The Wizard of Lies: Bernie Madoff and the Death of Trust (46 page)

Ruth Madoff was in an even more precarious situation in the months after her husband’s arrest. Her sons at least still had their young families, their in-laws, their closest friends. But her decision to stand by Bernie had cut her off from her sons and almost everyone else in her world except her husband’s lawyers.

Within a week, she was being insulted in print, caricatured in cartoons, and openly accused of criminality by some of Madoff’s victims. She was badgered by crowds of photographers on the few occasions she left the apartment to shop or, later, to pay a weekly visit to her husband in jail. The attacks on the Internet were especially virulent. One cultural anthropologist memorably observed that Ruth was “perceived as the succubus to Bernie’s incubus”—in plain English, a life-sucking female demon working hand in hand with an equally evil male demon.

Her only proven offense? Not walking out on her husband after his confession. According to a confidential source, she later explained her decision like this: “I had a love affair with someone for fifty years—I couldn’t abandon him, even though he had committed this terrible crime. If you had a grown child who committed a terrible crime, what would you do? Would you abandon him?” So she stayed, apparently staggered by the crime but somehow unable to desert the man who had committed it.

Some of her relatives and a few close confidantes privately stood by her, even though her husband had robbed them, but none could step up to defend her in public. Many lifelong friends shunned her, some because of constraints imposed by their lawyers and others out of justifiable fury over Madoff’s betrayal of them. She was unwelcome at her hairdresser’s, shunned by her florist, turned away at a favorite restaurant. Her own sons blamed her for not walking out on their father, although they did not believe she was his accomplice.

Overnight, a woman whose peers had never considered her lifestyle garish or vulgar found herself accused of greedy, gaudy, nearly criminal excess—as if the East Sixty-fourth Street apartment suddenly had become a full marble-clad floor at Trump Tower, and Montauk had started parading its wealth with more swagger than any of the Hamptons. There were frequent breathless stories predicting her imminent arrest even after the civil forfeiture deal leaving her $2.5 million was approved by Judge Chin.

By then, it looked as if she would lose even that. On July 29, 2009, Ruth Madoff was sued personally by Irving Picard, who demanded the return of $44.8 million that he claimed she had received from the Madoff firm in the six years before it was bankrupted by her husband’s crime. The complaint detailed more than a hundred wire transfers from the firm to her personal accounts or to companies in which she had invested. It did not cite any evidence that she had participated in the fraud or had even known about it.

After forfeiting $80 million to her husband’s victims, Ruth Madoff could not possibly meet the trustee’s demands. She did not have $44.8 million—she had exactly $2.5 million and now feared most of that would be required to settle the case with Picard.

Picard was not trying to get blood from a stone. He simply wanted a judgment against Ruth Madoff that would obligate her to pay any future earnings—from a memoir, for example—into the victims’ asset pool. Her lawyer, Peter Chavkin, was outraged and said so. Bernie Madoff could not comment publicly, but he was equally furious. Any inclination he might have had to cooperate with Picard—and, admittedly, little had been evident—nearly evaporated the day he learned that his wife had been sued. It would be more than a year before he would even meet with Picard’s legal team.

Could Ruth’s life become more humiliating? It could. In August, one of her husband’s victims, Sheryl Weinstein, the accountant and former chief financial officer of Hadassah who had spoken so eloquently about Madoff’s beastliness at his sentencing, published the memoir in which she claimed that she had had a brief sexual affair with him in the mid-1990s. The tell-all was studded with hurtful comments about Ruth and her sons—that she “had Bernie on a short leash” and “was intimidated by the social circles in which they were traveling,” and that Bernie’s comments about his sons made them seem “spoiled and obnoxious.”

Of course, it is possible that Madoff had affairs; he was an attractive, seductive man, and every marriage encounters some rocky terrain at times that can tempt spouses to stray. But, in a less hysterical environment, even this might have been seen as proof that Ruth did not know about her husband’s crime: What lunatic would risk cheating on a wife who knew he was a crook and could turn him in with one phone call, a wife whose lawyers certainly could have cut her a pretty good deal in exchange for nailing him? If Ruth were Madoff’s accomplice and caught him cheating, he risked far more than the mere fury of a woman scorned.

Time and again, Ruth Madoff’s lawyers tersely denied or refused to comment on the more outlandish allegations about her. But when Weinstein’s memoir was published, Chavkin saw a teachable moment and seized it. He said that Ruth had been totally unaware of both her husband’s crime and the purported affair.

If the affair really happened, Chavkin continued, it “stands as a powerful reminder to those who say Ruth must have known of her husband’s criminal scheme, that there are some things that some spouses—however close they are—do not share with each other.”

Still, the public’s appetite for dirt about this fragile sixty-eight-year-old woman seemed bottomless. More than eighteen months after Madoff’s arrest, ABC News ran a news story and a brief Web site video segment, complete with telescopic camera footage, trumpeting a hot new discovery: Ruth Madoff had changed her hair color from blond to light auburn, perhaps because she thought that would allow her to move incognito through Manhattan. Little chance of that, obviously.

There is absolutely no denying that Ruth, Mark, and Andrew Madoff would have deserved all these hardships—and worse—if they had indeed been guilty of participating in the vicious crime that shattered so many people’s lives, or even of suspecting it and keeping quiet. If they were accomplices, they deserved to be more than vilified in the media; they deserved to be indicted, convicted, sued, ruined, and imprisoned for life.

But in the oceans of ink and galaxies of cyberspace devoted to Ruth Madoff and her sons, few, if any, commentators asked the obvious question: What if they were innocent?

Perhaps they simply trusted Bernie Madoff, without question—as all his victims did. Perhaps they honestly assumed they were the lucky beneficiaries of his obsessively private but hugely successful hedge fund business, as the heirs of any Wall Street billionaire would. Perhaps, if they did ask him, he bamboozled them with the same phony paper trail that had fooled regulators for years.

That would be an uncomfortable truth.

Thousands of Madoff’s victims suffered enormously from his betrayal of their financial trust—indeed, their lives were nearly ruined. Although most still had their families and friends, they had lost their money, their place in society, their sense of security about the future, their confidence in their own judgment—they had lost it all in an instant, in a heartbeat.

Ruth, Mark, and Andrew Madoff lost all of those things, too—all their money, their social position, their sense of security, their confidence in their own judgment, any hope for a better future. And in the same heartbeat, they also lost almost every cherished relationship in their lives, including their connections to one another.

If Ruth Madoff was innocent, she learned in an instant that she had been married for nearly fifty years to a living, breathing lie. She lost every happy memory, every scrapbook moment of their life together. Behind his mask, the husband she still adored, her sweetheart since she was thirteen years old, was actually an accomplished criminal who had been stealing for decades from thousands of people, including almost every member of her family and virtually all of their friends.

If it was true that Mark and Andrew Madoff were innocent, they learned in a heartbeat that their father had lied to them with every lecture about life, every pretense of honesty, every gift, every holiday. He had lied with every luxury he presented as the harvest of his genius and hard work, when it actually was all just loot from his crimes, some of it stolen from them and from people they all loved. The firm they thought they were helping to build was the scene of a historic fraud. Some of the employees they had trusted may have been their father’s accomplices. He had destroyed their future, and he had also destroyed their past. They had nothing left of their father, not even their memories.

Overnight, they all became social pariahs, scorned, slandered, sued, even physically threatened. No one but hired hands would defend them in public and few would publicly admit feeling any pity for them at all. And that might well be the case for as long as they lived—even if prosecutors never filed any charges against them. Without a single documented fact placed into the record, the supreme court of public opinion had already indicted, convicted, and banished them all, without appeal.

And that was exactly what they deserved, if they were guilty.

Yet if Ruth, Mark, and Andrew were innocent, then all three of them were Bernie Madoff’s victims, too—just possibly, his most damaged victims. But this was not a possibility anyone was willing to acknowledge in public in the summer of 2009. It was not something many of Madoff’s victims would ever acknowledge.

The fog of suspicion that engulfed the Madoff family would be especially thick around Peter Madoff.

Peter worked at his older brother’s shoulder for almost forty years, filling his gaps and constructing the framework of technology that had made his firm so admired in the industry. Their offices were never more than a dozen steps apart. They supported each other through dreadful tragedies and celebrated great achievements together.

The intimacy of Peter Madoff’s relationship with his brother, both in and out of the office, left him more vulnerable to civil lawsuits and criminal investigation than any other member of the Madoff family. He had been a senior executive and the chief compliance officer for the Madoff firm, and the SEC could conceivably hold him accountable for failing to prevent or discover his brother’s crime, even if he was never officially accused of knowing about it. Regulators would argue that, as a lawyer and licensed securities professional, he could not have failed to discover the crime if he had been doing his job properly.

Peter had signing authority for one of the firm’s bank accounts until about 1985. Although he was not an accountant by training or a partner in the firm, he could have gotten access to the firm’s general ledgers and might have seen the creative accounting and emergency loans arranged during the cash crisis in 2005 and early 2006, despite the awful distraction of his son’s illness during those frantic months. And, as chief operating officer of Madoff’s investment advisory business, he arguably should have made it his business to know what was happening on the seventeenth floor, however much his brother tried to shoo him away.

Like everyone else in the family, Peter was the target of lawsuits by Madoff victims. In late March 2009, he was sued by Andrew Ross Samuels, the grandson of Martin J. Joel Jr., the longtime Madoff broker and friend. Peter was the trustee of the college fund that Joel set up for his grandson, a trust fund totally wiped out by Bernie’s fraud. Peter settled that lawsuit by midsummer, but by then he was tangled in court in New Jersey in a lawsuit filed by U.S. senator Frank Lautenberg’s two grown children and their family foundation, which had lost about $9 million in the Ponzi scheme.

That lawsuit argued that Peter, by virtue of his position at his brother’s firm, was responsible for the damage done by the fraud, whether he knew about it or not. The paperwork in the Lautenberg litigation revealed that Peter Madoff had repeatedly asserted his Fifth Amendment rights at a civil deposition, saying that the prosecutors had advised him that he was the subject of a criminal investigation. The most serious status prosecutors assign in a criminal case is to identify someone as a “target” of an investigation; being identified as a “subject” is less conclusive but, for Peter Madoff, no less worrisome.

How could Peter not have known? Sure, he was the perpetual kid brother, and he was never made a partner in the business. Still, how could Bernie have hidden his crimes from Peter for so many years? Even people who knew Peter Madoff and trusted his integrity had a hard time finding plausible answers to that question in the weeks and months after Bernie’s arrest.

Peter’s lawyer, John R. “Rusty” Wing, answered every inquiry by repeating what he had said from the first: that his client had not known about or participated in his brother’s fraud.

By the time the criminal investigation entered its third year, no criminal charges had been filed against Peter, nor had the SEC lodged a civil complaint over his handling of his supervisory duties at his brother’s firm. But, of all the Madoffs, it was Peter whose legal fate was surely the most uncertain.

The seesaw of the Lautenberg case perfectly captured that persistent uncertainty.

In September 2009 the presiding federal judge denied Peter’s motion to dismiss the case, citing factual disputes about whether he had exercised enough control within the firm to bear some of the blame for his brother’s fraud. Yet, in November 2010, the same judge denied the Lautenbergs’ motion for a summary judgment in their favor. It wasn’t enough, the judge said, to argue that Peter Madoff simply could not have been deceived or misled about what his brother was doing. The judge recognized that Peter’s position at the firm, “his many years of close association with his brother,” and the “gross nature” of the fraud “would cast substantial suspicion about Defendant’s culpable involvement in those activities.” But, he concluded, “suspicions based upon titles without specific evidence of conduct and responsibilities cannot be the basis of legal judgments.” So far, the judge said, that specific evidence had not been presented.

After suing Ruth Madoff for $44 million in July 2009, Irving Picard filed a clawback lawsuit on October 2 against Peter Madoff, Mark and Andrew Madoff, and Peter’s daughter, Shana, also a compliance officer at the defunct firm.

But that carefully drafted lawsuit—written by people who had issued hundreds of subpoenas for documents, conducted dozens of interviews, and examined more of Madoff’s internal records than anyone with the possible exception of the FBI—did not provide any evidence that Peter or any of the other family defendants had been Bernie Madoff’s accomplices.

To the contrary, the suit flatly said that the trustee was
not
accusing them of knowing about the fraud until Bernie Madoff confessed—although this careful phrasing was ignored by those convinced of the family’s guilt. Rather, the lawsuit simply asserted that the Madoff family executives should have discovered the fraud and could have prevented it had they not been “completely derelict” in their professional duties. “Simply put, if the family members had been doing their jobs, honestly and faithfully, the Madoff Ponzi scheme might never have succeeded, or continued for so long,” the trustee’s brief argued.

In a subsequent court filing, David Sheehan made the trustee’s position even clearer. The trustee “has not taken on the burden of proving criminal complicity or common law fraud by these defendants,” he wrote. “By so strenuously denying [that] they knowingly participated in the Ponzi scheme, the defendants have moved to dismiss a case the trustee did not bring.” Peter Madoff’s lawyers were quick to point out in court that “the trustee’s concession is significant: in his year-and-a-half investigation, he plainly has uncovered no evidence that Peter Madoff was aware of or involved in his brother’s fraud.”

It made no difference. Armchair analysts without access to any of the evidence available to Picard still assumed that all the family defendants, including Peter, had been Bernie’s accomplices, and they regularly predicted their arrest. Some victims publicly referred to the Madoffs as an organized-crime family.

Picard’s lawsuit sought the roughly $200 million that had been withdrawn from Madoff family accounts, as well as unspecified damages and the rejection of any claims the family might have for SIPC relief.

At the same time, all over the world, the giant feeder funds were being sued by their own investors—although Picard insisted he had first claim on any of those funds’ assets. The same was true for the minor feeder funds, smaller pension advisory firms, and individual investment managers, who were being sued across the country, in Europe, and in the Caribbean. As the stack of lawsuits mounted, the allegation was always the same: “You knew,
or you should have known
, that Madoff was a fraud.”

These lawsuits cited Harry Markopolos’s red flags and the early warnings that a few alert bankers and hedge fund consultants had shared with their clients. They cited the 2001 article in
Barron’s
, the occasional errors in the account statements, the impossibly consistent returns. Given all those warning signals, how could any financially sophisticated person have failed to suspect Madoff’s fraud?

But the line dividing those who should have been suspicious from those who couldn’t have been expected to detect Madoff’s fraud was extremely difficult to draw. It became a bitter joke on Wall Street that the Madoff case proved there was no such thing as a “sophisticated investor.” Even financially astute people could look at worrisome facts and draw reassuring conclusions, and even a worrisome conclusion could be explained as sloppy paperwork or obsessive privacy. It did not automatically point to a massive fraud. Apparently, trust in Bernie Madoff could blind a hedge fund manager as easily as it could blind a retired retailer’s widow.

Without doubt, there were signs that should have made even unsophisticated investors pause before investing with Madoff. The firm’s Web site did not mention his advisory services, his “hedge fund,” or his customer accounts. As the years went by, his account statements remained primitive, printed and mailed, while customers at Fidelity or Merrill Lynch could check their accounts online. Some were warned by Madoff not to talk about being his investors. For most of his career, he was not registered with the SEC as an investment adviser, surely something a small pension plan trustee or IRA investor would have noticed. True, he paid relatively modest returns—roughly equal to an S&P 500 index mutual fund—but his results were far less volatile and, hence, much safer than an index fund. How was that possible? If he was a lot safer than an index fund, shouldn’t his returns have been a lot lower?

As Madoff’s victims sought redress, the question of who should have known would split the world cleanly into two groups. One group looked at Madoff’s stature in the industry, his long track record with his investors, his obvious wealth, and his phony but immensely convincing paper trail—voluminous account statements, simulated DTCC screens, bogus trading terminals for conducting fake trades—and asked, “How could his victims have ever figured it out?” The other group looked at the red flags—the anomalies, the impossible scale, the implausible consistency, the secrecy, the whispered warnings on Wall Street—and asked, “How could his victims
not
have known?”

In truth, the answer to whether you should have known depended on who you were, what your personal circumstances were, how much you trusted Wall Street—indeed, how much you trusted life in general. The world wanted a single answer; in fact, there were thousands, each different, each debatable, and each utterly academic in the aftermath.

It was indisputable that the SEC should have caught Madoff, and would have, except for its woefully inadequate investigative skills. But it is equally true that all his middle-income victims could have protected themselves from ruin simply by sticking with familiar heavily regulated investments, such as mutual funds and bank CDs, and avoiding the less regulated hedge fund environment—not to mention the totally undocumented promises of casual feeder funds such as Avellino & Bienes.

Still, all investors who are honest with themselves will realize that Madoff’s less sophisticated middle-class victims probably were no less diligent in doing their financial homework, or any more trusting in picking their investments, than most investors were in those galloping, giddy days before the 2008 meltdown. So many people were trying to manage their retirement savings in their spare moments, with too little training and too many other things to do. So they substituted trust and gut instincts for the fine print and legalese that regulators expected them to study. Some trusted Vanguard and Citibank, and others trusted Madoff—but it was a leap of faith for everybody.

That should have worried everyone much more than it apparently did.

At 2:45
PM
on Tuesday, August 11, 2009, Frank DiPascali entered a federal courtroom in downtown Manhattan. Smiling and seeming relaxed, he embraced members of his legal team, led by Marc Mukasey, and shared a few wisecracks with one of the attorneys.

At 3:05
PM
, Judge Richard J. Sullivan strode to his high-backed black leather chair on the bench. Tall and attractive, Sullivan had a deep, mellow voice that must have mesmerized juries when he was a federal prosecutor. In simple terms, he explained the purpose of the hearing to the two dozen Madoff victims in the courtroom.

“On Friday, I received notice that Mr. DiPascali was waiving indictment,” he said. The defendant had agreed to plead guilty to ten separate criminal counts, including conspiracy to commit securities fraud and tax evasion.