The Wizard of Lies: Bernie Madoff and the Death of Trust (52 page)

It got little attention in the uproar, but a passage in a statement released by SIPC that day quoted Irving Picard on the topic of Jeffry Picower’s relationship to the massive Ponzi scheme—and, in the process, offered a quick glimpse of the strategy that produced so many fierce accusations against various Madoff insiders and big investors in the lawsuits that had been filed over the previous two years.

“When we filed suit against Mr. Picower and others in the spring of 2009, the records available led us to allege that Mr. Picower might have or should have known of Mr. Madoff’s fraud,” Picard acknowledged. “With the benefit of additional records, I have determined that there is no basis to pursue the complaint against Mr. Picower and we have arrived at a business solution instead.”

It would certainly not be the last such “business solution” to the lawsuits in which Picard accused various defendants of deliberate misconduct or knowing complicity in the biggest swindle of the age. But it was the biggest solution so far, and while it did not shed any light on Picower’s role in Madoff’s fraud, it immediately improved the prospects for both the net losers and the net winners.

With nearly $10 billion in hand, Picard seemed on course to restore roughly half of the cash the net losers had invested with Madoff. If Sheehan had even modest success in the courts, the recovery could be even larger—and Sheehan himself began to say privately that he thought they could get the net losers close to that Holy Grail for bankruptcy trustees: a hundred cents on the dollar.

If that happened, then it would be a new ball game for the net winners. While they did not have valid customer claims, they certainly had fraud claims they could file against the Madoff estate—all the defrauded investors did, although that fact had seemed futile and academic until now. If Picard’s clawback blitz produced substantially more than the estimated $20 billion he needed to repay the net losers—and he already had almost $10 billion in hand—then the payment of fraud claims would become a real possibility.

And if this occurred, then this historically large, long, far-flung crime would have achieved another superlative. It would have produced the most remarkable Ponzi scheme recovery ever. For the Madoff victims, the record-setting Picower settlement delivered something that for two years had been even more elusive than justice: hope.

Oddly enough, Picard and Sheehan were not the only ones who thought some sort of historic recovery would be possible in the case. Bernie Madoff thought so, too.

In several e-mails from prison after the Picower settlement, Madoff wrestled almost obsessively with Picard’s arithmetic, protesting that it looked as if the trustee would “recover at least 24 billion in claw backs against 20 billion in valid loss claims.” He was certain that some European banks and hedge funds had reached confidential settlements with their investors in late spring 2010 that fully covered $15.5 billion in claims. “I know it’s 100% reliable and that’s all I can say,” he added. So it looked to him that Picard could wind up with much more money than he would need to repair the damage Madoff himself had caused.

The $20 billion would only cover the cash lost in his scheme, of course, not the accumulated wealth his investors had counted on for their future security—comfortable fortunes that turned out to be cruel fantasies. And no amount of money could repair all the broken hearts, bereaved families, and disrupted lives he left in his wake, or restore the trust his betrayed victims once had in themselves and the world around them. Even on a purely monetary level, the foreign investors who were supposedly made whole by those confidential settlements in Europe might not even have filed claims with Picard. And the foreign banks and hedge funds that paid those settlements might still have valid claims in their own right, even if they had paid off their investors.

Still, Madoff was calmly confident about the eventual outcome: “I have to assume that if the foreign claims were 100% settled in one form or the other, and the other domestic claims will be made whole from the recovered assets, everyone’s principal will be returned.”

After a short stay in a federal jail cell in Atlanta, Bernard L. Madoff arrived at the seven-hundred-acre Federal Correctional Complex in Butner, North Carolina, on Tuesday, July 14, 2009, two weeks after being sentenced by Judge Denny Chin.

The facility had housed a number of prominent white-collar criminals over the years, and its current notable inmates included the convicted Israeli spy Jonathan Pollard, the aging gangster Carmine Persico, and one of the executives convicted in 2004 of cooking the books at Adelphia Communications.

Madoff was taken to FCI-1, one of two medium-security prisons in the complex. Now officially designated as Inmate Number 61727054, he was issued the standard inmate uniform, a khaki shirt and slacks, and began several weeks of orientation.

The inmate handbook advised him that all his personal property had to fit within a single storage locker, although the space under his bunk might be used with permission. His jewelry was limited to a single inexpensive watch and a wedding band without gemstones. His normal purchases at the prison commissary could not exceed $290 a month.

His links to the world outside would now consist of monitored handwritten letters, a few monitored e-mails from people on a pre-approved list, and occasional visits with Ruth and his lawyers.

At first he worked in the prison library and education department. Then he was assigned to the commissary, a well-paid and coveted job among inmates. He did not mop floors or scrub toilets, as some published reports would later claim. By his own account, he remained in relatively good health and was always “treated well by the inmates and staff here,” in contrast to “all the absurd stories that have appeared in the media.” As for the reports that he had made disparaging remarks about his sons or victims, he was emphatic: “I have never said the slightest negative thing about my sons, who I love and miss terribly. I feel great remorse for my victims.”

On August 24, 2010, more than a year after his arrival at Butner, Bernie Madoff grants his first on-the-record interview, sitting in the prison’s nearly empty visitor room and spinning tales about his long career on Wall Street and the fraud that will forever be associated with his name.

The first question demanding an answer is: Who else knew?

He insists that his family knew nothing about his fraud. “I knew it was going to be a disaster; I had to take the blame,” he says. “I felt I deserved to be punished—it was almost a relief—but I had to spare my family.” So he faced the firestorm of his arrest, and he says he was horrified when his wife, brother, and sons were vilified anyway. There were no witnesses, no records, no bits of evidence that would implicate his family members, he continues, because they were not involved in any way. “I didn’t see how they could have been found guilty,” he asserts. “I knew there was nothing anyone could find.”

Then who else might have suspected he was a fraud?

“Picower was the only one that might have,” he says. “I mean, how could he not?” Jeffry Picower had promoted dubious tax shelters to his clients and had been a client of the corrupt arbitrageur Ivan Boesky in the red-hot 1980s. “He had pushed a lot of envelopes,” Madoff says of Picower, but he does not concede that the other giant feeder funds or major investors knew that they were investing in a Ponzi scheme. The worst he will say is that some of them were “lacking in sophistication.”

The second most compelling question must be: When did it start?

Madoff continues to insist, as he did in court, that his vast fraud did not start until 1992. Until then, he says, he was making legitimate investments. He claims that the government and the bankruptcy trustee are simply wrong when they assert that the fraud began earlier, or that it was a fraud from the beginning.

Of course, so much is riding on the answer to that question, “When did it start?” The earlier the fraud began, the more of the Madoff family’s remaining assets the government can claim for his victims. So the answer to this simple question will remain elusive at least until the Madoffs have settled all the financial claims now facing them. Even then, Madoff himself is unlikely to jeopardize those settlements by answering this question any differently than he does today.

Prosecutors have said at every opportunity that the Ponzi scheme began “at least by the 1980s.” The bankruptcy trustee claims that only a minimal amount of trading was done in a few big client accounts during all the years for which they have reconstructed Madoff’s in-house records—back to the late 1970s. But the account statements for those years do show investment holdings in client accounts. Banks and clearinghouse records go back only to 2002, so there are no records from independent sources that verify whether Madoff was actually making those investments. After nearly two years of investigation, there is nothing in any of the legal filings that proves precisely when the Ponzi scheme began. The records that would answer the question no longer exist, and the people who can answer the question either won’t do so, or they echo Madoff’s own story.

It could have been a Ponzi scheme from day one, but Madoff flatly denies that supposition. He says he was successful enough as a trader to build the visible, legitimate side of his business in the first two decades of his career, a period rich in arbitrage opportunities. It is not naïve to think that someone as successful as he was in public could have been equally successful as a private money manager pursuing commonplace arbitrage strategies, at least at first—before so much money started pouring in.

There is a slight tilt on the seesaw of probability toward the notion that the Ponzi scheme itself began on a large scale sometime in the middle or final years of the 1980s. Many investors recall being told that Madoff was shifting away from his arbitrage strategy around that time, a shift that may have been designed to cover his tracks. He told Mike Engler in Minneapolis soon after 1986 that he was opening his “institutional” money management business to individual investors for the first time, another plausible cover story. Until 1985, Peter Madoff occasionally signed redemption checks for Ruth’s relatives, but no one recalls him doing so after that date. It was during the mid-1980s that the “friends and family” accounts originally set up by Saul Alpern began their astronomical growth under Avellino & Bienes, perhaps funneling more money to Madoff than he could deploy in legitimate arbitrage. Even Madoff concedes that a rise in withdrawals after the 1987 market crash put him under intense pressure, just as an abundance of cash started to flow in from his first hedge funds clients.

But it is clear from Madoff’s answers today that he has drifted across the border between truth and lies since the earliest days of his career. He talks about getting into trouble as a young broker in 1962, when he lost money for his “friends and family” clients but made them whole by borrowing money from Alpern—allowing them to think he was a genius. He talks about the foreigners who used him to evade their home country’s currency controls in the 1980s—clearly across the bright line of their local laws—but he never blinked at helping them.

So even if Madoff were to take a lie-detector test, the odds are he could not be pinned down as to precisely when he became a crook. Was it a decision he made on a single red-letter day, or was it a destination he reached after a decades-long journey along the edges of right and wrong?

What is also evident in Madoff’s answers is that he clearly feels betrayed by the big clients who abruptly started to pull money out of his hands after the 1987 crash—men listed now among the victims of his own vast betrayal.

“Part of the agreement I had with them was [that] the profits would be reinvested—not withdrawn,” he says, sounding disappointed rather than angry. “They were the only ones who didn’t abide by that. Picower and Shapiro were the worst; Chais and Levy were not so bad.” But he concedes that “there was nothing I could have sued them over.” And he acknowledges that Carl Shapiro, Jeffry Picower, and Norman Levy did put in fresh cash when he desperately needed it during the SEC investigation in 1992. But he still believes that these men “changed the deal on me. I was hung out to dry.”

Without a trace of irony, Madoff says, “Picower claimed he had lost a lot of money on bonds with Goldman Sachs. It turned out he lied—he didn’t lose money; that wasn’t why he withdrew [money] from me.” Madoff’s other big customers took money out, too, though nowhere near as much. In fuzzy language, he suggests that their holdings included paper profits on long-standing securities positions that were offset by counterparty positions held by his foreign customers, positions that he claims he could not liquidate without huge losses.

Like so much that Madoff says, it is a plausible, detailed, credible-sounding explanation that starts to fray after it is handled a few times. What kind of legitimate positions would have created such a problem for him? If there were paper profits on real securities, surely at least some of those profits could have been realized. Why didn’t his sophisticated customers understand that rapidly unloading huge amounts of stock would drive the prices down and reduce or even eliminate their profits?

Before any such questions can arise, Madoff moves swiftly to the punch line about those unwelcome post-1987 withdrawals: “Before I realized it, I was in the hole for a few billion dollars.”

To have simply admitted his losses at that point “would have been a total scandal,” he continues. So he covered up the losses with money stolen from other people, some of them relatives and lifelong friends whose faith in him grew with each year of impervious success.

Asked to explain his relationships with a long list of big investors and feeder fund managers, he veers off on a tangent, sounding almost defensive for the first time. “People are greedy,” he says, apparently unaware of the chutzpah required for Bernie Madoff to express that opinion about anyone. “I told everyone, ‘Don’t put more than half of your money with me—you don’t know, I could go crazy.’” But he took their money anyway, and thousands of them were ignoring his sage advice and betting their entire family’s future on their faith in him.

“Somehow [at first], I assumed it would work out,” he says, returning to his explanation of why he started to steal from his big institutional clients. “That’s when I started taking money in from all of those hedge funds. And I said, ‘Well, I’ll just get myself out of a hole.’”

But he couldn’t. “I got trapped in this hole. I never set out to just steal money,” he says.

But he was stealing money; he was running an enormous inescapable Ponzi scheme. If he didn’t plan to kill himself or go into hiding, how did he think it would end?

“It was almost like—it sounds horrible to say it now, but I just wanted the world to come to an end.” He pauses, glances at his lawyer, and shrugs. It does sound horrible to say it, but he continues, struggling to explain. “When 9/11 happened,” he went on, “I thought that would be the only way out—the world would come to an end, and I’d be dead and everyone would be gone.”

He knew that sort of oblivion wasn’t really possible, of course, unless he took his own life or fled, and either exit ramp would have left his family to face the scandal alone. And he could not do that, he says. “It never entered my mind,” he adds.

Implausibly, against the weight of the available evidence, he claims that he could have kept his gigantic fraud going if he had wanted to. He insists he had not been beaten by the market maelstrom of the summer and fall of 2008; he had simply decided to quit. “I could have covered everything,” he says. “I had commitments of cash that would have come in. So I could have—but I got tired…. I knew by Thanksgiving that I was going to give it up. I was going to stop.”

He backs up. “For sixteen years, I kept this secret from my wife, my brother, my sons. How I was able to do that and maintain any degree of sanity—well, that worries me, when I think about it,” he says, shaking his head slightly as if he is still baffled.

Even at the end, he says, “I always expected that the people who would take the big losses would be the hedge funds”—not the friends, relatives, foundation directors, college administrators, and trusting investors who fawned over him for years. He recalls all the fund-raising galas and charity dinners that were a common feature of his calendar: “I hated going to those events. I hated having everybody falling over me, telling me how wonderful I was, when I knew it was not true. It was all a charade.”

He adds, “It was like the emperor’s new clothes.”

The one time his control slips is when he is asked about the wisdom of Ruth’s decision to stay with him after his arrest, the one topic he cannot seem to tackle with any fluency.

“I never told Ruth that she couldn’t leave me. I said to her, ‘You could leave me.’ Friends advised her to [leave]. It’s hard to understand.” He pauses. “You have a relationship of fifty years,” he says, staring out the window and pausing again. “It would have been better for her if she’d left.” Their sons “are still furious with me,” he acknowledges. “They don’t understand why she doesn’t hate me, why she isn’t as angry as they are.”

She is fiercely angry, he says, his voice breaking. “But somehow she was still able to find some compassion for me.”