The Madoff Chronicles: Inside the Secret World of Bernie and Ruth (2 page)

“I never got a feel for him as a financial genius,” recalled former employee Bob McMahon, who was hired to help maintain and improve the computer system at the Madoff office. “The first time I saw him, I thought he was an electrician or running cable.”

Madoff did not need a financial genius. He did not need to know whether the market was up or down, or even whether the firm had made money in trades on any particular day. There were no actual trades, only the fictional transactions. Madoff never made any investments for his clients all those years. Anyone visiting the Madoff offices would have wondered how that could be possible given the hectic activity on the nineteenth-floor trading room. All of the employees on that floor worked for another part of the Madoff business that was legitimate and made trades for large institutional customers. The investment advisory business was completely separate and completely crooked. All that really mattered for that part of the business was the cash flow in and out of the Chase account. All withdrawals had to come out of that account. As with any Ponzi scheme, the scam could continue only as long as more money came in than went out.

Between 2006 and 2008, records showed that the Chase account had an “average balance of several billion dollars.” But by mid-November 2008 the daily balance had dropped close to zero on a regular basis. Madoff ordered his London office to sell its holdings in British treasury notes and transfer at least $164 million to the Chase account. Customers had taken out $320 million in November, and only $300 million had come in. Madoff realized there wasn’t nearly enough coming in to cover what his longtime clients would want to take out by the end of the year. Madoff needed $7 billion by the end of the quarter.

So he scrambled to perpetuate the scam by trying to recruit new clients and secure more deposits from current clients. People in the office noticed he seemed preoccupied, but few knew why.

“All these heavy hitters were coming in,” his secretary, Eleanor, remembers. “I’m saying to myself, Bernie must be doing really well, and he must be under a lot of pressure and that explains why he hasn’t been himself.”

She would learn a few weeks later just how badly she had misjudged the cause of her boss’s anxiety.

In the days before Thanksgiving, Madoff’s appointment book shows he met on November 25 with Ezra Merkin, a New York financier and close friend who had $2.4 billion of his clients’ money with Bernard L. Madoff Investment Securities. Much of the money Merkin sent to Madoff came from Jewish organizations, including Yeshiva University, where Merkin served on the board of trustees.

As a possible target of the criminal investigation, and facing a range of civil lawsuits, Merkin declined to speak about the meeting with Madoff other than to say, through a public relations spokesperson, that he too had been fooled by “the intricate, fraudulent scheme perpetrated by Madoff.”

On that same day just before Thanksgiving, Madoff’s wife, Ruth, came into the office and withdrew $5.5 million from an account she had with Cohmad, one of the companies co-owned by her husband, which recruited investors for Bernard L. Madoff Investment Securities. The money was wired to another account. Ruth was preparing for something.

She had been by Madoff’s side for fifty years and would remain loyal even after the arrest. She had kept the books in the early days in the 1960s and continued to balance the checking account in an office one floor below Bernie’s that she still had on the day he was arrested.

On Thanksgiving Day itself, Madoff came into the office. “That had to be big,” said Eleanor, who could not recall Madoff ever working on any holiday.

“Do you want me to come in too?” she asked him. “No, no, no need,” Madoff replied. Then he asked her where the coffee was kept in case his visitors wanted something.

The appointment book, turned over to the FBI and provided to the author by Madoff’s secretary, shows he met with representatives of Optimal, the asset management side of the huge Spanish bank Santander.

It’s not known if the Spanish bankers were being asked for more money or demanding to pull their money out, but the bank later reported it lost almost $2 billion invested with Madoff on behalf of its clients. A spokesperson for the bank refused to comment on the meeting. Unlike other large funds, Bank Santander says it will reimburse its clients for their losses.

After the meeting, Madoff flew to Palm Beach for the rest of weekend, during which he would mark his forty-ninth wedding anniversary.

In the first week of December, Madoff confided to one of his sons that he “was struggling” to raise the necessary funds to cover withdrawals but “thought that he would be able to do so,” according to an FBI affidavit. This was a very big red flag for the Madoff sons, who were, at best, blissfully ignorant of their father’s scheme until the very end.

Many of his longtime investors said they were “too stretched” to put any more in, but ninety-five-year-old Carl Shapiro agreed to help out. Shapiro, who became a multimillionaire in the garment industry, had been one of Madoff’s first “millionaire” investors and had trusted Madoff with his money for forty years. Madoff used Shapiro’s son-in-law, Robert Jaffe, to recruit more customers, and earlier in 2008, Madoff had attended Shapiro’s ninety-fifth birthday party in Palm Beach.

Shapiro already had about $295 million in accounts with Madoff, and now he agreed to invest $250 million more. People familiar with Shapiro’s dealings say Madoff promised “nice, above average returns” for an investment of only a few months.

Now, with Shapiro’s money, essentially a short-term loan, Madoff had managed to get his cash account balance at Chase back into the black. He had just scraped by with a huge redemption payout on November 19, but he was still far short of the $7 billion he needed for all the other withdrawals clients had requested. If the checks did not go out, everyone would know Madoff was a fraud.

Two weeks later, Shapiro would learn that the entire $545 million he had entrusted to Madoff was gone.

As the days went by, Madoff was still Mr. Cool to the outside world, and only a few close to him saw the tension building. Madoff’s blood pressure shot up, Eleanor remembered. “He was taking blood pressure medicine and his back was killing him,” she said. “He was walking crooked and we tried to give him a pain patch. He could make it through meetings with investors, but then he would collapse afterward. I’d see him lying on the floor,” she said. “His eyes would be closed and his arms outstretched, like a dead person.”

Eleanor says her boss never confided in her about what was really going on, but she is convinced he had pretty much given up by early December.

“At one point, out of nowhere, he told me that he was sorry he had been so hard on me,” she remembered. “He never said anything like that before. Then he started throwing the mail back at me, saying he didn’t want it,” she said. “He was so preoccupied, his voice was very low and I kind of felt like I was working by myself.”

Still, Madoff tried to keep up outward appearances.

On Monday, December 8, three days before he would be arrested, Madoff hosted a meeting of the board of the Gift of Life Bone Marrow Foundation, which raises money to help Jewish victims of leukemia and lymphoma find bone marrow transplant donors. His nephew, Roger, died of leukemia in 2006, and his youngest son, Andrew, was diagnosed with lymphoma in 2003.

Madoff was chairman of the board of the charity and had served on the board along with a who’s who of other wealthy Jewish New Yorkers, including Merkin and real estate developer Fred Wilpon, the owner of the New York Mets baseball team. Many of the board members were also investors with Madoff, including Wilpon, who reportedly lost “hundreds of millions of dollars.” The Mets were later forced to announce they still had enough money to meet the team payroll, despite the losses attributed to Madoff.

As the board members gathered that Monday evening in Madoff’s nineteenth-floor conference room, Madoff already knew he would be out of business by the end of the week. People in the room—many longtime friends—would soon learn he had willfully cheated them without batting an eye that night or ever.

“If you don’t have a conscience, then that is not a problem for you,” said former FBI agent Garrett. “I call them hollow people because on the outside they can smile, they can be charming, they can be engaging, and on the inside there is nothing. They have no emotions. They couldn’t care less about you. He’s thinking, ‘I did these people a favor and I’m just going to continue to act as I normally act: smile, shake their hand,’ knowing in a few days he might be in jail.”

A notice on the Gift of Life Bone Marrow Foundation’s Web site says its funds were “not managed by Madoff” but that the losses suffered by many of its contributors “understandably impacted” their charitable giving.

His secretary said Madoff “was his normal self that night” at the charity board meeting.

The next day, Tuesday, December 9, Madoff canceled the meeting scheduled later in the week with his lawyer, Sorkin. He also canceled a meeting scheduled that day with investment banker Ira Harris and his son Jonathan Harris, according to his secretary. They would not talk about their relationship with Madoff, but the secretary said the senior Harris had been meeting regularly with Madoff and appeared to be “giving some advice,” but she did not know the subject of the advice. The canceled meeting was to take place in a New York hotel.

There were no meetings on Madoff’s calendar for Wednesday, December 10.

Instead, around 10:30 a.m., he asked his two sons, Andy and Mark, and his brother, Peter, to come to his office on the nineteenth floor.

An hour or so earlier, Ruth had again come to the office to withdraw more money from her Cohmad account. She ordered $10 million wired to another account. With the pre-Thanksgiving withdrawal of $5.5 million, Ruth and Bernie now had a $15.5 million stockpile set aside for what was about to happen.

Eleanor knew something unusual was happening when Ruth came in. “She was up to something. I remember turning around and seeing her scoot by me and she just started with this nervous laugh.”

Then Eleanor saw the two sons arrive. They appeared to have been summoned to their father’s office.

“I thought there was something wrong with the family,” she recalled. The marriage of Andy, Madoff’s youngest son, had been on the rocks for some time and he already had a girlfriend, Catherine, he had brought around to the office. Some thought she was his fiancée, even though he was still married. His wife, Deborah, would file for divorce the next day, the day her father-in-law was arrested.

The family gathering in Bernard Madoff’s office, however, was not about the divorce.

Madoff’s younger brother, Peter, arrived first. Bernie had told Peter about the scam and the coming collapse the night before, according to a person on one of the Madoff family legal teams. Then Mark and Andy came in. Mark had been told the night before by his father that he was going to distribute all the cash in the checking account as employee bonuses, normally paid in February, because “he had recently made profits through business operations, and that now was a good time to distribute it.” Mark knew something was wrong, he later told the FBI, and called his younger brother, Andy, who was less involved with the business on a day-to-day basis. “We have to meet with Dad,” Mark told Andy.

Mark and Andy told the FBI that when they challenged their father about the payments, he said he wanted to move the discussion to his apartment, because he “wasn’t sure he would be able to hold it together” if they stayed in the office.

After a few minutes, Bernie was through talking. Eleanor says she saw the sons get their father’s overcoat, help him on with it, and then walk out of the office.

“Where are you going?” Eleanor asked.

“I’m going out,” he said, with the collar on his dark green cashmere coat turned up, shielding his face.

“We’re going Christmas shopping,” Mark told the secretary.

Eleanor didn’t believe it. “I knew something was wrong. They seemed to be pretty anxious, they were in a rush.”

Peter stayed behind, giving no indication for the rest of the day that there was any problem.

The two boys and their father climbed into one of the firm’s black Cadillacs for the quick trip to Madoff’s apartment about twelve blocks away. “They mostly talked about the grandchildren,” recalled the driver. “Mark sat in front, and Andrew and his father sat in back.”

It was unusual for the three of them to be leaving the office in the middle of the day, and the driver said he sensed something wasn’t right.

The sons told the FBI that when they got to their father’s apartment, he quickly confessed he was a fraud. “It’s all just one big lie,” he reportedly said, calling it “basically a giant Ponzi scheme.” “I’m finished,” he told his boys. “I have absolutely nothing.”

After being told by their father that his life had been a lie, that he was a crook and a cheat, Mark and Andy left the apartment and told the driver they were going to get lunch before heading back to the office. But Mark and Andy never returned to the office. Mark and Andy told the FBI that their father asked them to keep quiet about the scam for a week while he “wound up” his affairs. Then, he expected them to contact authorities so they would be the heroes, turning in their own father. At least, that was Madoff’s plan.

Instead, his sons immediately called a lawyer, Martin London, the stepfather of Mark’s wife, Stephanie. London, now retired from the firm Paul, Weiss, is a famed litigator who represented Vice President Spiro Agnew in the bribery case that led to his resignation. London himself was an investor with Madoff. Realizing the enormity of the problem, London sent the Madoff boys to another lawyer in his firm, Martin Flumenbaum. By 4 p.m. that afternoon, Mark and Andy were in Flumenbaum’s law office and by 5:30 p.m. they were giving statements to federal prosecutors and the SEC.

An hour after telling his sons, one of Madoff’s drivers took Madoff back to the office and listened in as the boss talked to someone on his cell phone.