The Wizard of Lies: Bernie Madoff and the Death of Trust (43 page)

Still, some sort of global SIPC settlement or custom-tailored emergency relief for the neediest victims might have been possible if the SEC had immediately recognized the scale of financial devastation and had gotten the White House to persuade Congress to enact a more creative response.

But the reality of late 2008 was that the SEC was hamstrung by its history with Madoff and caught in a leadership change as a new administration moved into the White House. A divided Congress already was wrestling with failing banks, faltering insurers, near-bankrupt automakers, several endangered brokerage giants, a rising flood of home foreclosures, high levels of unemployment, and the paralysis afflicting most of the nation’s sources of consumer and business credit.

In the absence of a more creative and flexible option, the default position was a blind, slow, and bitterly adversarial SIPC liquidation in bankruptcy court.

Clawback lawsuits were an integral part of bankruptcy court liquidation. Typically, the cash withdrawn before a Ponzi scheme collapses is the primary asset a trustee can find to settle claims. With luck, there may be some untapped bank or brokerage accounts, or some costly toys and pretty houses that can be seized and sold. In essence, though, a Ponzi scheme is simply a liar’s bank account, with a stack of deposit slips at one end and a checkbook at the other. Its lifeblood is the money that flows in as “investments” and flows out again as “withdrawals.”

To recover the investors’ money that had flowed out, Picard needed to sue those who had withdrawn it, an obligation the net winners saw as a threat aimed directly at them, especially if they had taken out millions more than they originally invested. If Picard could be forced to acknowledge their final account statements as the basis for their claims, then they would still be owed money by the estate regardless of how much they had withdrawn. This would mean they would not be vulnerable to clawback lawsuits at all and, in turn, the recovery of many of the billions of dollars Picard had gone to court to claim would be impossible.

Picard’s bedrock assumption was that there was a limited amount of money available to satisfy the claims of Madoff’s victims. As he saw it, the net winners had already gotten back 100 percent of every dollar they had given Madoff. But, even on his optimistic days, he feared that net losers would get back just twenty cents on the dollar—maybe thirty cents if David Sheehan got very lucky with the big-ticket clawback lawsuits.

If that limited pool of cash were reduced by the invalidation of most clawback lawsuits and then had to be shared with every Madoff customer based on the final account balances, the payout could be pennies on the dollar, at best.

But what if the assets weren’t limited? What if the saddlebags retrieved by the posse were bottomless? What if someone—such as SIPC or the SEC—somehow came up with the full $64.8 billion necessary to pay 100 percent of everyone’s final account balance?

By law, SIPC could turn to Wall Street for the cash, and the SEC could get money from the U.S. Treasury. Perhaps that approach might have seemed fair to many Madoff victims—that the fat cats on Wall Street should deliver the fictional profits that Madoff had promised them, with something chipped in by the negligent regulators who had allowed this disaster to happen.

The debate over compensation escalated. Why rescue just the Madoff victims? Literally dozens of Ponzi schemes had fallen apart or were shut down in 2008 and the first half of 2009. And what about the legitimate profits the rest of America had lost in the same market meltdown that caused Madoff to implode? Why should the fictional profits promised by a crook magically reappear in people’s bank accounts, while the reality-based profits created through honest trades by the rest of America just vanished? If Wall Street and the SEC were going to make Madoff’s victims whole, why not make everyone whole?

It was going to be that kind of war, and the first shot was fired on June 5, 2009.

On that day, the small law firm of Lax & Neville filed a class-action suit against Picard on behalf of plaintiffs whose claims he had rejected. One plaintiff was a seventy-six-year-old New Yorker named Allan Goldstein, who had been one of the victims to testify before Congress soon after Madoff’s arrest.

He had been an eloquent spokesman in his congressional testimony.

“I am a human face on this tragedy,” he told the House Financial Services Committee on January 5. “I speak not only for myself but for the many people who have also lost everything because of this Ponzi scheme.”

In a hardworking life, he had accumulated $4.2 million in retirement savings, all of it invested with Madoff. During twenty-one years of booming bull markets, Madoff had paid him steady annual returns ranging from 8 percent to 12 percent. “I was willing to forgo outsized gains in boom years in favor of greater security,” he said. “We entrusted Mr. Madoff with all we had, and now everything that I worked for over a 50-year career is gone.”

Since the collapse, he had cashed in his life insurance to pay his mortgage, was trying to sell his home in a dismal market, and feared he would be forced into foreclosure. “At this stage of our lives, I never could have envisioned the financial devastation that we are now suffering,” he added. “In the blink of an eye, savings that I had struggled my entire lifetime to earn have vanished…. I sit before you today a broken man.”

He urged Congress to set up a restitution fund and enact some sort of emergency legislation that would allow SIPC to “loosen the standards” and distribute money more quickly. He concluded, “We are not trust funds, hedge funds or banks. We are ordinary people who were victims of an incomprehensible crime and who have had their lives turned upside down. We are turning to you, our only hope, for relief we so desperately need.”

But no emergency legislation or restitution fund was enacted by Congress; nor was either even considered. Appeals to the SEC did not produce any change in SIPC’s policies, either. Privately, regulators might fume about how poorly SIPC was handling its escalating public relations problem. But the SEC had gigantic public relations problems of its own, and it did not commit itself in the net equity battle at all until just before it was required to do so in court.

The Lax & Neville lawsuit was followed almost immediately by a similar complaint by Helen Chaitman. She argued that Picard was wrong and conflicted, that clawback lawsuits were simply immoral, and that both clawbacks and Picard had to be eliminated from the Madoff claims process if the victims were ever to find justice.

Spurred by their tireless advocates, the “net winners” became more organized. In letters to the editor, Internet postings, media interviews, and letters to Congress and the courts, they honed their arguments against Picard’s “cash in, cash out” approach. Some of them set up advocacy groups, forming alliances with other fraud-victim groups and lobbying Congress for legislative action to force Picard and SIPC to recognize their claims.

The net losers were less inclined to take a public stand. They found it less upsetting to remain silent—after all, Irving Picard and David Sheehan were fighting their fight, and they were loath to open themselves to attacks from the most vocal net winners. But in the absence of any public outcry from the thousands of net losers, Picard and Sheehan stood alone as the only visible defenders of the “cash in, cash out” approach.

A little before 3:00
PM
on Wednesday, June 17, 2009, SEC inspector general H. David Kotz, an elfish-looking man with dark hair and deep-set eyes, entered the Metropolitan Correctional Center, a cocoa-colored building in the shadow of the towering federal buildings on Foley Square in Manhattan. With Kotz was his slender, blond deputy, Noelle Frangipane.

They came to ask Bernie Madoff how he had eluded dozens of SEC investigators for more than a decade.

Inside the MCC, they were shown to a small conference room furnished with only a handful of chairs—no table, no desk—where they were joined by Ike Sorkin and his colleague Nicole De Bello.

After a brief wait, Madoff arrived, escorted by a guard, who removed his handcuffs. Despite spending three months in jail, he looked much as he had on the newscasts and television specials over the past six months, except for his prisoner’s uniform.

Kotz asked to swear in the witness, but Madoff declined to take the oath. He simply nodded when Sorkin reminded him of his obligation “to tell the truth.”

Madoff immediately had some matters he wanted to set straight. He claimed that the prosecutors and Irving Picard had misunderstood some of the things he had said in his proffer session in December. “There’s a lot of misinformation being circulated” about the case, he began, though quickly adding, “I’m not saying I’m not guilty.”

He then spun out a true-false version of what had really happened, giving Kotz a firsthand look at how he had toyed with SEC lawyers for years.

He insisted that everything he had told the SEC about his split-strike conversion strategy and his computer algorithms had been true—in the very beginning, he’d actually been buying stocks and options and had been successful at it, he said. “Even with artificial intelligence, you still need to have a gut feel,” he went on. “It’s a combination of technology and trader’s feel, and I was a good trader.”

He repeated what he had said in court—that his fraud began in the early 1990s as a temporary measure. “I made commitments for too much money and then I couldn’t put the strategy to work,” he told Kotz, laying on the jargon and weaving fantasy and truth together. “I had a European bank, I was doing forward conversion, they were doing reverse conversion…. I thought I was going to be able to do it.” When his profits fell short, he said, “I thought, ‘Fine, I’ll just generate these trades and then the market will come back and I’ll make it back.’”

He added, “But it never happened. It was my mistake not to just be out a couple hundred million dollars and get out of it.”

In an almost surreal way, Madoff kept assuring Kotz—accurately—that the investment strategy he pretended to be using all those years could have worked, could have been real, was “not that exotic.” Big Wall Street firms might be claiming now that they saw through him, but his clients had included several former top executives at Merrill Lynch and Morgan Stanley, he said truthfully.

“Credible people knew it could be done or 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,” he continued. Those people “knew a lot more than this guy Harry”—meaning Harry Markopolos. Madoff did not acknowledge that even if the strategy could have been used honestly, it could not have produced profits almost every month for nearly two decades—and it could not have been used honestly on a multibillion-dollar scale without overwhelming the markets.

His contempt for the SEC’s failure to catch him was gentle but withering. “It all comes down to budgets, I guess,” he said.

Madoff answered other questions posed by Kotz: He hadn’t used a lawyer for his SEC testimony in May 2006 because he thought going in without one would suggest that he had nothing to hide. He hadn’t been worried, either. “I had good answers for everything,” he said. “Everything made perfect sense.”

And, no, he hadn’t been worried when Frank DiPascali was also questioned in early 2006, he said, lying as smoothly as ever: “He didn’t know anything was wrong, either.” And, no, he had never created fake DTCC records to show the SEC. In fact, he insisted that the SEC investigators who looked at Avellino & Bienes in 1992 had seen that his trades were real. He said he had had no idea the two men “had thousands of clients.”

Madoff’s opinion, which almost seemed to be taking shape as he answered Kotz’s questions, was that the SEC’s relentless focus on a crime he wasn’t committing blinded it to the crime he was committing—otherwise, they could easily have caught him. They “asked all the right questions, but it was still focused on front-running,” he said, adding, “It never entered the SEC’s mind that it was a Ponzi scheme.” Even after asking for his DTCC clearinghouse account number, the SEC never checked to see if the stocks and bonds on the client statements were actually there.

“If you’re looking for a Ponzi scheme, it’s the first thing you do,” he told Kotz.

Madoff had been astonished at that. He remembered thinking, “After all this, I got away lucky.”

In a rare reflective moment, Madoff observed: “I got myself in a terrible situation. It’s a nightmare.” Businesslike and composed until now, he lost his grip for a moment when he reflected on the “living hell” his family was facing: “It’s a tragedy, it’s a nightmare.” But soon he regained his footing and asserted that he did a lot of good for the industry before he did anything wrong. “The thing I feel worst about, besides the people losing money, is that I set the industry back,” he said.

By now, Kotz began to wonder if Madoff himself knew where the line between truth and lies was located. Months later, one exchange that day would remain sharp and suggestive in his mind.

Did you create false documents to give to the SEC?

No, Madoff answered, almost affronted. He said he gave the SEC the same documents he gave to his customers.

But weren’t those customer statements actually false documents?

No, they weren’t. Madoff paused for what seemed like thirty seconds, then gave a tiny nod to reality.

“I could see how you might see them as false,” he said.

On Monday, June 22, Ike Sorkin delivered a letter to Judge Denny Chin, who would sentence Madoff the following week. “We seek neither mercy nor sympathy,” Sorkin wrote. “Respectfully, we seek the justice and objectivity that have always been—and we hope always will be—the bedrock of our criminal justice system.”

His letter was one of the rituals of American justice. It was Sorkin’s chance to persuade Judge Chin to ignore the demands the government was making—the 150 years tallied up when Madoff agreed to plead guilty—and the forever-after prison term that Madoff’s victims demanded in the e-mails and letters the prosecutors were collecting to submit to the judge.

A confidential “presentencing report” by the federal probation office had just arrived at Judge Chin’s chambers. It detailed the history of Madoff’s crimes and the devastating human damage they had inflicted. The report recommended a prison term of fifty years.

In his letter, Sorkin urged the judge to consider a sentence of a dozen years. Given Madoff’s age and the early age at which his parents died, that would allow at least for the thin possibility that Madoff would one day be released from prison—at age eighty-three.

Sorkin acknowledged the storm of justified anger and “heart-wrenching stories of loss and deprivation” reflected in the victims’ letters to the court. Those letters uniformly demanded that Madoff be locked up for the rest of his life. The victims’ fury, he wrote, was “no doubt justified in light of the circumstances” of a case that involved such grave injury to so many people. Sorkin promised that Madoff “will speak to the shame he has felt and the pain he has caused” at the sentencing hearing.

Sorkin observed that the messages the victims had submitted to Judge Chin were free of the anti-Semitic vitriol and death threats contained in some of the letters that Sorkin and his client had received. But these messages still disturbed Sorkin deeply. “The unified tone of the victim statements suggests a desire for a type of mob vengeance,” he wrote. “It is the duty of the court to set aside the emotion and hysteria attendant to this case and render a sentence that is just and proportionate to the conduct at issue.”

When word of Sorkin’s request became public, it simply poured more fuel on the fiery outrage of Madoff’s victims.

On Friday, June 26, a fax machine came to life in the law office of Peter Chavkin, disgorging a legal document’s signature page. When Chavkin and his client, Ruth Madoff, signed this page, she would be handing the government more than $80 million worth of property—a portfolio of municipal bonds, the Manhattan penthouse, the beach home in Montauk, the Palm Beach house, the three-bedroom apartment on the French Riviera, the boats and cars, the furniture and artwork, the Steinway piano her son Andrew had played, her fur coats, her well-worn designer handbags, the vintage jewelry, the Wedgwood china and Christofle silver, even Bernie’s class ring from Hofstra, class of 1960.

She would be signing away every treasured thing she had thought was hers—until that December day when her husband revealed that her dream world had been built entirely from dreams he had stolen from other people, many of them people she had known and loved all her life.

In offering Ruth Madoff this civil settlement, the prosecutors were making some significant admissions—publicly and implicitly. Publicly, they were conceding that they might not be able to prove in court that they had a valid claim to the $14.5 million in equity that Ruth held in the Manhattan penthouse and the beachfront home in Montauk, properties purchased before the date Madoff claimed his fraud began. They were also acknowledging that, if she decided to, she could fight them in court over the other $70 million she would be handing over.

But the unspoken message behind the settlement was that the prosecutors had no criminal charges to file against Ruth Madoff. If they had had any, then this civil settlement would have been unnecessary. If she were to be indicted and convicted, they could seize every penny she had under the criminal forfeiture laws, and there would be nothing she could do to stop them.

So in exchange for agreeing to sign over these assets without a fight, Ruth was allowed to keep $2.5 million in cash to furnish herself with a new home, a new life, some kind of future.

It was perhaps the only personal exoneration she could hope for, even though it protected her only from further claims by the prosecutors. It didn’t protect her from claims filed by anyone else—including Irving Picard, the bankruptcy trustee. And it certainly didn’t protect her from the suspicion and insults she faced every day in the world outside this quiet law office in a tower attached to the Chrysler Building.

She signed the settlement anyway, in a firm hand, as did Chavkin. At some point, the page was faxed to Judge Chin and the federal prosecutors downtown.

The stage had now been set for Monday’s performance. On June 29, spectators squeezed elbow to elbow on every polished bench in the richly decorated ceremonial courtroom on the ninth floor of the federal courthouse, with its wood-paneled walls and gilded coffered ceiling. The marshals scanned the crowd, alert for any outburst.

As was his style, Judge Chin swept gracefully onto the high, carved bench, the prosecutors and defense lawyers already positioned at tables before him. Just minutes before 10:00
AM
, Bernie Madoff was brought in and seated at Ike Sorkin’s side. He appeared thinner, no longer looking as carefully tailored in the familiar gray suit, white shirt, and gray tie that Ruth had been allowed to send from his apartment the previous week. He looked haggard and gray, his once-silvery hair now a lank pewter.

The four-act drama of a criminal sentencing was about to begin.

After a few curtain-raising procedures, Judge Chin invited Madoff’s victims onstage. Hundreds of them had sent in letters and e-mails, and many were present in the court on this day. Nine had asked to address the court, and a microphone had been placed at the ornate rail that divided the spectators’ benches from the area reserved for the lawyers and the judge.