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By David Gelles and Gillian Tett
Published: April 8 2011 17:04 | Last updated: April 8 2011 17:04
We are cruising through North Carolina on a foggy morning in late March, heading up to its rural north. Our route takes us through swampland shrouded in a thick mist; spruce trees and an occasional pink dogwood line the interstate. Butner, population 6,391, is our destination.
The town is home to a vast federal prison complex that includes a hospital, a minimum security unit and two medium security facilities. Since July 14 2009, arguably the most notorious inmate at FCI Butner Medium I has been Bernard Lawrence Madoff, the disgraced New York financier who orchestrated a $65bn Ponzi scheme, among the biggest financial frauds of all time. He is prisoner 61727-054.
When the Madoff scandal broke in 2008, a Financial Times reporter learnt that two acquaintances of his were close to the Madoffs and passed along an invitation for any member of the family to speak with the paper. For more than a year, there was silence. Then, early last December, the reporter received an e-mail from Madoff himself. Following sporadic correspondence, and at very short notice, a message came from the prison: Madoff would meet with the FT.
It is only the second time he has agreed to meet a reporter in prison. But as we drive north, we wonder if this man who built his career on lies will tell us the truth. Or when we get to the prison, will he simply vanish "“ like all those billions in his Ponzi scheme? Crossing rusted train tracks, we drive a couple of miles and arrive at the main intersection of this one-traffic-light town.
Butner revolves around the prison. Its centre is just a clutch of convenience stores and a petrol station. In search of strong coffee we consult an iPhone: the nearest Starbucks is 18.4 miles away. Instead, we go to a diner and order the classic southern fare of biscuits and grits. The coffee is terrible.
Nervously, we pore over our files. No matter how many times we read about Madoff, his tale never loses its ability to shock. Over at least 16 years, Madoff deceived investors, regulators, banks and associates. His Ponzi scheme "“ a fraud which involves paying old investors with funds from new ones "“ made him extraordinarily wealthy. He took in $20bn in capital from investors including European nobility, average American workers, worthy charities and his own close-knit family and Jewish community. Madoff's scheme was the largest in history.
Yet the man behind this fraud never looked anything like a crook. Instead, he was the former chairman of the Nasdaq stock market, a buddy of regulators, and vice-chairman of the National Association of Securities Dealers, his industry's self-regulatory body. He lived a gilded life, flitting with his family between a penthouse in New York and holiday homes in Palm Beach and Long Island, travelling in private jets and on his yacht, called Bull.
The earlier fog has lifted, opening up to a bright day. We drive towards the prison through a rolling wooded landscape. It would be lovely were it not for the stark, low-slung concrete buildings and rolls of razor wire, glinting in the sun.
We enter FCI Butner Medium I, a drab, white building. Brusque guards order us to deposit our belongings into a locker, except for pencils and paper, and we pass through a metal detector. Our hands are stamped. We walk into a sealed area with a heavy iron gate that locks behind us before the next door opens. The interior is spare, and our footsteps echo against tile and cinderblock. On the walls of a long corridor, somebody has hung a dozen Ansel Adams posters. We have seen the same pictures hanging in Wall Street offices.
As the guard escorts us past the prison cells, we are given our orders: we will meet Madoff in a visitors' room; we have exactly two hours; a guard will watch, but will only intervene if there is "trouble". We ask, half in jest, if we can exchange a handshake. "No," our minder says sternly. And then the door opens.
. . .
Madoff sits in a metal chair, his arms folded across his chest and his legs outstretched. He has his back to us, head turned slightly to reveal his now infamous profile "“ the aquiline nose, drooping jowls and curly silver hair. As we approach, he rises with a smile, says hello and extends a hand.
Should we take it? We pause "“ then meet his grasp. The grip is firm and he looks us directly in the eyes, as if welcoming us into his old Manhattan office.
"So, how are you doing?" we ask as we sit. We are in a large room overlooking a sun-drenched courtyard. Shelving holds books and some children's toys. Behind us, two vending machines make an irritating hum.
"As well as might be expected," he replies. He is neatly dressed in khaki prison garb "“ very different from the velveteen monogrammed slippers and tailored suits he once wore. Thin, but looking healthy at 72, his slightly tanned face suggests he has been outside. The lines around his eyes are pronounced, and age spots dot his hands, as do a few blue marks from a ballpoint pen. He wears simple, brass-rimmed glasses and smells faintly of aftershave.
"Let me set the ground rules," he says, already trying to take control. He knows exactly why we have come: we want to understand what would motivate a man who looks like a friendly family doctor to engage in such a devastating fraud. And, for reasons we can only guess, he wants to comply.
"Nothing that I say should be taken as an excuse for my behaviour," he starts, in a thick New York accent. "I take full responsibility for what I did. I was aware of what I was doing." As he talks, his body is completely still. The speech sounds well-rehearsed; it seems that he has not only worked out his story with his therapist or lawyer, but also mastered the jargon of pop psychology.
So why, we ask, did you do it? "You have to understand my history." He sighs. "I started with $500 in capital. I watched my father go bankrupt. I was very driven. But I was always outside the club, the club being the New York Stock Exchange and white shoe firms. They fought me every step of the way."
This part of the story, at least, is absolutely true. Madoff was born in 1938, the son of Ralph and Sylvia Madoff, a Jewish couple from Queens, New York. During most of his childhood, his father ran a moderately successful sporting goods business. But it failed when Madoff was a young man, shattering the family's comfortable middle-class existence. Madoff met Ruth Alpern, who would become his wife, in high school, and managed to get himself into college, working to support himself by installing sprinkler systems. He toyed with the idea of entering Wall Street, but assumed that it would be impossible for somebody like him, with few academic credentials and no family money, to break in. So in 1960 he founded Bernard L Madoff Investment Securities, his own tiny brokerage, in office space borrowed from his father-in-law.
It was such a tin-pot operation that it initially attracted no notice. In the 1960s, Madoff focused on a minor field: making markets for small parcels of bonds. But as time passed, BLMIS "“ as it came to be known "“ grew. He entered the more prestigious world of trading equities. Then, with the help of his brother, Peter, he innovated with technology. Traditionally, the business of trading equities on Wall Street had been conducted by a club of human brokers; however, by the 1970s the Madoffs had begun using computers. The traditional firms "“ and brokers "“ hated this. "They even had congressional hearings against me," Madoff recalls.
He is a born raconteur. The words pour out with a sense of rhythm, timing and even humour. He clearly hopes to have a hand in shaping his legacy.
Starting in the 1960s, Madoff began managing money. He soon had four prominent clients: Jeffry Picower, a New York investor; Stanley Chais, another investor; Norman Levy, a real estate developer; and Carl Shapiro, a Boston clothing manufacturer. These men would eventually become the largest beneficiaries of Madoff's Ponzi scheme, taking out much more than Madoff's own family. Picower alone took out an eye-popping $7.2bn over the years. But during the 1970s and 1980s, Madoff insists he was making money for them legally.
Exactly what drew these powerful men to Madoff's small-time firm has never been clear. The four were not all friends. Ethnicity might have played a part: all, like Madoff, were Jewish. However, there was another, practical factor: taxes. In the 1970s and 1980s, the tax rate was punitively high, prompting many wealthy families to seek creative ways to reduce their tax bill. And one option was to invest in the stock market, since long-term capital gains were not taxed as highly as short-term profits.
During most of the 1980s, as Madoff tells it, the strategy worked. He bought long positions for his big four clients, and some new clients, and saw high returns. "I caught [the market] at the right time. So they had big long-term gains. They were just deferring tax and rolling it," he recalls.
Then it went badly wrong. "It was all fine until the market crashed in '87, and these people started to go into a total panic," he says. "The long-term gains started to evaporate. But they refused to close it out "“ they were greedy."
Madoff says he told them to hold their positions until the market recovered. But in 1986 the US authorities had tightened the tax code. That left the families wanting to liquidate some of their holdings. This, he says, was difficult. When he had invested in the US equity market he had hedged "“ or protected his positions "“ by making trades in the opposite direction with other investors, particularly in Europe. These, he claims, could not be unwound quickly "“ leaving him locked in. "I had long-term hedges in Europe "“ I was at their mercy," he says with a heavy sigh. "So I had to find other clients."
Madoff says his four big clients were motivated to help him, and referred their friends to him. "Picower brought in clients, Shapiro brought in clients, Levy brought a lot "“ he had a fund with his bank," Madoff tells us.
And these four men were not the only source of funds. In 1992 Avellino & Bienes, a firm that had already been funnelling money to him, closed down after being investigated by the Securities and Exchange Commission for being a Ponzi scheme. Avellino & Bienes was founded by two men who had worked for Madoff's father-in-law, Saul Alpern. "I got hundreds of phone calls from their clients "“ they had clients who had $50,000 who wanted to get in. So I put a minimum of $500,000 for an investment. I brought in, over a period of a month, lots of new clients."
As the new money came pouring in, Madoff insists he planned to continue using his legitimate investment strategy, which was based around a so-called "black box" "“ a complex technique that relies on computing algorithms to select trades. "Before, I had helped develop products for the Chicago Board Options Exchange for index trading "“ I had built a model for that business," he says. "So I thought I would put together a portfolio of S&P 500 stocks, with 85 per cent exposure, then used OEX [the S&P 100 index] positions as a hedge."
This type of jargon sounds unintelligible to non-bankers, but is entirely typical "“ and credible "“ on Wall Street, and Madoff delivers it without missing a beat. Is he lying? It is impossible to tell; but as he speaks, he becomes so animated that colour flushes into his cheeks.
"But the problem [with my black box] was that to make it work you need to have volatility, volume and momentum. And, of course, we didn't get that." Soon after Madoff took in this new influx of capital, the markets became becalmed "“ which prevented his "black box" strategy from producing profits. Yet his new clients expected generous returns, and were soon demanding redemptions.
So in 1992, he says, his slide into the Ponzi scheme began, using money from new deposits to pay some returns. "I thought I could do it. I did! I took the money "“ let's say I had $1bn, by then "“ and I was convinced that when the market straightened out I would be able to cover things." But it never happened. "The turning point was really about 1992 onwards. From then on, it started getting worse and worse. I spend a lot of time thinking about it "“ it is almost like a blank to me now. I try to piece it together; why didn't I say, "?I cannot do it?' Why didn't I return the money to those four or five clients "“ and the others "“ and say, "?I can't do it.' Why?"
Silence; we look at him expectantly. Madoff blinks intensely and often: it is a tic that grows more pronounced during pivotal moments of our conversation, like a poker player's tell. In the corner, the prison guard nonchalantly taps at his computer, seemingly oblivious.
. . .
Exactly when the Ponzi scheme started is actually a matter of dispute. The trustee seeking to retrieve assets for Madoff's victims, Irving Picard, says the fraud began as early as 1983. But Madoff denies this, telling us that in the 1980s, at least, he was making plenty of legitimate trades. "[The prosecutors] came up with this idea that I came up with this whole legitimate business to come up with this fraud," he says. "That is wrong. In the end I left $1bn on the table. I had access to any Swiss bank and offshore bank in the world if I had wanted to stash money. But it wasn't about the money."
To hear Madoff say it was not about the money strikes us as improbable. He spent lavishly on his lifestyle; after the fraud was revealed, authorities uncovered $75m in a Gibraltar bank account and millions in jewelry and luxury goods. These were reminders of how much Madoff personally had to lose. He was on the board of Yeshiva University and a regular at charity balls in Manhattan. He and Ruth holidayed in Monte Carlo, where she liked to shop.
We ask why he didn't just hand the money back to investors. After all, he says that in 1992 he was already a fairly wealthy man, since the market-making operation was performing well. "Ego," he explains. "Put yourself in my place. Your whole career you are outside the "?club' but then suddenly you have all the big banks "“ Deutsche Bank, Credit Suisse "“ all their chairmen, knocking on your door and asking, "?Can you do this for me?'
"[I was] under a lot of pressure "“ a lot," he mutters. "And I was embarrassed. It was the first time in my life that something hadn't worked. I was just dumb. Dumb! Starting in the early 1990s there were no trades. It was just paper. But let me tell you," he adds forcefully. "It looked real."
Once the Ponzi scheme was under way, it required a constant influx of new cash. Madoff began taking on clients referred to him by existing ones, who were inclined to keep their money parked with him because of the steady returns. At some point "“ Madoff never makes it clear exactly when "“ the real trading ceased altogether, and he began forging trade records for clients. And he says Picower, Chais, Levy and Shapiro "“ his big four clients "“ knew something was amiss. "They were complicit, all of them," he says.
Madoff's accusations cannot be corroborated. None of the four families has been charged with criminal wrongdoing. Picower is dead, and his estate settled for $7.2bn; his lawyers maintain he was not aware of the fraud. Levy is dead and his family settled for $220m. Chais is dead; his family denies any wrongdoing and has not settled. And Shapiro, the only one still alive, settled for $625m but denies any wrongdoing and has not been accused by authorities of being complicit. In the words of his lawyer, "Mr Madoff is a liar. These latest statements are no more believable than all the other lies that Madoff told his investors and the authorities for decades."
On its surface, the fraud looked real enough to attract a steady stream of new investors, and not just from the US. According to Madoff, there were rich clients on both sides of the Atlantic eager to use his services to dodge local regulations. In France, for example, wealthy clients initially invested with him in order to avoid rules that prevented them from exporting francs.
"I did it for all of them "“ so many important people from France and elsewhere," says Madoff. "That woman from L'Oréal, Christian Dior, so many "“ I even impressed myself. They came up to my office to meet me. They really wanted to deal with me." The woman from L'Oréal Madoff refers to is Liliane Bettencourt, one of Europe's richest women.
The returns on Madoff's funds were not extraordinarily high, running at about 10 per cent; however, they were steady, which appealed to conservative European investors. Clients were also reassured by the apparently close ties that Madoff enjoyed to respected French and Swiss banks, such as Union Bancaire Privée.
Not everybody in Europe was keen to deal with the fund: Société Générale, for example, stayed away. But most investors seemed impressed by Madoff's "black box". Some also suspected that Madoff might be using inside information to give him an "edge". That added to his allure. "The Swiss thought this "“ they are the most suspicious of all," Madoff says, revealing a dislike that may stem from his Jewish heritage and the actions of some Swiss banks in relation to Nazi Germany. "Slimy people."
In the US, Madoff used his powerful network of contacts across the wealthy Jewish community to lure money. By this time, Madoff had moved into the very heart of the financial "club" he once scorned. He was appointed the chairman of the Nasdaq index, to the board of the Depository Trust & Clearing Corporation, and was vice-chairman of the NASD, his industry's self-regulatory body.
This did not prevent the regulators from watching him. "In 2002 I had a contact with the SEC, who were concerned that I was front-running," he recalls, referring to the practice of using insider information to inform trades. "I started laughing to myself "“ I knew I wasn't because I wasn't doing the trades." Some of his rivals also asked why his returns were so steady. Harry Markopolos, a fund manager, was so suspicious that he filed reports to the SEC in 2000, and again in 2005, suggesting that Madoff was running a Ponzi scheme. "Markopolos was the biggest idiot in the world," recalls Madoff, displaying his first flash of anger, blinking hard again. "He had a hedge fund that couldn't make money and his clients abandoned him [so he called the regulators]."
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