The Wizard of Lies: Bernie Madoff and the Death of Trust (29 page)

Nine months after Madoff’s nearly ruinous 2005 liquidity crisis erupted, his Ponzi scheme was finally back in the black.

It had been a big-budget battle. By the time Madoff was sitting down to spin the SEC at the end of May 2006, he had borrowed $342 million under his brokerage firm’s letter of credit to keep his Ponzi scheme alive. But by the end of August 2006, when the SEC finally dropped its thoroughly fumbled investigation—it merely required him to register as an investment adviser—the borrowed money had all been paid back to the brokerage firm’s banks. Even by the end of June, Madoff had been able to start whittling down the debt, arranging to transfer $262 million back into the firm’s operating account by reversing the accounting gimmicks that were used to hide the payments made earlier in the year.

How did Madoff’s imperiled Ponzi scheme get back on its feet so quickly? With a lot of help from his friends—specifically, some new hedge fund friends.

It helped enormously that the global appetite for hedge fund investments had quickly shaken off any queasiness left over from the Bayou fund collapse. The turnaround in Europe was nothing short of spectacular. A money manager there who in 2001 had purchased shares in a Kingate fund invested with Madoff decided to cash out in 2005. “I said, ‘I want to sell,’” he recalled, “and people were saying, ‘me,’ ‘me,’ ‘me.’ In fifteen minutes I could have my money.” He made 40 percent on that stake but kept watching for an opportunity to invest in Madoff through other funds. He shrugged: “We all thought he was front-running. But so what?”

Thanks to the continuing sales effort led by Walter Noel’s handsome sons-in-law at Fairfield Greenwich, Madoff was well situated to benefit eventually from this rebound, although Fairfield Greenwich did not start to recover from its 2005 decline until late in the year and saw its biggest gains in 2007.

The real powerhouse behind Madoff’s fraud-saving success in Europe in 2005 and 2006 was Sonja Kohn, the energetic founder of a boutique bank in Vienna called Bank Medici. Born in 1948 in Vienna, Sonja Blau married Erwin Kohn, a career banker, in 1970 and raised five children. Early in their marriage, they operated an importing business in Milan and Zurich, but in 1983 they moved to New York, and by 1985 she had obtained her broker’s license. An exuberant and somewhat flamboyant woman who was fluent in at least four languages, she worked briefly in the late 1980s for Merrill Lynch and Oppenheimer. Although some remembered her generating big commissions for the firm in those days, two of her Merrill Lynch customers complained that she had steered them into unsuitable investments, and records show the firm paid more than $125,000 to settle the disputes.

Publicly, Sonja Kohn recalled that she had been introduced to Madoff in the 1990s, when his “hedge fund” had the endorsement of “people and companies who were the gold standard of the financial community.” In fact, Kohn was introduced to Madoff in the mid-1980s by Madoff’s cheerful Roslyn neighbor and business partner Sonny Cohn.

When Cohn was mulling over ideas for life after retirement, his accountant at the well-known firm of Oppenheim, Appel, Dixon & Company suggested he talk with a dynamic Austrian woman who supposedly was one of the “biggest producers” at Merrill Lynch. There was a meeting—but apparently no meeting of the minds about any kind of joint venture. Sonja Kohn was very tough-minded and had big ambitions and expansive ideas, while Sonny Cohn was probably looking for a quiet sort of semiretirement. Still, Cohn did introduce Sonja Kohn to Madoff, who was more than a match for her in toughness and ambition.

In April 1987, Sonja Kohn formed a small company in New York called Erko. A few months later, she formed Windsor IBC, a brokerage firm wholly owned by Erko. Within a few years, she would stand at the center of a dizzying international complex of corporate shells, holding companies, offshore trusts, and private partnerships, the most prominent of which was her flagship institution, Bank Medici, founded in 1994.

The first to become publicly known was a small investment firm she established in 1990 called Eurovaleur, a hedge fund collective based in New York that worked with some of the top money managers in Europe. When she showed up in Madoff’s appointment book, even two decades later, she was most commonly identified as being from Eurovaleur, not Bank Medici.

In 1996, a decade after her fruitful association with Madoff began, Kohn set up another small New York company called Infovaleur, later described as a financial research service. One of its most lucrative clients was Bernie Madoff, whose legitimate firm had easy access to any Wall Street research it wished to see. The trustee liquidating Madoff’s firm years later would assert that Infovaleur was “a sham,” one of many shell companies designed simply to receive tens of millions of dollars from Madoff and send the money along to other shell companies controlled by the Kohn family and its associates in Gibraltar, elsewhere in Europe, and Israel. The cash—which allegedly was always handed over face-to-face, never mailed—was Kohn’s compensation for the billions of dollars she helped steer into Madoff’s Ponzi scheme over the years, the trustee claimed.

Another lawsuit by the trustee would contend that Madoff’s small affiliate in London, Madoff Securities International Ltd., had been a link in this chain of compensation since 1987. That case described meetings at which one of Madoff’s longtime senior executives in London personally delivered Kohn’s quarterly check “over tea at the Ritz or Claridge’s in London.” These fees were identified in Madoff’s records as being for research, but the intermediary was “well aware that whatever research Kohn did provide to Madoff was worthless,” the trustee alleged. The London executive did not comment but took steps to dispute the trustee’s allegations in court. Through her lawyers, Kohn insisted that she never had any knowledge of Madoff’s fraud.

After meeting Bernie Madoff in the mid-1980s, Kohn made no secret of her admiration for him—although she abided by his wishes and obscured his role in the sales literature for her funds. According to his employees, she visited his offices frequently and was always greeted by Madoff with great warmth.

Like Ezra Merkin in Jewish charity circles and Walter Noel in the hedge fund world, Sonja Kohn was a linchpin for Madoff since the early 1990s, linking him to new sources of cash in Europe and beyond. She introduced him to Mario Benbassat, the founder of a Swiss firm called Genevalor, Benbassat & Cie, and his two sons. Their firm would set up five early feeder funds in Europe, including the hefty Thema funds, and ultimately would put almost $2 billion into Madoff’s hands. Benbassat was a director of another prominent Swiss investment firm called Union Bancaire Privée, and in 2003 UBP set up its own collection of Madoff feeder funds, one that would ultimately gather $1 billion in fresh cash for him. Subsequent litigation also identified Sonja Kohn as the person who introduced Madoff to Carlo Grosso and Federico Ceretti, the two Italian money managers based in London who set up the Kingate funds to invest with Madoff in the early 1990s and ultimately steered $1.7 billion his way. She also reportedly introduced Madoff to Charles Fix, a scion of a Greek brewing empire who had established himself as a money manager in London—and who, ultimately, invested hundreds of millions with Madoff through the Harley and Santa Clara hedge funds.

To these investors, Kohn’s credentials were impeccable. In her distinctive bouffant auburn-red wig and expensive but slightly frumpy outfits, she became known as “Austria’s woman on Wall Street,” dividing her time between Europe and New York. When Bank Medici was granted a full-service banking license from the Austrian government in 2003, she and her husband established themselves again in Vienna, where she already had been honored for her contributions to the Austrian economy.

Then the established bank that had been her minority partner when she formed Bank Medici was acquired by Creditanstalt, one of Austria’s largest financial institutions, and she was catapulted into the aristocracy of European banking. After more mergers, her minority partner, now called Bank Austria, was acquired by the giant Unicredit bank holding company of Italy. It wasn’t long before Unicredit had its own family of Madoff feeder funds called the Primeo funds.

From her gilded and baroquely furnished offices overlooking the Vienna opera house, Sonja Kohn would help steer nearly $9 billion into Madoff’s hands in the decades after their initial meeting in 1985, according to the trustee’s litigation against her. Her hedge fund empire would expand across Europe and beyond, into the former Soviet Union and the offshore fund world of the Caribbean.

From Madoff’s standpoint, one of the most significant things Sonja Kohn did was to help create the Herald fund, which opened for business in April 2004. Of the half-dozen giant feeder funds serving Madoff in those years, none sent more fresh money to him during his 2005 cash crisis than the Herald fund, according to a subsequent academic study. From its inception, the Herald fund would pump more than $1.5 billion into Madoff’s hands, but much of that flowed in during its early years of operation, when he needed the cash so desperately.

Still, the Herald fund was only the pace car for other newborn European feeder funds that helped rescue Madoff. Another promising source of cash in 2005 was Access International, a private money management firm run by two elegant Frenchmen. Access was the sponsor of the LuxAlpha funds, formed in 2004, which brought in a steady stream of fresh cash in Madoff’s hour of need. The chief executive of Access was the warm but aristocratic René-Thierry Magon de la Villehuchet, but his longtime friend and banking partner, the more prosaically named Patrick Littaye, was the one who provided the link to Bernie Madoff.

Subsequent lawsuits against Access would assert that Littaye insisted that no one at Access deal with Madoff except through him. It isn’t quite clear how the two men met. Madoff recalled that the connection was through a French bank executive whom he knew through his old friend Albert Igoin in Paris, whose ties to Madoff dated to the 1970s. Littaye later recalled that he first met Madoff in 1985, when he phoned Madoff’s office to confirm a transaction for one of his private banking clients. In any case, the two men seemed to enjoy each other’s company, and Madoff was impressed by Littaye’s European connections.

In 1995, Littaye and de la Villehuchet, a gifted salesman, formed Access International, quietly investing its private clients’ money with Madoff. With the formation of the new LuxAlpha funds in February 2004, Access became an even more formidable source of money for Madoff. With the imprimatur of UBS, a prestigious international bank based in Switzerland, the fund attracted investments from such historic names as Rothschild et Cie and brought in a number of aristocratic family fortunes—including de la Villehuchet’s own money, the wealth that enabled him to preserve the beautiful provincial estate near St. Malo, on the north coast of France, that had been in his family since 1685.

It seemed that nothing could shake the trust that Littaye and de la Villehuchet placed in Madoff. In early 2006 an Access executive confirmed an odd fact noticed by people on his staff: the options supposedly traded by Madoff were not reflected in the records of Wall Street’s central options clearinghouse. When this executive raised the issue with the Access founders, they insisted on hiring an experienced independent hedge fund analyst to provide a second opinion about Madoff—and this analyst’s opinion was also firmly negative. In early May the analyst joined Littaye and de la Villehuchet for lunch in the soaring wood-paneled dining room of the University Club in Midtown Manhattan. “I did my best to inject doubt in a courteous yet effective manner,” the analyst recalled later. But Littaye, appearing “highly sensitive and defensive,” allegedly stood up for Madoff, questioned the analyst’s “business judgment,” and dismissed his concerns.

By 2006, Madoff had planted his flag on virtually every continent. His presence in Europe had expanded dramatically, with Bank Medici in Vienna and Union Bancaire Privée in Geneva not only running feeder funds directly but also providing advisory services to some of Madoff’s other feeder funds—including Fairfield Greenwich Group, based in New York and Bermuda. The Italian-based Unicredit’s Primeo funds attracted a small investment from a multinational development bank in Central Africa and, in turn, added the money to the $1.5 billion that flowed into the Herald fund. An offshore company called Euro-Dutch Management, run by Dutch bankers, raised more than $2.3 billion for its Madoff feeder funds based in the Cayman Islands. In the course of raising a total of $4.5 billion in fresh cash for Madoff, Fairfield Greenwich would draw money from Singapore, Qatar, Abu Dhabi, Dubai, Korea, and Tokyo. The Optimal funds sponsored by the prestigious Banco Santander in Spain would ultimately raise at least $1.5 billion from investors in the wealthy enclaves of Central and South America.

Even these big feeder funds had feeder funds of their own, which in turn had feeder funds, creating a vast worldwide irrigation system that sustained Madoff’s fraud with steady high-pressure streams of cash. Many of the feeder funds paid “retrocession fees”—the trustee would later call them “kickbacks,” but they also could be called sales commissions—that provided a tangible reward and a powerful incentive for those who brought in new investors.