Saturday, 20 December 2008

No questions asked

 

  By Francesco Guerrera, Anuj Gangahar and Deborah Brewster

 
Published: December 19 2008 19:57 | Last updated: December 19 2008 19:57
 
Looking down on a sunlit Manhattan skyline from the seaplane carrying him to work, Bernard Madoff must have felt on top of the world.
 
In the late 1980s, when his morning routine involved a short hop from Long Island to the East River, a stone's throw from his office in New York's financial district, Mr Madoff was just another successful Wall Street operator.
 
A prominent member of the securities industry with deep ties to the wealthy Jewish community that divides its time between New York and Florida, Mr Madoff had an otherwise fairly ordinary lifestyle and could have been forgiven the extravagant touch of an aerial commute.
But after last week, when US prosecutors say he confessed to what could be the largest fraud ever perpetrated, nothing will ever be ordinary again for the 70-year-old Mr Madoff.
 
There will be no more seaplanes after a court ordered Mr Madoff to submit to electronic monitoring and remain in his Manhattan duplex daily from 7pm to 9am. Gone, too, is the adulation of the rich investors who used to beg "Bernie" to take their money – replaced by the shock and pain of huge financial losses and betrayal of trust.
 
As details begin to emerge of a "Ponzi scheme" that is alleged to have swindled up to $50bn (£33bn, €36bn) from investors ranging from HSBC, the giant UK bank, to the charity of Steven Spielberg, the film director, one central question remains unanswered. How could Bernie have duped so many investors for so long?
 
Those who met Mr Madoff during a career that began in 1960, when he founded his securities firm with $5,000 earned installing garden sprinklers and patrolling Long Island beaches, talk of a private, self-effacing man. "The last thing Bernie Madoff wanted was publicity," says one of his fellow travellers on the East River seaplane.
 
Affable and polite but not overly talkative, Mr Madoff was active on the social and charity scenes in Manhattan and Palm Beach – the Florida town that serves as an escape hatch for rich New Yorkers.
Wrapped up: Bernard Madoff returns to his New York apartment on Tuesday after a court imposed a curfew

Yet despite his wealth – he owns a yacht and houses in Palm Beach and Cap d'Antibes in France as well as his Upper East Side apartment – Mr Madoff did not stand out from the crowd of well-off middle-aged people with whom he socialised. "He was low-key," recalls Charles Gradante, a hedge fund adviser who met him regularly on the Palm Beach social circuit. "When I saw him at cocktail parties, he would be in the corner and investors would sometimes go over to him. He didn't have a charismatic presence; he wasn't exuding confidence."
Senio Figliozzi, owner of the Ever­glades Barber Shop in Palm Beach, cut his hair and gave him facials, manicures and pedicures for 17 years but rarely heard him talk about business. He describes Mr Madoff as a "very nice man who was always polite and gentlemanly" and tipped the standard 20 per cent.
 
But behind that everyman persona, Mr Madoff weaved a complex web of connections that lured more and more investors into his fold. Ponzi schemes – pyramid arrangements named after the Italian immigrant to the US who first attempted the scam in the 1920s – are relatively unsophisticated frauds in which the organisers repay old investors not with genuine gains but with funds from new investors. Investigators allege that Mr Madoff's was in operation from at least 2005.
 
If he did indeed craft one, there were no outward signs when, more than a decade ago, Mr Madoff added an investment firm to his brokerage house and later moved to the tall, thin midtown skyscraper known as the Lipstick Building. With a reputation as a leading market-maker – the middle-man between buyers and sellers – on Nasdaq, the stock market he chaired for a few years, Mr Madoff was not unusual in moving from broking to investing.
 
Nor did it seem strange that, as a self-made man of a certain standing in the Jewish community, Mr Madoff's should tap his friends and acquaintances in New York society and Palm Beach's exclusive Country Club.
 
To be sure, Mr Madoff did not move in the top circles of American social life – the parties dominated by film celebrities, tycoons such as Donald Trump or super-rich donors such as Sandy Weill, the former Citigroup chief. His was a more intimate, less flashy group, according to David Patrick Columbia, the editor of NewYorkSocialDiary.com – a tightly-knit community centred on Upper East Side synagogues and charitable organisations.
Many of these pious, often elderly, people looked to increase their retirement nest-eggs without taking too many risks and thought they had found the holy grail in Mr Madoff's enviable record: he consistently beat other fund managers and the market, year after year.
 
"This is a community of affluent Jewish people who basically socialise with each other. They are very philan­thropic and all support each other's charities," Mr Columbia says. "Even though Mr Madoff was not a top member of this community, his business made him the man to know. He became an icon of financial success for them."
 
But after a few years, word of Mr Madoff's ability to generate steady returns, by employing a seemingly simple strategy of buying shares in large companies and selling options on the same names to mitigate risk, began spreading beyond his inner circle. Yet as more and more people wanted in on Mr Madoff's outstandingly consistent performance, he played it cool. "He never pushed investing with him: he would turn people away sometimes or tell them, 'it is not for you', recalls Mr Gradante. "That all added to the mystique and made people want to get in."
 
Barbara Rosenthal, a Palm Beach property agent, says Mr Madoff's standing was such that people felt "you had to be lucky for him to talk to you", while another resident recalls that many people joined the Country Club "so they could meet this guy". Experts on "affinity frauds" say the strong demand for Mr Madoff's services – and the fact that many investors were coming in through "friends" – had a crucial consequence: those who did get in felt they had a special deal and were less inclined to ask questions.
 
But as the friends and family network became inadequate to satisfy investors' craving for a piece of Mr Madoff's miraculous returns, an informal marketing system began to take shape. In Palm Beach, one of the main middlemen for Mr Madoff's business was Robert Jaffe, according to several investors. Dapper and well-spoken, Mr Jaffe got a number of individuals and charities to place their money with Bernard Madoff Investment Securities.
Mr Jaffe is the son-in-law of Carl Shapiro, founder of the Kay Windsor clothing company and a renowned Boston philanthropist. Mr Shapiro's foundation is believed to have lost nearly half of its $345m in assets and both he and his family are thought to have suffered significant losses as a result of the collapse of Mr Madoff's firm.
 
There is no suggestion that either Mr Jaffe or any members of his family knew about Mr Madoff's alleged fraud. A spokeswoman for Mr Jaffe did not return calls.
 
As the years went by without any sign of a dip in performance, the tentacles of Mr Madoff's operations began stretching beyond Palm Beach's manicured lawns and Manhattan's skyscrapers. The long list of potential victims of his alleged actions includes Swiss and Austrian private banks, hedge funds owned by large insurance companies such as MassMutual's Tremont Capital Management, as well as famous names such as Fred Wilpon, owner of the New York Mets baseball team.
 
Other high-profile investors, such as Mr Spielberg's Wunderkinder foundation and several charitable organisations that now face ruin, went in through the more traditional route of their long-standing financial advisers.
 
Some of the funds that fed international money into Mr Madoff's operation were run by well-known financiers such as Walter Noel, the founder of Fairfield Greenwich Group. A Harvard-educated former banker, Mr Noel had the ability to reach investors around the globe, partly thanks to the help of Andres Piedrahita, a well-connected banker who is Mr Noel's son-in-law and runs Europe and Latin America for Fairfield.
 
Fairfield, which is the largest potential victim of Mr Madoff's alleged fraud with some $7.5bn invested in his firm, declined to comment.
Ascot Partners, a hedge fund run by Ezra Merkin, also chairman of GMAC, General Motors' former finance arm now owned by Cerberus, the private equity group, was also an active recruiter of funds for Mr Madoff's enterprise. Ascot and Mr Merkin could not be reached.
 
The "feeder funds", whose returns were augmented by billions of dollars in loans from banks such as HSBC and Royal Bank of Scotland, had a powerful incentive to persuade investors to place money with Mr Madoff: lucrative returns. He forwent the standard 20 per cent cut on profits demanded by most fund managers and, by and large, charged feeder funds only commissions on trades.
 
Crucially, not many of the investors appear to have challenged that unusual structure, let alone Mr Madoff's suspiciously good returns over the years.
Those who did were less than impressed with Mr Madoff's answers. Jim Hedges, an asset manager, said that when they met in the late 1990s, Mr Madoff was unable to explain his winning strategy. "He made little conversation – he looked interested in ending the meeting as soon as possible," says Mr Hedges, who decided against investing.
 
Another hedge fund expert recalls that he once approached Mr Madoff at a party and quipped that his performance was too good to be true. Mr Madoff chuckled and replied: "A lot of people say that."
 
Now, as investors contemplate the ruins of the financial edifice he built, the tragedy is that among that "lot of people", so few paused to ask themselves why.
 



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