Bernard Madoff cast his net wide in conning billions of dollars out of investors, but the poor boy from the wrong side of the tracks saved the worst for his friends
THE ICY WINDS that blow across town on the Upper East Side of Manhattan in December can chill you through to the bone. Mark and Andrew Madoff, sons of the now infamous Bernard Madoff, battled such inclement weather on the afternoon of December 10th last year as they travelled from their offices high in the Philip Johnson-designed “Lipstick Building” on Third Avenue to their father’s penthouse apartment on East 64th Street.
The invitation seemed strange as Madoff, 70, and his sons worked together and attended many meetings at the office. The family business, Bernard L Madoff Investment Securities, had a large trading floor and executive offices on the 18th and 19th floor of the towering elliptical skyscraper where Mark and Andrew ran day-to-day operations. The firm was what is known on Wall Street as a “market maker”; that is, Madoff’s people would provide the nuts and bolts required to trade shares and all manner of other securities for big firms all over the world.
But Bernard Madoff did not want to talk to his sons about the 18th and 19th floor. Instead, he was about to reveal, in the privacy of his luxury apartment, what had been going on down on the 17th floor, where Madoff kept a small and loyal coterie of trusted employees who looked after “the other business”, the secret and exclusive investment advisory firm where Madoff said he made stellar returns for the world’s wealthiest investors, and had done for more than 20 years.
The doorman, in his heavy black woollen overcoat with gold brocade, ushered the Madoff brothers inside and guided them to the exclusive penthouse elevator. They were glad to get out of the icy wind. Little did they know that a nuclear winter was about to engulf all that they had ever known.
The economic crisis, the credit crunch, call it what you will, had spooked Madoff’s biggest private investors, he told them. For the past few months the money men, who had for years formed the backbone of Madoff’s “exclusive” investment business, had been asking for their money back.
The biggest of these so-called redemption demands had come just days earlier from a firm called Fairfield Greenwich, a massive investment company and the leading “feeder fund” that delivered investors and cash to Madoff as regular as clockwork.
Fairfield and others had tried to withdraw $7 billion (€5.4 billion)from Madoff’s firm in the first two weeks of December alone and the silver-tongued supposed investment guru could not convince them to stop. His next words to his sons would bring to a grinding halt what was supposed to be the most exclusive and successful investment firm on earth and expose it for the historic fraud it really was.
“I am finished,” he said. “I have absolutely nothing. It’s all just one big lie . . . basically, a giant Ponzi scheme.”
His sons apparently listened to their father confess his epic scheme for several hours and then left his apartment. Later they called the FBI and turned Madoff in, just as he had asked them to.
The next day, two FBI investigators visited the penthouse and Madoff was led out in handcuffs.
WITHIN HOURS, THE lives of thousands of the worlds wealthiest figures began to fall apart as the news spread through the country clubs of Palm Beach and the private banks and salons of Switzerland that the man who promised them the earth was nothing more than a con artist.
The question remained: if Madoff wasn’t the investment guru who could conjure 10 to 22 per cent returns out of thin air when all others were losing money, then who was he?
As with so many American stories, Madoff was a poor boy from the wrong side of the tracks. Born in Queens, New York, he got his start with money he had saved working as a lifeguard on Rockaway Beach and from installing sprinkler systems in offices.
He started his small financial firm, Bernard L Madoff Securities LLC, far from the high life of Wall Street. He was considered a complete outsider in those early days. But he was a great salesman and relied only on his brother, Peter, and other family connections to do business. By the late 1970s the former pipe-fitter had fashioned himself a reputation as something of an investment expert.
Looking back at Madoff’s career it is important to remember that, whatever he says, he is and always has been a con man. Whatever business he was doing was always on the edges of the financial world, or in new technology, where few had a true understanding of the services he said he could provide.
It was no coincidence then that he ended up as chairman of the Nasdaq electronic stock market, the upstart rival to the clubby New York Stock Exchange. Perhaps more surprising was that he managed to parlay that position into the chairmanship of the National Association of Securities Dealers, the regulatory body that was supposed to oversee the operations of investment broking firms like his own and keep a lookout for fraud.
No one really knows when Madoff’s con began. He said in court this week that he started during the recession of the 1980s. In a 10-minute statement delivered to a packed courtroom he implied that he started the Ponzi scheme as a way of helping investors out. He said he meant to do it for a short while, to maintain his impressive investment record before returning to business as usual.
But investigators do not believe him. Indeed, there is some hard evidence that I uncovered last month, which seems to indicate that Madoff’s secretive investment firm had always been a scam from its inception decades ago.
Finra, the US’s financial industry regulatory authority, told The Irish Times that in more than 40 years examining the books of Madoff’s brokerage, it never saw a share traded on behalf of his investment advisory business.
Madoff is said to have confessed that his investment business was a Ponzi scheme siphoning billions from friends, charities and others. The brokerage, meanwhile, was a legitimate business trading shares wholesale on behalf of investment banks, mutual funds and other institutions.
“Our investigations of Bernard Madoff’s broker dealership showed no evidence that any shares were ever traded on behalf of his investment advisory business,” a spokesman for Finra said, adding that the regulator had been looking at his books since 1960.
Clients of Madoff’s investment advisory business received statements that showed many hundreds of trades made by the brokerage every year. Richard Rampell, an accountant from Florida who had several clients who were victims of Madoff’s alleged scam, saw dozens of statements.
“Everything I saw on those statements told me that Madoff was clearing his own trades. There was no third party mentioned on any of those statements,” Rampell said.
Steve Harbeck, chief executive of the Securities Industry Protection Corporation who is overseeing the Madoff bankruptcy to ensure that clients get compensation, said: “I do not have any evidence to contradict that. This is an amazing story that something like this could have gone on undetected for so long.”
Harbeck said he believed Madoff was defrauding clients at least 28 years ago. “I have seen evidence to that end and I have nothing to contradict it,” he said.
Perhaps the worst thing about Madoff’s con was the way he chose his victims. He preyed on his own in what is called an “affinity con”. He targeted wealthy Jews and Jewish charities. He hoodwinked tens of billions of dollars from banks and hedge funds too, but he appears to have saved his most vicious losses for his close friends.
For example, Madoff convinced one decades-long friend, a woman in her 60s whose husband had recently died, to hand over her entire life savings for safe keeping just weeks before his arrest.
Carl Shapiro, a women’s-wear magnate and one of the US’s most generous philanthropists, gave Madoff his start in the investment business in 1960. But that didn’t stop Madoff from conning him out of more than $500 million (€388 million). Shapiro, who is 95 and quite frail, said it was “devastating to think that so many charities, individuals and institutions that had put their trust in Mr Madoff have had their lives so negatively impacted”.
Robert Jaffe, another of Madoff’s friends who lost millions to the scamster, is married to Ellen Shapiro, Carl Shapiro’s daughter. It was Jaffe who introduced his father-in-law to Madoff, something close friends now say he deeply regrets. Jaffe was considered one of Madoff’s closest friends, having known him since the late 1950s. He and his wife, Ellen, claim they knew nothing of Madoff’s secret double life. They, too, are understood to have lost tens of millions of dollars.
Walter Noel, the head of Fairfield Greenwich, a hedge fund of funds firm, had more than $7 billion (€5.43 billion) of clients’ cash invested in Madoff. All of it is probably lost. No one person funnelled more cash to Madoff than Noel, who in return for his decades of loyalty is likely to see his firm collapse. The list of victims runs to the thousands and is packed with famous names, such as Steven Spielberg, Kevin Bacon and Kyra Sedgwick.
TO PERPETUATE A Ponzi scheme, large amounts of cash are needed constantly to satisfy the demands of those brought in earlier and to keep the fraudster in the style to which he has become accustomed. Once US investors started to run out of cash, Madoff turned to Europe, mainly to the secretive Swiss, for funds.
One of his wealthiest “feeders” was René-Thierry Magon de la Villehuchet, 65, who represented some of the most powerful elites in Europe. After Madoffs scam was made public, de la Villehuchet was found at his desk with both wrists slashed. A bottle of pills was found near him, but there was no suicide note. He had worked day and night to try to recoup the money he’d lost to Madoff, but in the end could not live with the shame.
Now Madoff must await sentencing in a 6ft-by-6ft jail cell in lower Manhattan. He is likely to spend the rest of his life behind bars, but the case is not over. His wife Ruth, who did not appear in court to hear his guilty plea, is expected to be the target of a new investigation. She has $62 million (€48 million) of assets she claims have nothing to do with Madoff’s scam, and intends to keep them. There are no charges against her as yet. Mark and Andrew are also in the sights of investigators who find it incredible that such a close-knit family could have been unaware of the biggest fraud in history being run right under their noses.
The victims, those that who still alive, will get a few dollars for the more than $64 billion (€49.5 billion) they lost and Madoff will have to start working for a living – but not on his usual commission.
As a guest of the federal prison system, Madoff will instead be earning a couple of bucks a day making licence-plates.