As his black Mercedes S550 made its way north from Manhattan's federal courthouse to his apartment the afternoon after the holiday party -- the day he was arrested -- Bernie Madoff told his driver nothing about why he had been at the judicial complex for hours. It wasn't uncommon for Madoff to be silent, and only later did the driver grasp the meaning of the one observation Madoff did make: "All my life, I've watched the evening news. But tonight I sure won't be watching."
Within hours, Bernard Madoff, wise man of Nasdaq, had been transformed into Tabloid Bernie, the $65 Billion Villain. Almost as fast, Madoff's life collapsed into isolation. Only two people would visit him and his wife during his three months under house arrest, and neither was a close family member. Mark and Andy haven't called since Bernie's arrest. "They've had no desire to talk to their parents," says a person close to the sons.
Dozens of agents from the Federal Bureau of Investigation, the SEC, and the Securities Investor Protection Commission descended on the offices of Madoff's firm. The 17th floor was designated a crime scene, and guards were posted. The staffers who worked on 17 were herded to a small conference room near the coffee machines on the 18th floor, where they sat nervously in what some of them called "office arrest." One by one they were taken to be questioned by the FBI. The company's computer and e-mail systems were shut down, so dozens of staffers passed the time watching movies, playing cards, and talking.
Several days after the feds had locked down the office and told staffers not to remove anything, Peter instructed several employees to carry four boxes and two shopping bags filled with documents downstairs, where his driver was waiting with his own Ford Explorer (the company vehicles were now off-limits). The driver was halfway to the offices of Peter's lawyer when the authorities discovered what was happening. An agitated federal agent called the driver and told him to turn around immediately. When the driver arrived back at the Madoff offices with his cargo, a teary Peter told him, "Sorry I got you involved in this." Peter was assigned an armed FBI "escort" to accompany him wherever he went on the premises that day and later was told not to return at all. A lawyer for Peter Madoff, John Wing, calls the incident "a misunderstanding" between Madoff's office and the FBI over "the removal of his personal files and other personal items." Where's the money?
The Bernie Madoff who appeared in court in March was a diminished figure, a sad version of the vital, regal person he'd been just a few months before. Gone was the smirk that some had detected in the videos of him right after his arrest. From 10 feet away in the jury box, where a handful of reporters were seated, one could detect what looked like turbulent currents under the placid exterior. Even with his eyes closed, Madoff blinked furiously at moments, his eyebrows spasming above the top of his rimless glasses. His hands betrayed his tension: At times he gripped and twisted his pen; he cracked his knuckles; he steepled his hands so hard that his fingers trembled.
The impression was of a mighty attempt at control. And somehow, Madoff managed to preserve a modicum of dignity, even as he pleaded guilty to 11 charges of fraud, theft, money-laundering, and perjury and absorbed the anger directed at him from the audience, where his victims watched. One of them addressed Madoff directly: "I don't know whether you had a chance to turn around and look at the victims," he said angrily. Madoff hesitated and then wheeled awkwardly in his seat as the judge admonished the victim for speaking to Madoff rather than to the court.
When the judge remanded him to custody that day, Madoff silently pulled his shoulders back and allowed himself to be handcuffed. The cuffs, which gleamed as if freshly polished, seemed somehow suited to the fastidious elegance of the defendant. And then Madoff was gone, likely never to take another step on free soil. He awaits sentencing on June 16. And even if he doesn't get the maximum 150 years, whatever he does receive will effectively be a life sentence for a 71-year-old.
The federal investigation proceeds. Less than a week after Madoff's plea, the firm's outside accountant, David Friehling, was charged with criminal fraud for years of signing off on phony statements. (Friehling's lawyer, Andrew Lankler, declined to comment.) The charges did not assert that Friehling knew of the Ponzi scheme. Friehling now appears to be trying to negotiate a deal with prosecutors.
Investigators continue to try to locate Madoff assets -- a bit more than $1 billion has been discovered so far, with specialists now fanning across the world's offshore locations. The court-appointed trustee, whose job it is to gather assets, has hired lawyers in the Cayman Islands, Gibraltar, and Luxembourg, with more jurisdictions likely to come. They're uncovering $50 million here, $75 million there. What isn't going to happen is the miraculous discovery of a giant vault with $65 billion in cash. That's because that $65 billion -- the most widely cited figure for the size of Madoff's heist -- is a fiction and always was. It's a tally of the stated value of all the account statements of every Madoff account holder as of Nov. 30. The total includes, in some cases, decades of fabricated returns. According to experts, the actual amount investors gave to Madoff over the years is probably closer to $20 billion. But even that outlandish sum will never be found; it was chipped away year after year after year. That, after all, is the definition of a Ponzi scheme: Most of the cash put up by new investors went to pay the old ones.
Put another way, if Madoff had still enjoyed access to large sums of cash in December, he would have continued paying his investors. The collapse of a Ponzi scheme means there is no money left. In the end, victims will likely collect only a tiny fraction of what they lost -- and some substantial portion of that will come from other Madoff investors who had appeared lucky enough to pull their cash out before the entire edifice crumbled.
This is arguably the most prominent financial crime ever, and the prosecutors -- who declined to be interviewed -- have to be aware that the public's rage won't be placated with the conviction of Bernie Madoff. So it will likely come as a huge relief to the Madoff family that DiPascali is telling prosecutors they were not participants in the scam. After all, nobody, apart from Bernie Madoff, is better positioned to describe who took part. But it's worth remembering that such a statement represents less than a full exoneration.
One of the most widely made assumptions is that various family members "had to know" what was going on. Frank DiPascali, of course, is not in a position to say what the family knew or didn't know. Representatives for all the family members have declared their innocence.
Even if Bernie Madoff never informed his family members of the fraud, there were a number of events that could have -- perhaps should have -- raised their suspicions. As the people in charge of the legitimate Madoff businesses, Peter, Mark, and Andy knew or should have known, for example, that some $250 million had been transferred from the Madoffs' London office to their business. That cash, Madoff later admitted, was money laundered from the illegitimate operation to the legitimate one. (Those funds, it turns out, were crucial. In court, prosecutor Marc Litt asserted that "at times, his [legitimate] firm would've been unable to operate but for the cash generated by this Ponzi scheme.") A lawyer for Mark and Andy Madoff says, "They had no knowledge whatsoever that their father engaged in any fraudulent activities, including allegedly fraudulent transfers of funds through Madoff Securities International in London."
Whatever happens, Peter, Ruth, and to a lesser extent the other Madoffs have many years of civil litigation to look forward to as various individuals, funds, and government entities try to recover whatever assets they can find.
As for DiPascali, his potential testimony may provide some good news for at least one feeder fund. According to a person familiar with the matter, DiPascali has no evidence that Fairfield Greenwich's top brass knew of the scam.
But DiPascali could spell trouble for certain key Madoff customers. DiPascali, according to this source, admits manipulating the returns of several clients, jiggering them up or down -- phantom gains added or reduced -- to suit their needs. Says the source: "This is a group of inside investors -- all individuals with very, very high net worths who, hypothetically speaking, received a 20% markup or 25% markup or a 15% loss if they needed it." The investors would tell DiPascali, for example, that their other investments had soared and they needed to find some losses to cut their tax bills. DiPascali would adjust their Madoff results accordingly.
According to this source and a second one familiar with the investigation, these special deals for select Madoff investors have become a central focus for federal prosecutors. The second source describes the arrangements as "kickbacks" and "bonuses." A spokesperson for the U.S. Attorney declined to comment. But a little-noticed line in a public filing by the prosecutors in March supports at least part of these sources' account. The document that formally charged Madoff with his crimes asserted that he "promised certain clients annual returns in varying amounts up to at least approximately 46 percent per year." That was quite a boost when most investors were receiving 10% to 15%. It appears to reflect the benefits that accrued to those who helped bring large sums to Madoff.
As for Madoff himself, he has traded a 4,000-square-foot penthouse for a 76-square-foot jail cell. The bespoke charcoal suits have been replaced by an orange jumpsuit. Even so, one person close to the family says he's bearing up well in jail. He's exercising. He is reading a lot of books. "He makes the best of it," adds this person, who says that Madoff looks surprisingly good these days. Perhaps that's because for the first time in decades, Madoff has no secret weighing him down.
That burden has been passed. To his family members, whose name is eternally blackened whether or not they were involved. To his former employees, who lost their livelihoods and are now struggling to get new jobs with the taint of his company's name on their résumés. And most of all, to his victims, many of whom are struggling to make ends meet. Madoff left a historic mess. It's going to take a long time to clean it up.
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