Madoff with the Money (34 page)

After Bernie's arrest it was revealed that the foundation that funded the center's work was heavily invested in Madoff and was a victim of Bernie's massive fraud.

The foundation was the brainchild of wealthy New York commercial real estate mogul Norman Levy, who died in 2005 at 93. In a paid death notice in the
New York Times
he was hailed by a friend who wrote: “Your spirit and love of life have changed all who knew you. You taught me so much. I'll cherish our friendship forever.”

The friend was Bernie Madoff.

Though Bernie was a quarter century younger than Levy, the two had developed a close bond and immense trust. Levy was like a father figure to Bernie. He had invested heavily in Madoff, though suspicions were later raised that Levy—who once owned the Seagram Building skyscraper in New York—might have had knowledge about some of what Bernie was up to.

In any case, Norman's son, the novelist Francis Levy, had financed the Philoctetes Center with $950,000 of Levy Foundation money. It was the younger Levy who invited longtime family friend Bernie to appear on the panel at the center and discuss the world of Wall Street and investing.

After Bernie was arrested, Levy quoted his late father as declaring, “If there's one honorable person, it's Bernie.”

One would never have guessed in a million years watching Bernie pontificate and boast at that panel session moderated by Justin Fox,
Time
magazine's “The Curious Capitalist” columnist, that this hero of Wall Street was nearing the nadir of his secret criminal scheme. Bernie appeared relaxed, confident, articulate, and funny at times. Wearing a black suit, his long hair expensively cut, a crisp white shirt open at the collar, his legs crossed, he seemed to all concerned like the Master of Universe he was—at that moment in time.

In introducing Bernie, the low-key, boyish-looking Fox noted:

Later, after Bernie was behind bars awaiting sentencing and with dozens of tentacles of his crime stretching around the world, Fox, a veteran business reporter, acknowledged that he wished he had done some hard research on Bernie beyond a routine googling before moderating the panel discussion and tossing softball questions.

He told the author he was unaware of the earlier
Barron's
story and didn't know anything about the allegations Markopolos had made. “I googled Bernie to see who he was. I had never heard of him before I was asked to moderate.” He acknowledged that “at some level” the session was like a virtual infomercial for Bernie, “but that's what most of these panel discussions end up being. They're not the same as journalism. I had no idea he basically had a giant hedge fund on the side.”

Several weeks before the event, Fox says, he was invited by Bernie up to his office in the Lipstick Building to “brainstorm” what would be discussed. “When he called I thought he was offering lunch, but there was no lunch on offer. We talked about the panel, and how to make it work.” He says Bernie asserted no ground rules.

However, a careful analysis of some of the things Bernie had to say that day, according to a transcript and video, was quite revelatory in view of what came to be known about him.

Bernie told the gathering, “Wall Street is one big turf war . . . by benefiting one person you're disadvantaging another person, and the basic concept of Wall Street, which sometimes regulators lose sight of, as do the academics, is it's a for-profit enterprise,” which got a big laugh from the audience. He noted that Wall Street “is one of the few industries where the cost of doing business had dramatically increased” for firms like Madoff, and “the cost of regulation has dramatically increased. Now, no one is going to run a benefit for Wall Street”—more laughter—“so whenever I go down to Washington and meet with the SEC and complain to them that the industry is either overregulated or the burdens are too great, they all start rolling their eyes.”

He revealed that “the big money on Wall Street is made by taking risks.”

Firms like BLMIS, he noted, were forced into taking risks because they “couldn't make money charging commissions . . . because of the regulatory infrastructure you had to have dealing with clients,” and he stated that the “great majority” of income came from “risk taking. . . . That's where the money is made.”

He even gave Mrs. Madoff a big plug, and made her sound much more like a decision maker at the family firm than had been previously known.

When the discussion turned to the types of people who work for a firm like BLMIS, he recalled how he'd hired MBAs as traders, and how that wasn't the perfect situation. “Then we went through another stage. Actually it was my wife [the math whiz in high school and college] who said, ‘Why don't you hire math people? Why don't you go to MIT and hire math people, because everything you're doing is related to algorithmic trading and they're probably the best people.'”

Bernie said Ruth's suggestion didn't work out because, “They just spend too much time thinking. . . . You could actually watch them; they would deliver an order. My brother and I and my sons would look at them saying, ‘Well?' And they would say, ‘I'm getting there.' By that time the price would usually have moved against us.”

He said that BLMIS, like all brokerage firms, was “very carefully enforced and surveilled. It doesn't mean there are not abuses, for sure, but by and large in today's regulatory environment, it's virtually impossible to violate rules. . . . If you read things in the newspaper and you see somebody violate a rule, you say well, they're always doing this. But it's impossible for a violation to go undetected, certainly not for a considerable period of time.”

As one participant who was present at the session observed after Bernie's arrest, “If there had been a bullshit detector present in the room, it would have exploded.”

Another who asked some questions at the session and didn't feel he got straight answers was Daryl Montgomery, a 49-year-old independent equities trader, who headed a group of people interested in the stock market called New York Investing Meetup.

Montgomery says he was aware of who Bernie was, that he had headed Nasdaq and was helping to run markets, “but not that he was the biggest crook on earth.” After seeing and hearing Bernie for the first time, he states, “He was not a great intellect, and was fairly insubstantial, but that is very common for people that have these big positions—pleasant but don't seem incredibly bright.”

Montgomery is further convinced that people who invested in Bernie and got big returns didn't want to hear anything bad about him, whether it came from
Barron's
or Markopolos. That's why they continued to invest. He says:

Many of Bernie's victims, as it turned out, felt that way.

Despite all the suspicions and investigations and proliferating civil lawsuits, the only other person arrested in the Madoff scandal in the days after Bernie's guilty plea was his accountant, handsome 49-year-old David G. Friehling, who more resembled the character Carlo Rizzi in
The Godfather
than a nerdy numbers cruncher. But according to prosecutors, Friehling was quite creative.

Amazingly, virtually none of Bernie's thousands of hoodwinked investors, or other financial advisers, ever questioned the fact that the financial messiah in whom they had so much trust, the Wall Street guru whom many begged to take their money, had an accountant who worked out of a dumpy 13-by-18-foot storefront office in a drab strip of offices in the hamlet of New City, across the Hudson River and about 45 minutes from Madoff headquarters.

He was a red flag, if there ever was one.

It was like the equities trader Daryl Montgomery observes—no one questioned or wanted to believe that Bernie was a rotten egg, as long as those beautiful earnings statements arrived in the mail, and extraordinary returns kept coming despite all the warning signs.

For more than a decade, Friehling, of the firm Friehling & Horowitz—Horowitz being Friehling's father-in-law, Jeremy, who had retired to Florida in 1997 and later died of cancer at the age of 80, curiously on the morning Bernie pleaded guilty—handled all of the auditing for Bernie's crooked investment advisory business.

Charged with securities and investment adviser fraud linked to the Ponzi operation, Friehling surrendered to federal authorities in mid-March 2009, about a week after Bernie was sent to jail, and was released on $2.5 million bond.

The six-count criminal complaint charged that Friehling, who was licensed with New York State as a certified public accountant (CPA) in 1987, “deceived investors by creating false and fraudulent certified financial statements for Bernard L. Madoff Investment Securities LLC and its predecessor Bernard L. Madoff Investment Securities and causing those certified financial statements to be filed with the United States Securities and Exchange Commission and sent BLMIS clients.” The government also charged that Friehling “caused false and misleading certified Bernard L. Madoff Investment Securities audit reports to be filed with the SEC” beginning in December 2004 and continuing through December 2007.

In exchange for his services that had escaped detection for years, Friehling received handsome returns from Bernie—he was paid $12,000 to $14,500 per month between 2004 and 2007, the government alleged.

“Mr. Friehling is charged with crimes that represent a serious breach of the investing public's trust,” declared acting U.S. Attorney Lev Dassin, who was in charge of the Madoff investigation. “Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff 's business. Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money.”

Beyond Friehling's alleged rubber Madoff stamp, the accountant and his wife had a more than $500,000 account with BLMIS.

Friehling was initially scheduled to appear in court on June 17, 2009, and the expectation was that he would either be indicted by a federal grand jury or cop a plea. There was speculation among knowledgeable observers that he was cooperating with prosecutors in exchange for a lighter sentence, or in the best-case scenario for immunity if he had hard evidence that went beyond Bernie's admissions—evidence of conspirators, evidence of where the billions went. He faced a maximum of 105 years in prison if found guilty, and also faced civil charges by the Securities and Exchange Commission (SEC).

But the June date came and went after prosecutors received a 30-day extension—until July 17, 2009—stating they were seeking a possible “disposition”—boilerplate legal jargon that left it up in the air as to whether a plea deal was in the works. What it did mean was that talks were ongoing between the prosecutors and Friehling's lawyer. In mid-July 2009, he pleaded not guilty, waiving an indictment, which meant no grand jury review. Another hearing was scheduled.