The Wizard of Lies: Bernie Madoff and the Death of Trust (64 page)

their first confidential meeting with Bernie Madoff and his lawyers: This passage has been reconstructed from confidential interviews with as many of the participants as possible and from Madoff’s own recollections of the event.

Madoff could not get four people to sign a surety bond: Letter dated Dec. 17, 2008, to U.S. magistrate judge Gabriel W. Gorenstein from Marc Litt, assistant U.S. attorney, filed in the Madoff criminal case, 08-Mag. 2735, in U.S. District Court for the Southern District of New York.

“When I first heard the news that Madoff had been arrested”: Kotz Report, p. 363.

he armed himself with a shotgun to prepare for the possibility: Markopolos,
No One Would Listen
, pp. 207–8.

he provided copies of his extensive documentation to reporters: Ibid., p. 209.

“the complicated steps that Mr. Madoff took”: SEC press release, “Statement regarding Madoff Investigation,” Dec. 16, 2008, Press Release No. 2008-297.

“The Commission has learned that credible and specific allegations”: Ibid.

directing him to open an independent investigation: Interview with H. David Kotz.

she met him only a handful of times: Madoff would tell SEC Inspector General Kotz in June 2009 (see Kotz Report, Exhibit 104, p. 9) that Schapiro was a “dear friend,” and that she “probably thinks ‘I wish I never knew this guy.’” When the Kotz exhibits were released, the SEC immediately put out a public statement denying Madoff’s claims of friendship. Kotz confirmed that he found no correspondence between Schapiro and Madoff in her SEC files.

sorting through some of their personal treasures: Details in this passage are drawn from court documents and transcripts, auction catalogs, and confidential interviews.

12. Reckoning The Damage

“I am supposed to believe that one day he gets up in the morning”: Arvedlund and Roth,
Club No One Wanted to Join
, pp. 16–17.

“everything had vaporized”: Ibid., p. 179.

“In the 50 seconds it took to read that fax”: Ibid., pp. 35–36.

“life-shattering phone call that changed my world”: Ibid., p. 160.

“I couldn’t catch my breath and thought I might be having a heart attack”: Ibid., p. 46.

“I was hoping that it was all a terrible mistake”: Ibid., p. 117.

“Everything he worked for all his life was gone—‘poof!’”: Ibid., p. 99.

Steven Norton of Fort Lauderdale had just driven quietly home: Ibid., p. 171.

“Kate, we just lost our house”: Interview with Gordon Bennett.

“The feather doesn’t enable you to fly”: Confidential interview with victim.

Another supposedly came from Harry Markopolos: Markopolos,
No One Would Listen
, p. 99.

“A castle of cards falling down in one CNBC news flash”: Confidential interview.

“It’s a complete nightmare”: Zachery Kouwe and Michael Wilson, with reporting by Nelson B. Schwartz, “Financier Is Found Dead in a Madoff Aftermath,”
New York Times
, Dec. 24, 2008.

locked the door behind them: Confidential interview.

the judge in the Bayou case ruled: Michael J. Missal, Richard A. Kirby, Rebecca L. Kline Dubill, and Michael D. Ricciuti, “The Madoff Dissolution: A Consideration of the Bayou Precedent and Possible Next Steps,” a publication of K&L Gates law firm, Dec. 17, 2008, p. 4.

were ordered to return their fictional profits: Although other aspects of this bankruptcy court ruling in the Bayou case were reversed on appeal to U.S. District Court, this conclusion on fictional profits was affirmed. See Judge Paul G. Gardephe,
In the Matter of Bayou Group LLC, et al., Debtors, Christian Brothers High School Endowment, et al., Appellants
, WestLaw 2010, WL 3839277, pp. 42–43.

“Mr. Litt, why don’t you tell me exactly what we’re here for”: This passage is based on the official transcript of the hearing before Judge Ellis, a copy of which was provided to the author.

the
Wall Street Journal
published an article: Dan Slater, “SEC to Probe Relationship Between Madoff’s Niece and Ex-SEC Lawyer,” Dec. 17, 2008.

The Serious Fraud Office in London was investigating: Katherine Griffiths, “Bernard Madoff’s UK Staff Investigated by Serious Fraud Office,” Telegraph.co.uk, Mar. 27, 2009, among several other citations from British publications.

not getting the cooperation he had expected from the London liquidators: Letter from Joon P. Hong of Richards, Kibbe & Orbe to U.S. district judge Louis L. Stanton, dated Jan. 23, 2009, and First Richards Report.

French prosecutors had begun a preliminary inquiry: “Paris Prosecutor to Investigate Madoff’s France Businesses for Fraud,”
Jurist Legal News & Research
, Jan. 21, 2009, accessible at
www.jurist.law.pitt.edu/paperchase/2009/01/dnp-madofffrance.php
.

Spanish regulators were examining losses in the Optimal funds: Thomas Catan, Christopher Bjork, and Jose de Cordoba, “Giant Bank in Probe over Ties to Madoff,”
Wall Street Journal
, Jan. 13, 2009.

Austrian officials had begun an emergency examination of Bank Medici: “Austria Regulator Assumes Control of Bank Medici,”
New York Times
, Jan. 2, 2009.

“I think things are moving a little bit slower”: Transcript of the hearing on the
Main Madoff Liquidation
, at this point titled “In the Matter of the SIPA Link,” pp. 20–21.

“‘Denial’ is not just a river in Egypt”: Notes of the author, who covered the hearing.

“The SEC is a group of 3,500 chickens”: Ibid.

“In order to minimize the risk of discovery”: Testimony of Harry Markopolos, Chartered Financial Analyst, Certified Fraud Examiner, Before the U.S. House of Representatives Committee on Financial Services, Wednesday, Feb. 4, 2009, 9:30 am, pp. 3–4.

“each of us feared for our lives”: Ibid.

armed only with legal technicalities: Notes of the author, who covered the hearing.

“We thought the enemy was Mr. Madoff”: Diana B. Henriques, “Anger and Drama at a House Hearing on Madoff,”
New York Times
, Feb. 4, 2009.

As his son Willard Foxton later recounted in a moving BBC documentary: Allan Little, “Banking Crisis Killed My Father,” BBC News, Feb. 12, 2009; Roger Corke (producer), Lucy Hetherington (executive producer), and Fiona Stourton (executive producer), “The Madoff Hustle,” BBC 2, broadcast on “This World,” June 28, 2009.

“Dear Will, I will be brief”:
Repex Ventures S.A. et al., v. Bernard L. Madoff, et al.
, case number 09-cv-00289 (RMB) in U.S. District Court, Southern District of New York; Declaration of Gregory B. Linkh, Exhibit A, Certification of Proposed Lead Plaintiff Pursuant to the Federal Securities Laws, by Willard Foxton, dated May 2, 2009, p. 2.

Shortly after 10:00 am, Picard and Sheehan walked onto the bare stage: Notes of the author, who covered the meeting.

“There are a couple of ground rules”: Direct quotations are from a transcript of the hearing obtained by the author.

He would serve more than 230 subpoenas: These details are all drawn from the Trustee’s Reports to the court, other court filings, and reporting notes by the author, who covered these events.

a silver sedan pulled up outside the north entrance: This passage is based on observations and reporting notes from the author’s colleagues at the
New York Times
, William K. Rashbaum and Jack Healy, various video segments posted online, and a transcript of the hearing.

Two days later, hundreds of victims gathered: This passage is based on notes by the author, who covered the event, as well as a transcript of the hearing.

13. Net Winners And Net Losers

David Friehling and his lawyer arrived quietly: William K. Rashbaum and Diana B. Henriques, “Accountant for Madoff Is Arrested and Charged with Securities Fraud,”
New York Times
, Mar. 19, 2009.

Picard had the bank records: Diana B. Henriques, “Court Denies Madoff Aide’s Request for Bail,”
New York Times
, Oct. 28, 2009; and notes by the author from interviews with Picard.

generally known in bankruptcy court as “fraudulent conveyances”: New York State’s Uniform Fraudulent Conveyance Act involves different standards of proof for nullifying these transfers from those stated in the federal bankruptcy code, but the term
fraudulent conveyance
is typically used to describe withdrawals made in both the two-year and the six-year windows for recovery.

But many investors were not familiar with the legalese, and they were outraged: Many victims were in frequent communication with the author about their anger over the form letter sent out by Picard; midway through the claims process, the letter was revised to sound somewhat less accusatory.

by the end of June he would file eight of them: All of the figures that follow are drawn from the individual lawsuits filed by Picard, which are enumerated as “Associated Cases” under the main SIPC bankruptcy case against Madoff’s firm.

for the return of $395 million: “Trustee’s First Interim Report for the Period December 11, 2008, to June 30, 2009,”
Main Madoff Liquidation
(hereafter
Trustee’s First Report
), p. 34.

Chais had been honored in absentia: Brad A. Greenberg, “Stanley Chais Targeted in Madoff Suit,”
Jewish Journal
, May 6, 2009.

He claimed that the brokerage firm had knowingly served as the sales force:
Picard v. Cohmad
First Amended Complaint, p. 3.

He sought another $3. 5 billion from the Fairfield Sentry funds:
Trustee’s First Report
, p. 38.

raised to $7. 2 billion a few months later: “Trustee’s Second Interim Report for the Period Ending October 31, 2009,”
Main Madoff Liquidation,
pp. 60–61.

as Madoff himself suspected, that Jeffry Picower was shrewd enough: First BLM Interview.

Nevertheless, many small investors said they were terrified: Again, this was a common complaint by investors in e-mails and phone conversations with the author, and on victim blogs.

The increasing hostility saddened him and frustrated his colleague David Sheehan: Interviews with Picard and Sheehan, and confidential interviews with others involved in the broad effort to respond to Madoff claimants.

Picard’s team eventually would speed up the claims-paying process: Diana B. Henriques, “It’s Thankless, but He Decides Madoff Claims,”
New York Times
, May 28, 2009; Diana B. Henriques, “Trustee’s Total of Madoff Losses Nears $3 Billion,”
New York Times
, July 1, 2009.

the only court-tested way to calculate Ponzi scheme losses: It is notable that the K&L Gates law firm memo on the Bayou case’s significance for Madoff investors (Missal et al., “Madoff Dissolution”) was published within days of Madoff’s arrest. Similarly, the receiver in a separate Ponzi scheme,
SEC v. Joseph S. Forte et al.
, acknowledged in a letter on Dec. 2, 2009, to the federal judge in Philadelphia handling that case that “a receiver’s right to recover ‘net winnings’—the amount by which withdrawals exceed investments—from investors in a Ponzi scheme is
well settled
” (emphasis added).

She was a Bryn Mawr graduate: These details are drawn from the biography posted on the Phillips Nizer Web site prior to Chaitman’s departure to join another firm, Becker & Poliakoff.

a tireless and fiercely tenacious advocate for her clients: On several occasions, opposing lawyers asked unsuccessfully that she be sanctioned by the court for what they considered obstruction of court procedure. Once, she was disciplined by bank regulators for her allegedly overzealous defense of a shuttered bank’s owners. See Office of the Comptroller of the Currency,
Quarterly Journal
24, no. 1 (March 2005): 69.

“safe and conservative”: Letter from Helen Davis Chaitman to SEC commissioner Mary Schapiro, dated Apr. 2, 2009, p. 2.

two separate visits to the appellate court: The two Second Circuit appellate decisions in the
New Times
case are published at 371 F. 3d 68 (2004) (hereafter cited as
New Times I
) and 463 F. 3d 125, 130 (2006) (hereafter cited as
New Times II
).

“Treating…fictitious paper profits”:
New Times II.

or, indeed, crystal clear about anything: The arguments summarized here were made in hundreds of court filings by Chaitman and Picard in the Madoff bankruptcy case; to simplify the citations, the arguments from both camps are laid out in the ruling in the dispute by bankruptcy judge Burton R. Lifland, “Memorandum Decision Granting Trustee’s Motion for an Order (1) Upholding Trustee’s Determination Denying Customer Claims for Amounts Listed on Last Customer Statement; (2) Affirming Trustee’s Determination of Net Equity; and (3) Expunging Objections to Determinations Relating to Net Equity,” dated Mar. 10, 2010, in the
Main Madoff Liquidation
.

“there is very little case law on point”: The case is
Focht v. Athens
(
In re: Old Naples
Securities, Inc.
), 311 B.R. 607 (Middle District, Fla., 2002); the quotation is at pp. 616–17.

nor did it flatly require the trustee to honor customers’ final account statements: The statute obliged the trustee to consider final account statements only in determining whether customers had claims for cash, which were limited to a $100,000 advance, or claims for securities, which would be eligible for a $500,000 advance. SIPC had already ruled that the Madoff victims were entitled to be treated as customers with claims for securities, not cash.

the Massachusetts School of Law in Andover: The law school had state permission to award law degrees but was not accredited by the American Bar Association.

“will have to continue living on welfare or dumpster diving”: The quotation is from Velvel’s blog, hereafter known as
www.velvelonnationalaffairs.blogspot.com
.

were generally considered fair: See, for example, the editorial “Mr. Feinberg and the Gulf Settlement,”
New York Times
, Aug. 29, 2010.