Tangled Webs (76 page)
Authors: James B. Stewart
Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility
As for the victims, Judge Chin noted that they came from all walks of life, and cited letters from a retired forest worker, a corrections officer, an auto mechanic, and an eighty-six-year-old retired New York City school secretary. He said he was “particularly struck” by one woman who told him she went to see Madoff after her husband died of a heart attack. Two weeks before, her husband had given the couple’s entire savings to Madoff. Madoff had put his arm around her. “The money is safe with me,” he’d said.
“More is at stake than money,” Judge Chin continued. “The victims put their trust in Mr. Madoff. That trust was broken in a way that has left many–victims as well as others–doubting our financial institutions, our financial system, our government’s ability to regulate and protect, and, sadly, even themselves.
“Mr. Madoff, please stand.”
Madoff rose, steadying himself with his hands on the table in front of him.
“It is the judgment of this court that the defendant, Bernard L. Madoff, shall be and hereby is sentenced to a term of 150 years.”
D
avid Kotz completed his investigation of the SEC’s various Madoff investigations and issued a detailed and unsparing 457-page report in August 2009. It should be required reading for every current and future staff member of the agency. Kotz concluded that there was no “misconduct” or inappropriate influence exerted on any individual staff member. Rather, the staff “never took the necessary and basic steps to determine if Madoff was misrepresenting his trading,” and “there were systematic breakdowns” in the investigation, which, if anything, seems an understatement. The SEC’s entire approach to investigating fraud needs a thorough overhaul, starting with training its enforcement staff on the rudiments of securities trading. Beyond Kotz’s report, the Madoff failure suggests a broader problem of culture at the agency: there was simply no zeal for exposing wrongdoers. Too many just wanted to close cases. They narrowed the investigations to minor technical issues rather than confront the possibility of massive fraud. They didn’t reach out to the Renaissance officials and treated Harry Markopolos as a meddlesome fortune-seeker who was making their lives more difficult. They seemed more interested in proving him wrong than in catching criminals. They didn’t seem to care about the public they were hired to protect.
avid Kotz completed his investigation of the SEC’s various Madoff investigations and issued a detailed and unsparing 457-page report in August 2009. It should be required reading for every current and future staff member of the agency. Kotz concluded that there was no “misconduct” or inappropriate influence exerted on any individual staff member. Rather, the staff “never took the necessary and basic steps to determine if Madoff was misrepresenting his trading,” and “there were systematic breakdowns” in the investigation, which, if anything, seems an understatement. The SEC’s entire approach to investigating fraud needs a thorough overhaul, starting with training its enforcement staff on the rudiments of securities trading. Beyond Kotz’s report, the Madoff failure suggests a broader problem of culture at the agency: there was simply no zeal for exposing wrongdoers. Too many just wanted to close cases. They narrowed the investigations to minor technical issues rather than confront the possibility of massive fraud. They didn’t reach out to the Renaissance officials and treated Harry Markopolos as a meddlesome fortune-seeker who was making their lives more difficult. They seemed more interested in proving him wrong than in catching criminals. They didn’t seem to care about the public they were hired to protect.
Still, for all the missteps by the SEC, it came amazingly close to catching Madoff. Thomas Thanasules deserves a promotion and recognition for spotting the Madoff issues in the Renaissance e-mails and bringing them to the attention of his superiors. Michael Garrity and others in the Boston office also showed genuine enthusiasm and an investigative bent. Would that their instincts had extended further into the agency.
When Simona Suh was on the phone with the compliance officer from the Depository Trust Company, she was only one question away from exposing the biggest fraud in history: What was Madoff’s total trading volume in his DTC account? And had she allowed the Royal Bank of Scotland to send the letter it had already drafted, that might well have established that Madoff had no counterparties, and that the options trades were fake. She came close to exposing the Madoff fraud. But then, incredibly, she stopped. Meaghan Cheung had evidently already made up her mind that the investigation was a “fishing expedition,” as she later put it, and getting an eminent Wall Street figure like Madoff to register as an investment adviser was accomplishment enough.
Ostrow and Lamore, for all their inexperience, were also well on their way to contacting Madoff’s alleged counterparties when John Nee pulled the rug from under them. And Lamore wanted to pursue perjury charges, but was brushed aside by the enforcement lawyers, who of all people should have taken Madoff’s false statements seriously. Had the case been referred to the U.S. Attorney’s office for a perjury and false statement investigation, the scheme would almost certainly have been uncovered. As Eckenrode demonstrated in the Libby case by immediately calling Tim Russert, the first step in any perjury investigation is to test the suspect’s veracity by verifying information attributed to others. After Madoff was arrested, the SEC was able to verify his fraud with just one phone call to the DTC.
John Nee remains an assistant director in the SEC’s New York office. He has declined comment on all aspects of the investigation. Meaghan Cheung left the SEC in September 2008, before the Madoff scandal broke, to care for her two children. In her only public comment since, she told the
New York Post
, her eyes “tearing up”:
New York Post
, her eyes “tearing up”:
“Why are you taking a mid-level staff person and making me responsible for the failure of the American economy? I worked very hard for ten years to make a career and a reputation, and that has been destroyed in a month.”
As of late 2010, two years after the Madoff scandal broke, the SEC had taken no disciplinary or other measure against anyone involved in the various Madoff investigations. The SEC officials’ collective failure is, as Madoff himself put it, astonishing. It will surely rank as one of the greatest regulatory failures ever, not just because of the size of the fraud, but because it was staring them in the face.
J
ames Simons, the founder of Renaissance, whose 2004 e-mails set the investigation of Madoff in motion, directed $8 million of the state university’s money to Madoff while he was chairman of the Stony Brook Foundation. Stony Brook was thus one of Madoff’s first investors, at a time when Madoff denies the fraud had even started. The university and Simons were also powerful drawing cards for other investors. The
Wall Street Journal
reported that in 2004, soon after the Renaissance e-mails raised questions about Madoff, the university withdrew $3.5 million at Simons’s behest, and that Simons had urged that the entire investment be liquidated. Other members of the board overruled him. Neither Simons nor anyone else at Renaissance ever raised concerns with the SEC. Simons retired from Renaissance in 2010 with a net worth estimated by
Forbes
at $8.5 billion.
ames Simons, the founder of Renaissance, whose 2004 e-mails set the investigation of Madoff in motion, directed $8 million of the state university’s money to Madoff while he was chairman of the Stony Brook Foundation. Stony Brook was thus one of Madoff’s first investors, at a time when Madoff denies the fraud had even started. The university and Simons were also powerful drawing cards for other investors. The
Wall Street Journal
reported that in 2004, soon after the Renaissance e-mails raised questions about Madoff, the university withdrew $3.5 million at Simons’s behest, and that Simons had urged that the entire investment be liquidated. Other members of the board overruled him. Neither Simons nor anyone else at Renaissance ever raised concerns with the SEC. Simons retired from Renaissance in 2010 with a net worth estimated by
Forbes
at $8.5 billion.
When news of Madoff’s arrest broke, Harry Markopolos was waiting for his sons at karate practice. His years of skepticism and perseverance had been vindicated. Soon television crews were camped on his front lawn, and as he later put it, “my phone never stopped ringing.” “I was living on adrenaline. I couldn’t sleep.” Markopolos was profiled on the front page of the
Wall Street Journal
on December 18; a Hollywood producer told him he could get him $1 million if he appeared on
Oprah
(an approach he rejected) and he appeared on
60 Minutes
. He testified in Congress. Markopolos went overnight from being an obscure accountant who was rebuffed by the SEC to the star of a real-life Frank Capra movie, “Mr. Markopolos Goes to Washington.” In 2010, Markopolos published a book about his experience,
No One Would Listen.
Wall Street Journal
on December 18; a Hollywood producer told him he could get him $1 million if he appeared on
Oprah
(an approach he rejected) and he appeared on
60 Minutes
. He testified in Congress. Markopolos went overnight from being an obscure accountant who was rebuffed by the SEC to the star of a real-life Frank Capra movie, “Mr. Markopolos Goes to Washington.” In 2010, Markopolos published a book about his experience,
No One Would Listen.
F
rank DiPascali appeared before Judge Richard J. Sullivan in federal district court in Manhattan on August 11, 2009. “I am standing here today to say that from the early 1990s until December of 2008 I helped Bernie Madoff and other people carry out the fraud that hurt thousands of people. I am guilty and I want to explain a little bit about what I did and how I want everybody to know that I take responsibility for my conduct,” he said.
rank DiPascali appeared before Judge Richard J. Sullivan in federal district court in Manhattan on August 11, 2009. “I am standing here today to say that from the early 1990s until December of 2008 I helped Bernie Madoff and other people carry out the fraud that hurt thousands of people. I am guilty and I want to explain a little bit about what I did and how I want everybody to know that I take responsibility for my conduct,” he said.
“Judge, I started working for Bernard Madoff Investment Securities in 1975 right after I graduated from high school. I was a kid from Queens. I didn’t have a college degree. I didn’t know anything about Wall Street. I ended up spending the next thirty years working for Bernie Madoff and his firm. . . . During that first fifteen or so years, I watched Bernie Madoff and other people at the firm. I learned how the securities industry worked, or at least how it worked in the Madoff universe. I thought I worked for a prestigious and successful securities firm.
“By 1990 or so Bernie Madoff was a mentor to me and a lot more. I was loyal to him. I ended up being loyal to a terrible, terrible fault. . . . From at least the early 1990s through December of 2008, there was one simple fact that Bernie Madoff knew, that I knew, and that other people knew but that we never told the clients nor did we tell the regulators like the SEC. No purchases or sales of securities were actually taking place in their accounts. It was all fake. It was all fictitious. It was wrong and I knew it was wrong at the time, sir.”
DiPascali specifically addressed the issue of perjury: “On January 26, 2006, at Bernie Madoff’s direction, I lied to the SEC during testimony I gave under oath in Manhattan about the activities of the Madoff firm.”
Were these in fact false statements? Judge Sullivan asked. And did DiPascali know at the time they were false?
“Yes, Your Honor,” he replied. “I knew at the time I was describing it, it was entirely fraudulent.”
“You did this to mislead the SEC?”
“Yes, sir.”
“For what purpose?”
“To throw them off their tracks, sir.”
“Did you have the sense they were on the track?”
“Yes, sir. . . . Your Honor, while this was going on, I knew no trades were happening. I knew I was participating in a fraudulent scheme. I knew what was happening was criminal and I did it anyway. I thought for a long time that Bernie Madoff had other assets that he could liquidate if the clients requested the return of their money. That is not an excuse. There is no excuse. I knew everything I did was wrong and it was criminal and I did it knowingly and willfully. I regret everything that I did . . . I don’t know how I went from an eighteen-year-old kid happy to have a job to someone standing before the court today. I can only say I never wanted to hurt anyone. I apologize to every victim of this catastrophe and to my family and to the government. I am very, very sorry.”
DiPascali signed a cooperation agreement with the government. His sentencing was deferred until the investigation of Madoff family members, employees, and others was complete.
A
court-appointed trustee liquidated Madoff Securities. All of Madoff’s assets were sold, including the houses, the yacht, and the boats. Madoff agreed to surrender $170 million in personal assets and investments, and his wife, Ruth, gave up $80 million pursuant to an agreement that allowed her to keep $2.5 million. By late 2010 Irving Picard, the trustee overseeing Madoff’s estate, had recovered about $1.5 billion for Madoff’s victims, a small fraction of the $65 billion they thought they had. Picard filed thousands of suits seeking a total of about $50 billion, but many defendants, such as JPMorgan Chase, vowed to fight the allegations and the trustee seemed likely to recoup only a fraction of the victims’ losses.
court-appointed trustee liquidated Madoff Securities. All of Madoff’s assets were sold, including the houses, the yacht, and the boats. Madoff agreed to surrender $170 million in personal assets and investments, and his wife, Ruth, gave up $80 million pursuant to an agreement that allowed her to keep $2.5 million. By late 2010 Irving Picard, the trustee overseeing Madoff’s estate, had recovered about $1.5 billion for Madoff’s victims, a small fraction of the $65 billion they thought they had. Picard filed thousands of suits seeking a total of about $50 billion, but many defendants, such as JPMorgan Chase, vowed to fight the allegations and the trustee seemed likely to recoup only a fraction of the victims’ losses.
Picard filed a lawsuit claiming $200 million against Madoff’s brother, Peter; his sons, Mark and Andrew; and his niece Shana, who, according to Picard, earned a combined $141 million during the last six months before Madoff’s arrest. Their assets, which include luxurious multimillion-dollar Manhattan apartments, were frozen pending resolution of the case. Ruth also agreed to a freeze of her remaining assets. Madoff continues to insist that none of them knew anything about his fraud, though given his track record, it’s hard to take such claims seriously.
After their father’s confession, Mark and Andrew Madoff had no further contact with him, nor, on advice of their lawyer, did they speak to their mother. Friends said Mark was especially distressed by the proliferating lawsuits, his inability to find work on Wall Street, and speculation that he and other family members knew about his father’s fraud. On December 11, 2010, the two-year anniversary of Madoff’s confession, Mark Madoff committeed suicide by hanging himself with his dog’s leash. His wife was out of town and his two-year-old son was sleeping nearby. His lawyer said Mark “was an innocent victim of his father’s monstrous crime who succumbed to two years of unrelenting pressure from false accusations and innuendo.”
Bernie Madoff entered the federal prison in Butler, North Carolina, a minimum-to-medium-security prison northwest of the Raleigh-Durham area, on July 13, 2009. The facilities are sufficiently comfortable that the camp has earned the nickname “Camp Fluffy,” and it is known for its medical facilities.
Judged by the duration and magnitude of his fraud, Madoff would seem the most cunning and skilled of liars. That’s what David Kotz assumed when he began his investigation of the SEC’s failure to expose Madoff. “I assumed Madoff was a genius, a master, that nobody would have had a prayer of figuring him out,” Kotz said. But in fact, Madoff was no better than average, if that. Written records flatly contradicted his lies, had anyone bothered to check them. He repeatedly changed his story on numerous points: whether he did or didn’t trade options; whether his accounts were or weren’t segregated; whether he did or didn’t manage money for individuals; who did or didn’t handle his trading; how many clients he had and how much money he managed. Madoff had the temerity to lie about what he said to Lamore to Lamore’s face. “He wasn’t a good liar,” Kotz concluded. “He couldn’t keep his story straight. He was no evil genius.”
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