The Wizard of Lies: Bernie Madoff and the Death of Trust (39 page)

Soon it was a sincerely held article of faith for some of them that Picard and Sheehan were deliberately, heartlessly breaking the law to protect SIPC at the expense of thousands of devastated Madoff victims. As they saw it, anyone who argued otherwise had crossed over into the enemy camp.

At a little past 2:30
PM
on Monday, January 5, 2009, magistrate judge Ronald Ellis leaned forward on the bench and said, “Mr. Litt, why don’t you tell me exactly what we’re here for.”

Federal prosecutor Marc Litt was there to try, once again, to get Bernie Madoff locked up.

By now, the public outcry against Madoff and his family had become a relentless, reverberating roar. Madoff’s sons could not leave their homes without being dogged by photographers. Shana Madoff and her husband, former SEC lawyer Eric Swanson, expecting their first child, were under fierce scrutiny after the
Wall Street Journal
published an article suggesting that their relationship might have helped deflect the SEC’s attention away from her uncle’s hidden fraud.

As for Ruth Madoff, the consensus of the city’s tabloids and the virulent Internet chatter was that she was the new Marie Antoinette, her husband’s foolish pampered queen and, most likely, his outright accomplice. She could not leave the apartment for groceries without a paparazzi posse on her heels. The outcry against Madoff and his family was at a fever pitch.

At the hearing, Litt did his best to persuade Judge Ellis to change his mind about Madoff’s bail. But he was pushing against the bedrock legal principle that all defendants are initially presumed innocent until their cases are adjudicated. Even if an accused person has confessed, he is still considered innocent in the eyes of the law, and it will be the prosecutor’s burden to prove his guilt beyond a reasonable doubt. Because of this presumption, all defendants are entitled to bail unless they are a danger to the community or themselves or are likely to flee.

Litt argued that circumstances had changed since the magistrate’s colleague, Judge Eaton, first approved bail for Madoff on December 11. The government’s investigation was moving forward, and the extraordinary scale of the crime had been confirmed. Madoff would be facing a “very, very lengthy” jail term, Litt continued in his soft classroom voice. He concluded, “Given the defendant’s age, the length of the likely sentence, the strength of the proof against the defendant, including his confessions—these facts present a clear risk of flight.”

Judge Ellis mildly pointed out that all of those facts were known to the government when it last agreed to Madoff’s bail conditions, those approved by Judge Gorenstein a week after Madoff’s arrest. Moreover, Madoff had already surrendered his passport. So what had really changed?

What had changed, Litt explained, was that the Madoffs had mailed out those packages of valuable holiday gifts to their family and friends on Christmas Eve, in defiance of an asset freeze imposed in the civil case filed by the SEC. Though the items had all been quickly recovered, the episode was proof that Madoff “is not able to respect the limits imposed by the court.”

When it was Ike Sorkin’s turn for rebuttal, he pointed out that, even now, Litt was not claiming that Madoff had violated any of the bail conditions that had been imposed in the criminal case against him. Rather, Sorkin said, Litt was complaining that Madoff had violated an asset freeze that had been imposed by a different judge in a different case—a freeze that did not even apply to Ruth.

And how did Madoff do that? By sending out what “can best be described as some heirlooms,” Sorkin said. Yes, some items had material value, but others had mostly sentimental value—some mittens, some cuff links. He portrayed the incident as an innocent mistake prompted by Madoff’s awkward longing to make some gesture of reconciliation and connection toward his estranged sons, his brother, and his friends.

As close to visible anger as he had ever been in court, Litt protested: “The government is not here because of some mittens and cuff links.” He continued, more calmly, “We’re here because of hundreds of thousands of dollars, and perhaps millions of dollars worth of very expensive watches and other jewelry.” The defendant violated a court order by mailing out those gifts, and “that is a change of circumstances. That’s what brings us here.”

Once again, Litt failed to persuade the court that Madoff should be locked up in advance of his trial. Judge Ellis ruled that the defendant could remain free on bail, confined around the clock to his penthouse apartment.

A month later, in a different courtroom with a different mandate, Judge Burton R. Lifland was getting worried.

One of the longest-serving judges on the federal bankruptcy court in Manhattan, Lifland, who was overseeing the liquidation of Madoff’s assets, was also an expert on the complicated interplay between American bankruptcy laws and the rules that applied in foreign countries. When it came to the Madoff case, which spanned the globe, it was becoming evident that there were far too many cooks in this heated kitchen.

The Serious Fraud Office in London was investigating Madoff’s British affiliate after receiving a confidential report from the accountants liquidating the firm under British law. But Lee Richards, the receiver whom the SEC had put in charge of the London affiliate, was not getting the cooperation he had expected from the London liquidators. Meanwhile, several other European governments had opened their own Madoff investigations. French prosecutors had begun a preliminary inquiry and were eying Madoff’s property there—the town house, the $7 million yacht, and the $1.5 million slip where it was moored—as a source of compensation for local victims. Spanish regulators were examining losses in the Optimal funds. Austrian officials had begun an emergency examination of Bank Medici. Irving Picard had already sought Judge Lifland’s permission to hire British counsel, and he was preparing requests for additional legal help in more than a half-dozen other countries.

There were vague hints of conflicts closer to home. David Sheehan was locking horns with federal prosecutors over subpoenas Sheehan wanted to serve on dozens of individuals the prosecutors did not want him to approach yet. Some forfeited Madoff property that Picard could sell on behalf of the victims was being earmarked for sale by the U.S. Marshals Service—which, unlike SIPC, would deduct its own expenses from the proceeds available for victims, irritating Picard and Sheehan. The SEC was trying to investigate the Madoff case while being investigated itself by its own inspector general.

And so on Wednesday, February 4, after a routine hearing in the case, Judge Lifland gestured for Picard and Sheehan to stay a moment.

“I think things are moving a little bit slower than some people would anticipate, at least on the public front,” he said mildly. “I don’t really know what is going on behind the scenes.” But with “so many agents and agencies and units of government that are charged with maximizing recovery,” Lifland was beginning to feel that “agencies are not pulling together.”

He added, “I would like the word to get out for all parties to start working in harmony and not in disharmony.”

He did not sound optimistic—for good reason. Disharmony was winning, hands down. A prime example was taking place that same day in Washington, D.C., where the House Financial Services Committee was holding its second public hearing on the Madoff scandal since the new year.

The Madoff victims had hoped to find justice in the halls of Congress, but this would prove to be a dead end for those seeking immediate practical help or swift legislative changes. For those demanding that the SEC be held accountable for its catastrophic failures, however, Congress was eager to oblige. On this day the star witness was Harry Markopolos, the oft-ignored whistle-blower from Boston. His testimony was spiced with folksy insults and energized by righteous anger toward the SEC that perfectly reflected the rage of Madoff’s victims.

“‘Denial’ is not just a river in Egypt; it’s the mindset that the SEC has adopted,” he said.

“The SEC is a group of 3,500 chickens tasked to chase down and catch foxes,” he observed. “Bernie Madoff, like too many other securities fraudsters, had to turn himself in because the chickens couldn’t catch him, even when told exactly where to look.”

There were plenty of spy thriller flourishes. “In order to minimize the risk of discovery of our activities and the potential threat of harm to me and to my team, I submitted reports to the SEC without signing them,” Markopolos told the committee members. “My team and I surmised that if Mr. Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us.”

Since Madoff already faced life in prison, “there was little to no downside for him” to simply kill his accusers, Markopolos asserted. He added, “At various points throughout these nine years, each of us feared for our lives.”

These dramatic disclosures simply reinforced the questions Markopolos was
not
being asked: Since he was convinced that Madoff was a dangerous criminal, why didn’t he report him to the criminal authorities? Why had he persisted in sending his tips about this potentially murderous con artist to a civil agency—and always the
same
civil agency? Since the Boston SEC office saw Markopolos as a credible source, couldn’t they have vouched for him at the FBI’s New York office or at the Justice Department, and not just at the SEC? He never addressed these mysteries.

A few members of Congress looked a little uneasy, particularly when Markopolos described wearing latex gloves to prepare an anonymous package of information that he unsuccessfully tried to slip to Eliot Spitzer, who was then the New York State attorney general, during a speaking engagement at Harvard. No one asked the obvious question: Why not just put the package in the mail?

Mostly, however, Markopolos was lionized and applauded, after which came the public flogging of the SEC.

A panel of regulators filed up to the witness table, led by Linda Chatman Thomsen, the national director of enforcement for the SEC. The SEC team had apparently misread the occasion completely; they came armed only with legal technicalities and vague hints of executive privilege.

The congressional panel did not want to hear that an ongoing criminal investigation and an internal probe by the SEC inspector general made it legally impossible for these witnesses to give the candid details the committee demanded—although this was arguably true. Instead the committee members fired rhetorical questions at the SEC team, getting angrier with each inadequate answer. Their insults revealed a stunning degree of hostility.

The most merciless observation came from Representative Gary L. Ackerman, a Democrat from New York: “We thought the enemy was Mr. Madoff,” he told the SEC officials lined up before him. “I think it is you.”

Later that afternoon, the newly installed SEC chairwoman, Mary Schapiro, sent an apologetic letter to the committee’s chairman and its ranking Republican member, promising to work with them in a collegial way going forward.

But the damage was done. Congress was taking up the issue of massive regulatory reform in the wake of the financial meltdown of September 2008. The SEC’s failure in the Madoff case could erase all the other accomplishments it might offer to justify its continued independent existence. The contempt and impatience on display at the hearing certainly made this seem like an ominous possibility.

In his effort to speed the claims process along, Irving Picard needed to locate as many Madoff investors as quickly as possible. SIPC had already set up a Web site and a hotline, and now Picard decided to take a more proactive approach, seeking out the victims himself, rather than waiting for them to come to him. He instructed his forensic consultants to file a public exhibit in bankruptcy court on February 6 that consisted of more than thirteen thousand names found on account statements in Madoff’s files. As a public document, the list was available to anyone who wanted a copy, and it was soon posted online.

The “Madoff names” became an instant worldwide sensation, a road map to the stars and titans who had been swindled and also a roster of the ordinary people who had—or might possibly once have had—a Madoff account. In France, it was dubbed
la liste de pigeons
. In England, the
Guardian
featured it prominently. The
Wall Street Journal
built a map that showed the geographic concentrations of victims. The
New York Times
created an online database that could be searched by name, town, state, and zip code; it immediately attracted a nearly staggering number of visitors. Virtually every regional publication in the country, if not the world, had a feature story on the local “names” that had shown up on “the list.” Some accounts were active, some were not. Some people named on the list insisted that they had never invested with Madoff, and some had already disclosed that they had.