The Wizard of Lies: Bernie Madoff and the Death of Trust (40 page)

Among the surprises to be found on the list were the names of Nathan and Rosalie Sorkin of Boca Raton, Florida—Ike Sorkin’s deceased parents. The list also contained the name “Squadron, Ellenoff, Plesent & Sheinfeld,” the vanished law firm where Sorkin had once been a partner.

It seemed outlandish: Ike Sorkin’s client had enticed Sorkin’s parents and former law partners into his Ponzi scheme. But it was true.

In such a closely watched case, prosecutors had to be sure that everything was done strictly by the book. And, by the book, a defendant’s lawyer should not have such a close connection to the defendant’s alleged victims. It was a conflict that might cast doubt on how committed Sorkin was to his client’s defense—and that could cause problems for the government if Madoff should appeal his conviction or sentence. Behind the scenes, prosecutors began to insist that Madoff waive any right to invoke these conflicts of interest on appeal; within a few weeks, he would publicly do so.

The list may have served its purpose. It certainly got the attention of the people whose names appeared on it, and it enabled Picard to quickly sift out the long-defunct or simply erroneous accounts. But for many shell-shocked Madoff victims, the publication of the list felt like a bruising invasion of their privacy—one more injury to blame on Irving Picard.

The list captured only direct customers, not those who had invested through feeder funds. So there was no record on the list of a Herald fund account in the name of William Foxton, a ruddy, ginger-haired man who was a retired major in the British army.

As his son Willard Foxton later recounted in a moving BBC documentary, Major Foxton spent his life serving bravely in dangerous places. He lost a hand in combat and earned the Order of the British Empire. He later joined humanitarian aid missions and testified against war criminals. By all accounts, Major Foxton was a courageous, ethical, and very private man.

His family’s research indicated that Foxton invested roughly $3 million in the Herald USA fund and the Herald Luxembourg fund, both sponsored by Bank Medici in Vienna, sometime in late 2004 or early 2005. He had expected to live on those investments after his civilian retirement in November 2008.

Willard Foxton would later say that his father had no idea he was a Madoff investor—he believed that his money was invested in a safe, diversified fund at an established Austrian bank.

In early February, Major Foxton told his son he was having disagreements with the bank about his investments. Then his son received an erratically punctuated e-mail message:

On February 10, Foxton carried his military handgun to a small enclosed park near his home in Southampton. He lay down on a long wooden bench under some leafless trees and, sometime later, shot himself.

Normally there are no “creditor meetings” in a SIPC bankruptcy case. But there was nothing normal about this case, and the bankruptcy code allowed such informational meetings. So Irving Picard and David Sheehan decided they would hold one—not a “creditors” meeting, exactly, but a “customers” meeting. It was scheduled for Friday, February 20.

Investors began to queue up early at the Old Customs House, the classic-columned building that houses the federal bankruptcy courts in Lower Manhattan. Some victims still hoped that a remnant of the $64.8 billion they thought they had a few short months ago had been found.

Shortly after 10:00
AM
, Picard and Sheehan walked onto the bare stage in the building’s auditorium and sat at a metal folding table with a senior SIPC lawyer named Kevin Bell, a tall, taciturn man with a distinctive steel gray crew cut. Microphones were set up on the table and on both sides of the auditorium near the stage.

The audience, clustered near the front of the room, was a diverse crowd—some in sweaters or flannel shirts, others in suits and expensive ties. Many of them spoke to reporters about the hardships they or their family members were suffering since Madoff’s arrest and expressed fury at the federal regulators who had failed to protect them from Madoff’s crime.

Opening the meeting, Picard explained that he and Sheehan would brief investors and then field their questions.

“There are a couple of ground rules,” Picard said. “Number one, this case—as you well know—involves a crime, so we are operating out of a crime scene.” Although he and his team were working closely with federal prosecutors, FBI agents, and SEC investigators, he said, “there is a limit to what we can say.” He asked investors “to respect the judicial system so that it can play out.”

His briefing was detailed and legally precise, but possibly a little dense for the less sophisticated investors in the audience. He explained that victims would be paid from two sources of funds: cash advances from SIPC and whatever assets he could recover for the estate, which would take “some period of time. We can’t, at this point, speculate how long.”

He discussed the possibility of selling Madoff’s market-making operation for the investors’ benefit. He said he had hired a consultant to advise him about the sale of the Roy Lichtenstein prints and other artwork found on the premises. He had hired other consultants to reconstruct and digitize the account statements, an enormous task that had to be accomplished before customer claims could be paid. There was so much to be done.

Indeed, in the next four months, a hurricane of legal activity would spin out from the heirloom burl wood desk in Picard’s office in Rockefeller Center.

He would serve more than 230 subpoenas as part of investigations being pursued in the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, France, Gibraltar, Great Britain, Ireland, Luxembourg, Spain, and Switzerland.

He would grasp for assets anywhere he could find them, starting with the low-hanging fruit. He would cut a complicated deal to sell the Madoff market-making business. He would close all the firm’s brokerage or banking accounts, taking in just over $37 million, and settle the pending securities trades for just over $297 million. His team would sell the firm’s small stake in a charter airline. He would sell the firm’s remaining tickets to New York Knicks and New York Rangers games and auction off its New York Mets tickets for the 2009 season.

Nothing would be too trivial. Picard would cancel insurance policies, collecting nearly $234,000 in premiums. He would suggest that politicians and charities return the almost $145,000 in contributions they’d received from the now-toxic donor. He would cash out the firm’s stake in DTCC, Wall Street’s cooperatively owned clearing corporation, for more than $200,000. As soon as the FBI permitted it, he would cancel the leases on all but the seventeenth floor of the Lipstick Building. He would even cancel the firm’s magazine subscriptions, club memberships, and vehicle leases, netting another $54,000.

He only hinted at these plans as he briefed the Madoff victims. But he emphasized at the February 20 meeting that SIPC, financed by Wall Street, would pay all the expenses involved—including his and his law firm’s bills. Despite widespread reports to the contrary, he explained, none of the trustee’s bills were being paid with assets earmarked for the victims, as would have been the case in a normal bankruptcy. All of the legal bills and other expenses in the liquidation were paid by SIPC, at no cost to the victims.

There had been erroneous news reports a month earlier that Picard, as trustee, was entitled to be paid 3 percent of the assets he recovered through litigation. That arrangement was built into the federal bankruptcy code, but it did not apply in SIPC cases. Instead, Picard and his law firm submitted their bills to SIPC, which haggled a bit and sent them on to the presiding judge, who had the final say. Then SIPC paid them out of the membership assessments levied on Wall Street firms. The amount involved had nothing to do with how much Picard recovered from those he sued.

But it was too late to stamp out the misunderstandings. More than a year later, some angry victims would still rail against Picard’s “3 percent fee” and oppose every bill he submitted on the grounds that he was getting money that would otherwise have gone to them.

In perhaps the first sign of how tangled the lines of communication with the victims would become, Picard presented the most stunning revelation of the meeting as a parenthetical aside during his arcane discussion about the appropriate deadline for filing claims.

Some lawyers were telling their clients that their claims had to be filed by March 4, while Picard said that the only meaningful deadline was July 2, 2009, six months after the official notice of the bankruptcy had been mailed to investors. The March 4 deadline, he explained, applied only in SIPC cases where investors wanted the option of being reimbursed with actual shares of stock, rather than the cash value of the securities in their account.

The March 4 deadline did not apply to the Madoff victims, he continued, because—as far his team could tell, going back at least thirteen years—no securities had ever been purchased for their accounts. So the only relevant deadline for them was July 2.

It was almost like that painful old joke about how a drill sergeant broke the news of a family bereavement to a private under his command: “Everyone with parents living, take a step forward. Not so fast, Private Jones.”

Everyone who thinks that at least a few blue chips, some Treasury bills, a little cash might be left in their Madoff accounts, take a step forward. Not so fast, everybody…

“That means that for claims purposes, the November 30th statement that said you had various securities is not what we are going to rely on,” Picard said. “This is going to be a case in which we’re going to be looking at cash in and cash out.”

The headlines the next day spread the news that Picard’s team had searched all available records going back to 1995 and some records dating to 1993 and had found no evidence that Madoff had ever purchased any securities for his clients.

It had been a Ponzi scheme, pure and simple, the largest and most far-flung fraud in financial history—but, at heart, a classic Ponzi scheme, where Peter was robbed to pay Paul. And, as Picard saw it, there were clear rules for dealing with a Ponzi scheme, rules that had absolutely nothing to do with the calculations on the final account statements tucked hopefully into the handbags and briefcases propped beside seats in this bristling auditorium.

Many of the victims disagreed—and would disagree forever.

Two and a half weeks later, on Tuesday, March 10, a silver sedan pulled up outside the north entrance to the federal courthouse on Worth Street in Manhattan. The side street off Foley Square was thickly lined with satellite trucks and television cameras. Photographers pushed against the metal barriers that created a walkway between the car and the building’s entrance.

A security guard helped Bernie Madoff climb out of the rear of the car and hurried him toward the courthouse. U.S. marshals watched from the perimeter, their eyes darting, alert for danger, as Madoff’s eyes remained fixed on the sidewalk five feet ahead of him. He was a study in gray—a soft charcoal suit, a dove-colored knit tie, his silver hair brushed back in wings framing his temples, his face ashen and empty.

A few minutes before 3:00
PM
, he was ushered through a side door into the courtroom of Judge Denny Chin, a boyish-looking man in his mid-fifties. Born in Hong Kong but raised in New York, Judge Chin was the first Chinese American to have been named to the federal bench in Manhattan. He had drawn the Madoff case by lottery, and this was Madoff’s first appearance before him.

Prosecutor Marc Litt, his colleague Lisa Baroni, and FBI special agent Ted Cacioppi, who had arrested Madoff three months earlier, were waiting at the table nearest Judge Chin’s elevated bench.