The Wizard of Lies: Bernie Madoff and the Death of Trust (59 page)

the fraudulent use of the investors’ money: Ibid., p. 40.

elaborately concealed hush money: Ibid., pp. 51–54.

assisted by other close associates on the small staff devoted to Madoff’s investment clients: The criminal charges to which DiPascali pleaded guilty in 2009 acknowledged that others were involved in the effort and knew it was fraudulent. The government subsequently filed criminal charges against Annette Bongiorno, JoAnn Crupi, Daniel Bonventre, George Perez, and Jerome O’Hara, accusing them of helping Madoff and DiPascali carry out and cover up the elaborate fraud. All denied the charges. Similar accusations were made in civil suits filed by the Madoff trustee in bankruptcy court against Bongiorno, Crupi, Bonventre, Eric Lipkin, Lipkin’s father and mother, and David Kugel, a longtime arbitrage trader for the Madoff firm. Those allegations, too, were denied by the defendants.

A footnote showed that Madoff had fluently explained it all to them: Specifically, the SEC memo in the Kotz Report’s Exhibit 114 noted in footnote 10 on page 9 that “Madoff hedges A&B’s portfolio primarily by purchasing long-term equity anticipation securities (‘LEAPS’), which are essentially long-term options (two year expiration) on underlying stocks or stock indexes. During the time period reviewed by the staff (i.e., May through October 1992), Madoff purchased puts on the S&P 100 Index and utilized a ‘short [against] the box’ trading strategy designed to lock in trading profits.” A “short against the box” is a short sale of stock that an investor already owns—a way of reaping profits on the stock’s current selling price without actually selling the shares and incurring capital gains taxes.

“I was actually doing the trades”: First BLM Interview.

“Shapiro, Picower, and Levy all sent in actual money, new money”: Ibid.

“I am not a cash cow and I will not be milked”: Affidavit of Frank J. Avellino dated Mar. 10, 1993, filed in
SEC v. Avellino & Bienes, Frank J. Avellino and Michael S. Bienes
(hereafter “the 1992 SEC Case”), filed as 92-cv-8314 (JES) in U.S. District Court for the Southern District of New York, p. 1.

“I personally oversaw Avellino & Bienes’ books and records”: Ibid., p. 2.

“I don’t believe your client”: Transcript of a hearing in the 1992 SEC Case, held before federal district judge John E. Sprizzo on April 21, 1993, p. 147.

They denied that they were involved at all: Bienes
Frontline
interview.

laid out a very different scenario:
Picard v. A&B
Complaint, p. 51.

the “schupt” payments: Ibid., p. 55. In a separate complaint, the trustee would assert that Steven Mendelow of Konigsberg Wolf profited to a lesser degree from both the guaranteed profits and the “schupt” payments for allegedly steering his former Telfran investors back to Madoff. See
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Steven B. Mendelow, et al.
(hereafter
Picard v. Mendelow
), filed as Adversary Proceeding No. 10-04283 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, p. 25. In a telephone interview in January 2011, Stanley Arkin, a lawyer for Mendelow, denied the allegations and said his client “was a victim like many others, and had no idea that Mr. Madoff was conducting a Ponzi scheme.”

DiPascali, in turn, allegedly relied on two computer programmers: As of February 2011, the programmers, Jerome O’Hara and George Perez, had denied the allegations and were awaiting trial.

“I could not have operated in view”: E-mail from BLM, dated Dec. 27, 2010. In the e-mail, Madoff insists the move occurred when “the problems started with crime,” denying again that his Ponzi scheme started before the SEC investigation. What is more likely is that the scale of his fraudulent operation was compact enough to be hidden on the eighteenth floor until the enormous increase in the number of individual accounts that followed the SEC’s action against Avellino & Bienes.

The theory behind hedge funds: As one scholar noted: “High leverage, management expertise, performance fees, and absolute return strategies are the hallmarks of the industry. [Hedge fund managers] share a belief that markets are not strongly efficient, and that adroit managers can take advantage of superior information, analysis, and minimization of trading cost to achieve absolute returns under any market conditions.” J. W. Verret, “Dr. Jones and the Raiders of Lost Capital: Hedge Fund Regulation, Part II, a Self-Regulation Proposal,”
Delaware Journal of Corporate Law
32, no. 3 (2007): 803.

The hedge fund was pioneered: Carol Loomis, “Personal Investing: The Jones Nobody Keeps Up With,”
Fortune
, April 1966, p. 237.

even the fabled Jones fund: Carol Loomis, “Hard Times Come to the Hedge Funds,”
Fortune
, January 1970, p. 134.

its partners “aren’t rocket scientists”: Kotz Report, Exhibit 104, p. 5.

Born in Nashville and educated at Vanderbilt University: These and other personal details, unless otherwise noted, are drawn from his engagement announcement, “Monica Haegler Will Be Married to an Economist,”
New York Times
, Apr. 8, 1962. As in all society page announcements, the details were provided by the engaged couple and were not independently verified by the newspaper.

He later helped develop an international private banking operation: Official biography for Walter Noel contained in promotional material from Fairfield Greenwich Group.

four of them would marry into influential European and Latin American families: Lisina Noel’s husband, Yanko Della Schiava, was the son of a prominent Italian textile executive active in the fashion industry and his wife, the editor of the Italian edition of
Cosmopolitan
magazine. Daughter Alix’s husband, Philip J. Toub, had family ties to a major shipping company in Switzerland, where he was raised. Andrés Piedrahita, Corina’s husband, was the ambitious Boston-educated son of a commodities trader in Bogotá, Colombia. Ariane Noel married Marco Sodi, an investment banker born in Florence. The fifth Noel daughter, Marisa, was the only one to accept a domestic suitor: she married Matthew Brown, whose father had been an IBM executive and whose mother was briefly the mayor of San Marino, California. These details are all drawn from the daughters’ wedding and/or engagement announcements in the
New York Times
.

Monica Noel had her own wealthy family connections: Kristina Stewart, “Golden in Greenwich,”
Vanity Fair
, October 2002; Sarah Medford, “Easy in the Islands,”
Town & Country
, May 2005, p. 207.

“Mustique is the antithesis of Palm Beach”: Medford, “Easy in the Islands.”

it probably totaled more than $45 million in 1998: The estimate is based on comparisons of the fees collected on total Sentry fund assets of $4 billion in 2002, which totaled $87 million, according to exhibits filed in connection with lawsuits by the Madoff trustee, Sentry fund investors, and Massachusetts securities regulators. Since the Sentry fund’s assets were just under $2 billion in 1998—about half the 2002 level—it is reasonable to conclude that the firm’s fee income was likewise about half the 2002 level.

the firm would collect nearly $920 million between 2002 and 2008: For example, see
Picard v. Fairfield Sentry
Amended Complaint, p. 34.

J. Ezra Merkin was to the intimate, fraternal world of Jewish philanthropy: Steve Fishman, “The Monster Mensch,”
New York
, Mar. 2, 2009, p. 18. Fishman noted that “Ezra took Bernard L. Madoff Investment Securities places Bernie couldn’t have dreamed of going by himself. The list of people and institutions that Ezra Merkin put with Bernie Madoff is a kind of Jewish social register. There was Mort Zuckerman, the media and real-estate mogul, and Ira Rennert, chairman of Fifth Avenue Synagogue and owner of a 68-acre oceanfront Hamptons estate. Over 30 charities invested with Ezra, many of them with a Jewish affiliation” (p. 77).

One of them recalled the ritual of lunching with Hermann Merkin: Confidential interview with a former business associate of BLM.

the synagogue became the spiritual home of a number of wealthy congregants: Reporting notes contributed to the author by Alison Leigh Cowan, a reporter at the
New
York Times
, based on her extensive coverage of Merkin’s role in the Madoff affair.

“a voracious reader”: Ibid.

“pious, prayerful and profound”: Douglas Feiden, “Famed for Piety, Jacob Merkin Put Faith and Funds in Bernie Madoff,” New York
Daily News
, Jan. 18, 2009, quoting Rafi Weiss, “a retired investor who worshiped with Merkin at Orthodox synagogues in Manhattan and Long Island.” The same quote was included in Fishman, “Monster Mensch,” p. 20, attributed to “a fellow congregant.”

his sometimes harsh dismissal of those he considered his intellectual inferiors: Fishman, “Monster Mensch,” p. 24.

After briefly practicing law at an elite New York firm:
In re: J. Ezra Merkin and BDO Seidman
(hereafter
NYLS v. Merkin
), filed in U.S. District Court for the Southern District of New York as 08-Civ.-10922 (DAB), p. 23 of the Amended Complaint. An identical chronology is laid out in
The People of the State of New York, by Andrew M. Cuomo, Attorney General v. J. Ezra Merkin and Gabriel Capital Corp.
(hereafter
Cuomo-Merkin
Summons), filed as Index No. 450879/09 in Supreme Court of the State of New York, County of New York, on Apr. 6, 2009, p. 24, based on testimony by Merkin and others involved.

far less involved in actually managing the money:
NYLS v. Merkin
, pp. 4, 12–18, 25–32. Again, these allegations were echoed in
Cuomo-Merkin
Summons, notably on p. 29.

almost exclusively by a young man named Victor Teicher:
Cuomo-Merkin
Summons, pp. 26–27.

According to Teicher, he continued to advise the two Merkin funds: Ibid.

Merkin started thinking about putting a portion of the Ariel and Gabriel money: Excerpts from deposition of J. Ezra Merkin on Jan. 30, 2009 (hereafter Merkin Transcript), filed as Exhibit 1 in
Cuomo-Merkin
Summons, p. 8.

“a kind,
haimish
sort of guy compared to my father”: Fishman, “Monster Mensch,” p. 77.

One of Merkin’s associates would later theorize: Ibid.

Merkin would later argue in court that many investors were aware:
Cuomo-Merkin
Summons, Opinion Denying Defendants’ Motion to Dismiss by Justice Richard B. Lowe III (hereafter Lowe MTD Opinion), Feb. 8, 2010, p. 11.

According to Merkin, his father first introduced him to Madoff: Merkin Transcript, p. 8.

it apparently carried great weight with his eldest son that he spoke well of Madoff: Ibid.

“described Madoff in terms of what he was doing”: Deposition of Victor Teicher, filed in
Cuomo-Merkin
Summons, pp. 39–45.

Merkin got similar warnings from John Nash: Arvedlund,
Too Good to Be True
, pp. 252–53, 258–59.

Later lawsuits would calculate that Merkin collected nearly $170 million: Lowe MTD Opinion, p. 3.

“We did not speak about markets”: Author’s notes of Portfolio seminar featuring Wiesel.

“Everybody we knew told us we could do so much more”: Ibid.

It was widely known that prospective members had to demonstrate: Confidential interview with a person in Palm Beach familiar with the club’s membership rosters and practices since the late 1980s. This person said that the club’s initiation fee was $125,000 in 1990–91 and was about $400,000 in 2010. Assuming that the $275,000 increase had been spread evenly across the nineteen-year period, the fee in 1996 would have been $197,500.

7. Warning Signs

a lengthy article by writer Michael Ocrant: The article is reproduced in Markopolos,
No One Would Listen
, p. 288.

“considered somewhat high for the strategy”: Ibid.

“experienced far greater volatility and lower returns”: Ibid., p. 289. The Gateway fund actually tracked the Fairfield Sentry fund fairly closely from 1993 until about 1997; thereafter the disparity between the two funds widened sharply as Gateway became more volatile and less profitable.

“Never in my wildest dreams did I think I would have partners like these”: Michael Carroll, Hal Lux, and Justin Schack, “Trading Meets the Millennium,”
Institutional Investor
, January 2000, pp. 36–53.

“Market timing and stock picking are both important for the strategy to work”: The Ocrant article in Markopolos,
No One Would Listen
, p. 292.

The following week, a similarly skeptical view: Erin Arvedlund, “Don’t Ask, Don’t Tell,”
Barron’s
, May 7, 2001.

“Much of it I thought was, frankly, just irresponsible journalism”:
Galvin Fairfield Greenwich
Complaint, transcript excerpts from interview with Jeffrey Tucker, Mar. 12, 2009, p. 97. (Excerpts were also cited as Exhibit 85 in
Picard v. Fairfield Greenwich
Amended Complaint.)

“Come up this afternoon”: According to Tucker’s testimony, Madoff extended a similar invitation that day to Carlo Grosso, a principal of the Kingate funds based in London, who was visiting New York.

Wall Street’s central clearinghouse, the Depository Trust & Clearing Corporation: Originally named the Depository Trust Company, the clearinghouse later combined with a separate clearinghouse called the National Securities Clearing Corporation, on whose board Madoff served in the late 1980s, and was renamed the Depository Trust & Clearing Corporation, or DTCC. According to the official DTCC history, the clearinghouses were “both created in response to the paperwork crisis that developed in the securities industry in the late 1960s and early 1970s. At that time, brokers still exchanged paper certificates and checks for each trade, sending hundreds of messengers scurrying throughout Wall Street clutching bags of checks and securities.”

Tucker later told regulators about this pivotal visit:
Galvin Fairfield Greenwich
Complaint, transcript excerpts from interview with Jeffrey Tucker, Mar. 12, 2009, pp. 97–100.