At the Interbourse golf tournament held last May at Cabo San Lucas on the tip of Mexico’s Baja California peninsula, some participants suspected something amiss with Bernard Madoff.
No, what bothered some participants about the former Nasdaq chairman was his golf handicap. They suspected he had understated his skill to boost his chances of winning a prize. “It makes a difference if your handicap is the right or wrong one. I always had the impression that he was playing off a 14 or a 15,” says one who took part. But Mr Madoff’s score on the Golf Handicap and Information Network was 9.8, leading the fellow player to infer that the broker was better at the game than he told the organisers.
“He wasn’t altogether straightforward,” the participant says.
Seven months later, Mr Madoff was accused by US prosecutors of running the world’s biggest Ponzi scheme – a pyramid set-up that survived by using money from new investors to pay off earlier backers. He has allegedly confessed that his investment business, which drew money from all over the world, was “all one big lie” that may have cost investors $50bn (£36bn, €39bn). Prosecutors and the US Securities and Exchange Commission are combing through the books of Bernard L. Madoff Investment Securities and a court-appointed trustee is trying to track down what happened to the cash.
As Mr Madoff sits under house arrest in his Manhattan penthouse, the Financial Times has reconstructed the last year of his operation through interviews with dozens of his friends, colleagues and investors, most of whom do not wish to be named. They suggest he was endeavouring to keep up appearances, making the usual rounds of charity dinners, sporting events and industry gatherings and taking his regular summer vacation in the south of France. His family raised $151,000 for a leukaemia charity in October and he attended his company Christmas party hours before his arrest.
But beneath the surface, he and the dozens of hedge funds that sent him cash were growing increasingly strapped. For years, they had recruited new money with ease, thanks to an aura of exclusivity and Mr Madoff’s extraordinarily steady reported returns. In past years, would-be investors were often told the shop was closed to new money and they would have to wait before they could buy in. That changed. The credit crunch not only dried up new investment but also prompted many long-time clients to ask for some or all of their money back.
Authorities say this is what proved fatal; pyramid schemes collapse when the cash flow stops. Indeed, an examination of Mr Madoff’s 2008 activities reveals a desperate scramble for cash to keep the wheels spinning, before the alleged admission that he could not.
The scale of the losses is staggering. The trustee, Irving Picard, has mailed out more than 8,000 customer claim forms. A list compiled by Bloomberg suggests Madoff investors thought they had more than $41bn with the firm, although that may double-count investors and the funds they used.
While most financial frauds are confined to individual social groups or neighbourhoods, Mr Madoff stands accused of running the world’s first truly global Ponzi scheme. His early money came from Jewish charities and communities in New York and Palm Beach, earning him the nickname “the Jewish T-bill”. But by the mid-2000s, so-called feeder funds that supplied Mr Madoff were tapping deep – and not so deep – pockets all over Europe and Latin America. Seventeen funds in Luxembourg alone have halted redemptions due to Madoff-related losses.
Victims appear to include a remarkably wide range of people from Kevin Bacon, the US actor, to Liliane Bettencourt, the French heiress, along with a Hong Kong fisherman, a Spanish teacher and Mr Madoff’s own relatives. “There were no barriers to protect anyone from the wrath of Bernie,” says one American who was close to the Madoff family for years and had, so he thought, about $600,000 invested.
The year 2008 started as the previous one had, with a quarterly report to the SEC. Mr Madoff told the US regulator that his investment management arm held 443 different investments totalling $17bn. Many Madoff boosters believed the filing understated his total holdings because he supposedly moved into cash before reporting periods to avoid giving clues to his vaunted “split-strike conversion strategy”.
Its reported funds under management put the firm among the top 5 per cent of the 11,000 or so investment managers then registered with the SEC. But filing triggered no regulatory alarm bells. The SEC had inspected the Madoff firm in 2005 and briefly investigated him in 2007, yet neither that visit nor an attempt by Harry Markopoulos, a would-be whistleblower, to interest Jonathan Sokobin, the SEC’s new head of risk assessment, went anywhere. Mr Markopoulos, a former industry rival, had repeatedly tried to warn regulators of his suspicions that Mr Madoff was conducting a Ponzi scheme.
Mr Madoff did miss the Interbourse ski tournament in January – the winter version of the golf outing. He and his firm had been prominent sponsors in prior years, paying up to $15,000 to host the captains’ dinner and hobnob with European money managers. But one participant says his absence was put down to differences with that year’s French organisers rather than any larger problem.
Performance records of the European funds that sent money to Mr Madoff were meanwhile attracting attention – and money – from hundreds of ordinary retail investors. Among them was a Parisian property developer who asks to be identified as Pierre. Last February, he was simply looking for a place to park €600,000 he had raised from a property sale and chanced on the UBS-run Luxalpha fund while trawling the Morningstar internet aggregator. “I am normally very careful. I have never bought shares in my life,” he says.
But Luxalpha was listed as 80 per cent bonds and a relatively low-risk solid performer. He phoned UBS Luxembourg’s investor services and ended up putting the money into a sister fund called the Luxembourg Investment fund. He had never heard of Mr Madoff.
Spring passed uneventfully. Mr Madoff made the rounds of board meetings at New York’s Yeshiva University and the other charities he supported, attracting no more attention than before. Two fellow trustees of an educational institution where he sat on the board say they had long had reservations about his reported returns. However, they did not speak up and made no effort to prevent the school from investing with him.
“I thought he might be front-running [a form of insider dealing involving trades placed right before big orders] or something dubious like that – I never would have thought he was just inventing the whole thing,” says one.
Another charity was luckier. When a hedge fund manager joined its board last spring, he was instantly sceptical of the returns Mr Madoff had produced and asked his own staff to try and replicate the strategy, according to an industry colleague who was told about it at the time. When they could not, he convinced his fellow trustees to pull the charity’s money out.
After the May golf, Mr Madoff and his wife went to Port Gallice in the south of France, where he owned a yacht called Bull and regularly holidayed (and acquired a reputation among fellow luxury boat-owners for ill-humour, given to snapping at children). He bumped into Arki Busson, a London hedge fund manager, while collecting his luggage at Nice airport. “It was ‘hi, bye’,” Mr Busson says, adding that he gained no impression anything was wrong. EIM, Mr Busson’s fund, had about $230m invested with him. Mr Madoff also made the rounds at the US Open tennis tournament, held every August in Queens, and was introduced to one former tennis star with the words: “This guy is a miracle worker.”
Behind the scenes, Mr Madoff was trying to drum up money. In late summer, word circulated that he was ready to take in more cash, prompting one long-standing investor to set up a new feeder fund, Kallisto. “He had an outflow of money and he needed more cash,” says the investor, who first invested his own money with him 18 years ago. “I went to see him on October 2 and I said, ‘If I wanted $25m-$50m could I get it?’ and he said ‘sure’.”
Kallisto began early discussions with potential investors but, according to two people involved, its launch was conditional on due diligence being done on Mr Madoff’s back office, which had not occurred before the arrest.
The search for cash grew intense in October and November. Ezra Merkin, a money manager, met New York University’s chief investment officer and suggested the school start sending money to a Madoff feeder fund. When the school turned him down because of a lack of oversight, Mr Merkin did not say he had already invested nearly $25m of NYU’s money with Mr Madoff, according to a lawsuit filed by the university in the US federal court against Mr Merkin.
On November 12, Mr Madoff ordered his London business to wire $150m to New York, ostensibly to buy Treasury bills, and made a series of personal pitches. Among those he contacted were Ken Langone, founder of Invemed investment bank, who turned Mr Madoff down, and Carl Shapiro, the Boston philanthropist and longtime Madoff backer, who sent an additional $250m.
But the new money could not compensate for the funds that were flowing out. Some hedge funds needed cash to meet redemptions demanded by their investors. Others were concerned about the proportion of their money in Mr Madoff’s hands. Union Bancaire Privée pulled out $200m shortly before the collapse and Santander, the Spanish bank, sent Rodrigo Echenique, a director, to meet Mr Madoff in late November.
Individual investors were also trying to get out, sometimes with limited success. When one sought to pull money out of Luxalpha, the fund set up by UBS, he got a call from an intermediary trying to talk him out of it.
By early last month Mr Madoff had hit the wall, allegedly telling one of his two sons that he had received requests for $7bn in redemptions and was having trouble finding enough money, according to the government’s criminal complaint. On December 9 he told the other son he wanted to pay employees their bonuses two months earlier than normal. When the sons, Andrew and Mark, compared notes they decided to confront their father.
The next day, the two challenged Mr Madoff at the office but he asked to meet them later at his Manhattan apartment because “he wasn’t sure he would be able to hold it together”. Neither Andrew nor Mark put in an appearance at the Madoff firms’ Christmas party at the First Avenue branch of Rosa Mexicano that night, but Bernie Madoff did. He left at 7.45pm, according to one attendee.
At the apartment with his sons, Mr Madoff broke down and allegedly confessed, saying he had “nothing” and was “absolutely finished”, the complaint says. The losses, he added, would be as much as $50bn. He was going to turn himself in, he said, but first he wanted to use the $200m-$300m he had left to make payments to his family, employees and friends.
The sons called a lawyer, who alerted federal authorities. The SEC went into overdrive, putting more than a dozen employees on the case and drawing up documents to seek an emergency asset freeze. But even they did not quite understand the magnitude of what they were dealing with. “Is that a typo?” one official asked. “Isn’t that number meant to be $50m?”
Federal authorities took over Mr Madoff’s office in the Lipstick building on Third Avenue. They found in his desk $173m in signed cheques ready to be sent. Mr Madoff was interviewed at home. He was wearing his bathrobe and slippers when the agents arrived.
“There is no innocent explanation,” he allegedly told the agents. He had “paid investors with money that wasn’t there”.
When Pierre, the housebuilder, heard about Mr Madoff’s arrest he laughed, saying: “I knew I had not invested in these funds.” A few days later, his account adviser discovered that the fund was indeed invested with Mr Madoff. The Frenchman is now among those preparing legal action. Source.
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