
Sheryl Weinstein, former chief financial officer of Hadassah, forced to sell her home: “We, the victims, are greatly disappointed by the agencies that were set up to protect us. . . . The SEC appears to have looked the other way on numerous occasions.”
With the echoes of their voices still in the room, Judge Chin offered Madoff the chance to speak. He rose and faced the judge, his back to the audience.
“Your Honor, I cannot offer you an excuse for my behavior. How do you excuse betraying thousands of investors who entrusted me with their life savings? How do you excuse deceiving two hundred employees who have spent most of their working life working for me? How do you excuse lying to your brother and two sons who spent their whole adult life helping to build a successful and respectable business? How do you excuse lying to and deceiving a wife who stood by you for fifty years and still stands by you? And how do you excuse deceiving an industry that you spent the better part of your life trying to improve? There is no excuse for that, and I don’t ask any forgiveness.”
Madoff said again that when he started the Ponzi scheme, he thought he’d soon extricate himself, and meant no harm. But as the scheme grew, “I couldn’t admit that failure and that was a tragic mistake. . . . I live in a tormented state now knowing all the pain and suffering that I have created . . . I will live with this pain, this torment, the rest of my life. I apologize to my victims. I will turn and face them,” which he did. “I’m sorry,” he said. “I know that doesn’t help you.” And then he sat down.
Lisa Baroni, an assistant U.S. attorney, spoke for the government. “This defendant carried out a fraud of unprecedented proportion over the course of more than a generation. For more than twenty years he stole ruthlessly and without remorse. Thousands of people put their trust in him and he lied repeatedly to all of them. . . . He destroyed a lifetime of hard work of thousands of victims. And he used the victims’ money to enrich himself and his family, with an opulent lifestyle, homes around the world, yachts, private jets . . .
“This was not a crime born of any financial distress or market pressures. It was a calculated, well-orchestrated, long-term fraud, that this defendant carried out month after month, year after year, decade after decade. He created literally hundreds of thousands of fake documents every year. Every time he told his clients that he was making trades for them he sent them trade confirmations filled with lies. At every month end he sent them account statements that were nothing but lies. . . . In doing so he drove charities, companies, pension plans and families to economic ruin.
“In sum, for running an investment advisory business that was a complete fraud, for betraying his clients for decades, for repeatedly lying to regulators to cover up his fraud, for the staggering harm that he has inflicted on thousands of people–for all of these reasons and all the reasons Your Honor heard so eloquently from the victims, the government respectfully requests that the Court sentence the defendant to 150 years in prison . . . that ensures he will spend the rest of his life in jail.”
Judge Chin began by saying he would try to reach a “just and proportionate sentence,” unswayed by “all the emotion in the air.” But, “objectively speaking, the fraud here is staggering.” However calculated, the monetary losses “are off the charts by many fold. . . . The breach of trust was massive. Investors–individuals, charities, pension funds, institutional clients–were repeatedly lied to. . . . Investors made important life decisions based on these fictitious account statements–when to retire, how to care for elderly parents, whether to buy a car or sell a house, how to save for their children’s college tuition . . . Mr. Madoff also repeatedly lied to the SEC and the regulators, in writing and in sworn testimony . . . to cover up his scheme.
“In a white-collar fraud case such as this, I would expect to see letters from family and friends and colleagues. But not a single letter has been submitted attesting to Mr. Madoff’s good deeds or good character or civic and charitable activities [nor were any relatives in the courtroom]. The absence of such support is telling.”
Judge Chin acknowledged that given the seventy-one-year-old Madoff’s life expectancy of twelve or thirteen years, any sentence greater than twenty years was largely symbolic. “But symbolism is important. . . . Mr. Madoff’s crimes are extraordinarily evil” and took “a staggering human toll. . . . The message must be sent that in a society governed by the rule of law, Mr. Madoff will get what he deserves, and that he will be punished according to his moral culpability.”