The Wizard of Lies: Bernie Madoff and the Death of Trust (55 page)

There are three people without whom this book could not possibly have been written.

The first is my agent, Fredrica “Fredi” Friedman. In the frantic weeks after Bernie Madoff’s arrest, Fredi stamped her well-shod foot and waved her bejeweled hands until she finally got my frazzled attention. Then she said, “You were born to write this book.” She would not take “I’m too tired” or “I’m too busy” or “I’m too scared” for an answer. The minute a publisher hinted that we should do a “quickie” book, Fredi stood up, smiled, and marched me right out of the building for a fortifying drink. I never would have begun this journey if she hadn’t persuaded me I could.

The second is my extraordinary editor at Times Books, Paul Golob. We didn’t always agree about the route to follow on this trip. We hit a few rocks in the road, made a few detours, and broke the speed limit repeatedly in the final weeks. But when we finally reached the destination, it was far, far above any elevation I could have reached on my own. And somehow, Paul got us there with most of my original luggage intact—just more neatly, attractively, and logically packed. When I felt I was driving blind, Paul kept us on course. I could not have reached this destination without his help.

The third is my empowering husband, Larry Henriques. Throughout this expedition, he kept gas in the car. He made sure I stopped for coffee. He fixed every flat tire and replaced every dead battery. He kept the road map handy and the windshield clean. He rolled down the windows and told jokes to keep me awake when I was nodding off. He has been my tireless and cheerful companion for every mile of the way, uphill and down, and I will never, ever be able to thank him enough.

Many others made priceless contributions to this project, starting with my researchers: the incomparable Barbara Oliver, from whom no fact or document can hide; the talented Tim Stenovec, who was as deft at hand-holding interviews as he was at finding addresses in phone book archives; and our backstop in Europe, Bernadette Murphy, who was my own French connection.

The entire team at Henry Holt—especially Stephen Rubin, Maggie Richards, Patricia Eisemann, Chris O’Connell, Meryl Levavi, and Emi Ikkanda—has gone above and beyond on my behalf, as has Alex Ward, my trusted liaison in book development at the
New York Times
.

The bricks and mortar of this book are the people, more than a hundred of them from all sides of this scandal, who were willing to share their knowledge and their memories with me. Many did so in confidence, and I am grateful for their trust. Some victims of this crime spoke with me despite despair and disagreements; I am humbled by their generosity. I also want to acknowledge the courtesy of Warden Tracy W. Johns, Associate Warden Deborah Gonzales, and their staff at the Butner federal prison facility, and the cooperation of Bernard L. Madoff and his lawyer, Ike Sorkin, in facilitating my efforts to construct as complete a history of this crime as possible. My thanks are also due to all the professionals at Baker & Hostetler, the Securities and Exchange Commission, the Justice Department, the U.S. Marshals Service, the Financial Industry Regulatory Authority, and the Federal Bureau of Investigation, who responded to my countless queries with unfailing patience, from first to last, even when the only possible response was “no comment.”

Earlier drafts were greatly improved by a cadre of trusted critics. Besides Larry Henriques, Barbara Oliver, and Tim Stenovec, they included my dear friend and colleague Floyd Norris, the chief financial correspondent for the
New York Times
; my cousin Dr. Peter R. Henriques, a notable historian and teacher; and Professor Mark Vamos, a gifted editor and journalism educator, whose elegant brushstrokes are here and there in these finished pages. Special thanks to Christine Bockelmann, for her matchless last-minute quality control.

I also owe a huge debt to the family members and friends who patiently suffered through this project and forgave me for all the missed dinners, abbreviated reunions, forgotten birthdays, canceled holiday visits, and boring Madoffian monologues. They include my sister, Peggy van der Swaagh; sisters-in-law Noel Brakenhoff and Teakie Welty; cousins Marsha Wolpa, Sherry Stadtmiller, and Nancy Woodburn; and cherished friends Leslie Eaton, who talked me down from the ledge so often; Jaye Scholl Bohlen, who has endured four of my book projects and still takes my calls; and Jonathan Fuerbringer, who always laughs at all the right places. I am also grateful for the encouragement of Dean Michael Brown and my fan club at the Elliott School of International Affairs at George Washington University, and for the patience and support of my colleagues on the board of the Society of American Business Editors and Writers (SABEW), especially Beth Hunt, Bernie Kohn, Greg McCune, Kevin Noblet, and Rob Reuteman.

I cannot begin to thank all the journalists at the
New York Times
and elsewhere who went out of their way to help. But, with apologies to anyone omitted, I’m going to try: Charles Bagli, Vikas Bajaj, Al Baker, Alex Berenson, Alison Leigh Cowan, Julie Creswell, Eric Dash, Michael de la Merced, Claudio Gatti, Christine Haughney, Jack Healy, Dirk Johnson, Eric Konigsberg, Zachery Kouwe, Steve Labaton, Peter Lattman, Gretchen Morgenson, Joe Nocera, Catherine Rampell, William K. Rashbaum, Nelson D. Schwartz, David Segal, Louise Story, Stephanie Strom, Landon Thomas Jr., Mary Williams Walsh, Ben Weiser, and Julia Werdigier.

I owe an enormous thank-you to my patient and warmhearted newsroom boss, Larry Ingrassia. Add in the other unfailingly supportive
Times
editors: Bill Keller, Jill Abramson, Glenn Kramon, Adam Bryant, Winnie O’Kelley, David Gillen, Dan Niemi, Mark Getzfred, Keith Leighty, Bill Bright, and Kevin McKenna. And top the list off with Cass Peterson’s wonderful wizards of truth on the business news copy desk, who saved my bacon countless times and never audibly groaned when they saw me racing up minutes before deadline.

In the months between Bernie Madoff’s arrest and his guilty plea, I wrote or worked on about fifty separate stories about the scandal. At least twenty-five other reporters either shared those bylines with me or contributed reporting to those stories. It was the textbook example of a team effort. That is why this book is dedicated not just to my husband, Larry, but also to all the generous and talented people who produce the
New York Times
every day, to all those who came before us and—please, Lord—all those who will come after.

It has been my honor and joy to serve among you for these past twenty-one years.

Except as specifically noted, all the civil lawsuits and criminal cases cited in the text and notes were still pending in the courts as of February 2011, the deadline for revisions before publication.

Prologue

the guards here act “starstruck”:
American Greed: Madoff Behind Bars
, produced by Kurtis Productions (Mike West, executive producer) for CNBC (Charles Schaeffer, executive producer), premiered Aug. 25, 2010.

he was beaten up in an argument with another inmate: Dionne Searcey and Amir Efrati, “Madoff Beaten in Prison,”
Wall Street Journal
, Mar. 18, 2010.

he told a visitor he “didn’t give a shit” about his sons: Joseph Cotchett, a lawyer, quoted in Brian Ross and Kate McCarthy, “First Madoff Interview: Can’t Believe I Got Away with It,” ABC News, July 28, 2009.

Madoff blurted out, “Fuck my victims”: Steve Fishman, “Bernie Madoff, Free at Last,”
New York
, June 14–21, 2010, p. 32.

he had hidden away billions of dollars: Dan Mangan, “Madoff’s Hidden Booty,”
New York Post
, June 21, 2010.

50 percent bigger than the banking giant JPMorgan Chase: Based on
Institutional Investor
’s Hedge Fund 100 ranking for 2008, JPMorgan Chase topped the list with $44.7 billion in assets under management. Goldman Sachs ranked seventh, with $29.2 billion, and Soros Fund Management ranked eighteenth, with $17 billion.

he said in one prison interview: Interview with Bernard L. Madoff (hereafter BLM) on Feb. 15, 2011 (hereafter Second BLM Interview).

1. An Earthquake On Wall Street

He is ready to stop now: This chapter draws on the author’s interviews with BLM, Eleanor Squillari, Irving H. Picard, David J. Sheehan, and Lee S. Richards III; on fourteen confidential interviews with people familiar with the events of the week; on e-mail messages and letters from BLM; on the author’s personal inspection of many of the scenes involved, including the FBI building and the Lipstick Building lobby and suite; and, where noted, on court records, actual transcripts, and other published accounts.

Fairfield Greenwich has to replace the redemptions: E-mail from Jeffrey Tucker, Dec. 8, 2008, 12:22
PM
,
In the Matter of: Fairfield Greenwich Advisors LLC and Fairfield Greenwich (Bermuda) Ltd.
, Commonwealth of Massachusetts, Office of the Secretary of the Commonwealth Securities Division, Docket No. 2009-0028 (hereafter
Galvin Fairfield Greenwich
Complaint), Exhibit 44. (Direct quotes are used only for those passages designated as such in the e-mail itself.) Without admitting or denying the state’s allegations, Fairfield Greenwich settled with Galvin on September 8, 2009, paying $500,000 in state investigative expenses and agreeing to pay an estimated $8 million in restitution to its Massachusetts investors.

“My traders are tired of dealing with these hedge funds”: Ibid.

Madoff scoffs at the notion: Ibid.

“Just got off the phone with a very angry Bernie”: Ibid.

can withdraw $35 million from one of his accounts:
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Stanley Chais, et al.
(hereafter
Picard v. Chais
), filed as Adversary Proceeding No. 09-01172 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, Declaration of Matthew B. Greenblatt, Oct. 1, 2009, p. 3.

Jay Feinberg, the foundation’s executive director: Interview with Squillari.

they manage to link in Norman Braman: Ibid.

Feinberg passing around copies of the foundation’s conflict-of-interest policy: Gift of Life Bone Marrow Foundation, Boca Raton, Fla., Internal Revenue Service Form 990 for 2008, Schedule O, p. 2.

Madoff has planned to meet with the son of his friend J. Ira Harris: Interview with Squillari; BLM appointment calendar; e-mail message from BLM, Feb. 20, 2011.

He tells Mark to draw up a list of the trading desk employees who should get checks: Interview with BLM on Aug. 24, 2011 (hereafter First BLM Interview); David Margolick, “The Madoff Chronicles, Part III: Did the Sons Know?”
Vanity Fair
, July 2009, p. 72.

Troubled, Mark consults his brother, Andrew: Margolick, “Madoff Chronicles, Part III,” p. 72.

Madoff walks across the oval area where the secretaries sit and enters Peter’s office: First BLM Interview.

asks his brother if he had “a moment to talk”: Andrew Kirtzman,
Betrayal: The Life and Lies of Bernie Madoff
(New York: HarperCollins, 2009), p. 229.

“I have to tell you what’s going on”: First BLM Interview.

“You’ve got to tell your sons”: Ibid.

he still isn’t certain about when to do it: Ibid.

Madoff initially tries to reassure them:
U.S.A. v. Bernard L. Madoff
, criminal complaint by FBI special agent Theodore Cacioppi (hereafter
Madoff Criminal Complaint
), U.S. District Court, Southern District of New York, Dec. 11, 2008, p. 3.

The sons stand firm: Ibid.

he isn’t going to be able to “hold it together” any longer: First BLM Interview.

Eleanor Squillari recalls asking Bernie where they were going: Interview with Squillari; Mark Seal and Eleanor Squillari, “The Madoff Chronicles, Part II: What the Secretary Saw,”
Vanity Fair
, June 2009, p. 103.

it took nearly ninety minutes to return with the sedan: Kirtzman,
Betrayal
, p. 231.

Mark in front and Andrew and his father in the back: Brian Ross,
The Madoff Chronicles: Inside the Secret World of Bernie and Ruth
(New York: Hyperion, 2009), p. 20.

a dark refuge of rich burgundy leather and tapestry fabric: First BLM Interview; confidential interview, a U.S. Marshals video tour of the room, and the author’s inspection of its furnishings at auction in November 2010.

“basically, a giant Ponzi scheme”:
Madoff Criminal Complaint
, p. 4.

he plans to pay that money out to certain loyal employees: Ibid.

with a tenderness that sears itself into Madoff’s memory: First BLM Interview; confidential interviews.

“a father-son betrayal of biblical proportions”: Margolick, “Madoff Chronicles, Part III,” p. 68.

The brothers leave the apartment: Kirtzman,
Betrayal
, p. 233.

London is a formidable litigator: Margolick, “Madoff Chronicles, Part III,” pp. 72–73. London handled the criminal defense for the disgraced U.S. vice president Spiro Agnew when bribery accusations led to his resignation in 1973.

He immediately tries to reach a younger colleague at Paul Weiss: Ibid.; confidential interviews.

Mark calls and tells him to go on to the office party: Kirtzman,
Betrayal
, p. 235.

Mark and Andrew repeat the story of their shocking day:
Madoff Criminal Complaint
, p. 3.

Is that
billion
with a
B
?: Confidential interviews.

He recalls returning to the office: First BLM Interview.

“You are our most important business partner and an immensely respected friend”:
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Fairfield Sentry Fund LLC, et al.
(hereafter
Picard v. Fairfield Sentry
), Amended Complaint, Adversary Proceeding No. 09-01239 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, Exhibit 78.

Without even removing his coat, he lies motionless on his bed for hours: Margolick, “Madoff Chronicles, Part III,” p. 73.

They are on autopilot, trying just to function: First BLM Interview.

One person recalls that Madoff surprised the staff: Erin Arvedlund,
Too Good to Be True: The Rise and Fall of Bernie Madoff
(New York: Portfolio, 2009), p. 265.

“a look of death on his face”: Margolick, “Madoff Chronicles, Part III,” p. 73.

“out of it”: Jerry Oppenheimer,
Madoff with the Money
(Hoboken, N.J.: John Wiley & Sons, 2009), p. 11.

“as if they didn’t have a care in the world”: Seal and Squillari, “Madoff Chronicles, Part II,” p. 104.

“for a couple of hours”: First BLM Interview.

“a taco station, a guacamole station”: Kirtzman,
Betrayal
, p. 235.

He feels confident that he still has several days to settle matters: First BLM Interview.

Madoff had been about to get dressed for work: Ibid.

“There is no innocent explanation”:
Madoff Criminal Complaint
, p. 4.

“money that wasn’t there”: Ibid.

Squillari hears Ruth say to someone else: Seal and Squillari, “Madoff Chronicles, Part II,” pp. 104–5.

When Squillari first notices him: Ibid., p. 106.

DiPascali also tries to delete sensitive information:
U.S.A. v. Frank DiPascali Jr.
, filed in the U.S. District Court for the Southern District of New York (hereafter
DiPascali Criminal Information
), p. 32.

to take his granddaughter to her nursery school class: Confidential interviews; similar details are provided in Kirtzman,
Betrayal
, pp. 236–37; Ross,
Madoff Chronicles
, p. 1.

He quietly reports what has happened: First BLM Interview.

They quiz him as politely as they can: Ibid.

“took no extraordinary measures and sat there and waited to be arrested”: Mark Hamblett, “Dreier Remains Jailed as Court Imposes Bail Beyond His Reach,” Law. com, Jan. 23, 2009. The comments were made on the record at a subsequent bail hearing for Marc Dreier.

They arrange for guards to monitor the office:
Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC
(hereafter
Initial SIPC Filing
), 08-CV-10791 (LLS), U.S. District Court, Southern District of New York, “Report of the Receiver Lee S. Richards and Application to Terminate the Receivership” (hereafter First Richards Report), Feb. 26, 2009, pp. 8–10.

Yesterday, Richards was getting off his commuter train: Interview with Richards.

By the afternoon, he will be sitting in the office of one of the city’s top criminal defense lawyers:
DiPascali Criminal Information
, transcript of plea hearing on Aug. 11, 2009, p. 85.

Madoff, too, will spend this day: E-mail message from BLM, Jan. 4, 2011.

The members of Richards’s law firm have already curtailed access:
Initial SIPC Filing
, First Richards Report, pp. 4–9.

Richards’s staff has to try to unwind or complete the deals: Ibid.

At about 10:00
AM
, two New York City police officers: Interview with Richards.

2. Becoming Bernie

immortalized later as the “go-go years”: It’s not clear who first coined the phrase and applied it to the stock market of the 1960s, but it was etched into Wall Street’s vocabulary by John Brooks, a gifted financial writer for
The New Yorker
and the author of
The Go-Go Years
(New York: Weybright and Talley, 1973).

as five times higher than the Dow Jones Industrial Average: Frank K. Reilly, “Price Changes in NYSE, AMEX and OTC Stocks Compared,”
Financial Analysts Journal
(March–April 1972): 54–59. Reilly based his calculations on the National Quotation Bureau average of thirty-five industrial stocks, which he said were “consistently described as the blue chips of the OTC market.” Those robust returns, which did not include cash dividends, were challenged in Paul F. Jessup and Roger B. Upson,
Returns in the Over-the-Counter Stock Markets
(Minneapolis: University of Minnesota Press, 1973), which argued that the total return on OTC stocks did not significantly outperform New York Stock Exchange returns after adjusting for transaction costs and including cash dividends. Jessup and Upson’s findings were too arcane to have shaped public opinion about the OTC market, however, and their methodology was occasionally quite odd. For example, for some reason they decided to exclude banks and insurance companies from their sample of OTC stocks, although virtually all such companies traded only in the OTC market and virtually all of them paid cash dividends. The rapid evolution of the OTC market can be tracked by comparing the third edition of Leo M. Loll Jr. and Julian G. Buckley,
The Over-the-Counter Securities Markets
(Englewood Cliffs, N.J.: Prentice Hall, 1973), with the fourth edition, published in 1981.

“I thought, when we started up our company”: Editors of
Institutional Investor
,
The Way It Was: An Oral History of Finance: 1967–1987
(New York: William Morrow, 1988), pp. 270–71.

“the manufacture of The Sheets”: Martin Mayer,
Wall Street: Men and Money
, rev. ed. (New York: Harper & Brothers, 1959), p. 142.

he relied on day-old Pink Sheets: E-mail message from BLM, Jan. 17, 2011.

a little outfit called A.L.S. Steel: Ibid.

Madoff violated long-standing market rules: The National Association of Securities Dealers, which regulated member brokers such as Madoff, had imposed a “suitability rule” on its members since 1939. It required brokers to tailor their investment recommendations to the individual circumstances and goals of each customer. As one historical review of the rule noted, any broker caught violating the rule was subject to “license suspension and/or monetary sanctions.” (See Nelson S. Ebaugh and Grace D. O’Malley, “Picking Your Battles,”
Journal of Texas Consumer Law
[Jan. 24, 2009].)

its worst weekly loss in more than a decade: Brooks,
Go-Go Years
, pp. 56–58.

“the hot-issue boys, the penny-stock plungers”: Ibid., pp. 57–58.

“I realized I never should have sold them those shares”: First BLM Interview.

He simply erased those losses from his clients’ accounts: Ibid.

“I felt obligated to buy back my clients’ positions”: Letter from BLM to author, Oct. 3, 2010.