The Madoff Chronicles: Inside the Secret World of Bernie and Ruth (7 page)

Yet, on the seventeenth floor, he relied on an outdated computer and did not provide his customers with electronic real-time access to their accounts. Almost all Wall Street firms use electronic confirmations for stock trades, but Madoff used paper confirmations because they could be created after the fact—the key to his Ponzi scheme.

The use of outdated technology coupled with a beholden staff and a corporate culture of extreme secrecy enabled a business that had started with a folding card table in Queens to grow into a multibillion-dollar operation that had investors pleading to be allowed to participate. Of course, a Ponzi scheme cannot survive unless it continues to grow. The new money is needed to pay the yearly 12- to 20-percent returns to old customers.

With such great returns, year after year, a number of prominent hedge funds considered putting money with Madoff but then changed their minds after a closer look and a serious numbers crunch. According to investigators, Société Générale, Goldman Sachs, Citigroup, Morgan Stanley, Merrill Lynch, and Credit Suisse all “flatly refused to deal” with Madoff.

“There wasn’t enough volume on the entire floor of the stock exchange to support” all the trades he was supposedly making, said Suzanne Murphy, a hedge fund investment adviser. “It told us that what he said he was doing was not what he was actually doing.”

For example, if Madoff was to be believed, on one day in 1998 he had carried out half of all the trades for the Coca-Cola Company, a volume of trades that was not credible.

In the late 1990s the head of the trading desk of one major investment bank put Madoff in the fraud pool, said Murphy, referring to a gallows-humor pool that traders use for bets on which firms are the next to be indicted.

Yet other investors continued to line up, including some hedge fund operators who put their clients’ money in Madoff’s hands in addition to their own personal fortunes.

In a way, the savviest of them may have been like the “mark” in the film
The Sting
, the shrewd gambler Lon-negan. He knew the character played by Robert Redford was doing something illegal by knowing which horse had won a race before placing a bet. But it seemed a foolproof system to score big. His greed blinded him to the fact that he was the true target of the con.

Similarly, many of Madoff’s savvy investors suspected Madoff had his own foolproof system, which might be illegal, but could keep those big returns coming. “A lot of people on the street thought Madoff was front-running,” said Murphy, referring to an illegal practice in which traders and broker-dealers buy or sell their stocks ahead of large orders, which are sure to drive the price. “They could live with that—it’s illegal, but if he gets caught, hey, that’s not my problem.”

No one wanted to find out, or challenge Bernie, Murphy says. “Don’t ask Bernie too many questions because you know he doesn’t like that, he gets upset.”

“Every time I asked him a question, a roadblock was put up,” recalled Jim Hedges. He had a two-hour meeting with Madoff in 1997. As impressive as the trading floor appeared, Hedges smelled a rat by the way Madoff reacted to his questions. “I think he was probably offended by my questions. I knew, from his level of agitation and feeling of being put-upon, that this was a very unusual dynamic. And in twenty, thirty minutes I found enough to make me say I wouldn’t want my investors near this.”

Like any other financial firm, Madoff also had an accounting firm, Friehling & Horowitz, whose name appeared on certified documents filed with the SEC every year, as required by law.

But Friehling & Horowitz turned out to be a three-person firm located in a strip mall in rural Rockland County, thirty miles northwest of New York City.

Of the three, only one, David Friehling, was full-time. The other employees included Friehling’s part-time assistant and his father-in-law, Jerome Horowitz, living in semiretirement in Florida. Friehling claimed to have “hundreds of clients” and to be “well respected in the community.” Yet there is no evidence he had any client other than Madoff. The accounting firm’s total revenue in 2008 was $180,000—a surprisingly small amount for a firm supposedly doing the accounting work for a $64.8 billion investment business.

The father-in-law, Horowitz, had been Madoff’s accountant—going back to the 1960s when Horowitz worked out of the small accounting firm on East 40th Street that was run by Madoff’s father-in-law, Saul Alpern. Like a Mafia don, family connections were very important to Madoff.

The job of the accountant is crucial in assuring the public of the honesty and integrity of securities firms handling their money. Accountants are supposed to certify that the firm has the money it says it has, that it has made the trades it says it has, and that it has and holds the stock and securities it claims to have bought for its clients.

According to investigators, David Friehling did none of that. Instead, they say, he simply signed blank SEC forms for Madoff and others to fill in and file.

Eleanor remembers occasional visits to the office by Friehling, who also handled Madoff’s personal income tax returns. “He was a nice guy, but he didn’t seem to be very close to Bernie,” she said.

After questions began to be raised by some investors about Friehling & Horowitz, Eleanor remembers Madoff calling Friehling to say, “You have to get an office. You cannot continue to operate out of your house.” That’s when he moved to his eighteen-by-thirteen office in the strip mall.

On the day after Christmas, fifteen days after Madoff’s arrest, Friehling was seen removing boxes of documents from the tiny office. He was arrested by the FBI a few months later and charged with six criminal counts, including securities fraud and filing false documents with the SEC. He entered a not-guilty plea and prepared to go to trial after federal prosecutors played hardball in plea negotiations and insisted he would have to spend most of the rest of his life in prison.

Friehling’s best defense about his knowledge of the scheme, or lack of knowledge, may be that he and his family members had more than $14 million in accounts with Madoff, according to the SEC. Madoff paid certain key people through the accounts, but would someone who knew it was a scam leave his family’s money in those accounts? In the eight years before Madoff’s arrest, more than $5 million had been withdrawn from the largest of the Friehling accounts, but much was still left—at least on paper—when Madoff was arrested. He was a victim of the very scam prosecutors say he helped cover up.

Friehling’s eighty-year-old father-in-law, Jerome Horowitz, Madoff’s original accountant, died of complications from cancer on the day Madoff entered his guilty plea in March.

RUTH MADOFF WAS FURIOUS
.

She had accepted the shame attached to her husband’s $65 billion crime. She knew he had cheated thousands of people, including many of her close friends and family. She could handle being cut off from her social circles and even banned from her New York hair salon. She understood that the Palm Beach mansion, the oceanfront house in Montauk, and the villa and yacht on the French Riviera were gone. She was a virtual prisoner in her Manhattan penthouse. She was always afraid of running into one of her husband’s former clients. She would wait for the doorman to tell her that the photographers had gone, so she could sneak out for an afternoon movie.

But Ruth could live with all that. What made her so angry one morning in late March was an item in the New York
Daily News
claiming that ten years earlier Bernie had had an affair with a younger woman, someone in the media. Men are creeps, she fumed to people close to her after reading the article

“Was Ponzi Bernie Madoff man a philanderer, too?” read the headline on the
Daily News’
Rush & Molloy gossip column. The writers said two sources confirmed Madoff’s affair with “an executive assistant at a media company” who was “attractive and Jewish,” according to the account. The column said Bernie was generous with her and “used to fly her around” until Ruth found out and “kept him on a short leash after that.” Despite what the columnists’ sources had told them, Ruth had not known about the alleged affair until the column appeared.

The story of the alleged affair spread rapidly, and the next night it provided fodder for David Letterman, who presented the Top Ten Signs Your Wife Is Having an Affair with Bernie Madoff on his late night CBS program.

Number one: “When someone on the news mentions getting screwed by Madoff, your wife says, ‘Tell me about it.’”

Sitting in the luxury Manhattan penthouse made possible by her husband’s crimes, Ruth seethed for days. Bernie had pleaded guilty just two weeks earlier. The judge promptly revoked his bail, ending his house arrest and sending him to jail to await his sentencing.

Ruth had vowed her love to her husband of forty-nine years and had been warming to the role of the lonely, devoted wife until she picked up that
Daily News
. Now she was experiencing the overpowering sense of betrayal and anger that Madoff’s victims felt three months earlier when they learned he had cheated on them with their life savings.

At the time—three months after Bernie’s arrest—Ruth had not expressed any public regrets about her husband’s monumental crime or any sympathy for his victims. To the outside world, she seemed immune to the suffering of the families—including her own sister Joan’s, whose finances had been devastated—or the charities that were bankrupted by Madoff’s financial chicanery.

But the idea that Bernie would betray her? Cheat on her? After all she had done for him? After all they had been through together?

According to people familiar with her reaction, she vowed to get the truth from Bernie once she was allowed prison visits. And, in fact, a few weeks later, when she visited him at the federal Metropolitan Correctional Center in lower Manhattan, he denied the affair. And she believed him. She was sorry she had even brought it up. Her Bernie would not lie to her. After all, he wasn’t a creep. He was still that tan, handsome lifeguard who had swept her off her feet at a beach in Queens fifty years earlier.

Life in the ensuing decades had been very good for Ruth and Bernie. Once Bernie’s scheme was in place, there had never been any shortage of money. In some cases, tens of millions of dollars would suddenly appear in Ruth’s accounts with no apparent explanation, according to investigators.

In addition to swindling his investors, investigators say there is evidence he stole from some of them outright by looting the estates of clients who had named him the executor.

On their most recent federal income tax return, for 2007, the Madoffs reported $13,262,706 in gross income. His salary from the company was $9,422,238. They collected tax-free interest of $2,566,428 from some $45,000,000 in municipal bonds. He knew better than to put that money in the hands of the seventeenth floor.

Their IRS 1040 return was prepared by David Friehling, the same small-town accountant who is suspected of covering up Madoff’s fraud at Bernard L. Madoff Investment Securities. It is full of typographical errors.

Madoff may have cut corners in hiring an accountant, but he spared no expense in catering to his and Ruth’s every whim or desire.

They traveled the world together in two private luxury jets co-owned by Madoff with family and friends. Bernie and Ruth adopted a style and demeanor that belied their outer-borough upbringing. They sought the “old money” look, even though their money was freshly stolen.

His clothes were expensive and elegant. Dark blues and grays with a black knit tie. He looked like a French diplomat. On a shopping spree weeks before his downfall, Madoff spent several thousand dollars at Trillion, a men’s store in Palm Beach, where he chose a $1,200 blue Polo shirt and a $2,000 pair of light gray cashmere slacks.

“That’s Bernie’s shade,” said co-owner David Neff.

For shoes, Madoff was a loyal customer of Belgian Shoes, located just down the street from his office. Since 1979, Madoff had bought dozens of handmade suede loafers for around $350 a pair. He told people it was the only shoe he would wear.

Madoff was obsessive about his appearance. Often, when he bought a pair of the shoes, or any tie or shirt, he would buy ten of each item. There would be one each for the meticulous walk-in closets at his four homes in Manhattan, Montauk, Palm Beach, and the French Riviera. The other six sets of clothes were for the six steamer trunks he bought and shipped to his six favorite hotels around the world, including the Lanesborough in London, the Plaza Athénée in Paris, and the Hôtel du Cap on the Riviera, so that when Madoff traveled to his favorite places, he took no clothes; they were waiting for him.

“Someone who plans ahead so well that he pre-positions his clothes around the world, don’t you think he has some hidden bank accounts around the world, too?” asked one investigator on the case.

In the last ten years Bernie and Ruth’s life had been a wonderful merry-go-round, with stops in the Hamptons, Palm Beach, the Riviera, Cabo San Lucas, Mexico, and for skiing in St. Moritz, Vail, and Aspen. Bernie was the “non-skiing” captain of the ski team for the Cincinnati stock exchange, which he and his brother helped transform into the National Stock Exchange.

“We had these meetings around the world where all of the stock exchanges of the world would get together for one week and end up with a big gala and ski competition,” said Nando Pignatelli, a former broker from Monte Carlo. Bernie “was seen with very good-looking girls, but they and their husbands were part of the team. He had Ruth there as his wife. Peter with his wife. They were absolutely very regular.”

When they weren’t vacationing in exclusive locations around the world, they maintained their luxury lifestyle at home in New York City. Their penthouse apartment at 133 East 64th Street, on Manhattan’s Upper East Side, was an understated showcase. Valued at $7.5 million, it is a two-story expanse on the eleventh and twelfth floors. They moved into the city from their suburban home in Roslyn, Long Island, after their sons, Mark and Andy, had finished school. In a building full of millionaires, Madoff was on the top floor, with a commanding view of the city. One of the couple’s close friends, Susan Blumenfeld, served as the decorator. On her Web site, Blumenfeld boasts of her “artistic prowess” and ability to “customize any space to reflect each client’s character with an unexpected flair that is always elegant and beautiful.” She also was the decorator for Madoff’s offices and his yacht.

For the New York apartment, Blumenfeld chose a neutral color palette, with antique Oriental rugs and classic furnishings. As in the office, there were no loud colors—nothing flashy for the Madoffs.

There was a Steinway grand piano in the living room on the top floor, along with floor-to-ceiling windows and a fireplace. Small statues of bulls were placed on each side of the entrance to the room. Nearby was a formal dining room with its own fireplace, a crystal chandelier, and a $64,000 set of silverware. The large eat-in kitchen adjoined the room where Madoff spent most of his time after the arrest, reading the paper and watching old movies on a large flat-screen television. Visitors said the apartment was spotless. According to investigators, the Madoffs’ housekeeper, Praxides Dirilo, was paid out of the company accounts.

The bedrooms were on the eleventh floor, accessed by a large spiral staircase. Bernie and Ruth each had a personal walk-in dressing closet for their expensive wardrobes. Bernie arranged his suits, hand-tailored in London, precisely one inch apart. Each shirt had its own pull-out shelf, and his twenty pairs of suede loafers were arrayed as if on retail display. Down the hall, the master bathroom was big enough for an exercise bike and a large flat-screen television. Bernie and Ruth also had their own luxurious dens. His was all mahogany and decorated with a nautical theme and a leather sofa. There was a metal statue of a bull on the floor. Her den featured an equestrian motif, with Chinese lacquer and floral fabric for the sofa. While he was under house arrest, ABC News cameras from across the street saw both Madoffs relaxing in her den, watching television, surfing the Internet on an Apple computer, and then fluffing the thick pillows on the sofa before turning out the lights and going to bed.

The oceanfront home in Montauk, on New York’s Long Island, was their summer getaway place, purchased in the early 1980s. It is a sprawling estate with its own beach, on Old Montauk Highway. The Madoffs held a yearly summer party for the office in Montauk, but after one particularly raucous weekend, the event was shifted from the family home to nearby motels.

The office summer party began as a fishing trip in the 1980s, and it grew into a three-day beach extravaganza. Employees and their families were all put up at area beach motels. At the last party, in mid-July 2008, there was a beach bonfire dinner on Friday night. Saturday was spent on the sand, with clowns, games, and face painting for the children. Bernie and Ruth sat in beach chairs under a set of umbrellas, as if they were the king and the queen watching their loyal subjects from their thrones. On Saturday night, the festivities moved to the nearby Montauk Yacht Club for an elegant dinner under a huge tent, with a DJ playing music for dancing.

It was the social highlight of the year for the office, and it allowed Madoff to be seen as the great benefactor. Former employees remembered that Madoff loved to watch everyone dance as they stopped, started, and jumped up and down on the commands of someone with a loud whistle.

His messenger, Little Rick, remembers Bernie smoking joints during some of the beach parties, seemingly able to relax and forget for a moment the huge scam he was juggling. Many of those same people he so enjoyed watching on the dance floor, or playing with their children at the beach, invested their savings with Madoff. When they lost everything, they wondered how he could have done it to them when he had always appeared to be such a kind and thoughtful man.

“You would have liked him,” said one former Madoff trader whose savings were wiped out in the scam.

“We thought we were working for this wonderful man. We thought we were doing the right thing for our families. And we just thought that we were having a nice life. And we weren’t,” said Eleanor Squillari. “I never could picture him as wanting to hurt innocent people, but clearly he did, and clearly he knew he was doing it,” she said with anger as she recalled all the good times at the Montauk summer parties.

In the winter, the Madoffs spent their weekends, holidays, and long stretches in Palm Beach. It’s an easy commute from New York when a private jet is standing by. The Madoffs first bought a condominium in the area that some longtime residents in Palm Beach called the “Gaza Strip” because of the perception that most of the newcomers in the high-rise condos were Jewish, intruding on this WASP stronghold.

In 1994, as business was booming and the threat of an SEC investigation had passed, Madoff paid $8 million for a waterfront home on the very fashionable Lake Way. He was one of the first Jewish homeowners in that part of town.

The house at 410 North Lake Way seems to attract the notorious. It was previously owned by Herbert “Peter” and Roxanne Pulitzer, whose sensational divorce trial included testimony about sexual escapades in the house involving three-way partnerships and a long list of other titillating details. One witness testified that Roxanne Pulitzer had séances on her bed with a trumpet nearby, and she was soon described by the New York tabloids as “the Strumpet with the Trumpet.” Bernie and Ruth couldn’t top that for sensationalism, but their infamy may prove to be more enduring.

The Madoffs joined the Palm Beach Country Club, whose membership was mostly Jewish. All members were major contributors to charities—it was one of the requirements for membership. On their 2007 federal tax return, the Madoffs reported more than $8 million in charitable contributions to a variety of organizations, although much of it was given to foundations established in the name of Bernard L. Madoff and his son Mark Madoff. In 2007, The Madoff Family Foundation had more than $19 million in assets and distributed only $95,000, less than 1 percent.

The Madoffs met their country club’s definition of being charitable, although in their case they were giving away other people’s money. Ruth Madoff often used the corporate platinum American Express card to make charitable contributions in smaller amounts.

Members of the Palm Beach Country Club remember Madoff acting like royalty at the clubhouse. To know him, and be accepted by him as an investor, was to be in the elite of the elite. Multimillionaires in the club said they were hesitant to approach him directly for fear of causing offense. Someone had to recommend you.

“It’s almost like you’ve got to grovel. ‘Come to me, I’m the king,’” said former FBI agent Brad Garrett. “That’s extremely important to people with antisocial personality problems. ‘You’re going to have to do what I say and maybe I’ll help you and maybe I won’t.’”