Bernie Madoff

• 1. Introduction

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  Bernie Madoff told his own sons in December 2008 that the fund he ran was "just one big lie." Bernard Lawrence Madoff was an American financier, born in 1938, who had once served as chairman of the Nasdaq stock exchange. He admitted to masterminding the largest Ponzi scheme known to history, a fraud estimated at $65 billion. A Ponzi scheme pays older investors with money from newer ones instead of real profits.

  The confession came from a man at the center of the industry, not its fringe. His brokerage ranked among the biggest market makers in the country, and he sat on the boards of respected charities and trade groups. How does a trusted market insider keep a fraud running in plain sight? Why did regulators who investigated him repeatedly fail to stop it? And who ended up paying when the lie finally collapsed?

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• 2. Lifeguard to Market Maker

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  Bernard Madoff was born on the 29th of April 1938 in Brooklyn, New York City. His father, Ralph, worked as a plumber and stockbroker, and his mother was Sylvia, born Muntner. His grandparents had emigrated from Poland, Romania, and Austria. His siblings were Sondra Weiner and Peter. The family later moved to Queens, and Madoff graduated from Far Rockaway High School in 1956. Friends from his youth remembered a thin, outgoing boy who joined community center activities and ate ice cream at the local five-and-ten.

  A single year at the University of Alabama, where he joined the Sigma Alpha Mu fraternity, came before a transfer to Hofstra University. At Hofstra he earned a bachelor's degree in political science in 1960. He also started at Brooklyn Law School but left after one year. On the 28th of November 1959 he married Ruth Alpern, whom he had met at Far Rockaway High School.

  The money for his first company came from jobs far from Wall Street. Madoff had saved $5,000 working as a lifeguard and installing irrigation sprinklers. His father-in-law, the accountant Saul Alpern, added a $50,000 loan. In 1960 Madoff used both sums to found Bernard L. Madoff Investment Securities as a penny stock broker-dealer. Alpern also steered a circle of friends and their families toward the new firm. Carl J. Shapiro became an early customer, investing $100,000.

  The firm began by quoting bid and ask prices through the Pink Sheets of the National Quotation Bureau. To compete with firms that traded on the floor of the New York Stock Exchange, it turned to computers to spread its quotes. After a trial run, the technology the firm helped develop became Nasdaq, the National Association of Securities Dealers Automated Quotations system. Madoff Securities grew into a third market provider. It executed orders directly from retail brokers and bypassed the exchange specialist firms. At one point it was the largest market maker at Nasdaq, and in 2008 it ranked sixth among market makers in S&P 500 stocks. After 41 years as a sole proprietorship, the firm incorporated in 2001 as a limited liability company with Madoff as its only shareholder.

  Payment for order flow brought Madoff both a reputation and criticism. In this practice a dealer pays a broker for the right to execute a customer's order. Madoff has been called its first prominent practitioner, and critics labeled the payments a "legal kickback." Some academics questioned the ethics. Madoff argued that the payments did not change the price customers received. He likened them to a supermarket display of stockings paid for by the manufacturer, and he called order flow "grossly overrated."

  Madoff also held a leadership role in the industry's own governance. He chaired the board of directors of the National Association of Securities Dealers and served on its board of governors. His firm had a second division, an investment management and advisory business, that it chose not to publicize. That quiet division would become the focus of the fraud investigation.

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• 3. Backdated Trades

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  On the 17th floor of the Lipstick Building, Frank DiPascali and his team ran the machinery of the deception. Madoff's brokerage occupied the 19th floor, while the 18th held the main entrance and conference room. Each day the team watched the closing price of the S&P 100. They picked the best-performing stocks and assembled bogus baskets of them to serve as the basis for false trading records.

  Madoff told clients that these records came from a "split-strike conversion" strategy, in which he bought blue-chip stocks and took options contracts on them. The team often placed its fake trades at a stock's monthly high or low. That timing produced the impressive returns they advertised. On occasion they slipped up and dated trades on weekends and federal holidays. Nobody ever caught the mistake.

  Office workers Annette Bongiorno and Joann Crupi handled much of the paperwork, according to an SEC indictment. Madoff decided the return each customer should receive. A back office worker then entered a false trade report with an earlier date, followed by a false closing trade sized to produce exactly the profit required. Prosecutors say Bongiorno used a computer program built to backdate trades and manipulate account statements. They quote her writing to a manager in the early 1990s, "I need the ability to give any settlement date I want." In some cases, returns were allegedly fixed before the account was even opened.

  Secrecy mattered because a genuine split-strike strategy has natural limits. Over the years Madoff urged his investors to keep quiet about their relationship with him. He knew that if the size of his holdings became public, people would ask whether he could trade at that scale without moving the market. They would also ask whether enough options existed to hedge his stock purchases. As early as 2001, Harry Markopolos worked out that Madoff would have needed to buy more options on the Chicago Board Options Exchange than actually existed. The hedge-fund manager Suzanne Murphy declined to invest because she did not believe the trading volume could support his claims.

  Behind the statements there were no trades at all. In his March 2009 guilty plea, Madoff admitted that he deposited client money into a bank account instead of investing it. When clients wanted their money, he told the court, "I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds." Chase and its successor, JPMorgan Chase, may have earned as much as $483 million from that account.

  The date the scheme began is disputed. In his plea Madoff said he started in 1991 and never made a legitimate investment with client money afterward. Prosecutors believed it was underway in the 1980s, and DiPascali said he knew by the late 1980s or early 1990s that the advisory business was a sham. An ex-trader admitted in court to faking records for Madoff since the early 1970s. One investigator reconstructing the scheme believes it was well under way by 1964. Madoff himself reportedly told an acquaintance soon after his arrest that it began "almost immediately" after the firm opened.

  Bongiorno spent more than 40 years at the firm, longer than anyone except Ruth and Peter Madoff. She told investigators that she was doing "the same things she was doing in 2008" when she first joined. Outside the firm, a financial analyst had already started checking the arithmetic.

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• 4. Warnings Ignored

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  In 1999 the financial analyst Harry Markopolos told the SEC he believed Madoff's claimed gains were legally and mathematically impossible. By his own account, it took four minutes to see that the numbers did not add up and one more minute to suspect fraud. After four hours of failing to replicate Madoff's results, he believed he had proved it mathematically. The SEC's Boston office ignored him in 2000 and 2001. Meaghan Cheung at the New York office did the same in 2005 and 2007, when he presented more evidence. Markopolos later co-wrote No One Would Listen with Gaytri D. Kachroo, the leader of his legal team. The book describes ten years of effort to alert the government, the industry, and the press.

  The journalist Erin Arvedlund publicly questioned Madoff's reported performance in 2001. Doubt ran through the industry as well. None of the major derivatives firms traded with Madoff, because they did not believe his numbers were real. No major Wall Street firm invested with him, and several senior executives suspected his claims. Others found it inconceivable that his documented auditor could serve such a vast operation. That auditor was a three-person firm with only one active accountant.

  The SEC first touched the case in 1992. Two people complained about investments made with Avellino & Bienes, the successor to Saul Alpern's accounting practice. Alpern, Frank Avellino, and Michael Bienes had raised money for Madoff for years. Avellino returned the money to investors, and the SEC closed the case.

  In 2004 Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, found numerous inconsistencies in her review of Madoff. She told her supervisor, Mark Donohue, and recommended further questioning. Donohue and his boss, Eric Swanson, told her to stop, hand over her work, and investigate the mutual fund industry instead. Swanson had met Shana Madoff in 2003 while investigating her uncle's firm. He left the SEC in 2006, became engaged to her, and married her in 2007. A spokesman said Swanson "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship" with Shana Madoff.

  The SEC's inspector general, H. David Kotz, later counted six investigations of Madoff since 1992. He found that they were botched through incompetent staff work or neglect of allegations from financial experts and whistle-blowers. At least some investigators doubted whether Madoff was trading at all. The agency drew criticism for its lack of financial expertise and due diligence. A separate review by David C. Williams, inspector general of the United States Postal Service, questioned Kotz's own work. Kotz was a "very good friend" of Markopolos, and investigators could not determine when the friendship began.

  Madoff offered his own verdict from prison custody before sentencing. He told Kotz he could have been caught in 2003 and said investigators behaved like "Lt. Columbo" without ever asking the right questions. "They never even looked at my stock records," he said. He added that a check with the Depository Trust Company would have exposed a Ponzi scheme at once. In an interview on the 17th of June 2009, he called SEC Chairman Mary Schapiro a "dear friend." Abroad, the Central Bank of Ireland also missed the fraud, even though Madoff's use of Irish funds forced him to supply large amounts of information.

  Inside the industry, the Madoff family was honored rather than doubted. The Securities Industry and Financial Markets Association, known as SIFMA, gave awards in 2008 to Peter and Andrew Madoff for "extraordinary leadership and service." From 2000 to 2008 the Madoff brothers gave $56,000 directly to the group. Bernie and Ruth Madoff also gave about $240,000 to federal candidates, parties, and committees between 1991 and 2008. That included $25,000 a year from 2005 through 2008 to the Democratic Senatorial Campaign Committee. After the arrest, the committee returned $100,000 to Irving Picard, the bankruptcy trustee, and Senator Chuck Schumer returned almost $30,000.

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• 5. The Final Week

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  In the first week of December 2008, Madoff confided to a senior employee that he was struggling to meet $7 billion in redemption requests. Bloomberg News identified that employee as one of his sons. For years Madoff had simply deposited investor money in his JPMorgan Chase business account and paid redemptions out of it. He scraped together enough for a payout on the 19th of November. Several longtime investors added cash, but by the week after Thanksgiving it was clear there was not enough to begin meeting the remaining requests.

  The Chase account tells the story in numbers. It held over $5.5 billion in mid-2008 and only $234 million by late November. Banks had stopped lending, so Madoff could not borrow his way out. On the 3rd of December he told his longtime assistant Frank DiPascali, who had overseen the fraudulent advisory business, that he was finished. On the 9th of December he told his brother Peter about the fraud.

  That same day Madoff told his son Mark that he planned to pay $173 million in bonuses two months early. He explained that recent profits made it a good time to distribute them. Mark told Andrew, and the next morning the brothers went to their father's office to ask how he could pay staff bonuses while struggling to pay clients. They then traveled to Madoff's apartment, with Ruth Madoff nearby. There Madoff told them he was "finished" and had "absolutely nothing" left.

  According to the sons' attorney, they then reported their father to federal authorities. Madoff had meant to wind down his operations over the rest of the week before having his sons turn him in. He directed DiPascali to use the remaining money in the business account to cash out the accounts of several family members and favored friends. But Mark and Andrew left the apartment and immediately contacted a lawyer. The lawyer put them in touch with federal prosecutors and the SEC.

  The 11th of December 2008 brought agents from the Federal Bureau of Investigation and an arrest on a charge of securities fraud. Madoff posted $10 million bail and remained under 24-hour monitoring and house arrest in his Upper East Side penthouse. In a 2011 CBS interview, Ruth Madoff said that she and her husband had tried to end their lives on Christmas Eve 2008, taking "a bunch of pills." The house arrest would last until he pleaded guilty three months later.

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• 6. Counting the Losses

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  On the 27th of September 2009, David Sheehan, chief counsel to trustee Irving Picard, said that about $36 billion had gone into the scheme. About $18 billion had been returned to investors, and $18 billion was missing. Roughly half of Madoff's investors were "net winners," meaning they took out more than they put in. Withdrawals during the final six years became targets of "clawback" lawsuits, which seek to return the money.

  A statement from Picard on the 4th of May 2011 used a different frame. Customers were owed $57 billion after some adjustments, but only $17.3 billion had actually come from customers. Of that, $7.6 billion had been recovered, yet pending lawsuits left only $2.6 billion available to repay victims. The Internal Revenue Service ruled that investors could treat their capital losses in this and similar schemes as business losses, which allowed a tax deduction.

  Estimates of the real damage differ sharply. Former SEC Chairman Harvey Pitt put the actual net fraud between $10 and $17 billion. Erin Arvedlund, who questioned Madoff's returns in 2001, thought it was likely between $12 and $20 billion and might never be known. The early headline figure counted fabricated gains, which accounts for much of the gap. The smaller figures subtract cash paid out from cash paid in. They also exclude accused collaborators, people who invested through feeder funds, and anyone who withdrew more than they deposited.

  Jeffry Picower, rather than Madoff, appears to have been the largest beneficiary of the scheme. His estate settled the claims against it for $7.2 billion. Entities and individuals affiliated with Fred Wilpon and Saul Katz received $300 million from investments in the scheme. Wilpon and Katz "categorically rejected" the charge that they "ignored warning signs."

  Madoff aimed at wealthy American Jewish communities, using his shared background to win investments from individuals and institutions. This tactic is known as affinity fraud. Victims included Hadassah, the Women's Zionist Organization of America, the Elie Wiesel Foundation for Humanity, and Steven Spielberg's Wunderkinder Foundation. Jewish federations and hospitals lost millions of dollars, which forced some organizations to close. In Palm Beach, Madoff belonged to the Palm Beach Country Club, where he searched for targets.

  Boards and endowments added to the damage. Madoff sat on the boards of nonprofits, and many of them entrusted their endowments to his firm. The Chais Family Foundation, the Picower Foundation, and the JEHT Foundation were forced to close. The Robert I. Lappin Charitable Foundation also shut down for a time. The UJA Foundation of New York, where Madoff served on the Wall Street division's executive council, declined to invest with him because of the conflict of interest. He also chaired the Sy Syms School of Business at Yeshiva University and resigned after his arrest.

  Sheryl Weinstein, a former chief financial officer of Hadassah, disclosed in a memoir that she and Madoff had an affair more than 20 years earlier. By 1997, when she left, Hadassah had invested a total of $40 million with him. By the end of 2008 it had withdrawn more than $130 million, and it says its accounts were worth $90 million at the arrest. At the victim impact sentencing hearing, Weinstein called him a "beast."

  On the 9th of November 2017, the United States government announced it would pay $772.5 million from the Madoff Victim Fund to more than 24,000 victims. The trustee reports that $14.829 billion has been recovered and returned. The search for additional funds continues.

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• 7. A Family Business

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  Peter Madoff, Bernie's younger brother and an attorney, served as senior managing director and chief compliance officer. Peter's daughter Shana, also an attorney, worked as the firm's compliance attorney. Madoff's sons Mark and Andrew both worked in the trading section, alongside their paternal cousin Charles Weiner. Mark was born in 1964 and graduated from the University of Michigan in 1986. Andrew was born in 1966 and graduated from the Wharton School in 1988.

  Money flowed within the family long before the collapse. Mark owed his parents $22 million, and Andrew owed them $9.5 million, borrowed to buy homes and other property. Andrew received two loans from his father in 2008, $250,000 on the 21st of September and $4.3 million on the 6th of October.

  In a civil lawsuit filed in October 2009, trustee Picard alleged that Peter deposited $32,146 into his Madoff accounts and withdrew over $16 million. Andrew deposited almost $1 million and withdrew $17 million. Mark deposited $745,482 and withdrew $18.1 million. Picard also sued the sons, Peter, and Shana for negligence and breach of fiduciary duty, seeking $198 million. The defendants had received over $80 million in compensation since 2001. In 2012 Peter was sentenced to 10 years in prison.

  Andrew Madoff was diagnosed with mantle cell lymphoma in March 2003 and eventually returned to work. In January 2008 he became chairman of the Lymphoma Research Foundation, and he resigned shortly after his father's arrest. His father had given about $6 million to lymphoma research after the diagnosis. Andrew died of lymphoma on the 3rd of September 2014.

  Mark Madoff was found dead in his New York City apartment on the 11th of December 2010, exactly two years after his father's arrest. The city medical examiner ruled the cause a suicide by hanging.

  The family's way of life ended in an auction. In 1980 Madoff bought an ocean-front home in Montauk for $250,000. He also owned a Manhattan penthouse where he chaired the co-op board, a home in France, and an 8,700-square-foot house in Palm Beach. A 55 ft sportfishing yacht named Bull completed the list. The United States Marshals Service auctioned all three homes in September 2009. A filing on the 13th of March 2009 put the couple's worth at up to $126 million, plus an estimated $700 million for the business interest. The $19 million Madoff Family Foundation, which he ran with Ruth, was frozen by a federal court.

  Ruth Madoff agreed in a settlement with prosecutors to give up her claim to $85 million in assets, keeping $2.5 million in cash. Massachusetts regulators also accused her of withdrawing $15 million from company-related accounts shortly before her husband's confession. On the day of sentencing she did not attend court, but she issued a statement. She said she was "embarrassed and ashamed" and felt "betrayed and confused." The fraud, she wrote, was committed by a man who was "not the man whom I have known for all these years."

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• 8. Plea and Prison

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  On the 12th of March 2009, Madoff pleaded guilty to 11 federal felonies. They included securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and false filings with the SEC. A month earlier he had reached an agreement with the SEC that included a lifetime ban from the securities industry. He took no plea bargain and insisted he alone was responsible. Some speculated that he refused to cooperate in order to avoid naming associates. In his plea he said he had always intended to resume legitimate trading, but that reconciling his client accounts proved "difficult, and ultimately impossible." Judge Denny Chin revoked his bail that day, ruling that his age, his wealth, and the prospect of life in prison made him a flight risk.

  Others close to Madoff soon faced courts of their own. David G. Friehling, his auditor, pleaded guilty in November 2009 and admitted he had merely rubber-stamped Madoff's filings. He testified at the trials of five former Madoff employees, all of whom were convicted and sentenced to between two and a half and 10 years. Friehling faced more than 100 years but, because he cooperated, received one year of home detention and one year of supervised release in May 2015. His role made the scheme by far the largest accounting fraud in history, dwarfing the $11 billion WorldCom fraud masterminded by Bernard Ebbers. Frank DiPascali pleaded guilty to 10 federal charges in 2009 and testified as well. He faced up to 125 years but died of lung cancer in May 2015, before he could be sentenced. In November 2011 the former employee David Kugel pleaded guilty, admitting he helped build the phony paper trail of false account statements.

  Madoff's lawyer, Ira Sorkin, lost an appeal to return his client to home confinement on the 20th of March 2009. On the 22nd of June, Sorkin hand-delivered a letter asking for a 12-year sentence, noting that Social Security tables predicted a life span of 13 years. The defense had first sought 7 years. Prosecutors asked for 150 years. On the 26th of June, Chin ordered the forfeiture of $170 million in Madoff's assets.

  On the 29th of June 2009, Chin sentenced Madoff to 150 years, the maximum allowed. Madoff told the court he had left "a legacy of shame" for his family and grandchildren. "I'm sorry," he said. "I know that doesn't help you." Chin noted that he had received no letters from friends or family praising Madoff's good deeds. "The absence of such support was telling," the judge said. He called the fraud "extraordinarily evil," "unprecedented," and "staggering." He also said Madoff's crimes were "off the charts," since federal sentencing guidelines for fraud stop at $400 million in losses.

  Madoff's attorney had asked for the Federal Correctional Institution at Otisville, 70 miles from Manhattan. Chin recommended only a facility in the Northeast, and Madoff went to Butner Medium near Butner, North Carolina, about 45 miles northwest of Raleigh. His inmate number was 61727-054. His projected release date was the 31st of January 2137, a date described as "academic" because he would need to reach the age of 198. At the start of his sentence, his stress was so severe that he broke out in hives. On the 13th of October 2009 he reportedly had his first yard fight, with another elderly inmate.

  On the 18th of December 2009, Madoff was moved to Duke University Medical Center in Durham and treated for facial injuries. Some reports described facial fractures, broken ribs, and a collapsed lung. The Federal Bureau of Prisons said he signed an affidavit on the 24th of December stating that he had not been assaulted and had been admitted for hypertension. In a letter to his daughter-in-law, he said he was treated like a "Mafia don." He wrote, "They call me either Uncle Bernie or Mr. Madoff." After an inmate slapped him for changing the television channel, he reportedly befriended Carmine Persico, boss of the Colombo crime family since 1973.

  On the 29th of July 2019, Madoff asked Donald Trump for a reduced sentence or pardon. The White House and Trump made no comment. In February 2020 his lawyer filed for compassionate release, saying he had chronic kidney failure, less than 18 months to live, and added danger from the COVID-19 pandemic. The request was denied because of the severity of his crimes.

  Madoff died on the 14th of April 2021, at the age of 82, in the Federal Medical Center at Butner. The causes were hypertension, atherosclerotic cardiovascular disease, and chronic kidney disease. He was cremated in Durham, which went against traditional Jewish custom. His family never claimed his ashes, and as of 2023 they remain in a lawyer's office.

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