The Wizard of Lies: Bernie Madoff and the Death of Trust (61 page)

They’d cleared up the whole thing back in 2003: Kotz Report, Exhibit 48, p. 103.

“We are hoping that if what he is saying has any truth at all to it”: Kotz Report, Exhibit 247, p. 2.

they were stacked in a hallway, heading for the archives: Kotz Report, p. 136.

the staff had never even drafted a closing report: Ibid., p. 137.

he told the two examiners that they needed to wrap things up: Ibid., pp. 222–23.

She expected some of her clients would leave Tremont: Newton, “Talented Talent Scout.”

$175 million in redemptions in April, another $85 million in July, and $30 million in early September: Confidential “Fairfield Greenwich Group: Firm Profile” dated Nov. 15, 2007, and apparently prepared as part of the partners’ effort to find a buyer or major investor for the firm (hereafter FGG 2007 Profile), pp. 13–14.

not willing to accept profits of less than 7 percent a year: Ibid.

The Bayou Group was founded in the mid-1990s: Letter from Samuel Israel III to U.S. District Court Judge Colleen McMahon, Apr. 9, 2008, p. 1.

assets totaling $411 million: Gretchen Morgenson, Jenny Anderson, Geraldine Fabrikant, and Riva D. Atlas, “What Really Happened at Bayou,”
New York Times
, Sept. 17, 2005.

In mid-August the skeptical investor arrived at Bayou’s offices: Ibid.

accused of running a $400 million Ponzi scheme: Gretchen Morgenson, “U.S. Sues Bayou; Fraud Cited,”
New York Times
, Sept. 2, 2005.

He and Israel would subsequently plead guilty: Both Samuel Israel III and the CFO, Daniel E. Marino, were charged, pleaded guilty, and were sentenced in the U.S. District Court, Southern District of New York. Each was sentenced to twenty years in prison. The case is number 1:05-cr-01036-CM-1.

One of his last calls from his deathbed: Confidential interview with a longtime friend of the Levy family.

“Bernie Madoff, trust Bernie Madoff”: Fox Business News interview with Francis Levy, “Bulls and Bears,” January 2009, from a transcript of
Money for Breakfast
, Jan. 9, 2009, posted on CEOWire and retrieved from BNET.

He had named Madoff as the executor:
SIPC v. Bernard L. Madoff Investment Securities, Debtor; In re: Bernard L. Madoff, Debtor
(hereafter
Main Madoff Liquidation
), case number 08-01789-BRL in U.S. Bankruptcy Court, Southern District of New York, “Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Jeanne Levy-Church and Francis N. Levy,” dated Jan. 27, 2010, p. 4.

some of the people defrauded in the Bayou scam also had money with Madoff: These connections were identified and documented by the author, matching investor claims in the Bayou Group LLC bankruptcy case, filed as case number 06-22306 (ASH) in U.S. Bankruptcy Court in the Southern District of New York, with the records in the Madoff case.

e-mailed the firm after the Bayou scandal to ask explicit questions:
Picard v. Fairfield Sentry
Amended Complaint, pp. 100–102; actual e-mail exchanges are Exhibit 18 in
Galvin Fairfield Greenwich
Complaint.

had most, if not all, of their money with Bernie: Transcript, Plea Hearing in
U.S.A. v. David Friehling
(hereafter
Friehling Plea Transcript
), filed as Case No. 09-cr-700 (AKH), U.S. District Court, Southern District of New York, Nov. 3, 2009, pp. 34–35.

“We would question Bayou’s obscure auditing firm”:
Picard v. Fairfield Sentry
Amended Complaint, Exhibit 56, “Fairfield Greenwich Group Investment Team Presentation, November 2, 2005,” p. 15.

“250 hours in a year-long process”: July 2006 memo by Jonathan Clark, filed as an exhibit in the case
In re: Optimal Strategic U.S. Equity Fund Securities Litigation
, Multi-District Case No. 2073, U.S. District Court, Southern District of Florida, pp. 6–7.

“David seemed surprised to hear Madoff Securities described”: Ibid.

coached DiPascali in the role:
U.S.A. v. Daniel Bonventre
, Sealed Complaint, sworn by Special Agent Keith D. Kelly before Magistrate Judge Theodore H. Katz and filed as Case No. 10-MAG-385 on Feb. 24, 2010, p. 22. The complaint, the basis for the arrest warrant in the case, was replaced a month later by a formal indictment that combined the case against Bonventre with an indictment already pending against two other Madoff employees, Jerome O’Hara and George Perez, as noted below. Bonventre denied all charges filed against him.

the amount of custom-designed software serving the Ponzi scheme: There is no legal dispute that these computer programs existed and were used to deceive regulators, accountants, and investors. The dispute is over who created them and why. DiPascali admitted ordering that they be designed and putting them to use; the two computer programmers he accused of creating them, George Perez and Jerome O’Hara, have denied any wrongdoing and demanded a jury trial. Details of the charges against them are contained in a civil complaint,
SEC v. Jerome O’Hara and George Perez
(hereafter
SEC v. O’Hara and Perez
), filed in U.S. District Court for the Southern District of New York, Nov. 13, 2009, and a related criminal indictment against Perez and O’Hara made public the same day. As noted hereafter, a superseding indictment adding Daniel Bonventre as a defendant was filed Mar. 24, 2010; Bonventre also denied the charges and demanded a jury trial.

There were programs that generated random numbers:
SEC v. O’Hara and Perez
.

the balance in Madoff’s slush fund account:
U.S.A. v. Daniel Bonventre, Jerome O’Hara and George Perez
(hereafter
First Superseding Bonventre Indictment
), filed on Mar. 24, 2010, as S1-10-cr-228 (LTS), U.S. District Court, Southern District of New York, p. 29.

the firm’s proprietary trading desk:
In re: Bernard L. Madoff, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC. v. Peter B. Madoff, Mark D. Madoff, Andrew H. Madoff and Shana D. Madoff
(hereafter
Picard v. Madoff Family
), filed as Adversary Proceeding No. 09-01503 (BRL) in U.S. Bankruptcy Court, Southern District of New York, “Declaration of Martin Flumenbaum in Support of Mark and Andrew Madoff’s Reply Memorandum of Law in Further Support of Their Motion to Dismiss,” Exhibit A: Memorandum by Lazard Freres & Co., dated Dec. 23, 2008, p. 1.

A subsequent criminal indictment asserted that it was Dan Bonventre: Bonventre was arrested on a criminal complaint by the U.S. Attorney’s Office for the Southern District of New York on Feb. 25, 2010, three months after the indictment of two computer programmers who allegedly helped DiPascali construct phony records for the fraud. The reference here is to the formal charges that were filed against Bonventre in the
First Superseding Bonventre Indictment
, pp. 28–30.

Prosecutors and regulators at the SEC later claimed: On the same date as Bonventre’s arrest, the SEC filed related civil fraud charges against him,
SEC v. Daniel Bonventre
(hereafter
SEC v. Bonventre
), in U.S. District Court, Southern District of New York, providing additional details about his alleged role in the Ponzi scheme.

making the cash look like legal profits: Ibid., p. 14.

phony ledger entries were created: Ibid., p. 2.

“The World’s Largest Hedge Fund Is a Fraud”: Kotz Report, Exhibit 268, p. 1.

“Very few people in the world have the mathematical background needed”: Ibid.

They were impressed—indeed, alarmed: Kotz Report, p. 240.

the SEC office in New York would have to investigate him: Kotz Report, p. 242.

“The informant believes that Madoff may be running one giant Ponzi scheme”: Ibid., p. 243.

had virtually no experience investigating Ponzi schemes: Ibid., pp. 245–46.

she had been “hamstrung by a lack of resources and personnel”: Ibid., Exhibit 281, p. 4.

“she thought he was kind of condescending to the SEC”: Kotz Preport, pp. 250–51.

He said later that she seemed “offended” by this: Ibid., p. 251, note 174. In a statement on Cheung’s behalf, her lawyers argued to Kotz that, while the failure to uncover Madoff’s crime “is a burden Ms. Cheung carries daily and will continue to carry for years to come,” she and her colleagues conducted “a meaningful and good faith investigation” of Madoff that was “consistent with SEC rules, policies, and practices.” The lawyers complained that she was being unfairly blamed for “what appears to be a systemic failure.” See ibid., Exhibit 281, pp. 1–2.

he approached John Wilke in the Washington bureau of the
Wall Street Journal
: Markopolos,
No One Would Listen
, p. 152.

where he wrote about corrupt congressmen and the companies that corrupted them: Joe Holley, “John Wilke, 54: Acclaimed Investigative Reporter,”
Washington Post
, May 4, 2009.

Some of Markopolos’s allies urged him to approach other reporters: E-mails Markopolos submitted as part of his congressional testimony in 2009 included several messages in which friends urged him to contact other reporters.

Markopolos wanted to work only with Wilke: Markopolos,
No One Would Listen
, p. 154.

“that someone high up at the
Journal
had decided”: Ibid.

flatly denied that anything was behind Wilke’s decision: Joe Strupp, “Former ‘WSJ’ Editor Does Not Recall Madoff Tip,” the Market Rap blog, Feb. 5, 2009. See also Richard J. Tofel, “Bookshelf: Shadowing a Swindler,”
Wall Street Journal
, Mar. 8, 2010.

“basically some of the same issues”: Kotz Report, p. 255.

“I think he is on a fishing expedition”: Ibid., p. 256.

“There is still a little mystery as to what Madoff does”: Ibid.

There did not seem to be any explanation: Ibid., pp. 271–72.

“any
real
reason to suspect some kind of wrongdoing”: Ibid., p. 292.

conducted after the SEC gave him permission to consult with Madoff before testifying: The conversation the witness had with Madoff hit the headlines when a partial transcript of it was released as Exhibit 1 in the
Galvin Fairfield Greenwich
Complaint. According to the transcript, Madoff opened the conversation by saying to Fairfield Greenwich general counsel Mark McKeefry: “Obviously, first of all, this conversation never took place, Mark, okay?” (See Exhibit 1, p. 30.) Lawyers for Fairfield Greenwich responded that the call, however Madoff described it, was made with the SEC’s permission and was disclosed to the SEC after it took place.

using another $54 million in government bonds from Carl Shapiro’s account:
SEC v. Bonventre
, pp. 18–19.

On January 30, 2006, they interviewed Jeffrey Tucker: Kotz Report, p. 293.

Two days later they sent a letter to Tremont Partners: Ibid., p. 269, note 189.

Madoff…produced a six-page list of the financial entities: The list included Madoff’s own firm; the DTCC; the Bank of New York; Barclays Capital of London; forty-two overseas broker-dealers, thirty-six in the United Kingdom, two in Ireland, and one each in Belgium, Germany, the Netherlands, and Spain; and twelve counterparties for his options trades, including UBS and one other institution in Switzerland, the Royal Bank of Scotland (RBS), the Bank of Bermuda in London, four entities in Germany, and one each in Austria, France, the Netherlands, and Spain. See Kotz Report, Exhibit 334.

9. Madoff’s World

nearly 20 percent of its assets: FGG 2007 Profile, p. 13.

emptied their Madoff accounts in the spring of 2006:
SEC v. Bonventre
, p. 22. All three men denied government allegations that these withdrawals reflected knowledge of the Ponzi scheme.

They simply continued to tap Bernie’s piggybank: Ibid., p. 17. The SEC calculated that Madoff made $50 million in loans to family members between 2001 and 2008.

decided to delay sending the letters: Kotz Report, p. 304.

Madoff had done no options trading at all on that date: Ibid., pp. 307–8.

too large to fit into the agency’s limited imagination: A history professor who read an early draft of this book observed that the SEC’s reactions in the Madoff case were reminiscent of the response of U.S. leaders in the years before Pearl Harbor to reports that the Japanese were planning an air assault on Hawaii. Given the disparity in the military and economic power of the two nations, the reports just seemed too far-fetched to be credible—except in hindsight.

“If I was talking to a brain surgeon”: Kotz Report, Exhibit 267 (an excerpted transcript of the interview), p. 47.

“Everybody goes to the over-the-counter market on options”: Ibid., pp. 64–65.

“I’d like to go over this list”: Ibid., pp. 88–89.

“I thought it was the end, game over”: Kotz Report, Exhibit 104, pp. 3–4.

“if you’re looking at a Ponzi scheme”: Ibid., p. 3.

“Do you recall telling Peter”: Kotz Report, Exhibit 267, pp. 103–5.

Lamore was furious: Kotz Report, Exhibit 48, p. 182.

“I just remember sitting there”: Ibid., p. 250.

“I mean, ‘lying or misleading’ to ‘fraud, Ponzi scheme’ to me was a huge step”: Ibid., p. 184.

despite all the lies they had discovered, there was no evidence of fraud: Kotz Report, Exhibit 390. The Case Closing Memorandum, which relayed this conclusion, was apparently written in January 2007, but its author, Simona Suh, went on maternity leave and the final report officially closing the case was not completed until she returned. It was then delayed while she followed up on an anonymous tip reporting (quite accurately) that Madoff was looting the estate of Norman F. Levy; Madoff denied managing money for Levy, and the matter was dropped.

The turnaround in Europe was nothing short of spectacular: One good proxy for the growth in the overall hedge fund market was the popular cross-border funds called UCITS, an acronym for Undertakings for Collective Investments in Transferable Securities. Sales of stock-based UCITS—the best comparison to the funds Madoff serviced—increased 25 percent in the first nine months of 2006, compared with the same period in 2005.