The Wizard of Lies: Bernie Madoff and the Death of Trust (56 page)

“a large amount to me in those days”: Ibid. In 2009 dollars, Madoff owed his father-in-law more than $200,000.

high-risk “short sales”: In its orthodox form, short-selling is the practice of borrowing shares of stock (specifically, ones you think are going to decline in price) and selling them. If the price falls as you anticipated, you can buy cheaper shares to replace the ones you borrowed and pocket the difference as your profit. If the price goes up, you wind up buying more expensive shares to replace the borrowed ones and you incur potentially open-ended losses. For example, if you borrow and sell shares priced at $10 each and the price falls to $1, your profit is $9 a share. But if the price goes up and up without limit, to $20 or $40 or $100 a share, your losses climb right along with it. Being wrong about whether a stock is going up or down can ruin a short-seller overnight. This game is risky enough when you first borrow the shares from some brokerage house willing to lend them for a fee. But as a bona fide market maker, Madoff was allowed to sell short without borrowing the shares first—a practice known as “naked shorting,” which he said he sometimes deployed for clients. Without the stock-borrowing fee, the potential profit was greater. But without an assured supply of stock to cover the borrowed shares, the risks were even higher. A short-seller might find that there simply are no shares to be had except at an astronomical price—a ruinous situation known as a short squeeze. Another form of short-selling Madoff said he frequently employed was “shorting against the box.” In this strategy, a trader shorts the shares of a stock he himself already owns. His holdings protect him against a short squeeze if the price goes up; if the price goes down, his short sale locks in his accrued profits without his actually having to sell the shares, which could have tax consequences. Legislation later reduced the tax benefits of this strategy.

His grandparents on both sides: The most extensive research into Madoff’s genealogy is included in Arvedlund,
Too Good to Be True
, pp. 14–15. Their move to the Bronx was noted in the 1930 census.

Ralph Madoff described his employment as “credit”: Several of the 2009 biographies of Madoff cite this entry; see especially Kirtzman,
Betrayal
, p. 17.

Madoff himself said his father attended college: First BLM Interview.

the nation’s leading source for professional boxing equipment: See the obituary for Everlast’s founder, “Jacob Golomb, 58, a Manufacturer,”
New York Times
, Aug. 25, 1951.

the popular “Joe Palooka” comic strip character: Interviews with BLM and a confidential source who knew Ralph Madoff and was familiar with his family’s history. Ham Fisher’s “Joe Palooka” comic strip, about a virtuous prizefighter, made its newspaper debut in 1930. It migrated from newspapers to comic books, radio plays, and movies and became one of the most popular wartime comic strips.

In April 1946, he and Sylvia and their three children moved: Kirtzman,
Betrayal
, pp. 17–18.

The young Bernie Madoff attended Public School 156 and became a Boy Scout: Ross,
Madoff Chronicles
, p. 26.

it was nearly $90,000 in debt when it made its bankruptcy court filing: In 2009 dollars, the Dodger Sporting Goods Corp.’s debts exceeded its assets by more than $725,000. Its bankruptcy filing was reported in an agate section on business records in the
New York Times
on Jan. 23, 1951. In that report, its business was described as “manufacturing toys, sporting goods and kindred leather goods,” and it was located at 345 Carroll Street in Brooklyn. Its liabilities were approximately $150,000 and its assets were approximately $61,000. The company was listed in a 1949 edition of the Industrial Directory of New York State, but it was not included in the 1946 directory, according to researchers at Princeton University’s Firestone Library, where an archival copy was located. So the company’s life span was at least two years but probably less than five.

a tax lien was imposed on the family home: Kirtzman,
Betrayal
, p. 35. According to Andrew Kirtzman, citing “the real estate records kept by the Queens County clerk,” a government lien for $9,000—about $70,000 in 2009 dollars—was placed on the family home in 1956, Bernard Madoff’s senior year of high school, after Ralph Madoff and his business partners failed to pay withholding taxes. According to Madoff, this problem arose in connection with a second short-lived sporting goods venture his father launched after Dodger folded.

a one-man brokerage firm: There is no relationship between the firm founded by Ralph Madoff and any prior or current firm using the Gibraltar Securities name.

it was the firm through which he conducted his sporadic work as a finder: First BLM Interview.

their own junior high school fraternity: Oppenheimer,
Madoff with the Money
, pp. 30–31.

Bernie joined the swim team and was a decent competitor: Kirtzman,
Betrayal
, p. 24.

If you had a little savings, you kept it in the bank: Robert Sobel,
Inside Wall Street
(New York: W. W. Norton, 1977), pp. 103–4.

the executives at most of the top WASP firms on Wall Street: Editors of
Institutional Investor
,
Way It Was
, pp. 551–53.

he decided he’d like to sell sports equipment as a “manufacturer’s rep”: First BLM Interview.

the second son of Benjamin Alpern, a skilled watch repairman: Arvedlund,
Too Good to Be True
, p. 21.

the son of an early stock market success story: Michael Lieberbaum’s father was Louis B. Lieberbaum. According to SEC archives, the senior Lieberbaum founded Lieberbaum & Company at 50 Broadway in New York in January 1961; in 1963, Louis B. Lieberbaum d/b/a L.B. Lieberbaum & Co., was registered at 40 Exchange Place. Madoff had rented space at 40 Exchange Place in 1961, but by 1963, he was at 39 Broadway. In an interview, Madoff confirmed that Louis Lieberbaum was one of the first Wall Street figures to come to his notice, and that his close friendship with Michael Lieberbaum was a factor in turning his attention from sporting goods to Wall Street. Michael’s brother, Sheldon, would later introduce Madoff to one of his first big clients, Carl Shapiro.

the single best stock tip of his life: Oppenheimer,
Madoff with the Money
, pp. 98–100.

“would break up the trades into individual transactions”: Letter from BLM, Oct. 3, 2010.

in a green plastic loose-leaf notebook: Michael Bienes interview for “The Madoff Affair,” a RAINmedia production for
Frontline
, WBGH Boston, Program No. 2714, aired on May 12, 2009, hereafter cited as Bienes
Frontline
interview.

“No, I cannot handle small accounts like this”: Ibid.

“I’m taking the green book down to Florida”: Ibid.

“50 to 75 investors”: Letter from BLM, Oct. 3, 2010.

That pair of CPAs set up a separate fund to invest with Madoff: The account was set up by Edward Glantz and a partner, Steven Mendelow, who solicited investors under the name of the Telfran fund.

It was called riskless arbitrage: “Riskless” arbitrage was not really free of any risk; glitches in trading or delays in paperwork processing could derail a profit opportunity. The term was used to describe the lightning-fast strategies in which a security or its nearly exact equivalent, such as a convertible bond or a warrant, were almost simultaneously bought at one price and sold at a higher price.

changing hands in the so-called “when issued” market: Most commonly, these arbitrage opportunities involved stock splits by a company with shares already trading. For example, a company may authorize a stock split, effective on a given day. The not-yet-issued shares may trade in the “when issued” market at prices that don’t precisely reflect the arithmetic behind the stock split. Say a company has announced that, on a certain date, it will split each share of its stock into two shares. After that announcement but before the effective date of the split, the not-yet-issued shares should trade in the “when issued” market for precisely half the price of the pre-split stock. For example, if that stock is trading at a particular moment for $100 a share, “when issued” shares should be trading at that moment for exactly $50 each. But they don’t always do so. If a trader can buy one pre-split share for $100 and sell two shares of the “when issued” stock for $51 each, he can lock in a $2 profit.

Sometimes he took on more risk: E-mail from BLM, Jan. 13, 2011.

arcane securities called “warrants”: A warrant entitled its owner to buy the related common stock at a specified price, which could be higher or lower than the trading price for the stock. By buying stocks with warrants attached to them, a trader could exercise the warrant to buy shares at one price while simultaneously selling shares at a higher price, locking in an arbitrage profit.

actively and visibly pursuing warrant arbitrage: Peter Chapman, “Before the Fall: Bernard L. Madoff,”
Traders Magazine
, March 2009.

the returns on convertible bonds were slightly higher: Scott L. Lummer and Mark W. Riepe, “Convertible Bonds as an Asset Class: 1957–1992,”
Journal of Fixed Income
(September 1993), from an undated reprint by Ibbotson Associates, Inc., Chicago, Ill.

falsifying convertible bond arbitrage profits:
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. David L. Kugel, et al.
(hereafter
Picard v. Kugel
), pp. 19–21. The civil lawsuit asserts that because numerous pairs of convertible bond arbitrage trades produced highly consistent returns in Kugel’s account over a twenty-seven-month period beginning in August 1977, the trades must have been phony. They may have been phony, but consistency alone does not prove it. It is possible that Madoff simply closed out real arbitrage trades as soon as they had produced a targeted rate of return, rather than letting them remain open. That, too, could produce consistent returns, but would not involve fraud. A lawyer for Kugel did not respond to requests for comment about the trustee’s claims regarding the Ponzi scheme. No formal charges had been filed against Kugel as of February 2011.

3. The Hunger For Yield

the SEC suspended him from the brokerage business for seventy-five days: SEC release dated Aug. 15, 1970; disciplinary records of the National Association of Securities Dealers, now known as the Financial Industry Regulatory Authority, or FINRA.

the first outside employee of Bernard L. Madoff Investment Securities: Irwin Lipkin would remain with the Madoff firm for the rest of his career, and his son Eric was a Madoff employee at the time of Madoff’s arrest.

Madoff and Joel socialized frequently: Their relationship has been confirmed by BLM and was described in Oppenheimer,
Madoff with the Money
, who cited interviews with the Joel family. It was also confirmed in post-arrest litigation filed by various Joel family members against the bankruptcy trustee, Irving Picard. In 1981, Joel went to work for Madoff, and his daughter Amy followed him to the firm in 1989. He died in 2003, but Amy Joel was still on staff at the time of Madoff’s arrest.

Congress established the Securities Investor Protection Corporation: The law that set up the corporation and amended the bankruptcy code was the Securities Investor Protection Act of 1970.

“Often as not, Madoff’s firm did not get called”: Chapman, “Before the Fall.”

“We felt, as a small market-making firm”: Eric J. Weiner,
What Goes Up: The Uncensored History of Modern Wall Street as Told by the Bankers, CEOs, and Scoundrels Who Made It Happen
(New York: Back Bay Books, 2007), pp. 188–92.

“you had to show your hand, and they didn’t want to do that”: Ibid., p. 189.

the NASD’s own security measures: Created under the Maloney Act of 1938, the NASD was known legally as a “self-regulatory organization,” with the power to enact rules and enforce them, subject to the SEC’s oversight.

an automated system built for the NASD: Chris Welles,
The Last Days of the Club
(New York: E. P. Dutton, 1975), pp. 6–8, 286–87.

At least one former employee later thought so:
Andrew M. Cuomo, the Attorney General of the State of New York v. Ivy Asset Management LLC, Lawrence Simon and Howard Wohl
(hereafter
Cuomo v. Ivy
Complaint), filed May 11, 2010, in the Supreme Court of the State of New York, County of New York, pp. 22–23, 36–37. The lawsuit covers events that occurred after even Madoff acknowledged he was operating a Ponzi scheme, but it provides secondhand quotes from a former Madoff employee whose experience with the firm predated that period.

he applied and was admitted to Brooklyn Tech: The Brooklyn Tech High School Network Web site shows him as a member of the class of 1963.

the family’s golf games improved: By 2000, Madoff had a 12 handicap and consistently shot in the mid-80s—more consistently than many golf experts could credit when they were questioned after his arrest by reporters for CNBC, who relied on online records of the scores players reported to the Florida State Golf Association. Madoff’s suspiciously steady golf scores were also cited in Robert Frank and Tom Lauricella, “Madoff Created Air of Mystery,”
Wall Street Journal
, Dec. 20, 2008.

“was almost universally liked”: Chapman, “Before the Fall.”

“were just great, great people”: Ibid.

his only ownership stake in the primary Madoff firm: Peter Madoff would later hold a 9 percent stake in Cohmad Securities, formed by his brother and Maurice J. “Sonny” Cohn in 1985. But, unlike Bernard L. Madoff Investment Securities, that firm was not under Bernie Madoff’s control; he himself owned only a minority stake in it.

he and Sylvia would sometimes help Bernie by riding out to inspect some company: Confidential interview with a person familiar with the Madoff family history.

She was just weeks shy of her sixty-third birthday: First BLM Interview.