The Lasting Shadow of Bernie Madoff

The Lasting Shadow of Bernie Madoff
By DIANA B. HENRIQUES
Published: December 10, 2011



“I made the tragic mistake of trying to change the way money was managed and was successful at the start, but lost my way after a while and refused to admit that I failed.”

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Ruth Fremson/The New York Times
Irving H. Picard, The trustee who was appointed to unravel the Madoff estate, with David J. Sheehan, his chief counsel. They are still struggling to make headway in the federal courts, and in the court of public opinion.
John Van Beekum for The New York Times
Howard Siegel of Palm Beach Gardens, Fla., says he's been managing, “but things have to happen sometime in the foreseeable future for me to continue to be able to manage.”
Matt Rainey for The New York Times
Burt Ross of Englewood, N.J., says he's surprised investors like him have recovered anything in the case.
Stan Honda/Agence France-Presse — Getty Images
Helen Davis Chaitman, an investor and lawyer, has long opposed the trustee's approach to calculating claims in the Madoff case.

Jeffrey Langlois/Palm Beach Daily News
Barbara and Jeffry Picower in 2005. Mrs. Picower authorized the payment of a $7.2 billion settlement on behalf of the estate of her husband, who died in 2009 and had profited from his investments with Mr. Madoff.

Jim R. Bounds/Bloomberg News
The Butner Federal Correctional Complex in North Carolina, where Mr. Madoff is serving his 150-year sentence. “One of the many problems of my life here is the amount of time to think,” he wrote by e-mail recently. — Bernard L. Madoff, in an e-mail on Oct. 11, 2011

BERNIE MADOFF can’t let go.

He still hangs on each nugget of news from the outside, still points fingers, still spins his own story.

And, on occasion, he still mourns — something, he says, he will do for the rest of his life.

But these musings from prison, conveyed in dozens of e-mails to a reporter for The New York Times over the last year, are merely comments from the sidelines. For him, the case of the United States of America v. Bernard L. Madoff is officially over.

But for those he ensnared, the Madoff story drags on. It began three years ago today, when F.B.I. agents arrested a man who, to the world, was a wizard of Wall Street. Mr. Madoff soon confessed to a Ponzi scheme that became a symbol of our troubled financial times. Its unraveling took tens of billions of dollars of fictional wealth from thousands of victims around the world.

Mr. Madoff will mark this day in a federal prison in Butner, N.C., where he is serving a 150-year sentence. For countless others affected by his crimes — the lawyers and prosecutors still trying to unravel his scheme; the victims still hoping to recover money; and the Madoff family, who remain targets of public suspicion and hostility — today is but a milepost on a long, long road.

The Trustee: A Hunt for Billions

THIS might have been a triumphant year for Irving H. Picard, the lawyer appointed to unravel the Madoff estate and try to compensate victims.

To date, almost $11 billion has been recovered, more than half of the estimated $18 billion in cash that vanished in the Ponzi scheme.

For Mr. Picard, the trustee, 2011 began with court approval of a $7.2 billion settlement by the estate of Jeffry Picower, a longtime Wall Street investor who had profited enormously from his Madoff accounts. Other settlements this year made roughly $1 billion more available for victims.

The year also brought vindication when, last summer, a federal appeals court approved Mr. Picard’s formula for determining who should be paid first — a formula that some Madoff investors had denounced as illegal.

But as Mr. Picard and David J. Sheehan, his chief counsel at Baker & Hostetler, reach the third anniversary of their difficult but well-paid work, they are still struggling to make headway in the federal courts, and in the court of public opinion.

Their first priority for 2012 will be to appeal several lower court rulings that, together, could reduce by about $11 billion the total they had hoped to recover through future litigation and settlements. The rulings also could rewrite the bankruptcy laws that govern nearly 1,000 lawsuits they have filed.

At issue is whether Mr. Picard has the legal right to sue Mr. Madoff’s bank and other third parties on behalf of defrauded investors. Also in question is whether there is a safe harbor in the law that prevents Mr. Picard from recovering fictional profits that Madoff investors withdrew before the Ponzi scheme collapsed.

And, finally, there is a question of the level of proof Mr. Picard must show for his claims that sophisticated investors — specifically, the owners of the New York Mets — were “willfully blind” to the fraud and therefore should return profits and some of their principal.

Handicappers on the legal sidelines say Mr. Picard faces an uphill fight on the first issue but they give him better odds on the second.

“He’s had a setback,” said Anthony Sabino, a law professor at St. John’s University, but chances are that Mr. Picard will prevail on the safe-harbor question.

As for the third question, all bets are off. The willful blindness issue has been spotlighted in the Mets case by Judge Jed S. Rakoff of Federal District Court in Manhattan, who is known for bucking conventional wisdom. But in Mr. Picard’s favor, Judge Rakoff did not dismiss that element of the Mets case entirely and will allow the trustee to press it at trial in March, said Thomas S. Harty, a lawyer with Cozen O’Connor in Philadelphia.

Such legal uncertainties will hang over the Madoff case through the coming year, if not beyond. But there is no way to appeal verdicts rendered in the court of public opinion against Mr. Picard and his employer, the Securities Investor Protection Corporation, which provides a limited safety net for clients of failed brokerage houses.

For the last three years, Mr. Picard and SIPC have been fiercely criticized at Congressional hearings, on the Internet, in court filings, in several books and in many news media interviews.

Mr. Picard’s victory in the federal appeals court had little effect on the hostility of those Madoff investors who are hurt by his claims formula — specifically, those who took more cash from their Madoff accounts over the years than they had put in.

These net winners have argued that their claims should be based on the last account statements they received before Mr. Madoff’s arrest — statements showing that his investors were owed a total of $64.8 billion.

Ron Stein, who heads an advocacy group that opposes Mr. Picard’s formula, is placing hope in Congress. Last February, Representative Scott Garrett, Republican of New Jersey, introduced a bill that would require a trustee in a brokerage-firm bankruptcy to accept claims from innocent investors based on their final account statements, not on the net cash they lost.

That bill would also bar a trustee from suing to recover fictional profits from those investors even if the brokerage firm’s bankruptcy was a result of a Ponzi scheme, where the “profits” were actually the cash the con artist stole from someone else.

Last summer, Mr. Garrett also asked the Government Accountability Office to investigate how Mr. Picard was handling the Madoff liquidation. That inquiry is still under way, but people tracking it expect to see a report by the end of March.

The Prosecutors: An Upside-Down Investigation

WHO else was in on it? That question has vexed prosecutors all along.

A fresh break came on Nov. 21, when a trader named David L. Kugel confessed to having helped Mr. Madoff “and others” create fake trades as far back as the early 1970s. Mr. Kugel, who is 66, faces up to 85 years in prison.

For federal prosecutors, the development marked a turn a case in which the mastermind had confessed but had refused to name any accomplices. Mr. Kugel and another former Madoff employee, Eric S. Lipkin, are now cooperating with the government, prosecutors say. Mr. Lipkin pleaded guilty in June to falsifying various records.

With their confessions, a total of five people have pleaded guilty in the criminal investigation — a list that previously included Mr. Madoff himself; his key lieutenant, Frank DiPascali; and his outside auditor, David G. Friehling.

Five other defendants, all former longtime Madoff employees, say they are innocent and are preparing to go to trial next year. They are Daniel Bonventre, the firm’s former chief of operations; Annette Bongiorno, who was hired as a receptionist in 1968; JoAnn Crupi, who handled paperwork for customer accounts; and two computer programmers, Jerome O’Hara and George Perez.

Apart from these cases, there have been no other criminal charges, but at least one high-profile Madoff investor is embroiled in continuing regulatory issues.

Civil fraud charges were filed in April 2009 by the New York State attorney general against J. Ezra Merkin, a hedge fund manager whose formidable reputation was tarnished when Wall Street learned that, for more than a decade, he had merely been handing his clients’ money to Mr. Madoff.

Mr. Merkin and his hedge funds are also facing civil claims filed in bankruptcy court by Mr. Picard seeking almost $565 million that had been withdrawn from their Madoff accounts. There have been rumors of settlement negotiations with New York state authorities since early last summer, but any deal would have to address the trustee’s claims.

The Victims: An Army Divided

FAMOUS millionaires were embarrassed. Middle-class people were wiped out.

Regardless of their personal circumstances, thousands of Madoff investors — from an out-of-work actress to the owners of the New York Mets — are still fighting to recover money or to keep profits that Mr. Madoff had assured them were rightfully theirs.

As of Dec. 2, Mr. Picard had approved 2,425 claims totaling almost $7.3 billion. But two-thirds of the 16,519 claims originally filed have been denied, either because claimants took out more cash from the Madoff firm than they paid in over the years or did not have an account directly with the firm.

Some investors, like Helen Davis Chaitman, have mobilized to oppose Mr. Picard on every front. Ms. Chaitman, a lawyer who lost her retirement savings, says she represents about 500 other Madoff investors. She has become a fixture in Mr. Picard’s legal fight and has testified before Congress. Last spring, she asserted that Mr. Picard had “absolutely no legal authority” for his approach to calculating claims, but the federal appeals court disagreed. The deadline for an appeal to the United States Supreme Court is in early February.

At the other end of the spectrum is Howard Siegel, an accountant and lawyer in Palm Beach Gardens, Fla. Mr. Siegel, 71, invested with Mr. Madoff through a fund with more than 300 investors.

Mr. Siegel’s fund is a net loser — meaning that it lost more cash than it withdrew. People in his situation, he says, make up “the silent, vast majority” of Madoff investors.

Mr. Siegel says he thinks the trustee is doing a good job. As for himself, he says he is managing. “But things have to happen sometime in the foreseeable future for me to continue to be able to manage,” he says.

As he sees it, simple justice requires that net winners return their fictional profits. “If you went to the gym and picked up a gold watch you thought was yours and wore it home and discovered you hadn’t worn your watch that day — would you think you could keep it anyway?” he asks. “If you were called and asked to return it, wouldn’t you do that?”

Alexandra Penney, a photographer in New York City, said she had been able to hang on to her studio, which she feared she would lose when she lost her life savings. As a net loser, she has been paid “a small fraction of my claims,” she said. She gave the trustee “a B-plus,” but is frustrated at the slow pace of the process.

“But I don’t think about Madoff at all, at all,” she said. “However, I have to think about the impact of what happened every day — whenever I stop to consider ‘Do I take a bus or walk?’ It is ever-present and it will always be.”

Burt Ross, an investor who lives in Englewood, N.J., has a dog in both fights, with a stake in one account that was a net winner and another that was a net loser. “There is no way to make everybody whole,” he said.

For him, the biggest surprise is that investors like him have recovered anything at all.

“When this hit the news, I said to my wife, ‘We’ve lost all that money.’ It never dawned on me that there was a chance we would get any of it back,” he said.

Most problematic is the fate of the so-called indirect investors, whose money flowed to Mr. Madoff through an intermediary fund — as some of Mr. Ross’s cash did — or perhaps through several layers of funds.

Three years ago, these indirect investors were considered lucky. They still had someone with deep pockets they could sue — the intermediary fund or its managers or sponsors — while Mr. Madoff’s direct investors had little hope of recovering anything.

“Conventional wisdom has been turned on its head,” said Javier Bleichmar of the law firm Labaton Sucharow in New York, which has clients in the Madoff case. So far, indirect investors have been barred from pursuing their claims in bankruptcy court because they were not technically Madoff customers. And domestic courts have proven unreceptive to claims they filed against banks and other third parties, dismissing them on technical grounds.

Many of their offshore hedge funds are being liquidated in countries where the losing side pays all the legal costs — a risk that many investors just can’t take, Mr. Bleichmar said. “In the largest Ponzi scheme in history, not even the domestic investors have been able to access the courthouse steps,” Mr. Bleichmar said. “In offshore jurisdictions, it’s even more difficult.”

The Family: A Double Dose of Agony

THREE years ago today, the Madoff family’s world of wealth and privilege was shattered. One year ago today, Mr. Madoff’s elder son, Mark Madoff, hanged himself in his Manhattan apartment.

For his mother, Ruth Madoff, Mark’s death was bitter proof that she had waited too long to respond to her sons’ demands that she cut off all contact with her husband. She called Bernie Madoff to tell him of the death and hasn’t spoken to him since, she said in a recent interview.

Reconciliation is clearly a destination, not a reality, for the Madoff family. In October, Mark Madoff’s widow, Stephanie Madoff Mack, published a painfully revealing memoir, “The End of Normal” (Blue Rider Press). The book describes her fierce disputes with her husband about his relationship with his family and included harsh portraits of Ruth Madoff, her brother-in-law Andrew Madoff, Andrew’s fiancée and Mark’s ex-wife.

Two weeks later, another version of Madoff family life was on display in “Truth and Consequences” (Little Brown), written by Laurie Sandell with the acknowledged cooperation of Ruth and Andrew Madoff, among others.

That book revealed that Ruth and Bernie Madoff had made what he later called a “feeble attempt” to commit suicide two weeks after his arrest. But it also laid out its own collection of bitter arguments, heartbreaking memories and persistent estrangement.

The entire Madoff family remains locked in litigation with Mr. Picard, who has sued them to recover more than $200 million the family received from the Madoff firm over the years.

Late this year, Mr. Picard filed an amended version of his complaint against Andrew Madoff, both individually and as the executor of his late brother’s estate; Peter Madoff, a lawyer and for decades a top executive at his brother’s firm; and Peter Madoff’s daughter, Shana Madoff, also a lawyer and former compliance officer at the firm.

That litigation, too, has moved only a few inches down the field.

The Mastermind: Remorse and Defiance

THE man at the center of this drama follows these developments obsessively from a medium-security prison in North Carolina.

“One of the many problems of my life here is the amount of time to think,” Mr. Madoff wrote recently.

In dozens of e-mails this year, Mr. Madoff has fiercely disputed Mr. Picard’s assertions that he was a fraud from the start. He calls that allegation “an absurd theory.”

His message to Mr. Picard and prosecutors: “Stop beating a dead horse,” he wrote, in capital letters, in an e-mail dated Nov. 24.

“It drives me crazy,” Mr. Madoff wrote in mid-October, that the trustee and the government “developed their theory that no trading took place ever.”

He continued: “I wish I never agreed not to go to trial, when all this could have been aired.” And then: “I feel sad that it is not really in anyone’s interest to try and uncover the facts at this point. Not that I would ever be exonerated for the fraud I did commit.”

Mr. Madoff maintains that he went off the tracks in 1992 and would have been found guilty had he stood trial. He says he confessed to spare his family, but he wrote in November, “If I had known that things would turn out the way they did, with all the harassment of my family anyway, I would have spent the money and gone to trial.”

At this time of the Occupy Wall Street movement, Mr. Madoff agrees that there is a lot of rot in Washington and on Wall Street. “It is hard for anyone to imagine all the ills and corruption” he wrote on Oct. 12.

His contempt for the Securities and Exchange Commission is plain:

“It is not that they failed to uncover my fraud,” he wrote on March 4. “It is the fact that for their entire existence they have spent their time and resources on the petty problems of small firms and refuse to deal with the obvious problems and outright violations of the large investment banks who had free reign to cause the eventual destruction of the financial markets. This mentality is still in evidence today.”

He says again and again that the scheme began in 1992 and that he acted alone. A note on Oct. 11 opened with frustration: “I hope you understand that I am in no way trying to rationalize my terrible behavior. If nothing else I will always live with the pain I have caused to many innocent people and the shame I have caused my family. Nothing can ever justify that.”

Mr. Madoff blames himself for his son’s suicide and, in an e-mail last Wednesday, offered this: “For those people who wonder if I feel enough remorse, I can only say that the guilt and pain I live with every moment that is left of my life is impossible to appreciate without going thru it.”


This article has been revised to reflect the following correction:

Correction: December 13, 2011


An earlier version of this article misstated the role of Howard Siegel, a victim of Bernard Madoff’s Ponzi scheme, in a fund that had invested with Mr. Madoff. Although Mr. Siegel invested in that fund and is now a member of its investment committee, he never ran the fund.


A version of this article appeared in print on December 11, 2011, on page BU1 of the New York edition with the headline: A Lasting Shadow.