Madoff with the Money (26 page)

Suspecting that a major crime was taking place at BLMIS, Markopolos contacted the New York office of the SEC, expressed his concern, and began supplying the agency with memos and data. There had been little, if any, response by the time he left his job at Rampart in 2004 to start a financial fraud investigation business. Initially, he had hoped to make some money himself from the evidence he had gathered—a reward the SEC and other government agencies pay to whistle-blowers if a prosecution is successful. But with no action on the SEC's part and no financial reward forthcoming, he decided to pursue the case he had gathered with even more gusto; his goal now was simple: He wanted legendary Wall Street titan Bernie Madoff 's ass in a sling.

In 2005, the tenacious Markopolos sent the SEC a scrupulously researched memo with the straightforward title: “The World's Largest Hedge Fund Is a Fraud.”

Still no immediate action was taken.

Markopolos later revealed that in taking on Bernie, he feared for his life and the lives of his family members because Bernie “was one of the most powerful men on Wall Street and in a position to easily end our careers, or worse.” He said he initially acted anonymously with regulators because of this fear.

Was Markopolos afraid of a Madoff-dispatched hit man?

Did he fear Bernie was the Tony Soprano of the Madoff family—the Godfather?

Indeed he did. He had started checking his car for bombs.

It was not out of the realm of possibility, since the Mob had gotten into Bernie's kind of business. While Bernie was operating his Ponzi scheme, a real-life soldier in the Luchese crime family had set up a bogus hedge fund in the early 2000s with the confidence-inducing name America's Hedge Fund, conned investors from the Midwest, and, like Bernie, sent them bogus statements showing generous returns. The crew made millions before they were busted.

Markopolos asserted that Bernie's fund “posed great danger” to anyone who investigated it. While there was an industry self-regulatory agency called the Financial Industry Regulatory Authority (FINRA), Markopolos said he never took his allegations there because the Madoff brothers—Bernie and Peter—had power and influence within the organization.

Because no action was taken by the SEC, Markopolos declared, “I became fearful for the safety of my family until the SEC finally acknowledged, after Madoff had been arrested, that it had received credible evidence of Madoff 's Ponzi scheme. . . . ”

Just as Markopolos feared Bernie, Bernie feared the SEC, and as the world came to know, he had good reason.

Whenever SEC representatives announced even a routine inspection visit to Madoff headquarters every three or four months, the boss went ballistic. “Bernie was like a chicken with his head cut off,” recalls eyewitness Bill Nasi. “He freaked out in the sense that his voice became high-pitched and he was running around the office and was very agitated. My supervisor told me, ‘Keep out of Bernie's way today, because he's having conniptions—the SEC is coming in today, and when that happens he's super-agitated like the Energizer Bunny on high speed.'”

Bernie instructed everyone to dress up, be on their best behavior, and just keep working with their heads down.

“A small army [of SEC people] would come in,” says Nasi. “I'd see them scrutinize everything, and everyone had to look hard at work. It's as if someone had thrown a switch on Bernie. He was having a shit fit.”

Curiously, Bernie never asked anyone for receipts, except when documents had to be delivered to the SEC offices in lower Manhattan, according to Nasi.

The other odd quirk Madoff employees like Nasi noted was that Bernie would never give up his Social Security number to anyone. In a world where identity theft is prevalent, that's not a surprise. But in Bernie's case, he went to extremes. “When a vendor wanted to open an account with Bernie, they'd ask for his Social [Security number],” says Nasi.“But Bernie would rather send them a check for $250,000 and tell them that ‘at the end of the year, if you haven't used up all the money you can always return it.' But he wouldn't turn over the number. Those vendors, like the ones who serviced the backup computer systems, had to break their own protocols about Social Security numbers or face losing the business.” (Ironically, Bernie's SSN has been released in publicly filed court records as 069-30-9552.)

Meanwhile, it appeared authorities were finally going to take a hard look at what was going on inside the walls of Madoff.

Finally, in January 2006, based on Markopolos's allegations, the SEC opened an investigation, and then quickly blew another opportunity to nail Bernie and expose his crimes. The agency learned that he had given it questionable information about how he managed the money of his customers. The SEC asked for documents, and even interviewed Bernie. The investigators appeared to be getting close to the case laid out by Markopolos. But in the end the SEC gave Bernie an easy out—it asked him to register as an investment adviser, and he quickly did so.

Case closed.

The SEC's final report on the matter said the investigation was terminated because the discovered Madoff violations “were not so serious as to warrant an enforcement action,” the
Wall Street Journal
reported.

It was shades of the SEC's decision to end its probe of unregistered Madoff feeder fund principals Frank Avellino and Michael Bienes almost two decades earlier when they quickly agreed to return investors' money, thus keeping agency probers from looking more closely at Bernie's operation.

In early February 2009, with Bernie under penthouse arrest after admitting his fraud, the SEC came under scathing attack in a fiery hearing held by the House Financial Services subcommittee.

The key witness was the man who had started nosing around nine years earlier—52-year-old Harry Markopolos, now vindicated and hailed as a hero. He hammered the agency as incompetent, declaring that it “roars like a lion and bites like a flea. . . . I'm saying that if you flew the entire SEC staff to Boston, [and] sat them in Fenway Park for an afternoon, they could not find first base. . . . The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion.... It took me five minutes to figure out he was a fraud.”

SEC officials such as Linda Chatman Thomsen, the agency's enforcement director, were placed on the hot seat and attacked by legislators for their investigative and regulatory failure. Typical were the sarcastic and caustic words of furious New York Congressman Gary L. Ackerman, a Democrat, who declared: “We thought the enemy was Mr. Madoff. I think it is you.”

The
New York Post
's headline blared: “How SEC Bozos Blew It.”

A week later the embattled 54-year-old Thomsen, who had headed enforcement since 2005, resigned after being blasted by critics for “turning a blind eye” to tips that could have caught Bernie earlier.

Markopolos also claimed that he had tipped off the
Wall Street Journal
about Madoff 's scam in December 2005, and evidenced e-mail correspondence with a
Journal
reporter who wanted to investigate. But Markopolos said the story was never done because the reporter couldn't get approval from upstairs to pursue the lead. The journalism trade publication
Editor & Publisher
contacted Paul Steiger, who was the
Journal
's managing editor at the time, but he claimed he never heard of the paper getting such a tip. He said that any “assertion that we were afraid of Madoff is just preposterous; it is silly.”

As the Madoff investigation dragged on through 2009, agency officials promised reforms in order to restore shattered investor confidence. It even went so far as to hire a government-funded research organization, the Center for Enterprise Modernization, to examine and come up with better ways for the SEC to deal with Markopolos-like tips about bad guys in the financial sector.

A new sheriff was put in place to police Wall Street—it was hoped. Her name was Mary Schapiro, chairman of the SEC. But she was quickly criticized.

In a lead editorial, the
Wall Street Journal
in early February 2009 declared:

However, the walls were closing on Bernie Madoff. The fall of the Madoff dynasty was at hand.

Not long before Bernie was arrested he and Ruth had visited their multimillion-dollar abode in Palm Beach, the wealthy, somewhat Jewish enclave where investors in Madoff would lose hundreds of millions of dollars. One of Bernie and Ruth's favorite men's shops that also sold some women's wear was the chic Trillion boutique under the palms on ritzy Worth Avenue, an amalgam of trendy Rodeo Drive in Beverly Hills, Paris's glamorous Avenue Montaigne, London's tony Oxford Street, and Milan's stylish Via della Spiga.

The Madoffs had shopped at Trillion for some three decades.

Bernie, whose mother wouldn't buy him Keds sneakers when he was a kid, which made him feel like a Laurelton outcast, spent money like a kid in a candy store at Trillion.

The store offered a very special $7,400 unconstructed, handmade vicuna and cashmere, cream-and-brown herringbone jacket that took a very special buyer to see it for what it was—and afford to pay for it. Bernie was that kind of guy, says Trillion's owner, David Neff, who personally served the Madoffs, and bonded with Bernie.

Bernie also favored Trillion's navy crewneck wool sweater that he bought at $1,200 a pop, and it wasn't even cashmere. The $2,000-a-pair conservative charcoal flannel pants went well with the sweater. Bernie bought those, too. Observes Neff, “The guy that's wearing those says, ‘Holy smokes, am I a lucky boy.'” Bernie also liked the cotton and cashmere corduroy trousers—the ones that “don't wrinkle, are a pleasure to wear,” came in 18 “unique” colors, and cost him (or probably his bilked investors) $1,200 a pair.

Speaking of Bernie, Neff observes:

Bernie certainly was discerning in apparel and in people. He cleverly chose the investors who became victims in his Ponzi scheme very carefully. For the most part they had to invest multiples of seven figures, and they had to be the kind who didn't ask too many questions. Most of them who actually knew Bernie felt he was conservative—to them he was low-key and he didn't flaunt all the goodies he had. He saved his brashness, of which there was plenty, for those in his inner circle.

As David Neff rightfully perceived, Bernie was proud of the contents of the enormous custom-built walk-in closet in the dramatic mahogany-paneled master bedroom of the Madoffs' East 64th Street co-op apartment—Penthouse 12A (and for a time Bernie's Big House before he pleaded guilty and was put into a real prison cell). Even though Bernie amazingly banned Ruth from sitting on the antique furniture, the penthouse was in her name—a legal dodge, they both hoped, against possible seizure.

Bernie treasured the duplex apartment with its dramatic curved staircase like something out of a 1940s Hollywood movie set; it showed the world that the poor boy from Queens had made it big, and it gave him bragging rights because his place was the last to be done in Manhattan by the interior designer Angelo Donghia before he died from AIDS-related illnesses. Donghia was known for his chic, sophisticated interiors for clients who included, besides the Ponzi artist, such luminaries as Donald and Ivana Trump, Liza Minnelli, Halston, Ralph Lauren, and Mary Tyler Moore.