The Making of Madoff

Timothy A. Clary, AFP / Getty Images Jerry Oppenheimer’s new biography of Bernie Madoff traces the roots of his deceit and his odd compulsions back to a Queens childhood steeped in hustles and scams. The Ponzi King moved on to adult obsessions, from not letting family members sit on the furniture to alleged affairs with "baby Ruths" in his office, younger versions of his own wife.

Some highlights of the biography include:

•  Madoff's parents weren't thought to be "honest people"—they were running a broker-dealer operation out of their home until it was shut down by the SEC for "failure to file reports."
•  A close friend says Madoff was so "compulsive" later in life about having expensive clothes, boats, and cars all because his mother wouldn't buy him Keds.
• Madoff met his wife, Ruth, when he was a junior in high school. According to a source, Bernie later began affairs with "baby Ruths" in his office—pretty blondes who resembled his wife when she was younger.
• Madoff filled his office with dutiful and overpaid people who didn't ask questions and were willing to tolerate his obsessive-compulsive behavior. The offices had to be spotless. An employee said he would put a piece of thread on the floor and wait for Madoff to notice and "freak."
• One of Madoff’s mentors, Lou Lieberbaum, worked closely with Bernie through his brokerage firm. A former employee said some of Lieberbaum's clients were “clearly gangsters,” and that Lieberbaum would "manipulate the stock like crazy."

The two questions most often asked about Bernard Madoff, who pulled off the biggest Ponzi scheme in history, are: How did he do it? And, how could he do it, even defrauding friends and family? The first question is the one that most puzzles the people who knew him back at P.S. 156 and Far Rockaway High School, where he was generally regarded as "dumb." His old buddies have less trouble with the second question, because from an early age Madoff showed a propensity to fake it and game the system.

“I can’t sit on most of the furniture in our place,” Ruth told a friend. “They’re rare antiques, and Bernie doesn’t want me to sit on them.”

When he was assigned an oral book report as a sophomore, classmate Jay Portnoy recalls, Bernie told his friends that he would just wing it. When the time came, he invented a title about hunting and fishing and discussed the book smoothly for 15 minutes in front of the class. When the teacher asked to see the book, Bernie said he’d had to return it to the library. “We all had to stifle a laugh,” Portnoy says.

The somewhat shabby house in Laurelton where Bernie was raised with his younger brother Peter also had an air of deception about it. “It was always a mystery what Ralph and Sylvia did, ” says childhood friend Joe Kavanau of Madoff’s parents. The widow of another friend from that era, Elliott Olin, says, “His mother never wanted Elliott to be friends with Bernie, because she thought his parents weren’t honest people.”

Ralph Madoff, a crude, rough-and-tumble guy in the mold of the Honeymooners' Ralph Kramden, said he was a plumber, but no one ever saw him wield a wrench. Like Kramden, he was always looking for a big score, and another of Bernie’s high-school friends had the impression he was a stockbroker. That may have been because the Madoffs were running a questionable broker-dealer operation, named Gibraltar Securities, out of their home. It was registered in Sylvia’s name, perhaps because Ralph Madoff appeared to have ongoing financial problems and tax troubles, and in 1963 it was shut down by the SEC for “failure to file reports.”

Bernie, friends say, was embarrassed by his home and humiliated by Sylvia’s penny-pinching. The popular shoes for boys back then were black Keds with white soles. Bernie was the only kid in his Laurelton crowd who didn’t have them, because Sylvia bought sneakers from the bargain bins. Through the years, certain friends would tease him about that. “Bernie liked expensive shoes and suits, cars and boats and houses. He liked his home to look just right; he wanted his office to look perfect, ” observes one close friend. “And we used to kid around that he became compulsive about those things because his mother wouldn’t buy him Keds.”

Bernie also seems to have absorbed his parents’ loose business ethics, which became apparent in his first entrepreneurial venture during high school and college: installing lawn-sprinkler systems in the yards of Long Island’s new tract housing. Aware that his potential customers were young couples, including desperate housewives left alone in the suburbs all day, he hired two handsome fellow students to do the installations. According to one of them, Bernie was a good salesman, but he worked fast and he worked dirty. “He never got the required building or work permits,” says Gordon Ondis, and Bernie “was not a whiz when it came to the technical aspects of his business.” Years later, Bernie was still being accosted in public by dissatisfied sprinkler-system customers.

By the time he was a high-school junior, Bernie had also found his lifelong helpmeet, Ruth Alpern, two years his junior. With her flaxen hair, fair skin, and green eyes, she was a nice Jewish girl who looked so much like a Shiksa that a storekeeper once asked her why she was wearing a Star of David. Ruthie was pretty, preppy, and outgoing. Her father, Saul, was an accountant who, when Bernie began working as an investment adviser, steered many acquaintances to his son-in-law’s business. Significantly, Ruthie was also a whiz at math—a subject in which Bernie was notably deficient.

Fast-forward to the summer of 2008, when Bernie ran into his old friend Peter Zaphiris in Central Park. “He’s got two gold Rolexes on the same wrist, and I said, ‘Bernie, how come you ’re wearing two watches?’” Zaphiris recalls. “He says, ‘I gotta know what time it is in my London office.’ Think about that. He couldn’t do the addition and the subtraction to determine the time difference.”

Bernie cultivated the richer kids at Far Rockaway High School, which is how he met the man who would later mentor him in the investment business and some of its seemingly questionable variations. Lou Lieberbaum, the father of a Far Rockaway classmate, delivered milk and baked bagels after moving his family to Long Island. Then in the mid-'50s he began hawking mutual funds. He struck it rich on Polaroid stock and opened his own brokerage. Around 1962, Bernie, who’d been trading stocks since college, took a small suite of offices at 39 Broadway in Manhattan, directly across the street from Lieberbaum & Co., which was registered on the New York Stock Exchange. Bernard L. Madoff Investment Securities was not.

According to Zaphiris, who worked at Lieberbaum at the time, all orders given to Lieberbaum for over-the-counter stocks were “walked across the street” for Bernie to handle. Lieberbaum marked up the trade “an eighth or a sixteenth ” above his usual commission to compensate Madoff, and the customer was never the wiser. Looking back, Zaphiris says he “thought” the arrangement was “unethical. I don’t know if it was illegal.”

During his time at Lieberbaum & Co., Zaphiris also observed some clients who were “clearly gangsters,” and were believed to be from the Rockford, Illinois, family of La Cosa Nostra, which was a faction of the Chicago mob. “The boys from Rockford were calling all the time, and I suspected that there was some sort of money laundering going on,” he says. “There was a broker who was trading a company for these guys. He’d get a phone call before the close and they would tell him what to close it at and he would buy 30,000 shares and sell 30,000 shares. They would manipulate the stock like crazy.” This was the heyday of penny-stock bucket shops and “pump and dump” tactics.

One day, word spread that the Rockford boys were coming to town. “Three guys came into the office and they were like 5' by 5',” Zaphiris recalls. The brokers who did business with them were “literally shaking. “ But a closed-door meeting ended without any violence.

It was at 39 Broadway that Bernie began assembling a staff of loyal employees, such as Bill Nasi, who began working with Madoff in the early '60s. Unlike Nasi, who later went to college, most staff were barely educated bridge-and-tunnel types. “There was a lot of nepotism. It was almost like tribes working there,” Nasi said. “Bernie made it a point to hire people who weren’t that smart,” asserts another Madoff insider. “You could have a great job at Madoff even if you were a semi-moron, because you were well-trained on the job and paid far better than anyone on Wall Street and didn’t ask too many questions. ”

Madoff also employed his own family, while never letting them forget who was boss. Brother Peter was the main operations guy, and the technical guru who devised some of the electronic trading innovations that Bernie often took credit for, but he was hardly an equal partner. Nasi recalls once arriving early at the office to hear Bernie, who must have assumed they were alone, screaming at his brother. “ I want you to go outside and look to see whose name is on the door! You own 1 percent of the business, so until your name is on the door, you keep your fucking mouth shut! I run things here!”

Because Madoff paid well and generally treated people well, the staff was willing to tolerate his obsessive-compulsive behavior, which grew along with the means to indulge it. Madoff offices had strict color schemes and draconian rules about paper on the desk and pictures on the wall. Madoff was sometimes spotted polishing a glass door, and "if a window blind was not at a 90-degree angle, the man would go off the wall," says an employee, who began working for Madoff in 1989. "He hired three people to clean the office during the day even though the building had a cleaning service at night." But a colleague, who went back a long way with Bernie, made sport of Madoff's OCD: "It was like a running joke," says the insider. "He'd take a piece of thread and throw it on the floor, and Bernie would freak when he spotted it."

The same exacting standards applied on board Madoff’s beloved yachts—he had three—and in his homes, where Ruth bore the brunt of them. One family intimate consulted Ruth when she set out to redo an apartment. Make sure it’s livable, Ruth advised her. “Because I can’t sit on most of the furniture in our place,” she explained. “They’re rare antiques, and Bernie doesn’t want me to sit on them.” Madoff’s walk-in closet on Park Ave. was meticulously organized, and he even instructed his London tailor to custom-design his suits so they wouldn’t show the bulge of his Razr phone.

Early in his association with the Madoffs, Bill Nasi witnessed a curious moment between Bernie and Ruth. Bernie was sitting with a glass in each hand. Ruth poured a shot of Chivas Regal into the one with ice, Bernie took a sip and put it down, then Ruth added another shot. Then she poured Milk of Magnesia into the other glass as a chaser. “I said to Bernie, ‘What’s going on?—and all he says is, ‘I’m getting ready to do battle. I’m getting ready to make a decision.’” Clearly, she was devoted to him, but he was not always faithful to her.

Starting in his 50s, Bernie “had affairs in the office. There were two women I know of,” said one longtime female employee. “They were gorgeous. They were blonde. They were young. They were like baby Ruths.” When Ruth found out and ordered Bernie to stop, some of the young women “left with big hush-money checks in their purses,” confirms another former staffer. “The guy who signed the checks told me one of them left with $250,000. ”

Nasi had another bizarre encounter with Ralph Madoff, who had added a fake middle initial—Z—to his name by the time he began working in Bernie’s shop in the ‘60s. Once, when they were riding the subway together in those early days, the Madoff patriarch advised Nasi: “Whatever you do, kid, never invest a penny in the stock market, because it’s run by crooks and sons of bitches.”

Nasi was dumbfounded. Here was Ralph warning him to stay away from the world where his son was building a business. Years later, not long before Bernie’s fraud was exposed, Nasi mentioned the conversation to his boss. “Bernie starts laughing and says, ‘My, God, if everyone thought like my father, where would I be today?’ ”

This is the 10th book for investigative reporter Jerry Oppenheimer, who has written about such American icons as Martha Stewart (Just Desserts); Bill and Hillary Clinton (State of a Union), and Vogue editor Anna Wintour (Front Row). Most recently, he published a corporate expose’ entitled Toy Monster: The Big, Bad World of Mattel. He's also been a producer of TV news and documentaries.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from Madoff with the Money, by Jerry Oppenheimer.  Copyright © 2009 by Jerry Oppenheimer.