The Wizard of Lies: Bernie Madoff and the Death of Trust (58 page)

its monthly returns bounced around: Morningstar data, compiled for the author with the help of
New York Times
chief financial correspondent Floyd Norris.

“a simplistic, and most important, a very conservative strategy”:
Galvin Cohmad
Complaint exhibits, letter from Maurice J. Cohn dated Nov. 21, 1991.

a scorching courtroom battle over some audits they had done: The case,
In re: M. Frenville
, was cited in bankruptcy court battles for years.

Bienes later said the litigation was an enormous expense and distraction: Bienes
Frontline
interview.

Frank Avellino felt utterly burned out: Avellino-Bienes SEC Transcript, p. 36.

devote themselves exclusively to their Madoff business: Bienes
Frontline
interview.

But they were still remarkably casual about maintaining the paperwork: An affidavit filed by Frank Avellino in his 1993 bankruptcy court dispute over the accounting fees he had to pay as part of the SEC’s 1992 investigation.

the SEC’s fabled Enforcement Division director, Stanley Sporkin: David A. Vise and Steven Coll,
Eagle on the Street
(New York: Charles Scribner’s Sons, 1991), pp. 1–20.

John Shad, a lifelong veteran of Wall Street: Shad, who was vice chairman of E.F. Hutton at the time of his appointment, was the first Wall Street executive to head the commission since President Franklin Roosevelt tapped Joseph P. Kennedy, the father of President John F. Kennedy, as the first SEC chairman in 1934. Reagan moved Sporkin to the post of general counsel at the Central Intelligence Agency, and four years later appointed him to the federal bench.

Shad was less hostile to the SEC’s mission: Joel Seligman,
The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance
(Boston: Northeastern University Press, 1995), p. 576.

“was essentially an honest place”: Vise and Coll,
Eagle on the Street
, p. 128.

a general view in Congress that the NASD had fallen down: See Senate Report No. 94-75, at 2 (1975), as reprinted in 1975 U.S.C.C.A.N. 179, 181: “The Committee believes…the self-regulatory organizations must display a greater responsiveness to their statutory obligations and to the need to coordinate their functions and activities. In the new regulatory environment created by this bill, self-regulation would be continued, but the SEC would be expected to play a much larger role than it has in the past to ensure that there is no gap between self-regulatory performance and regulatory need.”

“a competent but cautious commission”: Seligman,
The Transformation of Wall Street
, p. 577.

a quiet prestige: The building, designed by Kenneth Murchison, “has most of the trademark elements of the type: an elegantly finished lobby of very modest dimensions, a sun-washed site—well away from the blocky ranges of tall apartment buildings to the west—and an elegant run of bronze storefronts,” wrote Christopher Gray in “Streetscapes: 133 East 64th Street: If a Building Could Blush,”
New York Times
, Sept. 16, 2009.

made some minor renovations: Ibid. Howard R. Goldin, who was the architect for the work, “said some clients were so prominent that he was asked not to list their names on the building permit, but the Madoffs had no such worries at the time. As the clients were not demanding, and paid promptly, ‘it went without a hitch,’ Mr. Goldin remembered.”

Bernie Madoff became a go-to figure for the industry press when international issues arose: In December 1986, for example, he talked with
Securities Week
about a two-day meeting he attended in Washington between officials of the Singapore Stock Exchange and other NASD leaders. The topic was the possibility of building an electronic link between their markets similar to the one the NASD maintained with the London Stock Exchange.

“Madoff’s sole proprietorship, founded 26 years ago”: The article also reported, incorrectly, that Madoff “did, however, found North Shore Hospital in Manhasset, Long Island, near one of his three homes.” According to the hospital’s successor institution, he played no role in the hospital’s founding, although his friend Sonny Cohn was a substantial benefactor to the hospital for many years.

The OTC market was “in shambles”: Tim Metz,
Black Monday: The Catastrophe of October 19, 1987…and Beyond
(New York: William Morrow, 1988), p. 198.

“This added to the confusion and panic in the markets”: General Accounting Office, “Financial Markets: Preliminary Observations on the October 1987 Crash,” GAO/GGD-88–38, p. 6.

“We’re scared. Of course we’re scared”: As quoted in Metz,
Black Monday
, p. 199. In fairness, the computer technology at the New York Stock Exchange had broken down, too. Later, NASD leaders would argue that NASDAQ’s technology failures were overstated in a government study of the 1987 crash.

Mike Engler, Madoff’s friend and associate in Minneapolis, would tell his son later: Telephone interview in 2010 with Steven Engler.

only seven losing months: Morningstar data compiled for the author.

the expectation that they would be rolled over year after year: Second BLM Interview.

“I felt they weren’t sham transactions”: First BLM Interview.

an influential voice in putting NASDAQ back together: As chairman of one of the key committees looking at automated order flow, Bernie Madoff was one of the men the media sought out for comment. On Nov. 16, 1987, the newsletter
Securities Week
headlined the news that the NASD board was ready to vote on four items to improve market making. The story noted: “The first item on the plate will require all OTC market makers to participate in the NASD’s small order execution system (SOES), according to Bernard Madoff, chairman of the SOES committee and founder of the New York broker/dealer bearing his name.”

the consequences of the NASD’s flabby discipline: The NASDAQ market’s own official history later acknowledged that traders soon learned how to use the rhythm of posting and boosting their quotes on the newfangled automated system to manipulate stock prices in old-fashioned ways.

a new standard for speed in handling customer orders: In its issue of July 10, 1989,
Forbes
took note of how revolutionary the Madoff system was by describing the system’s automatic purchase of some proffered shares of IBM: “Once the computer has that IBM stock it just bought, it shows the trader various ways of hedging his position and the costs. It even shows the carrying costs for not hedging. That hedging is done by Peter Madoff’s software. The Madoffs’ computer hedging is far ahead of anything that the specialists [on the New York Stock Exchange’s trading floor] have.”

“although the Madoff firm isn’t technically a stock exchange”: Blume, Siegel, and Rottenberg,
Revolution on Wall Street
, p. 221.

By one popular measure: The measure is the S&P 500 index, adjusted for inflation and dividends.

Squadron had once been the boy wonder: Hedy Shulman, “Prominent Attorney Howard M. Squadron to Be Honored on June 10 at Benjamin N. Cardozo School of Law Dinner,” Yeshiva University press release, May 10, 1999. Madoff cochaired the event with the media mogul Rupert Murdoch, a Squadron law partner named Stanley Plesent, and an owner of the New York Mets, Fred Wilpon.

Squadron was instrumental in the rescue of the New York City Center: Ibid. See also a paid death notice placed under Squadron’s name by the City Center board in the
New York Times
, Dec. 28, 2001.

a former SEC lawyer named Jeffrey Tucker: Tucker’s original connection with investment management was through a client, an options trader named Fred Kolber, with whom he formed an options trading fund. Tucker became a general partner in Fred Kolber & Company, which formed the Greenwich Options fund.

Noel thought Tucker’s new fund might have promise for his foreign investors:
Picard v. Fairfield Sentry
Complaint, p. 80.

“Walter was very impressed with their trading”: Interview with former Fairfield Greenwich employee Sherry Shameer Cohen.

Tucker’s father-in-law, a retired knitwear manufacturer:
Picard v. Fairfield Sentry
Complaint, pp. 81–82.

One associate called it “an aura”: Bienes
Frontline
interview. Bienes said: “He had an aura about him. Not charisma, an aura about him—a confidence, the way he was set up, the way he looked, the way he spoke, the self-confidence. He just evoked confidence in you, that he knew that he was in control and if he was around, everything was fine.”

almost literally “the world,” as it turned out: The worldwide distribution of the firm’s clients is documented in “Fairfield Greenwich Group: Firm Profile,” a confidential document provided to the author, dated Nov. 15, 2007, p. 5.

Madoff had caught the attention of a few other young offshore hedge funds: First BLM Interview. Madoff recalled that Fairfield Greenwich was the first hedge fund to invest with him, and he identified the Kingate funds, run by Carlo Grosso and Federico Ceretti in London, and the Thema fund, guided by the Austrian-born banker Sonja Kohn, as the other earliest investors. But his relationship with Kohn dated to 1985, and she was allegedly instrumental in steering several other European hedge funds to him in these early years, so Madoff’s version may be less than accurate. See
Irving H. Picard v. Sonja Kohn, et al.,
filed as Adversary Proceeding No. 10-05411 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, Dec. 10, 2010 (hereafter
Picard v. Kohn
), pp. 6, 9, and 65.

he wrote in an e-mail from prison: E-mail from BLM, Dec. 26, 2010.

6. What They Wanted To Believe

a legitimate and apparently successful brokerage firm: National Association of Securities Dealers comment letter on an oversight examination of Madoff’s firm for the period ending Sept. 30, 1994, dated Jan. 26, 1995. The exam showed that by mid-1994, the Madoff firm’s annual income was just under $125 million a year, so this estimate seems likely.

a remarkable 10 percent of the total daily trading volume: Ibid.

considered among the best on the Street: Chapman, “Before the Fall.” According to Chapman, Dennis Green, former head trader at Legg Mason, gave this assessment of the Madoff firm: “They always had the best technology. They always did. Even when none of us could afford that technology…. They always had the best systems.”

whose accounts now totaled at least $8 billion: Letter from BLM, Oct. 3, 2010. Madoff estimated that client account balances totaled $5 billion in 1987; if so, the annual investment returns he claimed to be producing would have pushed that number, conservatively, to about $8 billion by the early 1990s.

the harder it would be for savvy investors to believe: Indeed, as early as 1991, the pioneering quantitative analyst Edward Thorp looked at the results Madoff was producing for a pension fund client and found some red flags, including a day in April 1991 when Madoff’s reported trades in Procter & Gamble options were more than ten times the total number of P&G options traded that day. See Scott Patterson,
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
(New York: Crown Business, 2010), p. 63.

a pair of skeptical investors had sent two documents: Kotz Report, pp. 42–44, and Kotz Report, Exhibit 113, p. 1.

The fact sheet was on the letterhead of a financial adviser in San Francisco: Ibid., p. 43.

“relatives, friends and former clients”: Ibid.

he had received a call from his friend Richard Glantz: Avellino-Bienes SEC Transcript, pp. 12–14.

one of the earliest subcontractors: The elder Glantz was a partner with accountant Steven Mendelow in the Telfran fund, an indirect Madoff feeder fund that invested through Avellino & Bienes. Since at least 1985, Mendelow had been a principal in Paul Konigsberg’s accounting firm, Konigsberg Wolf.

The younger Glantz had shared in that business and steered others to it: Richard Halstead, “San Rafael Lawyer Helped Friends and Family Invest Money with Madoff,”
Marin Independent Journal
, Feb. 12, 2009, and interviews with Glantz investors. Glantz did not deny that he set up funds through which people invested with Madoff, but noted that he was as victimized as they were, having lost all his wealth in the Ponzi scheme.

Glantz explained why he had called: Avellino-Bienes SEC Transcript, p. 14.

Avellino promptly phoned Michael Bienes, who recalled the conversation years later: Bienes described the conversation in Bienes
Frontline
interview.

he called his friend and longtime investor Howard Squadron: Bienes recalled that Madoff himself recommended Ike Sorkin, but Sorkin disputes this, saying the request came through Squadron.

In 1992, Ike Sorkin knew Bernie Madoff only slightly: Interview in 2009 with Ira Lee Sorkin.

“When asked what he does with the money borrowed”: Kotz Report, Exhibit 112, p. 1.

“We do not deal in real estate or anything other than securities”: Ibid.

someone from the SEC team got a call from Ike Sorkin: Kotz Report, p. 45.

They listened patiently and directed more questions at Frank Avellino: Avellino-Bienes SEC Transcript, p. 35.

Eventually, he explained how the “very private group”: Ibid., p. 67.

“$400 million”: Ibid., pp. 61–62.

One of those creditors was Telfran Associates: See
SEC v. Telfran Associates Ltd., Telfran Associates Corp., Steven Mendelow, and Edward Glantz
, filed as 92-cv-8564 in the U.S. District Court for the Southern District of New York, included in Kotz Report, as Exhibit 126.

“in the late ’80s or early ’90s”: Transcript of DiPascali Plea Hearing before U.S. District Court Judge Richard J. Sullivan, Aug. 11, 2009, p. 46.

it was almost $30 million short:
In re: Bernard L. Madoff Investment Securities, Debtor; Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities v. Frank J. Avellino, et al.
(hereafter
Picard v. A&B
), filed as Adversary Proceeding No. 10-05421 (BRL) in U.S. Bankruptcy Court for the Southern District of New York, pp. 3, 39. Specifically, the lawsuit claimed that Avellino & Bienes gave the SEC a list showing that investors were owed $399,819,455, but Madoff’s account statements reported that their six accounts held only about $364 million. As of publication, lawyers for Avellino and Bienes were contesting the trustee’s allegations in court.