The Wizard of Lies: Bernie Madoff and the Death of Trust (13 page)

By the mid-1970s, New York City was on the brink of bankruptcy, and its real estate market was reeling. Levy owned a number of premier commercial office buildings but needed to generate more cash flow, Madoff recalled. They met through a daisy chain that began with Madoff’s father-in-law, Saul Alpern. A prominent Jewish leader and retired chemical industry entrepreneur named Maurice Sage, who had been a client of Alpern’s accounting firm, knew a country club friend of Levy’s named Arthur Schlichter, who made the introduction. “We met and hit it off,” Madoff said. Levy opened an account with Madoff in 1975 and maintained it until his death in 2005.

Like Madoff, Levy was a self-made man—but, unlike Madoff, he was gregarious, a little raucous, and utterly unpretentious. Tall and robust, he lit up a room with his personality, and Madoff seemed to bask in the warmth. Levy became a familiar figure to Madoff’s staff, who welcomed his visits. Levy, in turn, welcomed Madoff’s willingness to manage his financial life so that Levy could focus on what he knew best: gilt-edged real estate.

In time, Madoff became far more than Levy’s broker. He orchestrated elaborate vacations for Levy’s enjoyment and managed his family foundation’s assets. His link to Levy gave him credibility in banking circles, where Levy was a coveted client. Madoff was known at JPMorgan Chase as Levy’s “close friend and trader.” Within a decade of meeting Madoff, Levy had at least $180 million in his Madoff account; in the next dozen years, his balance would grow to $1.5 billion. In 2001, a stunning $35 billion would pour into Levy’s account and back out again in that one twelve-month period.

The fourth and most mysterious member of the early Madoff quartet was a tall, balding lawyer and tax accountant named Jeffry Picower. Like Levy, Picower met Madoff through Saul Alpern, although the connection was far more direct. Michael Bienes, who went to work for Alpern’s accounting firm in 1968, was married to Emily Picower, Jeffry’s sister. According to several sources, Picower—who was four years younger than Bernie Madoff and just out of law school—visited the Alpern firm’s suite frequently in those early years. Madoff recalled that Alpern was Picower’s personal accountant back then, but he confirmed that they met through Bienes.

Picower’s father was a Polish immigrant who worked in the millinery industry in New York and settled his young family in Long Beach, a small beachfront town on the south shore of Long Island. As a young man, Jeffry was fiercely intelligent; he graduated from Penn State in 1963 and by 1967 had earned an MBA from Columbia and a law degree from Brooklyn Law School. He was certified as a public accountant in 1971 and wound up at Laventhol & Horwath, a nationally known accounting firm.

He had a genius for making money in the stock market, a passion for privacy, and a willingness to take big risks in pursuit of big rewards. Sometimes he lost—as in 1976, when he invested more than $600,000 with a brassy and persuasive Broadway producer who promised whopping returns of up to 50 percent but who turned out to be running a Ponzi scheme on the side. More often, he won, even if his clients didn’t. He helped market tax shelters based on computer leases in the 1970s, and, by the time some of his clients’ tax write-offs were being challenged by the IRS, he had made enough to establish himself as a significant investor in the mergers and takeover deals that were starting to proliferate on Wall Street by the early 1980s.

Picower’s adversaries in later corporate battles would remember him as hard-edged, aggressive, and highly litigious, a man who skirted the edge of market rules and fair play time and again. Those takeover battles would put billions of dollars into his pockets—and, ultimately, into his Madoff accounts.

Among the quartet of early Madoff customers, Picower stood out as the only one with whom Madoff seemed to feel ill at ease. In a written response to questions posed after Madoff’s arrest, Jeffry Picower and his wife, Barbara, wrote that Picower’s ties to Madoff “started out as a professional relationship,” adding that they “did not establish a personal friendship until years later.”

By the early 1980s, Madoff had added another coterie of clients to the Big Four: a small group of wealthy French investors who liked to dabble in arbitrage in the U.S. market. In his first prison interview, he said he first connected with these French clients through Maurice Sage, the same notable Jewish leader who played a role in his introduction to Norman Levy.

One of these influential clients was Jacques Amsellem, a French citizen who invested in the American market throughout the 1970s, most prominently by building up a big stake in the Shopwell supermarket chain at the end of the decade. Amsellem opened accounts with Madoff that remained active until his death in 1994 and were then passed along to his widow and his grandchildren.

Through Amsellem, Madoff met another important French client, Albert Igoin, a French industrialist and Spinoza scholar. Madoff recalled making his first trip to Paris in the early 1980s to meet with Igoin, who he said “loved the stock market” and wanted to do small-scale arbitrage in U.S. dollars. Igoin and his American-born wife took Madoff out to dinner “at some terrible Chinese restaurant,” he said. “It was my first dinner in Paris and it was awful.”

The relationship was worth a little heartburn. Although Igoin was at least thirty years older than Madoff, they liked each other immediately and developed a close relationship. Igoin had a remarkable résumé, having served briefly in a leftist French cabinet before moving on to run a major navigation company. By the time he met Madoff, however, he was working largely as an elite financial adviser and, like Levy in New York, he helped open the doors of French banks to Madoff—and those introductions would generate billions of dollars of cash for him in the decades to come.

The 1970s, which brought so many new opportunities to Bernie Madoff, were not kind to most of the small brokerage firms that had sprung up in the early 1960s. After a spate of brokerage bankruptcies, regulators focused on the insulated environment that had let such fragile firms flourish: officially, a world without price competition.

Customers were supposed to pay the same fixed commission for every share they bought or sold, whether they got good service or bad. Brokers were supposed to receive the same fixed commission for every share they traded, whether the order was for one hundred thousand shares of one stock or one thousand shares of a hundred stocks. The biggest customers could demand backroom price breaks, of course, but small investors couldn’t. Nobody thought this arrangement was a good idea except the small, uncompetitive brokers it protected.

During the 1970s the SEC pushed the industry to accept greater price competition, and fixed commissions were abolished on May 1, 1975—known thereafter on the Street as May Day. The change doomed legions of shaky brokerage firms with too much elegant, expensive overhead and too little computing power and back-office manpower.

Still, some small firms, especially in the regional financial centers around the country, remained a reliable source of financial advice for countless small business owners and moderately affluent investors. As such, they also unwittingly helped pave the path to Bernie Madoff.

One regional brokerage firm that became a trusted conduit for Madoff investors was Engler & Budd in Minneapolis. Mendel “Mike” Engler founded the firm in 1961, and the relationship between his firm and Bernard L. Madoff Investment Securities represented an important step forward in the evolution of Madoff’s secret money management scheme: trust by association.

Saul Alpern’s early recruiting efforts were clearly aimed at people who wanted to invest with his brilliant son-in-law, even if they were unfamiliar with the arbitrage strategies he pursued. Avellino & Bienes inherited that cadre of trusting investors, who spread Madoff’s fame through whispered word of mouth. But Mike Engler recruited investors who might never have heard of Madoff, but knew and trusted Engler himself. It became a familiar pattern. Initially, people invested because they trusted Bernie Madoff; ultimately, people invested because they trusted the person or institution that was the last link in the long chain that led to Madoff.

Mike Engler met Bernie Madoff not long after Peter Madoff joined the firm in 1969. As part of his early chores for his brother, Peter Madoff traveled around the country selling the firm’s wholesale brokerage services to smaller regional firms. Engler’s business partner liked Peter and agreed to shift the firm’s business to Madoff.

Engler & Budd was a successful regional over-the-counter dealer at a time when the OTC dealer club was still very small. Mike Engler became active on industry committees and attended industry conferences, as did the Madoff brothers. Both families vacationed during the ski season in Aspen, where the Englers owned a condominium, and both had ties to the retirement enclaves of south Florida. Mike Engler and his wife came to enjoy socializing with Bernie and Ruth. “They really thought the world” of the Madoffs, Engler’s son recalled.

Although naturally reserved, Madoff seemed to enjoy talking with Mike Engler, who was an outgoing, exuberant entrepreneur from a family of successful businessmen. His father had developed an early chain of local movie theaters. With other relatives, Engler himself had founded a liquor store, a boat business, and a real estate development company.

When Engler later sold his brokerage firm in 1986, Madoff invited him to sign on with the Madoff firm as an “investment counselor,” supposedly because Madoff was opening his purely institutional money management business for the first time to wealthy individuals. It was at about this time that Engler first entrusted some of his own wealth to Madoff—it was seen as a golden opportunity to have “the dean of Wall Street” manage his money, his son said. “It never would have occurred to any of us to be suspicious—nobody questioned Bernie Madoff,” he said.

Engler also was a member of Temple Israel in Minneapolis and the Oak Ridge Country Club in nearby Hopkins, both fixtures of affluent Jewish life in the Twin Cities. As the years went by, more and more of Engler’s country club friends, temple acquaintances, and brokerage firm clients would become Madoff investors, attracted by steady but not spectacular returns and by the sterling local reputation of Mike Engler.

“I called it my ‘steady Eddie’ investment,” one Minneapolis widow recalled. Her late husband had decided to invest with Madoff after his old friend Mike Engler made a low-key sales pitch in the living room of their Florida vacation home in the early 1990s. “He didn’t go into much detail,” she recalled. “He said it was considered a hedge fund” and the minimum investment was perhaps $1 million.

Unlike her husband, she was a fairly experienced investor—before they married, she had invested with Fidelity’s famous Magellan fund during its golden years and managed her own portfolio of blue chips and bonds. She had never heard of Madoff but did some homework, reading a few newspaper articles about him and calling a wealthy couple she knew in Boston. She learned that the couple, whom she considered sophisticated investors, had been investing with Madoff for thirty years and that other businessmen she trusted—“a very smart accountant” in town, a Minneapolis shoe company owner—had checked Madoff out, satisfied themselves that he was honest, and handed some of their money to him to manage. All those people she trusted had been trusting Madoff for years. That was the clincher. She sent in her money.

By the late 1970s, although rich clients such as Stanley Chais, Norman Levy, and Jeffry Picower still got their old-fashioned account statements on paper, Bernie Madoff was enhancing his firm’s reputation for market innovation in some pretty expensive ways. He had become a member of the Cincinnati Stock Exchange, a trailblazing exchange that was the first to eliminate its trading floor entirely and rely only on electronic trading. He invested a substantial amount of his firm’s money to help finance that transformation, helping the exchange become a showcase for the virtual marketplace of the future. He and Peter rotated onto the new exchange’s board. Those positions—they were, after all, directors of a recognized regional stock exchange—added to Madoff’s visibility with regulators.