The Wizard of Lies: Bernie Madoff and the Death of Trust (60 page)

“This is a great exam for us!”: Kotz Report, p. 89.

Congress broadened the loophole: Previously, hedge funds restricted themselves to fewer than one hundred partners; the National Securities Markets Improvement Act of 1996 allowed them to have an unlimited number of partners, provided each was a “qualified purchaser” with at least $5 million in invested assets.

In a 2001 report: The General Accounting Office issued three reports and provided congressional testimony on SEC staffing issues: GAO-01-947, GAO-02-302, GAO-03-120 and GAO-02-662T. None reported any meaningful progress toward resolving the agency’s profound personnel problems.

left the agency between 1998 and 2000: General Accounting Office, “Securities and Exchange Commission: Human Capital Challenges Require Management Attention,” Report No. GAO-01-947, p. 1.

Markopolos had become interested in Madoff’s returns a few years earlier: Harry Markopolos, Testimony Before the House Committee on Financial Services, Feb. 4, 2009, p. 5

The son of immigrant Greek restaurant owners in Erie, Pennsylvania: These personal and career details are drawn from Markopolos,
No One Would Listen
.

“We settled for a carat and a half”: Ibid., pp. 65–66.

“Sometimes Harry is not too smooth”: Kotz Report, Exhibit 18, pp. 18–19.

“could count to 21”: Markopolos,
No One Would Listen
, p. 161.

“That would be equivalent to a major league baseball player batting .966”: Markopolos testimony, p. 9.

only fourteen losing months in the same period: Morningstar data compiled for the author, analyzed over the same period Markopolos used in his 2000 submission to the SEC. See Kotz Report, Exhibit 134.

“And Harry would say: See, there it is, you know”: Kotz Report, transcript of interview with Ed Manion, Exhibit 18, p. 24.

could tell that Ward’s eyes had glazed over: Kotz Report, p. 64.

“Returns can’t be coming from net long exposure to the market”: Ibid., Markopolos 2000 Submission, Exhibit 134, p. 2.

the official report concluded that this, too, was untrue: See Kotz Report, p. 67: “Based on [then-Boston regional administrator Juan] Marcelino’s testimony and [Ward’s predecessor Jim] Adelman’s corroborating statement, Ward’s testimony to the OIG was not credible regarding: (1) whether he recalled meeting with Markopolos or hearing concerns about Madoff’s hedge fund in 2000; and (2) the substance of his February 4, 2009 conversation with Marcelino. Accordingly, the OIG concludes that, based upon the preponderance of the evidence, Ward met with Markopolos in 2000 and told Manion that he had referred the complaint to NERO, but never actually did.”

“These numbers really are too good to be true”: Kotz Report, p. 67.

“I don’t think we should pursue this matter further”: Ibid., p. 27.

“My impressions are that this is a document”: Ibid., pp. 72–73.

A fund of hedge funds was the same idea: Funds of hedge funds that were not publicly registered as mutual funds had been available in the international market since at least 1990, when there were approximately four dozen of them, according to Van Hedge Fund Advisors International. By August 2005 the advisory firm estimated that there were three thousand such funds, constituting about 40 percent of the industry’s assets.

“Funds of hedge funds raise special concerns”: William H. Donaldson, “Testimony Concerning Investor Protection Implications of Hedge Funds,” U.S. Senate Committee on Banking, Housing and Urban Affairs, Apr. 10, 2003.

had already moved their “self-directed” IRAs into the hands of Bernie Madoff: Diana B. Henriques, “Questions for a Custodian After Scams Hit IRAs,”
New York Times
, July 24, 2009.

a small firm called Retirement Accounts Inc.: In 2008, the unit handling self-directed IRAs was spun off from Fiserv and divided, with the self-directed services going to a private company set up by the unit’s former president and the rest going to TD Ameritrade. Fiserv was sued on behalf of its customers in 2009 for “facilitating” Madoff’s fraud, and the case was still moving slowly through the courts more than eighteen months later.

By 2008 it would be handling roughly eight hundred self-directed IRAs: Henriques, “Questions for a Custodian.” Three other convicted Ponzi schemers steered their IRA investors to Fiserv for support services. Regulatory gaps and inconsistent court rulings about the duties of support firms left the legal landscape fairly foggy; litigation arising from the Madoff case may clarify their responsibilities.

they maintained a relationship with him for more than a decade:
Cuomo v. Ivy
Complaint, p. 12.

Some new limited partnerships were formed solely to invest with Madoff via the Ivy firm: Ibid., pp. 1–4.

By 1991 some Ivy partners had heard disquieting rumors: These details and the ones that follow are drawn from several sections of the
Cuomo v. Ivy
Complaint, which cites contemporaneous e-mails and letters from Ivy’s files.

“compensation for the use of their money”:
Cuomo v. Ivy
Complaint, p. 23.

The Ivy executive described the conversation in an internal memo: Ibid., p. 36.

“You omitted one other possibility—he’s a fraud”: Ibid., p. 42. The Ivy case is pending, but the partner filed a formal answer in court contesting the attorney general’s accusations and denying that he suspected Madoff was running a Ponzi scheme during these years. See
Cuomo v. Ivy
, Answer and Affirmative Defenses of Howard Wohl, Aug. 28, 2010.

In the early 1970s she developed methods for measuring fund performance: Official biography in Maxam fund prospectus; Greg Newton, “A Talented Talent Scout,”
Barron’s
, Aug. 2, 2006.

legendary fund managers such as Peter Lynch, Fred Alger, and Mario Gabelli: Newton, “Talented Talent Scout.”

Madoff himself identified Kingate as one of the first hedge funds to invest with him: First BLM Interview.

a public forum in 2003: The transcript for this session, held May 14–15, 2003, at SEC headquarters in Washington, D.C. (hereafter May 2003 Hedge Fund Forum), is posted on the SEC’s Web site without page numbers but in a form that can be searched. In February 2011, it could be found at
www.sec.gov/spotlight/hedgefunds/hedge2trans.txt
.

“It’s very difficult to get answers out of managers”: Ibid.

warned its clients away: Kevin E. Lynch, Charles Colfer, and Tomas Kukla, “Flash: Rogerscasey’s Buy-Rated Hedge Fund Managers Have No Exposure to Madoff Investment Securities LLC,” Rogerscasey Inc. internal publication, December 2008.

Rogerscasey’s rating for the Madoff-related Tremont funds was “sell”: The warnings surfaced in the course of lawsuits filed in Colorado by Madoff victims against units of Fiserv that provided IRA custodial services to more than eight hundred retirement savings accounts invested with Madoff.

“The Madoff exposure is a potential disaster”: Lynch, Colfer, and Kukla, “Flash,” p. 2.

he invested about $620 million: Diana B. Henriques, “Deal Recovers $7. 2 Billion for Madoff Fraud Victims,”
New York Times
, Dec. 17, 2010.

the model for the Gordon Gekko character in Oliver Stone’s 1987 movie
Wall Street
: James B. Stewart,
Den of Thieves
(New York: Simon & Schuster, 1991), pp. 202–3. Stewart noted that a Boesky aide, Reid Nagle, “had no idea where Picower’s money came from; he occupied an unmarked office suite in an anonymous Manhattan tower.”

Picower’s trading account at Goldman Sachs: Henriques, “Deal Recovers $7. 2 Billion,” and reporting notes made available to the author by her colleague Peter Lattman.

Available records show that Picower and his wife withdrew $390 million: Jake Bernstein, “Madoff Client Jeffry Picower Netted $5 Billion—Likely More Than Madoff Himself,”
ProPublica.org
, June 23, 2009 (subsequently updated), and the accompanying graphic, Dan Nguyen and Jake Bernstein, “Chart: The Picower-Madoff Transfers, from 1995–2008.”

a posthumous memoir called
Leukemia for Chickens
: Roger Madoff,
Leukemia for Chickens: One Wimp’s Tale About Living Through Cancer
(New York: privately published, 2007).

One hospital staff member would poignantly recall Peter gently rubbing ointment: Ibid., pp. 273–74. The scene, two days before Roger’s death, was described in Roger’s book by counselor Larry Dyche of Albert Einstein College of Medicine: “I wound my way through long corridors to Roger’s area. Through the door of his room, I could see a man putting ointment on Roger’s feet…. He was Roger’s father, a man renowned on Wall Street. Apologizing for not taking my hand, he rose to let us have the room to ourselves. He looked as if he would give all he owned to keep his son.”

twice the value reported just five years earlier: Based on self-reporting to the
Securities Industry Yearbook
for those years.

had written him off and warned their clients to get out: In one lawsuit against a Madoff feeder fund, the bankruptcy trustee noted: “Based on all of the foregoing factors, many banks, industry advisors and insiders who made an effort to conduct reasonable due diligence flatly refused to deal with BLMIS and Madoff because they had serious concerns that their [investment advisory] business operations were not legitimate. On information and belief, included among these were Société Générale, Goldman Sachs, CitiGroup, Morgan Stanley, Merrill Lynch, Bear Stearns, and Credit Suisse.” See
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Thybo Asset Management Ltd.
(hereafter
Picard v. Thybo
), filed as Adversary Proceeding No. 09-01365 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, p. 18.

8. A Near-Death Experience

“What are you looking for?”: Kotz Report. These details are drawn from transcripts of Kotz’s interviews with Lamore, Exhibit 48, and Ostrow, Exhibits 36 and 37, and his report on his interview with Madoff himself, Exhibit 104, and from confidential interviews with people familiar with SEC operations. Where direct quotes are used in this passage, they are the phrases recalled in official transcripts by the participants.

insisted on being their only contact in the office: Kotz Report, Ostrow Transcript, Exhibit 36, pp. 22, 34.

Frank DiPascali on the seventeenth floor had been busy:
Securities and Exchange Commission v. Frank DiPascali Jr.
(hereafter
SEC v. DiPascali
), filed as 09-cv-7085 in U.S. District Court in the Southern District of New York on Aug. 11, 2009, p. 16; and
DiPascali Criminal Information
, pp. 14–15.

On December 18, 2003, Madoff was walking through the Lipstick Building lobby: Kotz Report, Exhibit 104, Madoff interview, p. 3.

“Bernie, it’s Lori”: According to the Kotz Report, Richards recalled talking with Madoff in advance of a 2003 examination and agreed that it might have developed along the lines Madoff described, but she could not confirm the exact dialogue. See Kotz Report, p. 87.

The records from that exam were piled into a pair of boxes and forgotten: Kotz Report, pp. 136–37.

Lamore was okay, a smart kid: Kotz Report, Exhibit 104, Madoff Interview, pp. 1–3, 6.

Ostrow and Lamore tried to calm Madoff: Kotz Report, e-mail on Apr. 20, 2005, Exhibit 233.

a belated response to a set of e-mails: Kotz Report, p. 145.

an indirect stake in Madoff through its Meritor hedge fund: Meritor had entered into a total return swap with another party, who promised to pay Meritor a rate of return equal to the performance of one of the Madoff-linked hedge funds. See Kotz Report, p. 145.

The Renaissance e-mails, written in late 2003: Kotz Report, internal Renaissance executive e-mails contained in Exhibits 211, 212, and 213.

“First of all, we spoke to an ex-Madoff trader”: Ibid., Exhibit 211.

“where there was some chatter about Madoff”: Ibid., Exhibit 215, p. 2.

“Despite the fact that we are kind of smart people”: Ibid., p. 151.

on May 20, 2003, a hedge fund managing director: Ibid., pp. 77–78.

But the request was never sent: Ibid., pp. 97–98.

“Front-running—aren’t you looking for front-running?”: Ibid., Lamore Transcript, Exhibit 48, p. 77.

reassuring to those who thought they knew Bernie best: Confidential interviews with people familiar with Madoff’s trading desk operations.

“the possibility that Madoff is using”: Kotz Report, p. 131.

they would later vehemently deny this allegation: This argument was made in numerous lawsuits against various feeder funds, based on Affidavit of Edward H. Siedle, filed Mar. 26, 2009, in
Retirement Program for Employees of the Town of Fairfield, et al. v. Bernard L. Madoff; Tremont Partners, Inc., et al.
(hereafter
Town of Fairfield
Complaint), filed in Connecticut State Superior Court, Judicial District of Fairfield at Bridgeport, p. 6. Siedle was a financial consultant offered by plaintiffs as an expert witness in the case.

one Italian money manager said
market intelligence
was the code word: Confidential interview.

an illegal practice known as “cherry-picking”: Kotz Report, p. 146.

The supervisor did not share the response with Lamore or Ostrow: Ibid., pp. 189–90.

“We do a few trades on behalf of brokerage firms and institutions”: Ibid., Exhibit 104, p. 2; Exhibit 244; and Exhibit 245.

The news was a shock: Kotz Report, Exhibit 36, p. 24.

Recovering, Ostrow said something about the SEC being a large organization: Kotz Report, Exhibit 104, p. 4.

Madoff conceded that perhaps there were as many as fifteen entities: Kotz Report, Exhibit 245. In the e-mail that opens the exhibit, Lamore writes his colleagues that “Bernie’s fessing up.” His supervisor would later say that the obvious lies Madoff was telling did not overly concern him: “it’s hard to get inside someone’s head about why they’re saying what they’re saying” (Ibid., pp. 194–95).

But the model stopped using options about a year ago: Kotz Report, Exhibit 104, p. 4.