The Wizard of Lies: Bernie Madoff and the Death of Trust

All media visits require the prisoner’s invitation and the warden’s approval. After nearly a month of paperwork, the green light from the warden came with barely a week’s notice. The time allowed is limited, and that limit is politely enforced. (A follow-up visit will be authorized in February 2011. In the interval, Madoff will send along a note promising to mail his responses to any additional questions. He keeps his promise, sending several lengthy handwritten letters over the next few months and arranging to send short messages via the restricted and closely monitored prisoner e-mail system.)

Until today, Madoff’s only visitor, apart from lawyers, has been his wife. Until now, he has not answered any independent questions about his crime except when standing in a courtroom, responding to a judge.

Amid that continued silence and mystery, Madoff’s time in prison has been the subject of several speculative magazine and television specials—the latest one will air this week, in fact. In it, a former prisoner will claim that the guards here act “starstruck” around their infamous prisoner from Wall Street, although there is no sign of that today. That television program will also portray Butner as “Camp Fluffy,” a gentle white-collar jail compared with harsher state prisons that house murderers and other violent criminals. Madoff’s victims may feel that he deserves nothing more comfortable than a Vietcong tiger cage; if so, they will be disappointed at the roomlike two-man cells, the exercise equipment, and the television rooms available here.

But Madoff is unquestionably in a medium-security prison. It is not a steel jungle of brutal, barely restrained violence and depravity, but neither does it resemble a comfortable “Club Fed” with a golf course and tennis courts and casual visits from friends and family. These inmates do not wander beyond the towering razor-wire fences for a leisurely smoke. With his 150-year sentence, Madoff will live and die under lock and key.

It is unwise to trust the information about Madoff that leaks out of this sealed world. Besides an early tabloid report that he was dying of pancreatic cancer, there have been other reports, in more credible venues, that he was beaten up in an argument with another inmate. One report said he told a visitor he “didn’t give a shit” about his sons. New York magazine reported that, after being provoked by an inmate, Madoff blurted out, “Fuck my victims.” And the New York Post reported that he told unidentified inmates that he had hidden away billions of dollars during the course of his long-running crime.

What is the truth? The prison firmly denies that Madoff, who is now seventy-two years old, has pancreatic cancer or any fatal disease—he concurs, and he shows no sign of illness today. The prison and Madoff also deny that he was ever attacked or involved in a fight; the minor injuries that prompted the rumor were sustained when he fell after becoming dizzy from some blood-pressure medication. And Madoff denies that he ever said anything contemptuous about his sons or his victims or claimed to have a secret fortune stashed away. On those last points, someone in this self-contained world of lies is telling the truth. It might be him.

* * *

Bernie Madoff’s name is recognized and vilified around the world, a universal shorthand for a selfish, shameful era. He has been deplored in Switzerland, discussed on radio programs in Australia, whispered about in China, fretted over in the Persian Gulf. His face has been in every newspaper in the country, slapped onto the covers of magazines in a half-dozen languages, caricatured in editorial cartoons everywhere.

Even in an age of hyperbole, the story was beyond belief: a multibillion-dollar Ponzi scheme that lasted for decades, stretched around the globe, and ensnared some of the richest, wisest, and most respected people in the world. Thousands of ordinary people were caught in Madoff’s web, too, and were utterly ruined.

In the aftermath of the economic meltdown of 2008, with dishonesty and chicanery exposed throughout the world of finance, no villain put a human face on the collapse the way Madoff did, perhaps because his crime encompassed far more than just the financial crisis. It was a timeless drama in itself, a morality play as ancient as human greed, as poignant as human trust.

The Madoff scandal struck a chord deep in that part of our imagination that responds to folktales and endows them with so much emotional power. A staple of such tales is instant transformation. In the blink of an eye, the ugly frog is a handsome prince. With one kiss, a sleeping princess is awakened, still beautiful after a century. With the sweep of a magic wand, a rolling pumpkin and a half-dozen scurrying mice become a golden coach and six gray horses.

Instant change was the core experience of Madoff’s downfall. Suddenly, rich people were poor, admired people were scorned, smart people were exposed as fools, reasonable people were consumed with rage. The handsome prince became an ugly toad. This one man, Bernie Madoff, had made the life savings of tens of thousands of overly trusting people all around the world disappear in an instant. Thousands of times over, people were shattered by that stroke-of-midnight moment. Just an eyeblink, and it was all gone—their money, their status, their easy confidence in the future, the first-class travel, the secure retirement, the college fund, the peaceful sleep, the charitable pledges. In a single moment in their busy lives, while they were sleeping or having their hair cut or driving home from a meeting or waiting in line for a movie, their wealth simply vanished.

And there stood Bernie Madoff, the evil wizard who had waved his hand and, in one broken heartbeat, taken it all away.

* * *

For decades, Bernie Madoff lived at the center of an expanding web of lies.

In his long silence after his arrest, parts of that web became hopelessly knotted with misinformation and malicious gossip. In the pages ahead, many of those knots will be untangled, with the help of fresh information and new analysis about his relationships with his family and with key investors, and their relationship to his crimes.

More significantly, the chapters ahead will explore parts of his original skein of lies that have never been made public. They can be detailed here, for the first time, because Bernie Madoff himself agreed to meet with me in prison and talk with me about them, the first on-the-record media interviews he granted since his shattering arrest.

He deflected my numerous earlier requests with flattery and promises. “I have followed your distinguished career and reporting for many years,” he said in a letter from prison in September 2009. “I will certainly consider your request at the appropriate time, which could only be after the open litigation and inquiries are concluded. You can rest assured you are at the top of my list. I know you will continue to be the professional journalist you have always been and understand my position.”

When he finally sat down to talk with me for the first time, the conversation lasted more than two hours and ranged from family history to Wall Street foibles. His view of the fallout from his vast crime was shocking—another strand in his spidery web of illusion. He knew that some of his early victims had managed to withdraw more from his Ponzi scheme than they originally invested; the rest did not, but he knew that they would share in whatever assets the massive Madoff bankruptcy case produced. Looking at those two facts, he predicted—beyond all logic—that “people who were with me will make out better than if they’d been in the market” during the meltdown of 2008.

Madoff also disclosed details of his early life and business career that have been hidden in the shadows until now. From those details, it is clear that his habit of deceit began earlier than we knew. As early as 1962, by his own admission, he covered up huge losses he inflicted on his clients when he improperly invested their savings in high-risk newly issued stocks. The falsely inflated profits burnished his reputation and brought in more business. By the late 1980s, he acknowledged, he was using arcane strategies to help his biggest clients sidestep income taxes and evade foreign currency controls, drifting even further toward the gray edges of fraud. After the 1987 market crash, he was swamped by withdrawals from some longtime investors, familiar names whose ties to him can now be seen in a new light. He said he began covering those unwelcome withdrawals with cash that had just started to pour in from new hedge fund clients—and his Ponzi scheme, the classic fraud of “robbing Peter to pay Paul,” was born.

By 1992, he was undoubtedly falsifying whole portfolios of stocks, options, and bonds. At the end, his defrauded clients included giant institutional investors around the world—from Banco Santander in Spain to the government of Abu Dhabi, from hedge funds in the Cayman Islands to private banks in Switzerland—and the scale of his theft was unprecedented. On the day of his arrest, he was supposed to be managing roughly $64.8 billion of other people’s money. If he had actually possessed that money, he would have ranked as the largest investment manager in the world—50 percent bigger than the banking giant JPMorgan Chase, twice as big as Goldman Sachs, and more than three times bigger than funds organized by the legendary global investor George Soros.

But very little of that money was actually there. He was faking everything, from customer account statements to regulatory filings, on a scale that dwarfed every other Ponzi scheme in history.

“By 1998, I realized I was never going to get out of this,” he said in one prison interview. “That’s when I acknowledged the fact to myself that the ax was going to fall on me eventually.”

When it was clear that he would never climb out of the hole he was in, why didn’t he flee with his remaining millions and seek refuge beyond the reach of American justice? “There were lots of things I could have tried to do over the years [to escape], but I didn’t,” he said in August. “There was never a thought to run away and hide my money.… It never entered my mind to do that.”

So he stayed on, cultivating the trust and reputation that sustained his expanding fraud—living a life that had become “a charade” of honesty and respectability, he said.

Of course, there will always be mysteries about Madoff. In the months and years ahead, government investigators may yet turn up evidence that will expand or cast doubt on some of what seems plausible today. And intense skepticism must always be employed when assessing Madoff’s own memories and descriptions of his crimes—he tells the truth as gracefully as he tells lies, and the border between the two shifts from moment to moment. With that caveat, this book will map out the shadowy route Madoff followed on his long journey toward destruction and clarify what still remains beyond the borders of the map today.

Madoff’s construction of the biggest Ponzi scheme in history was enabled by the Wall Street he had helped to build. He played a prominent role in shaping the modern market, from computerized NASDAQ trading to the mystique of hedge funds to the proliferation of specious derivatives. He spotted the trends, saw the opportunities, helped write the rule book, and abetted the weaknesses that we all live with, even now. And he was a creature of the world he helped create, a world that was greedy for riskless gain, impatient with regulation, arrogantly certain of success, woefully deluded about what could go wrong, and selfishly indifferent to the damage done to others.

That his life was woven so tightly into Wall Street’s story surely helped him sustain his crime for as long as he did. To understand the Madoff scandal, we must understand the changing shape of the marketplace he helped build for the rest of us, a market that became increasingly crucial to our personal financial security just as it was becoming exponentially more difficult for most of us to understand. Madoff was reassuringly fluent in a new market language we all wished we could learn or pretended we already knew. He seemed warmly comfortable in a strange new place that left us feeling cold and anxious.

If he was an evil wizard, his power was vastly enhanced by the fact that we all moved into the castle with him.

1

AN EARTHQUAKE ON WALL STREET

MONDAY, DECEMBER 8, 2008

He is ready to stop now, ready to just let his vast fraud tumble down around him.

Despite his confident posturing and his apparent imperviousness to the increasing market turmoil, his investors are deserting him. The Spanish banking executives who visited him on Thanksgiving Day still want to withdraw their money. So do the Italians running the Kingate funds in London, and the managers of the fund in Gibraltar and the Dutch-run fund in the Caymans, and even Sonja Kohn in Vienna, one of his biggest boosters. That’s more than $1.5 billion right there, from just a handful of feeder funds. Then there’s the continued hemorrhaging at Fairfield Greenwich Group—$980 million through November and now another $580 million for December.

If he writes a check for the December redemptions, it will bounce.

There’s no way he can borrow enough money to cover those withdrawals. Banks aren’t lending to anyone now, certainly not to a midlevel wholesale outfit like his. His brokerage firm may still seem impressive to his trusting investors, but to nervous bankers and harried regulators today, Bernard L. Madoff Investment Securities is definitely not “too big to fail.”

Last week he called a defense lawyer, Ike Sorkin. There’s probably not much that even a formidable attorney like Sorkin can do for him at this point, but he’s going to need a lawyer. He made an appointment for 11:30 AM on Friday, December 12. He’s still unsure of what to do first and when to do what, but a Friday appointment should give him enough time to sort things out.

In his nineteenth-floor office on this cold, blustery Monday, Bernie Madoff starts going through the motions. Around him, the setting is incongruously serene: black lacquer furnishings against silvery carpets and darker gray walls, a graceful staircase in the center. His firm occupies the eighteenth and nineteenth floors of the Lipstick Building, a distinctive oval tower on Third Avenue at East Fifty-third Street. Around the curving walls of windows on each floor, slabs of glass hang from the ceiling to form bright offices and conference rooms. Hidden behind locked doors on the seventeenth floor is a bland set of cluttered offices that Madoff also rents, connected to the rest of the firm only by the building’s main elevators and fire escapes. It is down there, far from Madoff’s light-filled office, that his fraud is invisibly but inexorably falling apart.

A little before lunch, he talks on the phone with Jeffrey Tucker at Fairfield Greenwich. They’ve known each other for almost twenty years.

Madoff’s controlled frustration sounds fierce over the phone lines. What the hell is this, $1.2 billion in withdrawals in just over a month? Hadn’t the executives at Fairfield Greenwich been promising since June that they would “defend” against these redemptions? They’re even taking money from their own insider funds! Some defense.

He threatens: Fairfield Greenwich has to replace the redemptions already piling up for December 31, or he will close its accounts. He will kill the goose supplying all those golden eggs for Tucker and his wife, for his younger partners, and for the extended family of Tucker’s cofounder Walter Noel Jr.

He bluffs: “My traders are tired of dealing with these hedge funds,” he says. Plenty of institutions could replace that money, and have been offering to do so for years. But he has “remained loyal” to Fairfield Greenwich, he reminds Tucker.

As calm as a losing litigator, Tucker assures Madoff that he and Noel are working on a brand-new fund, the Greenwich Emerald fund, that will be a little riskier but will produce better returns. It will sell easily, when the markets settle down.

Madoff scoffs at the notion that Tucker and Noel will ever raise the $500 million they hope for—even though the partners are putting millions of dollars of their own money into it already. They’d better focus on hanging on to the money they are losing right now, Madoff says, or he is going to cut them off.

A shaken Jeffrey Tucker writes an e-mail to his partners a few minutes later. “Just got off the phone with a very angry Bernie,” he tells them, repeating the threats. “I think he is sincere.”

He isn’t. The Fairfield Sentry fund will shut down before December 31, but it won’t be because Tucker and his partners aren’t “defending” against their redemptions. It will be because they have stifled their skepticism for twenty years, determined to believe that their golden nest eggs were safe with Madoff.

Sometime today, people down on the seventeenth floor who work for Madoff’s right-hand man, Frank DiPascali, will get the paperwork done so that Stanley Chais, one of Madoff’s backers since the 1970s, can withdraw $35 million from one of his accounts. Chais has been loyal to Madoff a lot longer than the Fairfield Greenwich guys.

Around 4:00 PM, friends and clients start to arrive for a meeting of the board of the Gift of Life Bone Marrow Foundation, which helps find bone marrow matches for adults with leukemia. Bernie and his wife, Ruth, support the group because their nephew Roger succumbed to the disease and their son Andrew had a related illness, a form of lymphoma. In ones and twos, the board members show up, climbing the oval stairway from the reception area on the eighteenth floor, where the firm’s administrative staff is housed.

At the head of the stairs, they turn right and head for the big glass-walled conference room between Madoff’s office and his brother Peter’s office. Ruth Madoff arrives and joins them. Eleanor Squillari, Bernie’s secretary, has arranged some soft drinks, bottled water, and snacks on the credenza near one of the doors.

Jay Feinberg, the foundation’s executive director and a leukemia survivor himself, sits down at one end of the long stone table with a few of his staff members and his elderly father, a board member. Bernie is at the other end, with Ruth on his right. There are people here who were woven into every decade of Madoff’s life—Ed Blumenfeld, his buddy and the co-owner of his new jet; Fred Wilpon, an owner of the New York Mets baseball team and a friend since their kids were growing up together in Roslyn, Long Island; Maurice “Sonny” Cohn, his partner in Cohmad Securities since the mid-1980s, a friend who has shared so many jokes with him over the years and now shares his office space.

Ezra Merkin, the financier and conduit to so many Jewish charities, arrives and settles his bulk into the square black leather chair next to Ruth. The elegant stockbroker Bob Jaffe, the son-in-law of Madoff’s longtime Palm Beach investor Carl Shapiro and a broker with Cohmad, sits nearby. A few other board members or volunteers find seats at the table. There is a little trouble with the phone, but finally they manage to link in Norman Braman, the genial former owner of the Philadelphia Eagles football team, who presumably is in Florida.

At this moment, most of the people around this table are Madoff’s friends, his admirers, his clients. In a few days they, and thousands like them, will become his victims. Their wealth will be diminished and their reputations questioned. Their lives will become a nightmare merry-go-round of lawyers, litigation, depositions, bankruptcy claims, and courtroom battles. They will all profoundly regret that they ever trusted the genial silver-haired man seated at the head of the table.

With Ruth taking notes, Madoff turns to the agenda—fund-raising efforts and plans for the big annual dinner in the spring. A fund-raising committee is needed. “Who will take this on?” Madoff asks. Fred Wilpon agrees to do so. The rest of the discussion is routine, except that some members recall Feinberg passing around copies of the foundation’s conflict-of-interest policy and getting a signed copy from each member for the file.

By six o’clock, they are done. Madoff escorts his wife and friends through the private nineteenth-floor exit. They head out into the winter night.

TUESDAY, DECEMBER 9, 2008

Things are starting to slip. Madoff has planned to meet with the son of his friend J. Ira Harris, one of the wise lions of Wall Street and now a genial philanthropist in Palm Beach, but the visit is canceled.

Instead, Madoff sits down with his older son, Mark, and explains that, despite the recent meltdown in the market, he’s had a very strong year with his private investment advisory business. He’s cleared several hundred million dollars, and he wants to distribute bonuses to some employees a little earlier than usual. Not in February—now, this week. He tells Mark to draw up a list of the trading desk employees who should get checks.

Troubled, Mark consults his brother, Andrew. The two men have seen their father tense up a little more every day as the market crisis has wrung them all out. Just a little liquidity strain on the hedge fund side, he told them last month. But he is clearly more than just worried; they’ve never seen him like this. And now he wants to pay out millions in early bonuses—it doesn’t make sense. Shouldn’t he be conserving cash, with things as rocky as they are? He should wait to see how things look in two months, when bonus season arrives. But Bernie Madoff is an autocrat—he is in charge, and he brooks no opposition. Still, the brothers decide they must talk with their father on Wednesday about their concerns.

After the markets close and the firm starts to empty out, Madoff walks across the oval area where the secretaries sit and enters Peter’s office. Peter has aged and pulled inward in the two years since his only son died. He still carries Roger’s photo in his wallet, one taken after leukemia had already left its stamp on his once-handsome face. For decades before that bereavement, Peter had been Bernie’s right hand, his confidant, the technological guru of the firm, the “kid brother.”

If Peter has not previously known about his brother’s crime—his lawyers will insist later that he did not—he is going to learn about it now. Bernie takes a deep breath and asks his brother if he had “a moment to talk.” Peter nods, and Bernie closes the door.

“I have to tell you what’s going on,” he says.

People speak glibly about “life-changing” moments. Some truly qualify. You propose marriage and are accepted. You hear “You’re hired” or “You’re fired,” and your future shifts instantly. The doctor says “malignant,” and everything is different. But anyone who has ever lived through it will tell you: It is profoundly shattering to learn, in one instant, that everything you thought was true about a loved one is actually a lie. The world rocks on its axis; when it is finally steady again, you are in a strange place that resembles but is totally unlike the place you were in just a moment earlier.

So if this is the moment Peter Madoff learns of his brother’s crime, it seems unlikely that he immediately contemplates the ruin of his career and his family’s fortune, or worries about the chain saw of civil lawsuits and criminal investigations that will chew through the years ahead. Those thoughts will surely come. But if this news has hit him from out of the blue, it is far more likely that his mind just stops and tries to rewind an entire lifetime in a split second, to get back to something real and true.