The Wizard of Lies: Bernie Madoff and the Death of Trust (6 page)

Of course.

Wolfe calls Peter Madoff—one of countless conversations he will have with Peter or Shana that day. The questions from Peter are obvious: What should the company be doing? What should it tell its clients? Wolfe no doubt tells him that the SEC is getting a court order to suspend its trading operation and freeze its assets.

Within a few hours, the forty-eight-year-old firm called Bernard L. Madoff Investment Securities has been seized by regulators, who will shut it down and dismantle it.

Sometime on this day, federal investigators remove a thick stack of checks from Bernie Madoff’s office. Made out at DiPascali’s direction and signed yesterday by Madoff, they total $173 million, payable to various family members and friends. Madoff told his sons he intended to distribute between $200 million and $300 million; this was the first installment.

As investigators and accountants race to keep this leaking ship afloat until they can get it secured in port, its captain is downtown calmly answering his lawyers’ questions about how much he can afford to post as bail. There is the equity in the penthouse, the beach house in Montauk, Long Island, the Florida home—all owned free and clear. Madoff had Ruth move money from her investment account into her bank account, so she can write checks. What will the prosecutors demand?

Horwitz doesn’t know yet. Sometime after 1:00
PM
, he finds a phone and calls the prosecutor’s office to check on the status of the formal paperwork. Until that’s ready, nothing can happen—no hearing, no magistrate’s ruling on bail, no release.

Marc Litt, a quiet-spoken assistant U.S. attorney, was already busy with a major insider trading investigation when he was assigned the Madoff case. He takes Horwitz’s call and listens as the defense attorney makes a case for releasing Madoff on his own recognizance. The prosecutors have no evidence, except Madoff’s confession. In effect, he turned himself in by confessing to his sons. To Horwitz, a personal recognizance bond seems perfectly appropriate.

The bargaining begins. Nothing Horwitz proposes satisfies Litt—not the personal recognizance bond or the pledge of the $7 million apartment in Manhattan or Ruth Madoff as a cosigner with her husband. “I need more,” he says.

Okay, how about his wife and his brother as cosigners?

“I want four signatures,” Litt answers.

Four? Horwitz knows that Madoff’s sons turned him in to the government the night before. Would they agree to stand bail for their father, after what he had done? He counters: “Why don’t we put up another property?” There was Montauk, or Palm Beach.

“No, try to get four signers—at least try.”

The negotiations over the bail arrangement—which would be disputed, criticized, and litigated for weeks—take less than five minutes.

Waiting for the paperwork, Horwitz is also watching for Ruth and watching the clock. He hopes to get Madoff out of the courthouse on bail before the press corps calls in reinforcements. As the hours slip by, their chance for an inconspicuous exit is evaporating. At midafternoon, Madoff’s interviews are done and the marshals take him to a holding cell next to the large first-floor courtroom known as Part One, where federal defendants are arraigned before a magistrate judge. Horwitz and De Bello meet up with Ruth Madoff, take an elevator to the lobby, and head to Part One. Horwitz checks on Madoff in the holding cell and joins Ruth and Nicole in the crowded courtroom.

Federal magistrate judge Douglas Eaton, who will determine Madoff’s bail, is not having a good day either. His entire morning was spent haggling over the fate of Marc S. Dreier, a corrupt Manhattan attorney who was arrested the previous Sunday and accused of peddling more than $500 million in bogus promissory notes to hedge funds. Prosecutors argued that releasing Dreier on bail posed “an enormous risk of flight.” But Dreier’s lawyer would not give up.

By the time Judge Eaton denies bail to Dreier, cases have piled up. One is a drug bust with numerous defendants, some of whom don’t speak English. Translators are summoned. The hours tick by.

Horwitz finds a pay phone and calls a car service. He tries to craft an appropriate statement for the reporters already gathering in the courtroom. It is well past 5:00
PM
before the legal paperwork is ready. Finally, Judge Eaton’s clerk calls the case of
United States of America v. Bernard L. Madoff
.

Madoff, looking gray and poorly shaven, with a small cut on his left cheek, is brought in from the holding cell as Ruth watches from one of the crowded benches. Litt walks the judge through the agreement he has reached with Horwitz—a personal recognizance bond of $10 million, with four “financially responsible people” cosigning the bond. Travel will be limited to the New York area, Long Island, and Connecticut, and Madoff will surrender his passport.

After his turbulent session with the Dreier case, Judge Eaton is confident about releasing Madoff on bail. Here was a man who, after confessing to his sons, “took no extraordinary measures and sat there and waited to be arrested,” he says later. With no objections from the prosecutors, he rules that Madoff is to be released immediately on Ruth’s and his own signature, with the other conditions to be fulfilled later.

Horwitz and De Bello hurry Ruth over to the Clerk’s Office on the same floor to sign the bail documents, and the Madoffs are free to go. Three reporters cluster around, throwing questions at them, but when Horwitz and De Bello hustle Ruth and Bernie out into the rainy night, the reporters don’t follow.

As they hurry toward the waiting SUV, a photographer snaps a picture of Madoff, the raindrops on his gray raincoat sparkling like diamonds in the camera’s flash. Horwitz gets Madoff into the front seat quickly and then squeezes into the back with De Bello and Ruth. Rain is pelting down by now, and the traffic is awful. It is almost 7:00
PM
when the car delivers the Madoffs to their apartment.

By then, Ike Sorkin has landed at LaGuardia Airport and is recharging his phone from the ashtray outlet in his car as it idles in the middle of the huge puddle-filled parking lot. He calls his office and makes sure all the necessary legal chores have been done, then puts his car in gear and pulls out. When he reaches his Long Island home, he and Horwitz speak at length about the Madoff case. These two tenacious defenders are holding a nearly impossible hand. Madoff has confessed to an FBI agent in his own foyer. Absent proof that he is delusional or otherwise insane, there just isn’t much they can do.

Before midnight, the news that stunned Wall Street in the late afternoon is spreading like wind-driven fire across the country. Bernie Madoff, a pioneer of the modern stock market and a man whom regulators trusted and consulted for decades, has been arrested after confessing to what he himself calls a $50 billion Ponzi scheme.

Even if you’ve never heard of Bernie Madoff, the sheer size of his fraud—
fifty billion dollars!
—guarantees that you will notice. Even in normal times, it would have been news, and these times are nowhere near normal. The financial system is already reeling with bankruptcies and bailouts. The year 2008 challenges 1929 as the most frightening and frenzied in the long history of Wall Street. The Bear Stearns brokerage house has failed. Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants, have been bailed out; the venerable Lehman Brothers firm wasn’t. Within a day of Lehman’s bankruptcy, the nation’s oldest money market fund was swept away by a tsunami of panicky withdrawals. Before that day ended, regulators were scrambling to rescue the insurance giant AIG, fearing that another titanic failure would shatter whatever trust continued to hold the fragile financial system together.

People are already furious, shaking their fists at the arrogant plutocrats who led them into this mess.

Then, in a camera flash, Bernie Madoff is transformed from someone whom no one but Wall Street insiders and friends would recognize into a man who is headline news around the world. Longtime clients, comfortable people who have lived carefully and who entrusted all their liquid assets to Madoff, will wake up tomorrow nearly destitute.

This is the day the music finally stops for history’s first truly global Ponzi scheme—one that grew bigger, lasted longer, and reached into more corners of the globe than any Ponzi scheme that came before.

F
RIDAY,
D
ECEMBER 12, 2008

It’s still the middle of the night in New York when lawyers in London arrive at the small Mayfair town house occupied by Madoff Securities International Ltd.

The European markets will open soon, and Madoff’s London operation must be locked down and secured before that happens. As the shaken London staff watches, the lawyers take the necessary steps. They arrange for guards to monitor the office around the clock. They secure the bank accounts, locate important business records, take control of the computers, and change the door locks and security codes.

The lawyers are armed with a court order signed last night in New York at the SEC’s request; they work for the receiver the judge appointed to take control of the Madoff firm, a securities lawyer in Manhattan named Lee S. Richards III.

A calm, rumpled man with both the look and the voice of the humorist Garrison Keillor, Lee Richards is considered one of the top white-collar lawyers in the country. He has handled almost a half-dozen prominent receiverships, and his firm, with offices in New York, Washington, and London, is trained for exactly this kind of emergency.

Yesterday, Richards was getting off his commuter train at Grand Central Terminal when he got a call from the SEC’s Andrew Calamari alerting him to Madoff’s arrest and asking if he could take on the receivership of the firm. Until it is clear that the firm is insolvent and should be put into bankruptcy, a receiver needs to be on site to protect its assets and secure its records, starting immediately.

Murmuring into his cell phone in the middle of the train station, Richards agreed to take the Madoff case. A few hours later, staff lawyers for the SEC asked U.S. District Court judge Louis L. Stanton to freeze the Madoff firm’s assets and put Richards in charge. Judge Stanton signed the court order at 6:42
PM
Thursday evening, and Richards went to work that night, hiring the forensic consultants he would need and mobilizing his London staff.

Around 8:00
AM
today, as Madoff’s offices are being secured in London but before the markets open in New York, Richards and several colleagues arrive at Madoff’s Manhattan office. Lawyers and accountants from the SEC have been here most of the night, trying to find the border, if there is one, between the firm’s legitimate business and the massive fraud Madoff says he conducted here.

The regulators are occupying the conference room on the eighteenth floor, where most of the administrative and financial staff and their records are located. Richards goes upstairs and sets up his command post in the large glass-walled conference room that stretches between Madoff’s empty office and the slightly larger office still being used today by Peter Madoff.

Almost every Madoff employee shows up for work today, even Frank DiPascali—although he will leave sometime during the day and not return. By the afternoon, he will be sitting in the office of one of the city’s top criminal defense lawyers, shaking and crying as he describes the work he has done for Madoff for so many years. Madoff, too, will spend this day with his lawyers, trying to understand what happens next.

At the Lipstick Building, Richards asks for the employees’ cooperation and their patience; there is a great deal he simply does not know and cannot tell them.

The members of Richards’s law firm have already curtailed access to the computer systems and confiscated employees’ key cards. His forensic consultants start examining the customer account statements and the firm’s financial records. As in London, security guards are put on twenty-four-hour duty. Richards’s team soon learns that there also are two warehouses in Queens where records are stored and backup computer equipment is maintained; guards are put on duty there, too.

As the news of Madoff’s arrest has spread, the firm’s trading partners have threatened to back out on uncompleted trades. Richards’s staff has to try to unwind or complete the deals with as little loss to the firm as possible. Other lawyers on his team are working to freeze the firm’s bank accounts and its brokerage accounts at other firms.

At about 10:00
AM
, two New York City police officers arrive at Richards’s command center. He needs to come downstairs immediately, they tell him. About three dozen Madoff investors have poured into the lobby, the media is starting to arrive, and the crowd is becoming worrisome to the building’s security staff. Richards quickly heads for the elevators.

The investors gathered in the lobby are anxious, but quiet and well-behaved—remarkably so, given the devastation so many of them are facing. Gathered here in the subdued glow of the holiday decorations, they are the first visible faces of the tens of thousands of people around the world who have been injured by Madoff’s unthinkable fraud. They are proxies for all the trusting widows, all the second-generation investors, all the construction workers, dental office receptionists, retired teachers, restaurant owners, electricians, insurance agents, artists, writers, chefs, models, therapists, small business owners, modestly successful doctors and lawyers who all have suddenly been labeled as “Madoff victims.”

Richards explains to them that it is far too early for him to have any information about their individual accounts—and he can’t predict when he will have that information. There is nothing to be learned here in the lobby, he explains. The crowd gradually disperses as Richards returns upstairs.