The Wizard of Lies: Bernie Madoff and the Death of Trust (49 page)

Meanwhile, the criminal cases ground on slowly. On November 3, 2009, David Friehling changed his plea from not guilty to guilty, but only to the crimes involving the filing of falsely certified audits and financial statements with the SEC. When Friehling stood to speak to the presiding judge in his own behalf, he was emphatic. “First and foremost,” he said, “it is critical for Your Honor to be aware that at no time was I ever aware that Bernard Madoff was engaged in a Ponzi scheme.” In fact, he pointed out, he and many members of his family had put their savings and retirement funds into Madoff’s hands and had lost it all.

After pleading guilty, Friehling was released on bail, promising to cooperate with the continuing investigation.

The next defendants to come before the court were Jerome O’Hara and George Perez.

When the FBI agents came to arrest the forty-six-year-old O’Hara on November 13, he was at his home in Malverne, New York, a compact, tree-studded Long Island suburb about six miles due east of Madoff’s original hometown of Laurelton, Queens. A big ruddy man with salt-and-pepper hair, O’Hara had worked as a computer programmer for Madoff since he was in his twenties. Now, in an indictment unsealed that morning, he was accused of using his computer skills to help Frank DiPascali create the fictional paper trail that had concealed Madoff’s Ponzi scheme for years.

His officemate on the seventeenth floor, George Perez, was arrested the same morning, on identical charges. The FBI arrived early at his home in East Brunswick, New Jersey, one of the suburban bedroom towns that are strung like beads along the turnpike in central New Jersey. The forty-three-year-old Perez, a muscular man with a thick neck and small, some-what pugnacious features, had joined the Madoff firm about a year after O’Hara.

The SEC was suing the two men as well, echoing the accusations in the indictment, the most intriguing of which was that O’Hara and Perez, uneasy after helping Madoff through his cash crisis in 2005 and the SEC probe that followed, had allegedly confronted him in September 2006 and refused to help anymore—telling him to “ask Frank” the next time he needed his dirty work done, the SEC asserted.

According to the indictment and the SEC complaint, Madoff—flush with cash again and out from under the SEC’s unfocused microscope—had simply told DiPascali to offer the two men as much money as it took to keep them quiet.

O’Hara and Perez were brought before a magistrate at the federal courthouse in Manhattan, and each was released on $1 million bail. Their lawyers said that they were innocent and would vigorously fight the charges, which carried prison terms of up to thirty years.

On February 25, 2010, on a day of slush and spitting snow, a team of FBI agents pulled up at 6:00
AM
outside an apartment building on East Seventy-ninth Street, near the East River. They went directly to Dan Bonventre’s apartment and advised him that he was under arrest.

It was the usual drill. He was allowed to dress, advised of the wardrobe restrictions, handcuffed, escorted downstairs, and eased into the rear passenger seat of the waiting government sedan. Once, Bonventre had so closely resembled Bernie Madoff that employees joked that they were twins separated at birth. The similarity was lost now. Bonventre had grown a neatly trimmed white beard and lost weight since he last showed up for work at the Lipstick Building. Photographers clustered around him as he sheltered under an umbrella at Foley Square. He looked bereft and terrified.

He had been one of Madoff’s senior executives for more than thirty years, but now he stood accused of having conspired to sustain and conceal the Ponzi scheme, notably by helping Madoff survive the late 2005 cash crisis. As with O’Hara and Perez, the SEC was filing a parallel civil case against him, too.

Bonventre’s lawyer, Andrew J. Frisch, quickly arranged bail and then responded to media calls. The case is “a prosecutorial ‘Hail Mary’” effort, he said. “I’m not just saying he is not guilty or that they can’t prove it. I’m saying Dan Bonventre is absolutely innocent.”

As 2010 opened, none of the arduous journeys that began in the aftermath of Madoff’s arrest were anywhere near an end—except for Madoff’s own journey to a life behind bars. Criminal cases were still moving steadily toward distant trial dates as the government’s investigation continued to inch forward amid frequent changes in personnel. Civil lawsuits were still aiming for the appellate courts, where both sides would wait and pray for vindication. And regulatory reform within the SEC was gaining as much ground as budget and congressional constraints allowed.

Thousands of victims had actually been paid by SIPC and had begun to put their lives together again. Meanwhile, in the summer of 2010, more than two dozen victims, largely net winners, collaborated to publish
The Club No One Wanted to Join
, a moving collection of essays that bore witness to the heartbreak and the quiet heroism that Madoff’s crimes had drawn forth. And the advocacy groups that had formed in opposition to Irving Picard continued to seek tax relief for victims and constructive reforms at SIPC, which would be considered at congressional hearings that fall.

Behind the scenes, the spring and summer of 2010 were marked by almost relentless activity at Irving Picard’s offices, as he and David Sheehan pushed their staff to meet the December 11 deadline for filing their biggest and most sensational clawback suits. But these months also brought unexpected strain and continuing backstage friction between their staff and the U.S. Attorney’s Office over the handling of the assets forfeited by Madoff and other criminal defendants. From the beginning of the case, Sheehan had argued that the asset sales should be left to the trustee, since SIPC would pay all the expenses and thus leave more money for victims. The prosecutors preferred to handle the sale of seized assets through the U.S. Marshals Service, a process more familiar to them and more advantageous to their own budgets.

The conflict came to a head in the spring of 2010, when prosecutors stepped into the protracted negotiations between Irving Picard and Jeffry Picower’s estate. Inches away from a settlement agreement requiring the estate to pay $5 billion to the trustee, the senior Picower lawyer, Bill Zabel, balked when the U.S. Attorney’s Office threatened to file a civil forfeiture action to claim additional assets on top of any settlement with Picard. Zabel politely but implacably insisted on a global settlement or none at all.

Sheehan would later say that the day he heard that news from the prosecutors’ office was, for him, the worst moment in the entire tortured case.

David Sheehan was racing against time.

Under bankruptcy court rules, he had until midnight on December 11, 2010, the second anniversary of Madoff’s arrest, to file lawsuits aimed at retrieving cash withdrawn from the Ponzi scheme. By late September, nearly a thousand clawback lawsuits were still making their way through his firm’s pipeline. They included little ones against Madoff cousins and in-laws, midsize ones against elite hedge funds and former Madoff employees, and giant ones against Madoff’s earliest backers and some of the world’s biggest financial institutions.

Nearly four dozen lawyers in Baker & Hostetler’s offices in Rockefeller Center were working almost around the clock. The lawsuits against smaller investors had been farmed out to dozens of lawyers scattered among the firm’s offices in Orlando, Houston, Denver, and Los Angeles. Forensic accountants and private investigators were working alongside the legal teams—as were paralegals, courthouse computer specialists, and multitasking secretaries. In addition, a small battalion of foreign lawyers had been hired to monitor and respond to more than 275 lawsuits in courts spread from Luxembourg to the Cayman Islands.

Sheehan, who relished complexity, had divided the work among several specialized teams. Some teams were devoted to investigating and framing lawsuits against a single high-profile defendant, such as a major bank or a feeder fund. Others were handling the vast list of “good faith” withdrawals—the excess cash taken out by the modest net winners who opposed Irving Picard’s effort to recover any money from them. Another large team was focusing on what Sheehan called “bad faith” withdrawals, large sums of money taken out by sophisticated investors who might arguably have had solid grounds for suspecting fraud at the time they removed their cash.

Finally, representatives from all of these teams formed a “complaint review” task force that met several times a week to read one another’s drafts for consistency and accuracy.

The scene at the firm was like law school finals writ large: soggy pizza boxes, discarded take-out food containers, an increasingly pungent gymnasium smell in conference rooms used as “war rooms” by the rumpled people working on one case or another. As in a war, all leaves were canceled until further notice. One day, feeling a momentary lull in the pressure, Sheehan asked a colleague if she would like to strike a blow for civilization by going down to the lobby for a sandwich; she replied, “No, thanks—my priority is personal hygiene.” If she had time for a sandwich, she’d spend it on a shower.

By mid-November, Sheehan was ready to file a half-dozen cases to recover money from former Madoff employees, some of them with résumés that went back to the earliest days of the firm.

He sued Irwin and Carole Lipkin, whose association with Bernie Madoff dated to 1964, when Irwin Lipkin was hired as Madoff’s first employee. A letter Lipkin wrote in 1998, which was found on a computer at the firm, described Madoff as “the brother I never had.” Carole Lipkin had first worked for the stockbroker Marty Joel, Madoff’s officemate in the early 1960s, but she eventually joined the firm as well. Their son Eric had been hired in 1992 and was still on the payroll on the day of Madoff’s arrest. Among the checks Madoff had prepared in the final hours of his fraud was one for almost $7 million to be mailed to the Lipkins at their Florida home, according to the lawsuit.

Other lawsuits were filed the same day against Enrica Cotellessa-Pitz, a perky young woman with dark corkscrew curls who had worked for Madoff since 1978 and had been listed as the firm’s controller since the late 1990s, and David Kugel, a distinguished-looking Wall Street veteran who was hired by Madoff in 1970 as an arbitrage trader and who was accused by the trustee of helping to falsify arbitrage trades in the early years of Madoff’s fraud. Sheehan also sued Daniel Bonventre, Madoff’s operations director, who was already facing criminal charges in the case.

Two other Madoff employees—JoAnn “Jodi” Crupi, in her late forties with two young children, and Annette Bongiorno, a short, heavyset woman in her early sixties—were also named in lawsuits filed by Sheehan’s team on November 11. But a week later, those lawsuits became the least of Crupi’s and Bongiorno’s worries.

Shortly before dawn on Thursday, November 18, FBI agents arrived at Jodi Crupi’s white gabled home on a tree-darkened street in suburban Westfield, New Jersey, and arrested her on criminal charges of conspiring with Madoff and others to sustain his Ponzi scheme. She was driven into Manhattan for a bail hearing on Foley Square. Far to the south, other FBI agents were navigating past the shadowy fairways and ponds of the Woodfield Country Club community in Boca Raton, pulling up outside Annette Bongiorno’s pastel Spanish-style home. Also arrested on criminal conspiracy charges, she was driven a short distance north to the modern federal courthouse in West Palm Beach, where a bail hearing would be held that afternoon.

The two women’s names were added to the indictment that prosecutors originally filed in November 2009 against the two computer programmers, George Perez and Jerome O’Hara, and amended in February to include Dan Bonventre. All three men had denied the charges and vowed to fight them in court.

Now there were five defendants, all accused of having helped Bernie Madoff and Frank DiPascali construct and maintain the elaborate charade on the seventeenth floor of the Lipstick Building. Crupi, who faced a possible jail term of sixty-five years, was accused of maintaining the daily record of cash flowing in and out of the Ponzi scheme’s bank account, researching fake trades, and helping to maintain the computer programs that generated the account statements. Bongiorno, facing a seventy-five-year term, was accused of creating fake trades and phony account statements for several hundred individual accounts, including those Madoff set up for his biggest clients and family members.

Like their codefendants, both women denied the charges, asserted their innocence, and prepared to stand trial sometime in 2011.

The general public barely noticed Sheehan’s early lawsuits or the two new indictments and arrests. But a week earlier, on Wednesday, November 10, the hunger for Madoff news was on full display as the U.S. Marshals Service invited reporters to examine the personal belongings from the homes of Ruth and Bernie Madoff. These items would be auctioned off at the end of the week.

The pending auction was an instant sensation. Film crews from local television stations and news Web sites jousted with foreign documentary teams for the best-lit angles amid the arrangements of furniture and tightly packed racks of clothing. Reporters scribbled and photographers snapped as the marshals who had seized the goods provided anecdotes about where the items had once fit in the Madoff homes. Hundreds of items—from the couple’s ornate canopy bed to Ruth’s personalized Mother’s Day coffee mug—had been swept from the rooms and closets and drawers of the Manhattan penthouse and the Montauk home and were now spread out in a vast unused space at the Brooklyn Navy Yard.

It was the second auction of personal items seized from the Madoffs. The 2009 auction, a year earlier, had been dominated by Bernie’s fabled wristwatch collection, some of Ruth’s important jewelry, and garish oddities such as Bernie’s personalized silk New York Mets jacket, which was sold for $14,500. That sale raised just under $900,000.

This time, the marshals were selling off much more intimate relics from the private life the Madoffs once had—the most photographed item was a pair of black velvet bedroom slippers, lined in red and adorned with Madoff’s monogram embroidered in gold thread. Another object of fascination was Bernie’s pleated-front boxer shorts, neatly pressed and laid out among representative items of clothing being put up for sale.

But where were the bits of appalling excess and gaudy grandeur that people expected from the Ponzi king and his scorned queen?

Well, they were clotheshorses, those Madoffs—no doubt about it—although they apparently bought classics, lots of them, and wore them for years. The racks of Bernie’s custom-tailored Savile Row suits went on forever, but some were more than a dozen years old. His towering stacks of custom-made shirts and seven dozen unworn pairs of shoes in the same Mr. Casual Belgium style drew snickers—but sold for more than the marshals expected. Ruth’s designer handbags were a big hit, but some had worn linings and well-rubbed corners. Her iconic collarless Chanel jackets, all in size two, had seen a lot of seasons, and her evening gowns were few and elegantly modest.

The chintz hangings on the canopy bed were faded. There were small holes in the side of a gray leather sofa. The living room furniture looked well used and comfortable. Many of the rugs were frayed, mended, or marred; one catalog listing cautioned: “Note: cigarette burns on bottom.”

The art was by minor artists, the most recognized name being Thomas Hart Benton. The treasures here were small or subtle, in some cases too modest to have impressed the marshals. They expected no more than $12,300 for an oil painting by the American artist Ernest Lawson—it would sell for $40,000. But then they estimated that a beautiful early Georgian drop-front secretary, in figured walnut and rosewood, would fetch as much as $22,500, yet it would be hammered down for $9,500.

An atmosphere of faint embarrassment arose as people thumbed through the more modest household items on display at one end of the Navy Yard showroom. Oh, look over there. Isn’t that…a latke platter?

It was not surprising that Ruth Madoff had forfeited the designer clothing, the elegant Edwardian bracelets, and the magnificent 10.5-carat diamond ring with its custom platinum setting—it sold for $550,000. Those luxury items could generate substantial amounts of money for her husband’s victims. But the auction catalog was evidence of just how thoroughly she had been dispossessed. It listed eight pairs of her panty hose, her cosmetic brushes, two dozen pairs of her socks (used), her “assorted workout clothes,” including her well-worn tank tops and yoga pants, T-shirts from the Gap, and two laundered hankies—along with “a box of new hankies.” The contents of all her bathroom and kitchen cabinets had been swept out and put up for sale—shampoo and hand cream, pot holders and dish towels, a salad spinner and a tissue-box cover, anything and everything.

Lot number 448 included a fishing trophy Bernie had won with a 350-pound blue marlin in 1975 and an assortment of toys from the Montauk home—jacks, a kite, board games, decks of cards. It also included “two (2) partial boxes of light bulbs,” a box of staples, and ten size-D batteries. Another lot included pliers and other hand tools, several extension cords, gardening equipment, and a dozen packages of assorted screws and nails. The trays of costume jewelry included a tarnished Eagle Scout medal inscribed “Be Prepared.”

The bidding, in person at a Midtown hotel and online, was a headline event. As expected, there was fierce interest in the monogrammed slippers, which went for $6,000 in a lot that included one of Ruth’s monogrammed Ascot Chang shirts. Fifteen pairs of used slacks and jeans from Bernie’s closet went for just $25.

All told, the two Madoff auctions raised just under $3 million. The proceeds from the sale of their three homes, three boats, and a car brought the total from forfeited assets to about $27 million, not counting an estimated $10 million in future proceeds from the French town house and the eighty-eight-foot yacht that Madoff kept moored nearby, which were being haggled over in bankruptcy court in London.

This was a drop in the bucket against the “net loser” claims, which Picard estimated to run as high as $20 billion. The only way to raise that kind of money was through litigation. As Thanksgiving neared, Sheehan’s team announced lawsuit after lawsuit, sometimes electronically filing several major cases and dozens of smaller cases on a single day.

On November 24, UBS, the giant Swiss bank, was sued for a minimum of $2 billion in a complaint that accused it of lending its prestige to various Madoff feeder funds without taking any steps to protect investors. The case also named Access International, the company whose aristocratic French founder, René-Thierry Magon de la Villehuchet, committed suicide after Madoff’s arrest. A few days later, UBS would be named in a second suit involving another set of feeder funds, bringing Picard’s total claims against it to $2.5 billion.