Tangled Webs (74 page)
Authors: James B. Stewart
Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility
S
uh returned to work in January 2007. While she was gone, a letter dated April 26, 2006, to the SEC chairman, Christopher Cox, had been forwarded to her attention:
uh returned to work in January 2007. While she was gone, a letter dated April 26, 2006, to the SEC chairman, Christopher Cox, had been forwarded to her attention:
Dear Sir:Your attention is directed to a scandal of major proportion which was executed by the investment firm of Bernard L. Madoff, 885 Third Ave., New York, NY.Assets well in excess of $10 billion owned by the late Norman F. Levy, an ultra-wealthy long time client of the Madoff firm, have been “co-mingled” with funds controlled by the Madoff Company with gains thereon being retained by Madoff. . . .This is an extreme example of uncontrollable greed which should be investigated by the proper authorities.Sincerely,
A concerned citizen.
Norman Levy, the chairman of Cross & Brown, a commercial real estate firm in New York, and the owner of a vast real estate empire, had died at age ninety-three in September 2005. Levy’s offices were in the Lipstick Building with Madoff’s; Madoff was named an executor of his estate; and Madoff published a tribute to Levy in the
New York Times
after his death: “I’ll cherish our relationship forever.” Suh checked the list of eighty-two individual friends and family accounts that Madoff had provided. Norman Levy wasn’t among them.
New York Times
after his death: “I’ll cherish our relationship forever.” Suh checked the list of eighty-two individual friends and family accounts that Madoff had provided. Norman Levy wasn’t among them.
Suh reported this omission to Cheung, and called Brandon Becker, Madoff’s lawyer. No one contacted Levy’s daughter, Jean Levy-Hinte, or son, Francis, who oversaw the Betty and Norman F. Levy Foundation. Becker spoke to Madoff, and reported to Suh that “Bernie says he has not managed money for Norman F. Levy.” Cheung wrote Suh: “Then I think we are done and do not have to worry any further.”
On January 11, Suh began gathering the Madoff files so she could formally close the investigation. “I guess I can’t wait to lay this case to rest,” she e-mailed a colleague. But closing the investigation was hardly a high priority. It was inactive but still technically open six months later, when Markopolos, showing remarkable persistence, sent another e-mail to Cheung:
“Hello Meaghan,
“Attached are some very troubling documents that show the Madoff fraud is getting even more brazen. . . .”
The attachments were promotional materials from another hedge fund, the Wickford Fund, which was leveraging an investment in Fairfield Sentry, which in turn invested in Madoff.
“When Madoff finally does blow up, it’s going to be spectacular, and lead to massive selling by hedge funds, funds-of-funds, as they face investor redemptions,” Markopolos warned.
No one at the SEC had ever figured out how Madoff managed to generate his returns. But Cheung considered the Madoff case “for all intents and purposes” to be closed. Markopolos received no response.
Finally, on November 20, 2007, more than two years after Markopolos had contacted the Boston office, Bachenheimer sent a brief letter to Becker, Madoff’s lawyer:
“This investigation has been completed as to Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, against whom we do not intend to recommend any enforcement action by the Commission.”
Madoff did register as an investment adviser. In a form he filed with the SEC, he said Bernard L. Madoff Investment Securities had between eleven and twenty-five clients with assets of $17.1 billion.
O
n December 11, 2008, FBI special agent Theodore Cacioppi and another agent arrived at Madoff’s apartment building on East Sixty-fourth Street at 8 a.m. They were hoping to interview him, and perhaps obtain a confession. But they brought no arrest warrant. He and his colleague identified themselves to the doorman, and Madoff invited them up to his apartment, where he greeted them in the marble-floored entry hall with a sweeping, curved staircase. He was wearing a robe and slippers, and seemed nervous. Madoff said he knew why they were there. “We’re here to find out if there’s an innocent explanation,” Cacioppi said.
n December 11, 2008, FBI special agent Theodore Cacioppi and another agent arrived at Madoff’s apartment building on East Sixty-fourth Street at 8 a.m. They were hoping to interview him, and perhaps obtain a confession. But they brought no arrest warrant. He and his colleague identified themselves to the doorman, and Madoff invited them up to his apartment, where he greeted them in the marble-floored entry hall with a sweeping, curved staircase. He was wearing a robe and slippers, and seemed nervous. Madoff said he knew why they were there. “We’re here to find out if there’s an innocent explanation,” Cacioppi said.
“There is no innocent explanation,” Madoff replied.
Madoff led the agents into his study; they passed Ruth Madoff, who was elegantly dressed and seemed remarkably composed under the circumstances. And then, without any prompting, Madoff confessed: He had “traded and lost money for his clients,” it was “all his fault,” he “paid investors with money that wasn’t there.” Madoff said he had already admitted this to his brother, Peter, and his two sons, Mark and Andrew. Now he was “broke” and “insolvent,” and “it couldn’t go on,” according to Cacioppi’s notes of the meeting. The confession lasted forty-five minutes, and when it was over, Madoff seemed both “relieved and defeated,” in Cacioppi’s recollection.
Cacioppi told Madoff he’d have to accompany him to the courthouse that morning, and told him what not to wear: no belt, tie, or shoes with laces. No overcoat. Cacioppi waited for Madoff to dress, then escorted him to the car, where two other agents drove them to the FBI’s Manhattan field office at 26 Federal Plaza. Only then did he call a lawyer, Ira Sorkin.
As all Ponzi schemes do eventually, Madoff’s hedge fund business had collapsed under the weight of massive redemption requests. It had survived far longer than most, probably because most of his feeder funds and wealthy investors didn’t need the money and few wanted to get out of an investment that brought them such generous and steady returns. But then Lehman Brothers had collapsed, the stock market plunged, and investors were suddenly panicking. They wanted security above else, and started pulling back from hedge funds and alternative investments of every variety. Existing investors wanted their money out, and potential new investors vanished. Among the feeder funds, Fairfield Greenwich alone wanted to redeem $7 billion. On paper, Madoff’s investors owned $65 billion in assets. In reality, Madoff had less than $300 million.
Madoff had tried to pay what little was left to favored employees, friends, and relatives. He transferred $15.5 million to his wife, Ruth. Two days before, he had told his son Mark that he wanted to pay employee bonuses in December, rather than the usual February. He’d written out $173 million in checks. Mark thought this seemed odd, reported it to Andrew, and the next day the brothers met with their father in his office to ask about it. Madoff calmly said he’d recently made some profits on “business operations” and it seemed a good time to distribute them.
This made no sense–Wall Street was reeling from the Lehman collapse and its aftermath. Bonuses were being slashed. Mark and Andrew knew that Madoff ran an investment advisory business located on the seventeenth floor and separate from the broker-dealer and market-making business. He’d always been cryptic about it, keeping the financial statements “under lock and key,” according to Mark. The brothers thought that Madoff had about $8 billion to $15 billion under management. The first week in December, Madoff had told Andrew about Fairfield’s request to withdraw $7 billion, said he was “struggling” to meet it, although he thought he’d be able to. And now, just days later, he wanted to pay out $173 million in bonuses?
When pressed, Madoff’s façade crumbled. He was overcome by emotion and had trouble composing himself. Finally he said he “wasn’t sure he’d be able to hold it together” if the discussion continued at the office.
Madoff and his two sons retreated to Madoff’s apartment, where Madoff broke down and sobbed. He was “finished,” he said as his sons listened in stunned silence. He had “nothing. It’s all just one big lie.” He admitted that “basically, it’s a giant Ponzi scheme.” He thought the total losses would be about $50 billion.
Madoff said he’d already confessed to his brother, Peter. He planned to turn himself in in a week, and in the meantime wanted to give the $200 million–$300 million he had left to employees, family, and friends. In other words, he wanted to continue the fraud and deprive his investors of what little they had left. Mark and Andrew went to a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison, who immediately contacted the U.S. Attorney’s office. FBI agent Cacioppi debriefed the brothers the next morning, and then Cacioppi went to arrest their father.
G
iven the multitude of lies Madoff had told the SEC, there was no reason to believe that the statement he filed as an investment adviser was any different. One of Madoff’s (and DiPascali’s) more flagrant lies was that they had only fifteen to twenty clients, all of them hedge funds and institutions. Contrary to Madoff’s assertion to Becker and the SEC, Norman F. Levy had not only been a mentor and father figure to Madoff; he’d been one of his earliest and most important clients. His foundation’s $244 million in assets were invested with Madoff.
iven the multitude of lies Madoff had told the SEC, there was no reason to believe that the statement he filed as an investment adviser was any different. One of Madoff’s (and DiPascali’s) more flagrant lies was that they had only fifteen to twenty clients, all of them hedge funds and institutions. Contrary to Madoff’s assertion to Becker and the SEC, Norman F. Levy had not only been a mentor and father figure to Madoff; he’d been one of his earliest and most important clients. His foundation’s $244 million in assets were invested with Madoff.
Madoff, in fact, had 4,800 clients with reported assets under management of $64.8 billion. These included the large feeder funds like Fairfield Greenwich, which in turn had many thousands of clients.
Time
magazine estimated that the total number of Madoff victims worldwide would reach three million people.
Time
magazine estimated that the total number of Madoff victims worldwide would reach three million people.
As the shock waves from Madoff’s arrest emanated from Manhattan to Long Island; Greenwich, Connecticut; Palm Beach; London; and Madrid, and then rippled throughout the financial system, the damages and victim toll mounted. Though hedge fund investors were supposed to be wealthy and sophisticated (the main reason they aren’t regulated more intensively), Madoff’s victims came from every walk of life, from Hollywood royalty like Steven Spielberg and Jeffrey Katzenberg to retired schoolteachers and police officers. Tragically, many had all their assets invested with Madoff and stood to lose their life savings.
O
n March 12, 2009, Madoff appeared before U.S. district court judge Denny Chin in the same building where Martha Stewart was tried. He wore a dark gray suit, a white shirt, and a lighter gray tie, his silver-tinged hair swept back from his forehead. He looked thinner, but still distinguished. The twenty-fourth-floor courtroom in the federal courthouse in lower Manhattan was packed with lawyers, reporters, and many of Madoff’s victims. Madoff stood before the judge. He was charged with eleven felony counts: securities fraud, perjury, false statements, and eight related charges.
n March 12, 2009, Madoff appeared before U.S. district court judge Denny Chin in the same building where Martha Stewart was tried. He wore a dark gray suit, a white shirt, and a lighter gray tie, his silver-tinged hair swept back from his forehead. He looked thinner, but still distinguished. The twenty-fourth-floor courtroom in the federal courthouse in lower Manhattan was packed with lawyers, reporters, and many of Madoff’s victims. Madoff stood before the judge. He was charged with eleven felony counts: securities fraud, perjury, false statements, and eight related charges.
“How do you plead, guilty or not guilty?” Judge Chin asked.
“Guilty,” Madoff answered in an almost inaudible voice.
“Try to keep your voice up,” the judge admonished him. “Mr. Madoff, tell me what you did.”
“Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme. . . . I am actually grateful for this first opportunity to publicly speak about my crimes, for which I am deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come. I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates, and the thousands of clients who gave me their money. I cannot adequately express how sorry I am.”
Madoff said his scheme began in the early 1990s, during a recession, and that clients had given him their money expecting him to outperform the market. He promised to use his split-strike conversion strategy to achieve superior results and instead simply deposited their money in Chase Manhattan Bank, periodically withdrawing it to meet redemptions and for his own purposes. Apart from the window dressing of Madoff’s strategy, it was a simple Ponzi scheme.
Madoff readily acknowledged that perjury and false statements were essential to continuing the scheme. “I knowingly gave false testimony under oath” during his 2006 SEC interrogation and “filed false and misleading certified audit reports and financial statements with the SEC.” When he was finally required to register as an investment adviser, “I falsely and intentionally certified under penalty of perjury that [I] had custody of my advisory clients’ securities. That was not true and I knew it.”
Madoff stressed that his fraud was confined to Bernard Madoff Investment Securities, his hedge fund advisory business, and not the market-making or proprietary trading aspects of Bernard Madoff Securities, in what seemed an obvious effort to shield his employees and family members. And then he was done. “I hope I have conveyed with some particularity in my own words the crimes I committed and the means by which I committed them.”
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