The Wizard of Lies: Bernie Madoff and the Death of Trust (24 page)

Picower’s name showed up frequently in Frank DiPascali’s in-box, with requests for withdrawals that escalated sharply between 1995 and 2003 but which had begun in earnest after the 1987 crash, according to Madoff. Available records show that Picower and his wife withdrew $390 million from their Madoff accounts in 1996, more than seven times the amount they withdrew in 1995.

The Picowers took out more than $400 million in 1997, more than $500 million in 1998, and nearly $600 million in 1999. And that was just the warm-up. In the four years between 2000 and 2003, they took out a total of $3.4 billion—in 2002 alone, they made fifty-two withdrawals totaling just over $1 billion.

To put this into perspective, it is as if every penny that Fairfield Greenwich Group’s investors had given to Madoff by 2000 had been handed over to Jeffry Picower by 2003.

After their $1 billion withdrawal in 2002, the Picowers broke into the philanthropic headlines by endowing the eighty-thousand-square-foot Picower Institute for Learning and Memory at the Massachusetts Institute of Technology, which sought to become the world’s premier center for research into the brain and its agonizing ailments, from autism to Alzheimer’s.

From the day these withdrawals became public after Madoff’s arrest, one of the deepest mysteries of the case was why Picower—who did not introduce other clients to Madoff, did not run a feeder fund for him, did not even make big gifts to Madoff’s pet charities—was allowed to remain an investor despite his enormous and rapidly escalating withdrawals.

By this time, Madoff and Picower seemed to have a close relationship—the Madoffs frequently shared private jet flights with the Picowers from Palm Beach to New York, and the two couples dined out together fairly often—but as far as Madoff was concerned, the apparent friendship was a sham. “Picower had no friends,” he snapped during his first prison interview. “He was a very strange person. It was always a very tense relationship.”

There was ample evidence that Madoff occasionally “fired” difficult clients. Why didn’t he politely tell Picower to take his money and go elsewhere?

According to Madoff, Picower had simply become the Ponzi equivalent of a bank too big to fail: an investor too big to fire. Covering Picower’s annual withdrawals was difficult enough; coming up with the money to completely redeem his multibillion-dollar account would have been impossible. “I had to keep him attached to me,” Madoff admitted, offering a glimpse into the expediency that so often masqueraded for friendship in his life.

Picower had been victimized by a Ponzi scheme in the 1970s. Was he now astute enough to realize what Madoff was doing and devious enough to exploit the leverage that knowledge gave him? Madoff often suspected that the answer was yes. In September 2003, for the first but not the last time, Madoff did not fully honor one of Picower’s withdrawal requests, paying only a fraction of the amount Picower wanted—with no apparent complaints or repercussions. By then, Picower had withdrawn far more than the money he had originally deposited into his Madoff accounts. Perhaps he simply figured that he’d continue to milk Madoff’s fraud-fed accounts until the money finally ran out, knowing that Madoff had no choice but to let him do so.

Certainly at one point Picower believed that Madoff was legitimate—more than a decade earlier, he had put hundreds of millions of dollars’ worth of cash and securities into his Madoff accounts, and he left money in those accounts through several market storms that might well have toppled a Ponzi scheme. His lawyers and family insisted later that these actions proved that he did not know Madoff was a crook.

As with everyone who stayed at this party until the bitter end, it comes down to separating the villains from the victims, the knaves from the fools. If Picower was numbered among the fools, he became one of the richest fools in the crowd—richer, by far, than the people who were certainly villains, including Madoff himself.

Besides the hidden pain that Picower’s cash demands were inflicting on Madoff’s Ponzi scheme, the new century also brought unexpected pain to the Madoff family and the legitimate family business, Bernard L. Madoff Investment Securities.

In September 2002, Madoff’s nephew and employee, Charlie Wiener, learned that his young daughter had cancer. As she was being treated, Peter Madoff, who had already been treated for bladder cancer, learned in November that his son, Roger, had a vicious form of leukemia. In the early spring of 2003, after Roger had begun the debilitating treatments he would record in a posthumous memoir called
Leukemia for Chickens
, Bernie’s son Andrew went in for tests. He, too, had cancer—a tentative diagnosis was mantle cell lymphoma, another very nasty adversary.

As the new decade advanced, Peter Madoff’s focus of attention telescoped down to a single hospital bed. One hospital staff member would poignantly recall Peter gently rubbing ointment into his son’s feet to comfort him just a few days before his death. Ruth and Bernie used their family foundation to support research into the disease and other cancers of the circulatory system; Roger’s sister, Shana, was active in various fund-raising efforts but was deeply bruised by her grief. It was a difficult time that strained family ties in every direction.

He would later deny it, but Madoff’s prized market-making business was sick, too. The computerization and competition he had long championed with regulators had indeed reduced the cost of trading stocks—but they had also reduced the trading profits of firms like his. Reconstructed records suggested that the visible Wall Street business run by Bernie Madoff and his family lost almost $160 million between 2001 and 2003, losses that Madoff insisted were offset by the capital he had retained over the years. But those losses added greatly to the complexity of the Ponzi scheme.

Madoff’s growing roster of hedge fund clients—most likely unwitting but doubtlessly gullible—were raking in enough money from an ever-broader field of investors to allow Madoff to accommodate Jeffry Picower’s unwelcome withdrawals. And Frank DiPascali was finding ways to launder the stolen proceeds into streams of revenue that would look legitimate on the faltering brokerage firm’s books, revenues that would raise no eyebrows inside or outside the firm.

To do so, DiPascali painstakingly calculated what the commissions would have been if Madoff actually had been doing the stated volume of trading for his clients. He then swept the appropriate sum of money out of the Ponzi scheme’s bank account and into the London affiliate’s bank accounts, and then moved it back to New York, to show up on the New York firm’s ledgers as legitimate commission income supposedly generated from trading in European markets—which meshed with Madoff’s cover story about why his brother and sons didn’t see his hedge fund trades going through their own trading desk in New York.

Despite the personal heartaches of those years, Madoff and DiPascali had both grown pretty smug about keeping their secrets—and pulling in the cash.

There always seemed to be enough fresh money to cover the intra-office bailouts, the fat paychecks for DiPascali and some of his busy staff members on the seventeenth floor, the executive suite salaries and bonuses, and the loans for the Madoff family on the nineteenth floor. There was always money for the first-class travel, first-class shopping, first-class living, and, of course, the first-class philanthropy. It was a style of living that mirrored the lives of Madoff’s largest investors, the trusting people who had accompanied him on his journey to the land of almost unimaginable wealth.

Carl Shapiro was still one of Boston’s most respected philanthropists, and he was also a prominent but less active figure in the glittery country club life of Palm Beach, where he and his wife, Ruth, lived in a full-service suite at the luxurious Breakers Hotel. Their elegantly gowned daughters and his dapper son-in-law Robert Jaffe showed up at a host of expensive charity events every year, and their names and faces popped up frequently in the local society pages.

Sonny Cohn, the cofounder of Cohmad Securities, still lived comfortably on Long Island, where he and his brother had become notable donors to the North Shore Long Island Jewish hospital system. But he was spending more time with a group of congenial fellow multimillionaires in the Miami area and entrusting Cohmad’s operations to his daughter Marcia Beth, who had known Madoff since she was a child and trusted him completely.

Stanley Chais and his wife, a successful screenwriter, lived with almost ostentatious simplicity in Beverly Hills—his car was an aging Japanese import, and their home was far from elaborate by neighborhood standards. Life was becoming harder for Chais, who was beginning to suffer from the rare blood disorder that ultimately would claim his life in 2010. But his family and clients seemed to be prospering from the Madoff accounts he managed, and his philanthropic gifts earned him praise and attention in Los Angeles and Israel.

Madoff’s old friend and representative in Minneapolis, Mike Engler, had died in 1994, but his widow and adult children remained in Madoff’s orbit, joining his family for ski trips and golf outings for years and entrusting their wealth to his genius. Their close ties to Madoff were reassuring to the many other Madoff investors among their circle of friends.

Ezra Merkin had become a lion of Wall Street, admired for his eloquent quarterly letters to his investors and surrounded by the obvious trappings of success: museum-quality art, a trophy apartment in one of Park Avenue’s legendary buildings, and a seat on the board at a host of prestigious schools, universities, and charities. The president of the Fifth Avenue Synagogue his father had helped establish, he was widely seen as a pious, generous man of great wealth and wisdom.

To the outside world, Madoff’s brokerage firm seemed to be prospering, too. By 2004 it had nearly two hundred employees and a reported net worth of $440 million—a fivefold increase over the previous decade, and twice the value reported just five years earlier. This put it firmly in the ranks of the fifty largest firms on Wall Street.

Nobody seemed to ever poke too seriously into what was going on there. There had been a few bumbling queries from the SEC in the past few years, but Madoff had easily deflected them. A few smart consultants and a few private banking teams had come across the same inconsistencies that worried the Ivy Asset Management team in the late 1990s and had quietly blacklisted Madoff. Even some very influential people—prominent hedge fund managers, some senior people at Credit Suisse, all of whom would have carried weight with regulators—had written him off and warned their clients to get out. Fortunately for Madoff, none of these influential people seem to have picked up the phone and shared a few forceful warnings with Madoff’s regulators or with any law enforcement agency.

It was as if these skeptics had seen that his operation was a firetrap that could ignite at any moment. But their response was simply to usher their own clients to the exits and quietly walk away. If the crowded building ultimately went up in flames, it wouldn’t be their fault that the fire marshals and building inspectors hadn’t been smart enough to figure it out on their own, would it?

So, amid the anxiety and personal anguish in the Madoff family and his billion-dollar headache over the Picower accounts, at least something was going right for Bernie: his Wall Street reputation was brighter than ever, his secret fraud was safe from regulators, and boatloads of new cash were arriving almost daily.