The Madoff Chronicles: Inside the Secret World of Bernie and Ruth (9 page)

“He charmed the pants off of everybody, including everybody at the SEC. There came a point where the SEC would call me every year to have the interns come to take a tour of our office,” Eleanor said. “And we were more than happy to accommodate.” Bernie or Peter or one of Bernie’s sons would meet the interns and give them a full tour as a future generation of SEC auditors fell under the Madoff spell.

When SEC investigators were in the building to conduct routine audits, Madoff insisted that they not leave the conference room they had been assigned to. They were told that they could have anything they wanted, but Madoff also told Eleanor to keep an eye on them. Their comings and goings were closely noted and reported to Madoff. “If any calls came into the office for them, they would go through me and I would let Bernie know who was calling,” Eleanor said. “If they were gonna make copies, I would offer to do the copies for them and let Bernie know what they were copying.” Other than the men’s room, they were not allowed to go anywhere else in the office. They also weren’t permitted to have any “unauthorized” discussions with any employees.

Eleanor says that the SEC auditors accepted their role and did not complain.

Out of their sight, however, Bernie would be a nervous wreck, appearing to his secretary to be preoccupied, “just staring out the window, just seemed to be waiting, waiting for them to finish.”

Madoff knew better than anyone what was at stake. A simple slip or a glance at the wrong document could bring down his empire.

“He always said, ‘My reputation is my business.’ Of course, now I know, and I got to tell you, even for somebody who was sitting there staring out into space, he remained pretty calm. I find that pretty incredible. I don’t know how the man slept at night,” Eleanor said.

The investigation that began in 2005 and continued through all of 2006 and most of 2007 was a dangerous one for Madoff. At one point he thought he had been caught.

The SEC opened what it called an “initial inquiry” in late 2005. It turned into a full investigation in January 2006, based on serious allegations from an “independent fraud investigator” who claimed that Madoff’s investment strategy was nothing but a Ponzi scheme, and from the SEC’s own staff, which reported that “Bernard L. Madoff—mislead [sic] the examination staff” about the nature of his investment strategy.

The “independent fraud investigator” was Harry Markopolos, who first contacted the SEC Boston office about Madoff in May 2000 and continued to raise questions until he finally sent the SEC a twenty-page report entitled “The World’s Largest Hedge Fund is a Fraud” in 2005.

Markopolos became intrigued, and then puzzled, and then suspicious of Madoff’s unparalleled success. He worked for a Madoff rival who wanted Markopolos to figure out Bernie’s secret of success. When he and a colleague, Neil Chelo, tried to replicate trades using Madoff’s stated “split strike conversion” trading strategy, they found it was impossible.

As he analyzed the public filings, Markopolos could not understand why Madoff had only had $160 million in U.S. Treasury notes when, in other documents, he claimed his portfolio had $1.147 billion in U.S. Treasury notes. “Where did the missing $1 billion go???” he wrote to Chelo. “There’s more holes in the Madoff portfolio than all the golf courses in Florida.”

Markopolos and Chelo ran the numbers again and again and finally concluded the former chairman of the NASDAQ stock exchange was running a Ponzi scheme.

“In less than four hours I knew I had proved mathematically that [Bernard Madoff] was a fraud,” Markopolos said.

“You simply could not run that amount of money in that strategy and make those types of returns,” said Chelo.

Chelo even challenged Amit Vijayvergiya, the risk manager at Fairfield Greenwich, who told him that Madoff was just exceptionally skilled. “Bernie is long when the markets go up and out of the market when it is not favorable,” Chelo said he was told. “So for seventeen years, he has had perfect market timing,” wrote Chelo. Nobody, ever, had been that good.

Markopolos repeatedly submitted his findings and concerns to the SEC in Boston and New York. He later testified to Congress that “the SEC never called me. I had to call the SEC repeatedly in order to try to move the case forward and with little to no response.” He described the branch chief of the New York SEC office, Meaghan Cheung, as incompetent and rude. “Ms. Cheung also never grasped any of the concepts in my report, nor was she ambitious enough or courteous enough to ask questions of me. Her arrogance was highly unprofessional given my understanding of her responsibility and mandate.”

At the SEC offices, Markopolos’s strident tone and claims that his life was in jeopardy did not help his credibility. Some thought he was a “kook” and “obsessed with Madoff.”

Markopolos picked up on the skepticism at the SEC. “Every phone call to Meaghan Cheung made me feel diminished as a person,” he said.

Finally, in late 2005, after years of ignoring him, the SEC launched an initial inquiry based on Markopolos’s twenty-page report sent on October 25. In the document, Markopolos concluded that Madoff was conducting one of two frauds. Either he was “front-running,” using knowledge of other trades to place his trades first, or, “highly likely,” wrote Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” He wrote that three full years before Madoff would be arrested.

Even though the SEC could no longer ignore Markopolos’s well-documented findings, it still pulled its punches and continued to be skeptical that the esteemed Bernard Madoff could be a crook. Markopolos was characterized in the case file as “neither a BLM insider nor an aggrieved investor,” and members of the SEC said the commission only opened the investigation “in an abundance of caution.”

Instead of issuing subpoenas for Madoff’s documents and records, the staff only requested “voluntary production of certain documents,” trusting Madoff to comply fully and honestly.

According to e-mails discovered later by investigators, this gave Madoff plenty of time for the seventeenth floor to create reams of phony computer runs, which had the desired effect of fooling the SEC people in the office.

The SEC staff also decided to conduct “voluntary interviews” with Madoff and his assistant, Frank DiPascali, as well as Amit Vijayvergiya at Fairfield Greenwich, who was being extensively coached by Madoff about what to say. For some reason, Fairfield Greenwich taped the phone conversation and turned over the tape when subpoenaed by the Massachusetts Secretary of State, who launched his own investigation because of the huge losses suffered by the people in his state. The tapes provided yet another example of Madoff trying to manipulate others to help him deceive the SEC.

“Your position,” said Madoff at another point in the conversation, “is say, listen, Madoff has been in business for forty-five years, you know, he executes, you know, a huge percentage of the industry’s orders, he’s—you know, he’s a well-known broker. You know, we make the assumption that he’s—he’s doing everything properly.”

Madoff then instructed Vijayvergiya to keep away from answers that might reveal that Madoff was actually acting as an investment adviser. The SEC requires investment advisers to formally register, and Madoff had never done that in his five decades of serving as one. Now it was important to Madoff that he not be seen as the wizard who was making all the big decisions about what to buy and sell.

“I mean, the idea is that it’s—is that we’re not the one that’s making the decision how much to—I mean, you know—you know, we’re not the one that’s operating the fund,” Madoff coached Vijayvergiya.

At one point in the two-hour conversation, Madoff put the two men from Fairfield Greenwich on hold. He apologized when he came back on the line. “I’m sorry, if I get anymore solicitations for charity, I’m going to kill myself,” Madoff said.

Finally, Madoff told Vijayvergiya not to worry. That the SEC “has no idea what the hell is going on” in the rapidly changing financial landscape. “The guys come in to do a books and records examination and they—they whatchamacallit—you know, they ask you a zillion different questions and we look at them sometimes and we laugh, and we say, are you guys writing a book?”

Madoff’s contempt for the SEC investigators was deep. “These guys they work for five years at the commission then they become a compliance manager at a hedge fund now.”

“Right,” said the Fairfield Greenwich risk manager.

“Or they—they go work for proprietary trading desk. Nobody wants to stay there forever,” Madoff said. Madoff knew the power of greed.

Remember, said Madoff, “your [sic] best off just be, you know, casual.”

“We’re trying,” responded the Fairfield Greenwich lawyer Mark McKeefrey. “We’re trying to be cool and to just cooperate and get it over with and get them out of here.”

Vijayvergiya was interviewed on December 21, 2005, and the Fairfield Greenwich executives later gave Madoff a full report on the testimony. According to the Fairfield Greenwich lawyers, Vijayvergiya “did not follow Madoff’s implied suggestion, but rather told the SEC during the interview about his recent conversation with Madoff.” The Massachusetts secretary of state, William Galvin, says the transcript reveals a lot more than an “implied suggestion” from Madoff.

“They followed his instructions, they followed his coaching,” said Galvin. “If there’s anything remarkable about that conversation beyond his brazenness, it was how confident he was that he could steer them into deceiving the SEC.”

When the SEC interviewed Madoff “voluntarily” on May 19, 2006, he spun hours of tall tales that also easily deceived the SEC staff investigators. There were six or seven SEC investigators in the room, one of them wearing a vest with the initials “SEC” on the back, like the vests worn by agents on law-enforcement raids.

Madoff was asked by the investigators if it was correct that all of the trades for his investment advisory clients were done by the London office.

“Yes,” replied Madoff.

If the SEC staff had subpoenaed the records of the London office, it would have known this was a lie. But they did not question anyone in London, nor did they question Madoff’s brother, Peter, or his sons, Mark and Andy, who were on the board of directors of the London office.

“Who are the counterparties to the options contracts?” the SEC lawyer asked.

“They’re basically European banks,” said Madoff, who was not asked to provide specific names or validating documents.

“Who has custody of the assets?” the SEC asked.

“We do,” said Madoff. It was a particularly bold lie because there were no assets. No stocks. No U.S. Treasury notes. Investigators have since found e-mails in which Madoff’s right-hand man, Frank DiPascali, allegedly ordered the creation of documents showing that the assets were being held by Madoff.

“What is approximately the total amount of assets traded for these persons?” Madoff was asked.

“My guess would be something, a few hundred million dollars,” replied Madoff. At the time, if his clients’ monthly account statements had been added up, it would have indicated that the total amount of assets under management was in the tens of billions of dollars.

Madoff would later wonder “why didn’t I get caught sooner?” In an interview in prison with Joe Cotchett, a lawyer planning to sue the Madoff family, Madoff said that this SEC session was the closest he came to getting caught.

Madoff told Cotchett that at one point, the SEC investigators said they wanted to see the actual stocks and securities held by Madoff.

“Where are they physically?” the SEC lead lawyer asked.

“With the Depository Trust Company,” Madoff lied.

It was a Friday afternoon and Madoff told Cotchett that he expected he would be arrested by Monday after the SEC went to the Depository Trust Company and found that there were no stocks being held there for Madoff’s investors. “I was sure they got me,” Madoff said.

But the SEC lawyers never went to the Depository Trust Company, Madoff said. They took his word. At the time in early 2006, Madoff estimated to Cotchett he had approximately $20 billion in U.S. Treasury notes. If true, and if he had been caught then, his victims would have had $20 billion to split up, instead of the $1 billion that was found after Madoff’s arrest in 2008.

It was a hectic time for Madoff in 2006 and 2007 as he steered the SEC investigators away from the evidence that would have exposed his crimes. He did most of it without lawyers, who would have wanted to know the full story of what was happening on the seventeenth floor if they were expected to defend him. Madoff did hire one prominent Washington law firm, WilmerHale, to deal with the issue of his failure to register as an investment adviser. Company records show Madoff paid WilmerHale $40,000 for its legal services in dealing with the SEC. The WilmerHale lawyer working for Madoff, Brandon Becker, has since left the firm and declined to comment. His name continued to be in Madoff’s “little black book.”

WilmerHale general counsel, Bruce Berman, said the firm dealt solely with the “narrow issue” of whether Madoff should register as an investment adviser. The SEC confirmed in a July 2006 letter that WilmerHale’s representation was limited to the issue of registration, according to Berman. “He was careful in the way he used his lawyers,” said Berman. Madoff billing records show that Madoff discussed his “market basket strategy” with the lawyers, but Berman said Madoff never gave them any reason to believe he was engaging in fraud. “It is quite possible he lied to us in describing a trading strategy that didn’t exist.” Berman said the firm recommended that Madoff register as an investment adviser, and he did.

The SEC closed its investigation of Madoff on November 21, 2007. Over the course of twenty-three months, Madoff had pulled the strings like a master puppeteer, coaching Fairfield Greenwich, creating reams of phony documents, and lying through his teeth. It worked.

“The staff found no evidence of fraud,” concluded the SEC in the Case Closing Recommendation filed by the Division of Enforcement. The SEC staff was somehow able to reconcile its finding with Madoff’s earlier attempts to withhold information about customers’ accounts and “mislead” (sic) its investigators about the nature of his trading strategy.