Bernard Madoff $50 Billion Ponzi Scheme

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' Bernie's world'

http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/index.htm?postversion=2009042406

Today, the radio announcer intoned solemnly, the New York Mets have lost one of their greatest fans: Roger Madoff. Bernard Madoff's 32-year-old nephew, Peter's son, had died on April 15, 2006, from complications related to leukemia. The announcement, aired on the Mets' radio station, was an unusual acknowledgement of a fervent Mets fan. It also reflected the decades-long bond between the team's owners, the Wilpon family, and the Madoffs. (The Wilpons also had millions invested with Madoff, and lost the money.)

Roger's protracted illness shook the entire Madoff family. It was especially devastating for his sister, Shana, a compliance lawyer at the firm. Roger and Shana "were like stamp and envelope," recalls one employee. "You couldn't separate them." Peter Madoff was in even worse shape. Peter had been a frequent visitor to the hospital, bringing bagels for the nurses and newspapers for his son. A doctor once entered Roger's hospital room to find Peter tenderly applying ointment to his dying son's feet. Chauffeured home in his BMW on the Long Island Expressway, Peter would weep quietly in the back seat.

Cancer reached deep into the Madoff family. Peter had survived a bout of bladder cancer in 2000, and Bernie's son Andrew was in treatment for lymphoma. Another nephew, who also worked at the firm, was preoccupied with his young daughter's leukemia treatment. "We should curse the Madoff bloodline," Roger wrote in a posthumously published book on his struggle with the disease.

As Roger got sicker and sicker, the family channeled most of its philanthropy, which swelled into eight figures, into cancer research. "I hadn't realized the extent of the wealth that existed there," Roger noted with some surprise in his book.

By then, Bernie Madoff's "investment business" had ballooned. According to research by Harry Markopolos, it grew from as much as $7 billion in 2000 to as much as $50 billion by the end of 2005. What had started decades before as a small-time recruiting effort by Madoff agents at country clubs had gone global. Massive international institutions such as Grupo Santander, Fortis Bank, and Union Bancaire Privée were all funneling billions -- sometimes through intermediaries -- to Madoff, lured by the call of steady 10% to 12% returns. Even one of the world's biggest sovereign funds, the Abu Dhabi Investment Authority, ended up sinking tens of millions of dollars into the Ponzi scheme run by the guy from Queens on the Lipstick Building's 17th floor.

"Bernie's world" is the phrase Bob McMahon uses to describe the operations on 17. McMahon, a project manager specializing in information technology, was brought in to help rationalize the company's systems from 2007 to 2008. The situation he found was odd, especially for a firm whose legitimate business had been built on software prowess.

Traders had begun grousing about the firm's proprietary MISS software and the decades-old mainframe it ran on. The system was designed to trade equities; reconfiguring it to trade anything new was cumbersome. But replacing the mainframe wasn't so simple, says McMahon. It would also entail replacing a venerable IBM server, the AS/400, which served as the investment business's main computer backbone.

"Managing the AS/400 was getting to be a very, very hands-on, manual process," recalls McMahon. But "Bernie never wanted to get rid of [it]. That was the books and records of quote 'the company.'"

There were other idiosyncrasies in Bernie's world that might have raised suspicions. Around 2002 he proposed eliminating e-mail throughout his firm but was persuaded not to. Lots of Wall Street firms were talking about restricting it in the wake of corporate scandals featuring incendiary messages, but Madoff ultimately did the opposite of what you'd expect. He allowed e-mail for staffers at his trading business -- the one the SEC regulated -- while abolishing it for the people working in the unregulated investment business on 17.

Madoff took another step. He decreed that e-mails would no longer be stored electronically. First he decided that each of the firm's e-mails would be printed and then stored in boxes, but he was persuaded by others that such a plan was impractical. In the end, Madoff ordered that old e-mails be transferred to microfiche, a cumbersome process that costs much more than archiving the records digitally. Why would Madoff want to increase his archiving costs? Perhaps it had to do with the fact that microfiche is orders of magnitude more difficult to search than electronic records.

The 17th floor seemed like a galaxy far removed from the rest of the company. Most of the people there were a different breed from the overachievers upstairs. Many had arrived at Madoff's firm straight out of high school. "This was the only world they ever knew," says McMahon. "It was the old analogy of mushrooms: You keep them well fed and happy in the dark."

For weeks at a time, it was a torpid operation. Employees tended to disappear for long stretches of time -- for lunch, for vacation, for anything. Then, six to eight times a year, a frenzy would erupt. Madoff's purported investing strategy was the "split-strike conversion." We'll spare you the details -- they seem beside the point, given that Madoff didn't actually execute this strategy -- other than to note that he claimed it consisted of a "basket" of 35 or so large-company stocks hedged with stock options. In theory Madoff's investing genius consisted of knowing the best time to enter or leave the market. Ostensibly, every so often Madoff's team was "buying" or "selling" massive quantities of stocks and options. Each time that happened, the 17th floor team would spring into action and spend all-nighters churning out trade confirmations for thousands of customers.

Presiding over this process was Frank DiPascali. Raised in the blue-collar Queens community of Howard Beach, he was a high school graduate who had arrived at Madoff's firm in 1975 -- and then spent the next three-plus decades there moving through an unusual combination of legitimate jobs (at various times he was a gofer, a stock trader, and the person who coordinated the firm's move to new offices in 1987) before assuming his ultimate role as the chief lieutenant in Madoff's investment business.

DiPascali shared his boss's love of the sea, and like Madoff, he spoke with a distinct New York accent. In his mouth, the word "three" had no "h." DiPascali came to work in an incongruously starched version of a slacker's uniform: pressed jeans, a sweatshirt, and pristine white sneakers or boat shoes. He could often be found outside the building, smoking a cigarette.

Some customers found DiPascali off-putting. "I'd call Madoff and they would put me on with Frank," recalls Carl Englebardt, a longtime investor. "Quite frankly, when I was talking to him, I thought I was talking to someone in the Mafia. He didn't sound very professional to me. He never inspired a lot of confidence."

He may not have looked or acted like a financier, but when giant customers like Fairfield Greenwich came in to talk, DiPascali was usually the only Madoff employee in the room with Bernie. Madoff told the visitors that DiPascali was "primarily responsible" for the investment operation, according to a Fairfield memo.

As the business ballooned to ever more massive proportions in its final years, DiPascali complained of overwork. He even begged Madoff not to add more customers. "No more! No more!" he was heard pleading on several occasions. But the boss kept signing them up until the very end.
'I'm a steady and true investor'

The storm broke in 2008. The markets began a calamitous and accelerating decline. With their non-Madoff investments pulverized, more and more customers turned to what they thought was their most solid holding: They began requesting withdrawals from Madoff's fund.

For a time, Madoff seemed to defy the worst collapse since the Great Depression. While double-digit monthly drops suddenly became common, Madoff was somehow eking out a heroic positive return, ostensibly 4.5% through October.

Madoff's investors nervously hung on the firm's every word in e-mails that read now as tragicomedy. On Sept. 15, when Lehman Brothers collapsed and Merrill Lynch announced its sale, Fairfield Greenwich executives circulated e-mails describing Frank DiPascali's reassurances that Madoff wasn't using those firms as counterparties and his assertion that Madoff did "not want to sell into weakness." On Nov. 4, another Fairfield executive reported that DiPascali had told him that "they have their buying hats on."

Madoff appeared to be his smooth old self. In November he sat down with members of the investment committee for the American Jewish Congress, one of the nation's oldest Jewish philanthropic organizations. The group's president, Richard Gordon, asked how Madoff could be making money in one of the worst markets in history. "I could explain it to you, Richard, but it's really complicated," Madoff replied evenly. "I'm a steady and true investor." He gently tried to put Gordon on the defensive. "Aren't you happy with the returns?" Madoff asked. Gordon left the meeting as confused as he had been when he arrived. But he had no reason to doubt Madoff's integrity, he says, or to imagine there was a problem. Madoff, he says, was "extraordinarily avuncular -- calm, direct, and to the point."

Madoff was keeping up his façade at work. But at home his desperation had begun to show. In November and early December, he asked his wife to make two transfers totaling $15.5 million from a brokerage account to her personal bank account so that the cash would be at hand. Madoff had never made such a request before, two sources say. Ruth has insisted her husband didn't inform her of the fraud until the day before he was arrested. She maintains, according to one of these sources, that Bernie said he needed the cash to pay customer redemptions.

By this point, $15.5 million was a pittance compared with what he needed. As of early December, investors had demanded the return of some $7 billion. If Madoff truly withdrew his wife's money for that purpose, he had reached the point where he was rooting around in the sofa cushions for loose change.

The man once famous for rebuffing potential investors was now openly soliciting the ultrawealthy: Ken Langone, the Pritzker family, and others were invited to invest. And Madoff leaned on some of his most loyal investors for cash infusions. Carl Shapiro ponied up $250 million. Some of the principals at Fairfield Greenwich added another $15 million. But it just wasn't enough.

On Dec. 8, Madoff's cool veneer finally cracked. He berated Jeffrey Tucker of Fairfield Greenwich over that fund's inability to replenish the money that had been withdrawn from the firm. He threatened to close Fairfield's account and warned that there were plenty of other institutions that could take its place. His traders, Madoff said, were "tired of dealing with these hedge funds."

There is no better indication of the hold that Madoff exerted over his investors than Tucker's response. Tucker, after all, was co-founder of a $6.6 billion investor in Madoff's firm. In normal circumstances, a client of that magnitude would expect to be coddled. Instead, Tucker fretted about what he could do to placate Madoff. "We best talk," he told colleagues in a worried e-mail that day. "I think he is sincere."

Two days later Tucker sent a pleading letter to Madoff. He apologized for not keeping him better informed. "Our firm is very dependent on its relationship with your firm," he continued. "You are our most important business partner and an immensely respected friend ... Our mission is to remain in business with you and keep your trust." Tucker's lawyer, Marc Kasowitz, says his client "was deceived by Bernie Madoff just like the SEC and hundreds of other very sophisticated investors."

Madoff may never have seen the letter, for that was the day his fraud came apart. That afternoon Madoff drove up to his apartment with his two sons. There, as the world would soon learn, he apparently confessed his entire crime.

Afterward the sons proceeded to their lawyer's office, setting in motion the chain of events that led to their father's arrest. Madoff himself came downstairs a few minutes after the sons. According to one person who saw him then, he was as "calm as ever." Madoff returned to the office and then joined his wife at the company's holiday party at a local Mexican restaurant. According to employees who were present, Madoff seemed his usual self. But Mark and Andy never showed up.

http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/index.htm?postversion=2009042406