The Wizard of Lies: Bernie Madoff and the Death of Trust (34 page)

To be sure, the check Madoff wrote for Chais yesterday is tiny compared with the hundreds of millions in assets that Chais’s accounts supposedly hold, wealth that will vanish when Madoff’s fraud collapses.

From Madoff’s perspective, the cash draining from Chais’s accounts is trivial compared with the amounts he has wired recently to the Kingate Euro fund, one of his oldest offshore feeder funds.

No, a client like Chais—whose phone number is the first one programmed into Madoff’s speed dial—can never do the kind of damage to his teetering Ponzi scheme that can be inflicted by a few skittish international hedge fund clients.

As a crisply clear day ebbs into a cloudy night, Bernie Madoff and Stanley Chais meet at Fred’s, the warmly lit restaurant on the ninth floor of the upscale Barney’s department store on Madison Avenue—just two old friends having dinner.

T
HURSDAY,
O
CTOBER 16, 2008

The day gets off to a bad start for Amit Vijayvergiya. It starts with a call from the derivatives desk at JPMorgan Chase, one of the global banks that have structured and sold complex derivatives designed to track the performance of the Fairfield Sentry fund.

Vijayvergiya listens as the bank staffer poses a series of questions about—what else?—Bernie Madoff. The bank’s questions have become more frequent and insistent, and nothing Fairfield Greenwich says about Madoff seems satisfactory.

Then the bank sends in its upcoming redemption requests, and they are a shock. An executive in Fairfield’s London office had been trading e-mails with a contact at the bank within the past week, but the redemption amounts discussed, a few million euros, were almost routine. Today’s request is much larger than its original estimate.

With the sudden spike in the bank’s redemption requests and these questions about Madoff, something is obviously wrong. What’s happened?

Yanko Della Schiava, Walter Noel’s Italian son-in-law and one of the primary sales agents for the funds in Europe, tries to find out. He makes calls to some of his contacts at the bank, without success.

JPMorgan Chase is revving up to pull $250 million out of the Fairfield Sentry fund, virtually its entire investment. It is also pulling cash from a few other Madoff-managed funds involved in its derivatives deals, including the Herald fund. It clearly is worried about more than just counterparty risk.

T
HURSDAY,
O
CTOBER 23, 2008

Maurice E. Maertens, the chief investment officer for New York University’s endowment, and his assistant are ushered into J. Ezra Merkin’s office in the black granite tower at 450 Park Avenue. The thirty-three-story building caters to hedge funds, and Merkin’s thirty-second-floor suite is prime real estate in that community.

Maertens, the longtime head of Ford Motor Company’s pension fund, was wooed out of early retirement in 1997 by the NYU investment committee. By then, NYU was already an investor in Merkin’s Ariel fund, having bought its first $20 million stake in January 1994. Now its investment—which the committee assumes is being managed by Merkin—has supposedly grown to more than $85 million.

At today’s routine meeting, Merkin recommends that NYU invest directly in a fund run by Bernie Madoff. True, Madoff clears his own trades—there is no third-party custodian holding the assets—but he has offered a good steady return year after year, Merkin says.

Maertens and his assistant are instantly dismissive. As an institutional investor, NYU would never invest with any fund that “self-clears.” Without equivocation, Maertens tells Merkin that an investment with Madoff would not be suitable.

For some reason, Ezra Merkin does not say, “But you are already invested with Bernie Madoff through the Ariel fund.” Merkin has invested about a third of the Ariel fund’s assets, more than $300 million, with Madoff. It is part of roughly $2 billion that Merkin thinks his three hedge funds have in their accounts with Bernie. Indeed, Merkin’s trust is so solid that he has added another $10 million to his Madoff accounts this month.

Maertens will later recall that they simply moved on to other topics. When their routine business is done, the NYU executives exchange handshakes with Merkin and leave.

T
UESDAY,
O
CTOBER 28, 2008

A senior JPMorgan Chase executive in London signs and dates a startling confidential report to the Serious Organised Crime Agency, a national law enforcement body in Britain. In the section of the form entitled “Reason for Suspicion,” the report describes the bank’s complex derivatives deals involving three funds that all invest with Bernard L. Madoff Investment Securities.

The bank is concerned about Madoff’s performance, “which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true—meaning that it probably is,” the banker writes. On top of that, Madoff refuses to shed any light on how he achieves those results. So the bank has sent out a redemption notice to one of the funds and is preparing to pull its money out of the other two.

After that first notice went out, a bank executive talked with a fund manager in Geneva whose firm sold its clients the Madoff-linked derivatives affected by the redemptions. In the taped conversation, conducted in French, the Swiss fund manager made references to “Colombian interests who will not be happy” with JPMorgan Chase’s actions, “statements that the value of the funds in question must not fall and thinly veiled threats to the security of bank staff,” the banker reports.

A transcript of that telephone call, disclosed later in the French press, picks up with the London banker insisting that he’s always been clear about how risky the complex derivatives were.

“I can see the price you want,” the banker says, “but in reality this is not the price you can get….”

The man in Geneva asks, “You hear that the price would be lower?”

“Right now, yes,” the banker replies.

Still protesting, the man in Geneva sputters a bit: “If we really had to get there—and we wanted to be friends, I also insist on the second point—you know we have friends in Colombia that can cause damage when they are getting in—when they get angry, and it almost seems that someone is trying to upset [them] just now.”

The banker seems taken aback. “Is that a threat or—?”

Laughter from Geneva interrupts his question. “No, it’s just information,” the man says. “You know, we are simple people from Switzerland.”

On the same day that the JPMorgan Chase executive in London is reporting these suspicions about Madoff, a worried businessman in Dubai arrives for a meeting with his private banker. Meetings like this are occurring all around the globe, as everyone seeks safety from the turbulence sweeping the financial markets. No place is immune, not even this booming city on the Persian Gulf.

Since 2004 the wealthy businessman and four partners have been invested in the Fairfield Sentry fund. He recalls his banker recommending the fund as a “cash substitute,” a hedge fund with a long track record of small but safe and steady returns. Indeed, he remembers being impressed when the banker said the fund had achieved “mythical status” for its consistency. He was impressed and flattered that, although the Sentry fund was supposedly closed to new investors, the bank could get him in. The investment that he and his partners made in the account has supposedly grown to more than $5.3 million.

However, now the businessman wants out. He directs his banker to redeem all the Sentry shares he and his partners hold. He takes the formal paperwork required for a redemption request with him and returns it to the bank the next day, expecting the money to be returned to him and his partners by the end of November.

T
UESDAY,
N
OVEMBER 4, 2008

Today America goes to the polls to decide whether Senator Barack Obama or Senator John McCain will be the next president of the United States, and the stock market stages a roaring Election Day rally that pushes the S&P 500 index up more than 4 percent and adds more than three hundred points to the Dow.

Today is also when Bernie Madoff almost certainly begins to wonder if he will survive the panic of 2008—or if he even wants to.

On the seventeenth floor, Frank DiPascali gets the news first: the Fairfield Sentry fund has filed two redemption requests for next month totaling a staggering $850 million. This brings the Fairfield Sentry withdrawals since September to $1.25 billion, not counting millions withdrawn from some of the smaller Fairfield Greenwich funds.

The other big hedge funds are pulling money out, too. But for more than a decade, the Sentry fund has been Madoff’s biggest source of cash. Perhaps it’s only fitting that it is now his biggest source of worry.

For days, he has been on the phone to Palm Beach, gently imploring his old friend Carl Shapiro to hurry and make a $250 million investment in his Madoff account. The money is on its way, Shapiro tells him, and it is. When it arrives, it will make a splash in the increasingly shallow pool of cash in Madoff’s bank account.

That may be all he needs—just enough money to build a bridge between today and that future day when Wall Street will finally calm down and the cash will start to flow into the Ponzi scheme again.

Of course, any realist can see that, this time, Shapiro’s money is far too little and far too late. But that realist would not be Bernie Madoff. Even now, Madoff is sure he can forestall disaster. Prospective clients still want to meet with him. He can push Jeffry Picower to put some fresh cash into his accounts—he’s got the dollars, billions of them. Maybe some other faithful clients will add to their accounts, too.

He can get enough money to stay afloat, he tells himself. He will not acknowledge failure or defeat—only fatigue. He has been doing this tap dance for so long, juggling the bank accounts, whispering the reassuring lies, dazzling everyone with his fancy footwork. But now he asks himself: Do I really want to keep dancing any longer, even if I can?

Increasingly, he is inclined to say no.

T
HURSDAY,
N
OVEMBER 27, 2008

It is Thanksgiving Day, and on the West Side of Manhattan the Macy’s parade is producing happy squeals, snare drum flourishes, and traffic snarls. On the East Side, Third Avenue is quiet, its stores and businesses mostly closed for the holiday. In the lobby of the Lipstick Building, the newsstand is shuttered and a few building security staffers are at the reception desk when the men from Banco Santander arrive. They are directed to the south bank of elevators and ride up through the silent building to the nineteenth floor.

The most important person in the elevator is Rodrigo Echenique Gordillo, a distinguished-looking man in his early sixties who has been on the board of the giant Spanish banking company for twenty years. Echenique Gordillo has flown in from Madrid solely to keep this appointment with Bernie Madoff. He is surprised that Madoff scheduled it on the holiday, but Madoff said it was the only day available, and the meeting is important.

A lawyer by training, Echenique Gordillo is here at the request of the CEO of the holding company that owns Banco Santander. The bank’s Optimal hedge fund unit has more than $3 billion invested with Madoff—or thinks it has.

At least twice in the past six years, Optimal’s analysts have written memos citing weaknesses in Madoff’s financial and audit controls. Nevertheless, the unit’s due-diligence team and senior executives always managed to persuade themselves that Madoff was still safe—after all, he’d been managing money for years, he was regulated by the SEC, he owned a well-established and respected wholesale brokerage business, and he was a senior statesman on Wall Street with an excellent reputation.

But that was before the death of Bear Stearns, the bankruptcy of Lehman Brothers, and the bailouts of Fannie Mae, Freddie Mac, and AIG. Times are different. Risk weighs more on the scale than it once did, and reputation weighs less.

Echenique Gordillo and his colleagues step out of the stone-paneled elevator. Madoff himself is standing at the glass doors leading into his executive office suite. The floor seems otherwise deserted; not even Madoff’s private secretary is there. Madoff settles into his chair and, after some pleasantries, Echenique Gordillo unpacks his questions.

To his surprise, Madoff is not conciliatory; he does not try to cajole or persuade. When the issue of redemptions comes up, the mood becomes tense, maybe even threatening.

Later there will be conflicting whispers back in Madrid about what happened next. According to one account, Madoff warned the Spaniards: Take your money out now and you will never be allowed back in. The door to Madoff—the door to the $77 million in annual management fees the bank has been booking in its hedge fund unit in recent years—will be closed to Santander forever. It is certainly a threat that Madoff has made to others before.

If there are threats made today, they are ineffective. The meeting is quickly concluded, and the bankers ride the elevator back down to the silent lobby. There definitely will be redemptions from Santander’s accounts with Madoff.

W
EDNESDAY,
D
ECEMBER 3, 2008

Sometime today, Bernie Madoff sits down for a talk with Frank DiPascali, to make sure his faithful lieutenant knows where they stand. The Ponzi scheme’s bank account at JPMorgan Chase, which held more than $5.5 billion just six months ago, is down to a few hundred million dollars, nowhere near enough to cover the billions in pending and threatened redemptions.

And when the money in the bank is gone, Madoff tells DiPascali, there will be nothing left for investors. He’s tired of trying to scrape new money together. It’s over.

DiPascali has long known that Madoff was conducting a massive fraud—how could he not have? He created the counterfeit paper trail and bogus computer verification that sustained the scheme through a half-dozen investigations over the years. He has lied to regulators, accountants, and clients for at least fifteen years, if not longer.

He will later claim that he lied to himself, too, comforting himself with the outlandish belief that Bernie had “other assets,” oceans of wealth hidden beyond DiPascali’s limited horizon, enough to make good on all the promises reflected in those account statements.