The Wizard of Lies: Bernie Madoff and the Death of Trust (41 page)

At the crowded table behind them, Madoff’s legal team was joined by a new attorney, Peter Chavkin. Wiry and alert, Chavkin bore a strong resemblance to the Las Vegas tycoon Steve Wynn—except that today, he was somber and unsmiling.

Chavkin was there to assure Judge Chin that Madoff had been independently advised about the conflicts facing Ike Sorkin, which included not only Sorkin’s parents’ investments with Madoff and his old law firm’s ties, but also his representation of Avellino & Bienes in 1992.

Sorkin had been negotiating with prosecutors on Madoff’s behalf since the day of the arrest. The previous Friday, March 6, the judge had been notified that Madoff had waived indictment and would be confronted only with a less detailed document called a “criminal information.” The waiver was the first hint that Madoff would likely plead guilty at some point rather than stand trial.

But first Judge Chin had to be sure that Sorkin’s conflicts of interest would not taint the plea process, which could hand Madoff a trump card for a successful appeal.

Madoff was sworn in, and Judge Chin began questioning him about the conflicts, repeatedly asking the same question with slight variations: Does Mr. Madoff understand that he is entitled to a lawyer free of any conflicts or divided loyalties? He does. And does he nevertheless wish to continue with Mr. Sorkin as his lawyer? He does. And does he understand that he is thereby waiving his right to cite these conflicts in appealing any aspect of his case? He understands.

Judge Chin was satisfied that Madoff had knowingly waived his right to change lawyers. He then quickly walked the defendant through the steps involved in waiving indictment and determining the amount of restitution that would be imposed.

Finally, he dropped the day’s firecracker.

“Now, I gather that the expectation is that Mr. Madoff will plead guilty to the information on Thursday?” the judge said.

“I think that’s a fair expectation, Your Honor,” Ike Sorkin answered softly.

“And that would be to all eleven counts of the information?”

“Yes, Your Honor.”

No one on the crowded courtroom benches had seen the charges or knew that a guilty plea was imminent. Judge Chin asked Marc Litt to review the felony counts in detail.

“Yes, Your Honor, I’m happy to do so,” Litt said. “They are securities fraud, investment advisor fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan.” He added, “There is no plea agreement with the defendant.”

Judge Chin quickly pressed him: “And that means that if Mr. Madoff wishes to plead guilty on Thursday, as far as the government is concerned, he would have to plead guilty to the entire information?”

Litt answered, “That’s correct.”

The judge leaned back, still looking at Litt. “All right, would you tell us what the exposure is in terms of the maximum possible sentence of imprisonment, taking the eleven counts together?” he asked.

The prosecutor responded, “In total, it’s 150 years.”

Two days later, hundreds of victims gathered outside the federal courthouse well before dawn, waiting for seats in Judge Chin’s courtroom on the twenty-fourth floor. A large overflow room had been set up on the first floor, where TV screens would display the proceedings live.

Security was tight. The streets and sidewalks were a circus of television cameras, satellite trucks, reporters, and photographers. Helicopters hovered above, tracking the progress of Madoff’s SUV from his apartment.

When the courtroom was finally unlocked, several newspaper sketch artists, smudged with colored chalk and gripping giant clipboards, claimed the first row of the jury box. Reporters squeezed in behind them.

At 9:36
AM
, prosecutors Marc Litt and Lisa Baroni arrived and took their seats at the table nearest Judge Chin’s bench. Litt was wearing a navy suit and white shirt, with a dotted burgundy tie. Baroni wore a black skirt and jacket, her lanky dark blond hair pulled back from her face. Ted Cacioppi, his boss Keith Kelly (the head of the FBI’s Madoff task force), and two other FBI agents in business suits joined the prosecutors at the table.

At 9:47
AM
, Bernie Madoff and Ike Sorkin entered the well of the courtroom from a side door opposite the jury box. As on Tuesday, Madoff was dressed in gray. Unlike Tuesday, he wore no watch or wedding band.

The whole defense team was in attendance. At the center of the table, Madoff sat between the white-haired Sorkin and the young dark-haired Mauro Wolfe, who leaned over to pat his back softly. Madoff sat quiet and still, his hands clasped in his lap. Sorkin positioned a microphone in front of his client and leaned over to show him how to turn it on and off.

At 10:00
AM
, Judge Chin swept in and took his seat. Introductions were made, and then Madoff was sworn in.

“Mr. Madoff,” Judge Chin asked, “do you understand that you are now under oath and that if you answer my questions falsely, your untrue answers may later be used against you in another prosecution for perjury or making false statements?”

Madoff answered softly, “Yes, I do.”

“Try to keep your voice up so that I can hear you, please,” Judge Chin said.

In a stronger voice, Madoff repeated, “Yes, I do, Your Honor.”

Sorkin asked if a court attendant could provide some water. Some was fetched and put within reach.

After a few preliminaries, Judge Chin reminded Madoff that he was waiving his right to be confronted with a formal indictment and had agreed to respond to the less detailed criminal information, laying out the government’s case against him. “Correct?” the judge asked. “Yes.”

“And how do you now plead to the information, guilty or not guilty?”

Madoff answered, “Guilty.”

The government lawyers described the charges, which took some time.

Finally, Judge Chin said, “Mr. Madoff, tell me what you did.”

With Ike Sorkin standing by him, Madoff unfolded a typewritten statement and began to read it, fumbling slightly on the legal name of his firm: “Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC….

“I am actually grateful for this opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest, and this day, would inevitably come.”

His voice was flat, controlled. “I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done. I am here today to accept responsibility for my crimes by pleading guilty.”

Although Madoff claimed to be explaining how he had carried out and concealed his fraud, parts of his statement were far from the truth.

“I want to emphasize today that while my investment advisory business, the vehicle of my wrongdoing, was part of my firm, Bernard L. Madoff Securities, the other businesses my firm engaged in, proprietary trading and market making, were legitimate, profitable, and successful in all respects….

“To the best of my recollection, my fraud began in the early 1990s….”

He alone had caused false documents to be created and mailed to clients and had wired money between New York and London to give the illusion of trading activity, he said.

Some of those statements—about the financial health of his firm, the starting date for his crime—would always be clouded by doubt. Others—such as the assertion that he had acted alone—would soon be revealed as outright lies.

When Madoff had completed his fanciful description of his crime and sat down, Judge Chin turned to Litt.

“Does the government believe that Mr. Madoff’s admissions cover the elements of the crime of each count?”

“Yes, Your Honor,” Litt answered. “The government does not entirely agree with all of the defendant’s description of his conduct. However, the government does believe that his allocution does cover each of the elements of the charged offenses.”

The government knew that Frank DiPascali was already in negotiations to plead guilty and to name names. Still, Litt was not yet free to dispute publicly Madoff’s claim that he had carried out this crime alone. And, despite the obvious lies, it would be silly to waste resources prosecuting Madoff for perjury, given all the other work that needed to be done.

Madoff’s version of his crime was clearly aimed at protecting his employees and preserving as much of his family’s wealth as possible, since the government could not claim assets accumulated before the fraud began. His story was not the whole truth he swore he would tell. It was, instead, a clear declaration that he did not intend to finger anybody in this crime except himself.

Given a chance to speak, a Madoff victim named George Nierenberg insisted that the government should have charged Madoff with conspiracy, since it was obvious that Madoff could not have produced all the paperwork by himself. Maureen Ebel, a widow who had lost all her savings, urged the judge to reject Madoff’s guilty plea and force him to stand trial so that “we have more of a chance to comprehend the global scope of this tremendous crime.”

When the judge prompted Marc Litt to respond to the victims’ statements, he asked for a moment to consider and then answered. “I think the only thing the government would say,” he responded, “is that the government’s investigation continues. It is continuing. A lot of resources and effort are being expended, both to find assets and to find anyone else who may be responsible for this fraud.”

The man who could answer the government’s questions was sitting silently at the defense table.

What then followed was a one-sided dialogue about bail. When Ike Sorkin described the security cordon set up around Madoff “at his wife’s expense,” victims in the courtroom laughed bitterly at the notion that Ruth had any money but theirs. Judge Chin called for order.

After Sorkin’s long entreaty, Litt rose to his feet to respond. Judge Chin waved to him to remain seated.

“I don’t need to hear from the government,” he said. “It is my intention to remand Mr. Madoff.”

A cheer erupted. “Ladies and gentlemen, please,” Judge Chin said, with a sharp glance at the crowded courtroom. Silence returned, but it had a different quality now, no longer anxious and hostile but patient and relieved. The judge continued: “He has incentive to flee, he has the means to flee, and thus he presents the risk of flight. Bail is revoked.”

After a few more procedural arrangements, he looked at the defendant and said, “Mr. Madoff, I will see you at sentencing. We are adjourned.”

Madoff stood at the defense table, looking straight ahead as a U.S. marshal in a business suit approached him. At a soft word, Madoff brought his hands together behind his back. With a barely audible click, the handcuffs were snapped in place.

Bernie Madoff was led silently through a side door opening into the white-tiled corridor that led to a life behind bars.

On Wednesday, March 18, a week after the Madoff media circus, David Friehling and his lawyer arrived quietly and unnoticed at the federal courthouse in Manhattan.

Tall and trim in a pale taupe suit, Bernie Madoff’s accountant was turning himself in to face the criminal fraud charges that had been made public that morning. After the usual processing by the FBI and the U.S. Marshals, Friehling was brought before a federal magistrate, where he pleaded not guilty and was released promptly on $2.5 million bail.

The previous Thursday, the day Madoff pleaded guilty, David Friehling’s father-in-law and retired partner, Jerry Horowitz, died in Palm Beach Gardens, Florida, after a long battle with cancer. Horowitz had been Madoff’s auditor as far back as the 1960s, when he worked in Manhattan alongside Saul Alpern, Frank Avellino, and Michael Bienes. Even after he set up his own practice, Horowitz continued to handle the independent audits that Madoff’s firm submitted to the SEC each year. And he regularly invested a substantial portion of his own wealth, and that of many family members and friends, with Madoff.

It wasn’t a strictly kosher arrangement. An accountant cannot be considered “independent” if he invests his money with the firm he audits. But everyone at Alpern’s firm invested with Madoff.

In the early 1990s, as Jerry Horowitz focused more on retirement, Friehling took over the practice and moved it to a small office in New City, New York, about thirty miles north of Manhattan, where he and his wife had moved in 1986. He also took over as the independent auditor for Madoff’s brokerage firm—and continued to invest his own and his family’s savings with Madoff, as his father-in-law had done.

Released on bail, Friehling strode quickly from the courthouse toward the black SUV waiting at the curb, ignoring questions shouted at him by several reporters. His defense lawyer, Andrew Lankler, platinum-haired and silent, climbed into the backseat with him, and the car sped away. Lankler had worked hard to avoid the media spectacle of an arrest at home by the FBI and a “perp walk” at the courthouse. But his negotiations with the prosecutors remained unsettled, as it was still unclear how much Friehling could help them in their search for Madoff’s accomplices. The charges brought against Friehling on March 18 were just the first hand in this poker game.

The arrest, the first public development in the criminal investigation in three months, did not answer many questions about the fraud. Indeed, the prosecutors did not clearly assert that the forty-nine-year-old Friehling even knew about the Ponzi scheme. He was accused only of aiding and abetting Madoff’s fraud by falsely certifying that he had done independent professional audits of the Madoff firm when he hadn’t.

Neither the prosecutors’ charges nor an SEC lawsuit filed the same day mentioned Friehling’s curious meeting in November 2005 with the due-diligence team from the Optimal funds—the meeting, at the height of that near-death cash crisis, when he implausibly claimed to have verified Madoff’s account balances with the DTCC.

But the SEC attorneys and the federal prosecutors said that their investigations were continuing.

Meanwhile, at SIPC, the question was still hanging in the air, confronting Irving Picard everywhere he went: “Where did the money go?”

It was a constant refrain on Web sites and talk show discussions, with participants firmly rejecting the notion that all those billions of dollars had just vanished. Wall Street sources would occasionally call reporters with intriguing tips and theories: Madoff had converted the billions into small-carat diamonds and stashed them in safe-deposit boxes around Europe; or he’d bought luxury real estate around the world through shell companies based in Panama; or he’d been blackmailed by Russian mobsters; or he’d been part of an illicit plot to secretly finance “black ops” missions by the Mossad, Israel’s national intelligence agency. How else could one person consume so much money?

Even ignoring the fictional $64.8 billion on the final account statements, most of which had never actually existed in the first place, there still was an enormous amount of actual currency to be accounted for. Picard’s experts estimated that the sum of all the out-of-pocket cash losses among Madoff’s victims—money those victims paid in but never withdrew—was about $20 billion.

But Picard knew where most of that money had gone.

Aside from the hundreds of millions that Madoff diverted for his own use over the years, the cash handed over by investors had been paid out to other investors as bogus investment earnings. Picard had the bank records showing when the cash was withdrawn and by whom; and he knew whose account in which country received the money. By his estimate, more than $6 billion was withdrawn from the Ponzi scheme between the collapse of Lehman Brothers in September 2008 and Madoff’s arrest in December. In the scheme’s final year, withdrawals totaled nearly $13 billion—most of which had flowed in since early 2006.

Still, knowing where the money went was one thing, and getting it back was another.

While the federal bankruptcy code allowed Picard to seek the return of cash withdrawn within two years of the Madoff firm’s bankruptcy filing, New York State law extended that window to six years. (The bankruptcy filing was actually made on December 15, 2008, but the court ruled that the official filing date would be December 11, the day of Madoff’s arrest.) Withdrawals in the scheme’s final three months were called “preference” payments, and those were relatively straightforward to recover. Withdrawals made in the preceding five years and nine months were generally known in bankruptcy court as “fraudulent conveyances,” and recovering them usually involved a court fight.

As those who were well versed in bankruptcy law knew, the term
fraudulent conveyance
referred to Madoff’s own fraudulent motives for conveying the cash to other people—namely, he did so to perpetuate his Ponzi scheme. The word
fraudulent
did not refer to the motives of the people to whom the cash was conveyed, those who had simply withdrawn what they thought was their own money. But many investors were not familiar with the legalese, and they were outraged when Picard’s letters to them referred to their good-faith withdrawals as “fraudulent conveyances” and directed them to contact his office to discuss returning the money.

Under bankruptcy law, it didn’t matter how pure an investor’s motives were. Picard was allowed to sue to recover all “preference payments” and any money “fraudulently conveyed” to others by Madoff in that six-year window. In bankruptcy jargon, these lawsuits are known as “clawbacks,” and for the small Madoff investors, they were just as frightening as they sounded.

Picard hated the term
clawback suits
, but by the end of June he would file eight of them against the giant investors and feeder funds whose individual withdrawals totaled hundreds of millions and, in some cases, billions of dollars.

He sued the Kingate funds, run by Carlo Grosso, for the return of $395 million, including nearly $260 million withdrawn in the last ninety days of the Ponzi scheme’s life.

He sued to recover about $1 billion from dozens of accounts set up by Stanley Chais, who was now eighty-three years old. The first Madoff feeder fund entrepreneur had relocated from Los Angeles to New York, where he was undergoing medical treatment. Even after the Madoff scandal broke, Chais had been honored in absentia for his lifetime of generosity to a host of major Israeli nonprofits, including the Weizmann Institute of Science, Technion–Israel Institute of Technology, and the Hebrew University of Jerusalem.

Picard sought about $250 million from Cohmad Securities; its cofounder Maurice “Sonny” Cohn; his daughter and the firm’s president, Marcia Beth Cohn; and a long roster of brokers who had worked there. He claimed that the brokerage firm had knowingly served as the sales force for Madoff’s Ponzi scheme, allegations that the shattered firm and the Cohns themselves adamantly denied.

Picard sought another $3.5 billion from the Fairfield Sentry funds, operated by Walter Noel, Jeffrey Tucker, and their partners at the Fairfield Greenwich Group. With other smaller funds to operate, Fairfield Greenwich had not been completely wiped out by its Madoff losses. But the entire firm had denied any knowledge of Madoff’s crime, and it had armed itself with lawyers, who were digging in for a long fight.

And on May 12, in the most ambitious of these initial lawsuits, Picard sued Jeffry and Barbara Picower for more than $6.7 billion—a staggering sum that, on further investigation by Picard’s team, would be raised to $7.2 billion a few months later. No one else—not even Madoff and his entire family—had withdrawn anything remotely close to that sum of money from the Ponzi scheme.

The revelations in the Picower lawsuit were catnip for conspiracy theorists. Had Picower been pulling money out to hide it for the Madoff family? Madoff denied this—if it were true, surely he would have reclaimed the money to help keep his scheme afloat in those final months. Moreover, Madoff would have realized that his family’s future sources of income would be scrutinized with a microscope by law enforcement for the rest of their lives. Others speculated that perhaps Picower was the actual mastermind of the Ponzi scheme all along and that Madoff was just his bagman. Madoff denied this, too—if it were true, certainly Madoff would have exposed Picower in exchange for leniency once he was confronted with that deadly 150-year jail term. There was simply no explanation that made much sense—except, as Madoff himself suspected, that Jeffry Picower was shrewd enough to know that he shouldn’t leave his possibly fictional profits in Madoff’s hands for very long.

By law, Picard had until December 11, 2010, to file his clawback suits. Before the end of the summer of 2009, he had gone to court to demand the return of $13.7 billion, all of it from giant feeder funds or enormously wealthy individuals whose lawyers were prepared for a long siege of motions and objections that would end either with a verdict in court or with a negotiated settlement. They could run out the clock and increase the cost of litigation, but actually filing the lawsuits cost Picard about the same whether he sued a giant or a midget. So it made no sense to start suing midgets when there were still so many giants walking around with so much Madoff money in their pockets.

Nevertheless, many small investors said they were terrified that he would come after them. Their fear was a signal of just how adversarial their relationship with Picard had become in the months since the February 20 meeting. The increasing hostility saddened him and frustrated his colleague David Sheehan. As they saw it, Picard was being as accessible, flexible, and sympathetic as the law allowed. He replied to thousands of e-mails and phone calls, or referred them to someone on his staff. It was a fiercely complicated international bankruptcy case, but Picard felt he was doing his best to explain those complexities to the people most grievously affected by them. He rarely lost his temper, despite the ugly accusations flung at him almost daily.

However, there were two bones of contention that he simply could not take off his plate: the slow pace at which claims were being paid and the way he was calculating losses.

By the end of June, after more than six months of work, fewer than 600 of 13,705 claims had been fully processed. It was an infuriatingly small number, and Madoff’s more desperate victims were outraged by it.

This situation was not entirely the trustee’s fault. Since most of Madoff’s records were antiquated, Picard’s team had spent hundreds of hours and tens of thousands of dollars converting millions of pages of paper and filmy microfiche into digital records that could be examined and distributed by computer. The FBI was carefully screening the records for possible accomplices hiding behind fictitious account names and had put a hold on payments to some claimants. The Justice Department had prohibited Picard’s team from interviewing more than four dozen people, including nearly two dozen employees of the firm. Moreover, bankruptcy is not a speedy process in the best of times.

Yet Picard’s adversaries blamed him personally for the slow pace of payment because they believed it was a direct result of how he was calculating investor losses. They argued that the costly and time-consuming reconstruction of customer accounts would not be necessary if he simply accepted the final account statements as the basis for SIPC claims, as they believed he was required to do by law. The best way for Picard to speed up the claims process, as they saw it, was to drop his insistence on the “cash in, cash out” approach.

Picard’s team eventually would speed up the claims-paying process, creating a computer network that lawyers at several different locations could work on simultaneously. But the trustee and his adversaries were simply at an impasse over how he was calculating losses. He believed he was correctly interpreting the law, and thousands of investors believed he was dead wrong.

SIPC acknowledged that the delays were creating severe distress for some nearly destitute investors. Pressed by several investors’ lawyers to craft some sort of interim relief, the organization established a novel “hardship” program in May that was supposed to fast-track especially urgent claims—the first time it had ever done this, or ever needed to. But the unfamiliar and cumbersome rules that applied to this new program only further infuriated some elderly investors who needed help.

Picard stuck to his guns. Claims were going to be calculated on a “money in, money out” basis. Under that approach, several thousand accounts, affecting unknown thousands of people, had no “net equity” because the owners of the accounts had already taken out more cash than they had put in. In the painful idiom of the bankruptcy court, they were “net winners” and were not entitled to get anything from the estate until after all the other investors had recovered their initial cash investment—which, in this case, seemed like legal shorthand for “never.” More significantly for those in acute need, the net winners were not eligible for the cash advances of up to $500,000 from SIPC.

Many bankruptcy law experts had expected this outcome. In their view, it was the only court-tested way to calculate Ponzi scheme losses. But some Madoff investors were convinced that SIPC’s involvement changed those established rules of Ponzi scheme liquidations, and a few were willing to ride into battle to prove it. One of them was a New Jersey attorney named Helen Davis Chaitman.