The Wizard of Lies: Bernie Madoff and the Death of Trust (37 page)

They then stretched a little further and decided to make every valid claim eligible for the largest cash advance SIPC offered. By law, victims with claims for cash were limited to a $100,000 advance; those with claims for securities could get up to $500,000. Although SIPC did not know what was supposed to have been in those Madoff accounts or what might still be there, the agency decided that every Madoff claim would be treated as a claim for securities, not for cash.

So before most of Madoff’s devastated victims had even heard of SIPC, the agency made two decisions that would benefit many of them greatly at its own expense. Those steps would not earn it any high ground in the battles to come; SIPC would be confronting the most formidable legal challenges in its history, and angry Madoff investors would be demanding that it be completely overhauled.

But those battles were still in the future on the afternoon of Monday, December 15, when Picard and Sheehan bundled up for the subway ride downtown for a hearing before Judge Louis L. Stanton on the twenty-first floor of the federal courthouse just off Foley Square. They were accompanied on the trip by a senior lawyer for SIPC and were joined by SEC attorneys just before the hearing. Judge Stanton knew the issues; he had signed an emergency after-hours court order the evening of Madoff’s arrest authorizing Lee Richards to take immediate control of the Madoff operations in New York and London.

At the hearing, the SEC proposed that SIPC be allowed to put the domestic brokerage firm into bankruptcy, with Picard as the SIPC trustee and Baker & Hostetler—in reality, an army of lawyers led by David J. Sheehan—as the trustee’s counsel.

A little after 4:00
PM
, Judge Stanton signed the order granting the SEC’s request, after directing Picard to post a $250,000 bond.

Richards would remain in control of the London operation for a few more days, until it was put into bankruptcy in the British courts. He was still operating out of the Lipstick Building on Monday evening when Picard and Sheehan arrived, after a briefing by federal prosecutors at the U.S. Attorney’s Office.

Leaving his “war room” in the nineteenth-floor conference room, Richards gave the two lawyers a tour—through the impressive black-and-gray trading room at the opposite end of that floor, then down the oval staircase to the more congested administrative offices on the eighteenth floor, and finally to the heart of the mystery: the seventeenth floor. The office suite on that floor was nondescript and strangely banal, considering the financial damage and emotional pain that had rippled out from those rooms over the previous five days. Just some cheap-looking desks, some computers, and some file cabinets—but no people. As they returned upstairs, Richards recalled with a laugh that Frank DiPascali had been there last week but “went out for a cup of coffee and didn’t come back.” Richards then headed to the airport and his flight to London, as Sheehan and Picard got to work.

For that pair of old friends, the Madoff liquidation would be the opportunity of a lifetime, the capstone to their long careers—and the most difficult case they had ever handled.

They had encountered fraud cases, even Ponzi schemes, before. But they had never faced anything on this scale. The tally of customer losses was staggering, and the victims were spread around the globe. The firm itself was a crime scene, with FBI agents and federal prosecutors in charge. Employees on whom they would typically have relied for information were hiring lawyers and clamming up. They couldn’t find the kind of records they expected to find; instead, they found millions of pages of puzzling documentation stuffed into thousands of boxes at three locations around the city, much of it on old-fashioned microfiche.

There were more than a hundred employees, heaven knew how many general creditors, and at least four thousand active customer accounts, each one representing a person, a family, a partnership, the beneficiaries of a pension plan, a gigantic hedge fund with thousands of clients of its own, or a government agency investing money for an entire nation. Some of the firm’s customers were clearly innocent and almost destitute, but others were fabulously wealthy and possibly accomplices—and on the day Picard and Sheehan were appointed, they had no idea how to tell them apart.

On paper, the job assigned to them was simple: gather as much of the dissipated money as possible and divide it among the eligible claimants under the supervision of the bankruptcy court. But the journey Picard and Sheehan would have to take to reach that goal put them on a collision course with more than half of the Madoff victims.

The next day, Tuesday, December 16, a different legal drama was playing out. A crowded room in the offices of the U.S. attorney in Manhattan was the setting chosen by the harried prosecutors for their first confidential meeting with Bernie Madoff and his lawyers. To some former prosecutors in the room, it was a curious setting for the delicate ritual known as “the proffer.”

The proffer is the occasion when a defense lawyer brings his client in to answer questions and provide information under a limited grant of immunity covering the day’s conversation. If the defendant’s information is good and his desire to cooperate is persuasive, the proffer can give him a shot at a plea bargain—a deal of some kind—and give prosecutors a road map for future cases against others who may be implicated in the crime.

As in any emotionally charged interview, ambience matters. A smart prosecutor will want the defendant to feel at ease, relaxed, almost intimate with the people questioning him. But there was no hope for that at this proffer. There were nearly a dozen people in the room, some at the long central table and others in chairs against the walls, and Madoff hadn’t even shown up yet.

The prosecutor, Marc Litt, and his boss, Bill Johnson, sat at the center of one side of the table. Around them were two FBI agents, several lawyers from the SEC, and a few people from SIPC.

Then, at around 11:00
AM
, Madoff walked in, accompanied by his lawyers Ike Sorkin, Dan Horwitz, and Nicole De Bello. They took their seats at the table, directly across from Litt and Johnson.

After the formalities—chiefly, the clarification of the limited immunity agreement—Litt and Johnson began questioning Madoff, drawing him out.

Madoff recounted how he got started in his business, how he wanted to establish himself with the well-to-do Jewish businessmen he cultivated; he wanted to impress them. He got in some trouble back in 1962, had to borrow money from his father-in-law to cover some customer losses. He was doing all sorts of complicated trading, which he struggled to explain. He got in trouble again, started to cheat a little. Then he slipped into the full-scale Ponzi scheme. He expected to get out again quickly, but he never could. It got too big.

He insisted that he had run the elaborate Ponzi scheme himself. No one helped.

What about when you took vacations? Would you communicate through Frank DiPascali?

Madoff shrugged. No, he said, he was just careful; no one else was involved.

No one in the room believed him.

After several hours, the group broke for lunch. Madoff and his lawyers brought paper-wrapped delicatessen sandwiches back to the table.

The proffer session resumed. By now questions started popping from around the room, and some of them misfired, interrupting Madoff’s answers and derailing another questioner’s train of thought.

Somewhere in all this intellectual disorder, Madoff was asked how and when his crime began—and no one would agree later about what they heard, perhaps because no one specified “which crime?” Some people heard him date his Ponzi scheme to the 1960s, when he lost money for his clients and had to borrow from Saul Alpern to make them whole. When he lost more money later on—no one later recalled if he said when this was—he said he couldn’t go back to Alpern to be bailed out again. So he started to steal from one client to pay another.

Others would later insist that the early fraud that Madoff described was not the Ponzi scheme, which he would claim began in the early 1990s, but rather, the faked investment returns he reported to his clients back in the 1960s.

Which was it? As always with Bernie Madoff, the truth was a slippery creature. It wriggled out of this crowded room before anyone could catch it and lock it up.

But if the truth could not be locked up, this didn’t mean Madoff himself could roam free. At his initial hearing before Judge Douglas Eaton the previous Thursday, Madoff’s lawyers had agreed with prosecutors on a recognizance bond of $10 million, to be cosigned by four “financially responsible people.” Now, nearly a week later, Madoff could not get four people to sign a surety bond to secure his bail; only his wife and brother were willing.

His sons would not consider it. Even if they had not been silenced by their fury and grief, their lawyer would not let them speak to their parents, determined to protect them from any suspicion that they might be colluding with their father after the fact.

Madoff could not turn to his closest friends, either; they were also his victims. Even if their lawyers would let them take the call, it would be fatal to their credibility in the courtroom battles ahead to be seen helping the man who had stolen so much from so many.

So, on Wednesday, December 17, Litt agreed to accept a compromise. In lieu of more signatures, Madoff would have to submit to home detention with electronic monitoring and would pledge the homes in Montauk and Palm Beach, which were in Ruth’s name. In addition, Ruth would surrender her own passport, as Madoff had. Magistrate judge Gabriel W. Gorenstein approved the new arrangement without a hearing.

That afternoon, casually dressed in a navy canvas baseball cap and a black quilted Barbour jacket, Madoff returned to his apartment on East Sixty-fourth Street after being fitted with his electronic monitoring device. There had not been time for his lawyers to arrange security for the trip home, so Madoff was alone when he approached the gauntlet of cameras and microphones on the sidewalk outside his apartment.

The media crowd scurried to keep him on camera as he moved steadily toward the door, his face a mask, his mouth a thin, tight line. Someone blocked his way as questions were shouted at him. Someone else shoved him on the left shoulder; he tried to ward off the shove, pushing back and moving forward. Shaken, he finally reached the lobby and disappeared into the building. The recorded scene would be played repeatedly on television over the coming days.

If prosecutors, blindsided by the furious public reaction to Madoff’s release on bail, were looking for an opportunity to reopen the issue, the shoving match provided one. By Thursday morning, they started questioning Madoff’s lawyers about whether it would be safe for him to remain free.

His lawyers scrambled in an effort to preserve his freedom without burning up assets the government would need to claim for his victims. They managed to arrange a twenty-four-hour security detail headed by a former New York City police detective, Nick Casale, and staffed largely by retired NYPD officers.

With that in place, the prosecutors agreed that Madoff would be confined to his apartment around the clock, leaving only for court dates or medical emergencies.

The talk show comics immediately called it “penthouse arrest.”

For the people at the SEC, especially in the New York office, Madoff’s arrest was a stomach-sinking moment.

It took just a few hours to find traces of the previous investigations in the files. Some staff members had worked on the most recent ones and had signed off on the memorandum that read, “The staff found no evidence of fraud.” For a short time, they could still hope that Madoff had launched his vast Ponzi scheme
after
they closed their 2006 investigation of the tips from Harry Markopolos. This implausible hope lasted less than a day.

“When I first heard the news that Madoff had been arrested, I didn’t think it was in relation to this,” recalled the 2006 team’s senior supervisor. “I thought he’d done something different, and it wasn’t until the next day that I realized it was this.”

Harry Markopolos’s reaction to news of the arrest was characteristic. By his own account, he armed himself with a shotgun to prepare for the possibility that the civilian regulators at the SEC would acquire weapons, raid his house, seize his computer and documents, and destroy them, all to save themselves from public humiliation. At a more practical level, he provided copies of his extensive documentation to reporters at the
Wall Street Journal
. On Tuesday, December 16, a
Journal
reporter called the SEC’s Washington office with questions about its dealings with Markopolos.