If there ever was a con man on Wall Street who could sell crime by the slice, it was Bernie Madoff. His sweet smell of success was spiced with the idea that somehow his customers believed he was cutting them in on insider trading without the risk of being caught.
Madoff—who died in a North Carolina prison on Wednesday at the age of 82—succeeded by being opaque about his business dealings with clients while promoting himself enough to be regarded as The Mensch of Wall Street. He convinced customers he was doing them a favor by taking their money. He leveraged his seeming philanthropy, especially to Jewish causes, into becoming the caretaker for some of those very charities.
Bernie, as he was known, built his customer base by carefully targeting rich people who made their money in retail, real estate, manufacturing and other businesses, but who were not financial wizards familiar with the machinations of Wall Street or who were not likely to review their accounts closely. His Ponzi scheme, the biggest ever prosecuted, generated nearly $50 billion in fictional profits on top of the $20 billion in cash it actually took in.
“Madoff was a highly successful fraudster totally devoid of conscience who would hit on widows at funerals and take their husbands’ fortunes, leaving them, rather than in comfort, in poverty, as they got old. He did that without a thought routinely,” says John Moscow, a former Manhattan assistant district attorney who specialized in global fraud cases before joining the legal team at Baker Hostetler that as bankruptcy trustee recovered $14 billion from Madoff and his family, his clients, his associates, and the institutions that dealt with him.
He ultimately parleyed his “good deeds” into defrauding Nobel Peace Prize Winner Elie Wiesel and Hadassah, the Women’s Zionist Organization of America, and Hall of Fame pitcher Sandy Koufax among hundreds of others.
Right after Madoff was arrested in 2008, I went to a black tie event for a Jewish charity in New York looking for victims. On a hotel escalator, I caught up with Wilbur Ross, who had made hundreds of millions taking companies out of bankruptcy and later became Secretary of Commerce in the Trump Administration. Ross, who also had a mansion in Palm Beach where Madoff recruited many of his marks on the golf course and at charity events, told me that Madoff had created such a reputation for himself that he was known jokingly as “The Jewish T-Bill.” (Treasury Bills being celebrated for risk-free reliable returns.)
Madoff’s clients thought they were getting a special deal, so much so that for years people beseeched him to allow them to invest with him. It helped that he was a stone-cold liar who would take their money with a smile. At social gatherings and charity events, on fancy golf courses in New York and Florida, at ski resorts or fishing tournaments or even at funerals, he would set the hook when people were at ease—or distracted. Over the years, thousands of investors, including hedge funds and wealth managers, flocked to his Ponzi scheme. It expanded until it got too big to succeed as Madoff sought new victims in Europe, Asia, and Latin America.
Although detected repeatedly, Madoff’s long-running Ponzi scheme survived a half dozen investigations and stock market hiccups, thanks to good lawyers and his ability to deceive people.
His former defense lawyer, Ira “Ike” Sorkin, who also served as a federal prosecutor and a Securities and Exchange Commission regional enforcement chief, now tells The Daily Beast that Madoff should have been caught far earlier.
“The SEC blew it, sadly. It really hurts to say that because I have a great deal of fondness for the SEC, but they missed the boat on this. They didn’t ask the right questions. They didn’t follow up or they would have caught him much sooner. What would have happened then is they would have ended the Ponzi scheme.”
As early as 1992, an accounting firm called Avellino & Bienes, run by two men who had worked with Madoff’s father-in-law, got in trouble with the SEC about its clients’ investments with Madoff. Behind the scenes, Madoff scrambled to raise enough money to cover all the claims 100 percent, and the SEC decided to drop further pursuit since there were no financial losses to investors. Later questions raised by Barron’s and stock analysts also ultimately were headed off and deflected by Madoff.
But by 2008, his Ponzi scheme had thousands of investors and was too big to survive hordes demanding to cash out at once. Bernard L. Madoff Investment Securities claimed alleged assets on paper of nearly $65 billion and had only about $20 billion in real money in all of its accounts as the stock market plunged during December 2008. His scheme was so huge that he could not recruit new investors to pay the hundreds of clients demanding cash. Within three months following the collapse of Lehman Brothers in September 2008, Madoff investors had asked to redeem more than $12 billion from their accounts, a sum he could not produce nor stall until the storm blew over.
As Sorkin notes: “Ponzi schemes have to end at some point if the market keeps going up which is never inevitable. Crazy schemes succeed, but when the market turns and people want their money back, that’s when the bottom falls out. I think he knew all along at some point in time the bottom was going to fall out.”
Many of his long-term clients got hit the hardest, especially by the so-called clawbacks by the U.S. government and the Madoff bankruptcy trustee who together recovered almost $17 billion of the $20 billion or so the clients had actually invested. Those loyal Madoff clients got killed because over the years they thought their accounts had been growing steadily as they left their initial capital with Madoff. What actually happened is that over the decades they had withdrawn 100 percent or more of the money they had actually given Madoff. All of those fictional returns did not count and the government and trustee demanded paybacks. Several people committed suicide and hundreds, if not thousands, went broke. As bankruptcy Trustee Irving Picard said in a statement after Madoff died: “The pain experienced by the victims of Mr. Madoff’s fraud is not diminished by his death...”
So how did Bernie build his life of crime? How could he be guilty of what U.S. District Judge Denny Chin called “extraordinary evil” as he sentenced Madoff to 11 felonies and 150 years in prison? What were the secrets of his swindle that allowed him to live a rich life of deceit for decades, apparently without blinking?
Sorkin says: “I think his genius was to remain in the shadows. He never advertised. He never went out and solicited money. People begged him to take their money and I think that was the problem. The word got out that he was making these returns which on their face far exceeded returns along Wall Street and yet for years people kept giving him money. He kept running the Ponzi scheme.”
Those who suspected Madoff’s results were too good to be true avoided him, including former President Donald Trump who claimed that he declined an offer to invest with Madoff and in 2019 turned down his pardon request.
“People did stay away from him,” Sorkin says, “but the people who gave him hundreds of millions of dollars, billions of dollars, had dollar signs in their eyes. There was no transparency and that’s not a criticism of the investors, but it seems the same thing goes back to the heydays of the boiler rooms like Stratton-Oakmont back in the 90s. As long as I’m getting my money tripled in two weeks, what do I care how it’s being done. And you know that’s don’t ask questions, just keep sending those checks.”
Starting in 1960 with a small firm trading over-the-counter penny stocks, Madoff built a real business in the shadowy corners of Wall Street before grafting on questionable practices and customers originating from an accounting firm once run by his father-in-law.
Over the decades, Madoff ingratiated himself with Wall Street insiders as he moved up the ladder as the over-the-counter market migrated to a new electronic stock exchange in 1971. At various times, he served as non-executive chairman of NASDAQ, chairman of the National Association of Securities Dealers and testified before Congress as a Wall Street expert. He was well acquainted with influential people such as Arthur Levitt, who had been chairman of the American Stock Exchange before becoming chairman of the Securities and Exchange Commission. In the decade before Madoff’s firm collapsed, he and his firm numbered among the biggest customers at JP Morgan Chase.
Bernie portrayed himself as a feel-good story, a man who climbed over the obstacles of a middle-class upbringing, a second-rate education, and class struggle in financial markets by founding a firm with $5,000 that reached the pinnacle.
His initial success was running a small firm that handled odd lot stock trading, often processing the odds and ends of trades for fewer than 100 shares for bigger firms. That process led people to believe that Madoff, as an aggregator of small trades, had access to inside knowledge generated by order flow.
His firm paid other firms to place trades through his company. In exchange, the presumption by some was that he obtained prime information—an early read—on how investors were reacting to stocks as they were bought and sold. To some investors, that meant Bernie must be making money as an insider trader. They presumed that like a butcher who put his thumb on the meat scale, Bernie was profiting illegally, trading in front of the order flow which meant he knew which stocks were headed up —or down.
As the NASDAQ market grew, so did the side of Madoff’s legitimate business of clearing stock trades, so much so that at one point his firm was handling more than 10 percent of over-the-counter trades daily. Naturally people thought his investment advisory business was authentic too.
His family social profile was living large, but not too large... living at the level befitting a successful Wall Street investment banker, with a Manhattan penthouse, a Montauk home on the water with a well-equipped fishing boat, a home in Palm Beach and a pied-a-terre in Europe. But, as John Moscow points out, Madoff was not living—as some fraudsters attempt—as though he was “the crown prince of Saudi Arabia. In terms of asset recovery from the Madoffs (personal property), it was not much.”
Over the decades, Madoff became close with the Wilpon family, the majority owners of the New York Mets, and many players. They invested family money, company money and players’ money with Madoff in nearly 500 accounts. The Wilpons were ultimately sued by the bankruptcy trustee for more than $1 billion and settled for $162 million in clawbacks. The custom blue satin Mets baseball jacket that the Wilpons gave to Madoff when he accompanied the team on a tour to Japan sold at the trustee’s bankruptcy auction for $14,500. (One of the many minor questions that linger: The jacket has never been seen since.)
The beauty of Madoff’s giant Ponzi scheme was that he did not trade stocks at all for his accounts, even though he and his co-conspirators fabricated documents to make it appear they were buying and selling blue chips. Most people who had invested with him for years were content to accept the 10 percent returns he claimed to be making and left the bulk of their money in his hands. Many would take an annual withdrawal that he would cover with funds brought in by new investors.
He ran a family firm with his brother Peter, his two sons, and his wife, Ruth, all involved and reportedly confined to the fancy offices on the 19th floor of the Lipstick building on Manhattan’s east side. He segregated on the 17th floor a small coterie of highly paid assistants who helped him fabricate trades for the accounts. Ruth apparently was unaware of how his secretaries confidentially made massage parlor appointments for him and reservations for his hotel assignations with girlfriends.
His family turned him in to federal authorities the day after he confessed to them in his penthouse that the investment business was a colossal fraud. His defense and all the family lawyers claimed that Bernie was the only Madoff in on the crime. Whether that is true is moot. No other family member was charged with the Ponzi fraud and only his brother Peter went to prison on tax charges.
On Wednesday, Madoff died at the Federal Medical Center in Butner, suffering from kidney disease and renal failure. Both his sons predeceased him, his son Mark by suicide on the second anniversary of his father’s arrest. His wife ultimately scorned him and thousands hated him. As one of his victims told me: “He is suffering as much as a man without a soul can.”