Madoff with the Money (18 page)

The Lieberbaum brothers, Mike and Shelley, were weight lifters and because Shelley was especially buff, his proud and newly wealthy father commissioned a sculptor to fashion a bronze statue of him in a muscleman pose.

On one memorable occasion Lieberbaum invited some pals to the house to show off a gift he'd bought for his wife.

“We were having bagels and coffee in the kitchen at Hewlett Harbor, and he says, ‘What do you think of this? I just bought this for Lillian,'” recalls Zaphiris, who was present.

Carol Lieberbaum doesn't dispute her father-in-law's ostentatiousness.

“He was flashy. He was nouveau, and definitely showy,” she says, but with love. She adds:

He also brought his two sons, Mike and Shelley, Bernie's pals, into the business. Shelley served as an officer of the company from 1960 to 1971.

Lieberbaum & Company was a family affair, just like Bernard L. Madoff Investment Securities became when Bernie brought his two sons, Mark and Andy, into the business, along with their mother, Ruth, and Bernie's brother, Peter, among others.

Not long after Lieberbaum & Company got rolling, Bernie Madoff entered the picture.

Around 1962, he moved from his small office on Exchange Place to a small suite at 39 Broadway.

Recalls Bill Nasi, who worked there as Bernie's runner:

The layout, though, wasn't as important as the location. Bernie was now directly across the street from 50 Broadway, the headquarters of Lieberbaum & Company.

And instantly, new and bigger business was flowing his way courtesy of the Lieberbaums.

Whereas Lieberbaum & Company was known as a New York Stock Exchange-registered brokerage house, Bernard L. Madoff Investment Securities was not. According to Zaphiris, who worked at Lieberbaum at the time, an arrangement appeared to have been worked out between Bernie and Lieberbaum whereby all orders given to Lieberbaum for over-the-counter stocks were “walked across the street” for Bernie to handle.

Zaphiris, who worked at Lieberbaum as a 25-year-old broker trainee in 1963 after being recruited by Eddie Rochelle, another Far Rockaway graduate from Bernie's class of 1956, continues:

Each side made out on the deal.

Bernie made a commission for making the actual buy or sell, and Lieberbaum marked up the trade “an eighth or a sixteenth” above and beyond its usual commission (commissions back then were significant, much more than they later became). The customer was never the wiser, thinking he or she was doing business strictly with Lieberbaum when, in fact, it was all being funneled to Bernie.

Looking back, Zaphiris says he “thought” what was going on was “unethical. I don't know if it was illegal.”

Carol Lieberbaum asserts she didn't get involved in the family business, and says she “can't remember” whether Bernie ever worked with the family brokerage. “I don't
think
Bernie and Shelley and my father-in-law were ever in business together, but of course they all were in the
same
business. I don't know the business aspects of their connection.”

But Zaphiris emphasizes:

Michael Lieberbaum, the only surviving member of the family troika that ran Lieberbaum & Company before its demise, declined requests by the author for an interview through his wife, the former Cynthia Greenberger.

“The Lieberbaum thing was the genesis of Bernie's career,” Zaphiris believes.

Yet, it should be noted that at the same time, Bernie's investment advisory business—which was helped along by his father-in-law—was going strong, too.

That being said, the arrangement between Lieberbaum and Madoff back in the 1960s appears to have been a prototype for the future of how much of Bernie's investment advisory business-cum-Ponzi scheme operated: So-called feeder funds recruited investors for Bernie and fed billions of their dollars to him. The investors were unaware that their money was actually being passed on to Bernie. In exchange, Bernie gave the feeder fund operators hundreds of millions of dollars in commissions, simply for being middlemen. It was only after Bernie was arrested and his scheme revealed that many investors first heard the Madoff name, and by then it was too late.

The Lieberbaums and the Madoffs were a close-knit group, almost like family. As young couples, the Lieberbaums and the Madoffs often socialized, and had playdates for one another's children. Mike and Cynthia Lieberbaum lived in Roslyn Heights, near Bernie and Ruth, and Shelley and Carol Lieberbaum lived in nearby Woodmere.

Because of their friendship—and because he was handling all of Lieberbaum & Company's over-the-counter trades—Bernie was a constant presence in the Lieberbaum offices, “bullshitting with Shelley, Mike, and Louie,” recalls Zaphiris. “Bernie and the Lieberbaums were
really
,
really
,
really
tight together, and they did a lot of business together. The Lieberbaums at that time were kingpins. Across the street Bernie had a little dinky office with a couple of machines and a girl working for him.”

Working together with him at that time was his father, Ralph Madoff, with the fake middle initial
Z
. This was in the same time frame that Bernie's mother, Sylvia, got into trouble with the SEC for operating questionable Gibralter Securities out of the family home in Laurelton, and was suspected of fronting for her husband.

During the time Peter Zaphiris worked at Lieberbaum & Company, he noticed other curious activity along with the firm's close Bernie connection and the shuttling of over-the-counter trades to him. This included 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, something crazy going on,” says Zaphiris. “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, and that was one of about 300 deals going on, and they were all pretty much the same bullshit.”

One day word spread through the office to expect visitors. The Rockford boys were coming to town to pay a visit. Remembers Zaphiris:

A private meeting was held between the mobsters and the brokers in a conference room.“It was a poof,” says Zaphiris. No shots were fired.

No horse's head was left behind, and after a couple of hours the boys left and everyone was relieved.

But the fact that mobsters did business with the firm to which Bernie had close connections raised a red flag. However, during the time Zaphiris he worked there he never was aware of any questions of illegalities being raised or investigated by the SEC, the agency that years later gave Bernie a free parking card when presented with hard facts that he was running a Ponzi operation.

“We weren't dealing with customers coming in and bringing in presents from Tiffany's,” he observes. “Most of the people who showed up were
screaming
at the brokers. They were people who were really wounded.”

Zaphiris believes the wounding occurred because of what he suspected or witnessed—stocks that were being pumped and dumped and manipulated. “They ran one stock from seven bucks up to around $140 and they manipulated it. They put all sorts of people in it, and then they dumped it out. Most of the brokers there were fast and loose. They scoffed at the investors. They thought they were idiots.”

On another pump-and-dump stock, Canadian Javelin, two brokers who acted as partners within Lieberbaum had a deal under which they received one dollar in cash for every share that they placed. The SEC eventually halted trading by all brokers in the stock, and the case went to the U.S. Supreme Court to decide on the agency's action. It became a landmark securities case, and existing certificates of the stock later became collector's items.

After the two brokers left Lieberbaum, they were caught in a stock scheme. Federal court papers called them “New York stock manipulators,” and one of them pleaded guilty to a conspiracy count. One of the federal prosecutors in the case was Ira Lee Sorkin—Bernie's attorney. One of the two former Lieberbaum brokers later was involved in another fraudulent scheme involving the writing of a questionable newsletter promoting the stock of a California firm. The ex-Lieberbaum broker was sentenced to six months in prison. One of the big-name investors in the company was then New Hampshire congressman and later the state's U.S. senator, John E. Sununu, son of John H. Sununu, former chief of staff in the George H. W. Bush White House.

Besides the mob boys, loan sharks appeared one day to deal with another Lieberbaum broker who was a compulsive gambler, an East Side playboy who was an heir to a fortune that he wouldn't inherit for a few years, and who had been hired at Lieberbaum mainly to bring in rich friends and family as clients. He was betting as much as $5,000 a day from his trading floor desk, studying the
Racing News
rather than the
Wall Street Journal
.

Says Zaphiris: