The Madoff Chronicles Read online

  Madoff claimed it was “the world’s largest market-maker in off-exchange trading of listed U.S. equities.” In 1983, Madoff opened a London trading office, which gave him the appearance of an international operation, but investigators say this was actually a front to give the impression that the seventeenth-floor schemers were buying and selling on the European market.

  The legal trading part of the Madoff business bought and sold stock in the Standard & Poor’s 500 Stock Index without going through the New York Stock Exchange or any other exchange. By operating independently of the formal exchanges, Madoff’s firm could shave pennies or fractions of pennies off the price of a stock for its customers.

  Madoff said that these institutional customers included “scores of leading securities firms and banks from across the United States and around the world.” Bear Stearns was one of the firm’s major clients.

  Madoff was proud of his trading operation, and in 1992 he invited ABC News cameras into the office to show off his sleek, high-tech operation. Some feared that this division of his company could one day put the big stock exchanges out of business.

  “The difference is that ninety-five percent of our transactions are running through our technology and are so-called untouched by human hands until such time as the execution takes place,” Madoff said in a rare on-camera interview.

  Steve Aug, the ABC News correspondent who interviewed Madoff, said in his report that with one hundred employees and a roomful of computers, “Madoff is now the Big Board’s largest competitor, trading five percent of the stock exchange’s entire share of volume.”

  While Madoff’s name was not well known outside Wall Street, insiders knew it well.

  At an industry conference in 2007, the moderator said of Madoff, “That name may not say a lot to you, but go over to Madoff and you talk to Bernie and he mentions ‘Oh, by the way, ten percent of stocks traded in the United States are going through this firm right now.’ It’s one of those really important parts of our financial system that doesn’t show up in the headlines. Most people outside of markets don’t understand the role it plays, but it’s a major factor in American and global financial markets today.”

  For Madoff, it was crucial to his image to keep up appearances, and the eighteenth and nineteenth floors reflected his obsessive-compulsive personality. He imposed a sleek black and gray color scheme on the office décor. Employees were allowed to have only one or two personal photographs on their desks, and they had to be in a Madoff-approved silver or black picture frame. All papers had to be removed from the top of the desk at the end of the day.

  “His rules were he didn’t want any loud colors. And he didn’t want you spilling things, so he didn’t want you walking around with anything that didn’t have a cover on it,” remembered Eleanor Squillari.

  His obsession extended to the London office. Madoff had technicians install television cameras in the ceilings after he became suspicious that the employees there were taking long, liquid lunches and doing little work in the afternoons.

  The veteran FBI agents who were investigating Madoff were reminded of the fastidiousness of legendary director J. Edgar Hoover, who similarly mistrusted his employees and imposed his compulsion for “tidiness” on the Bureau’s offices.

  When prospective clients or government regulators came to see Madoff, they would be shown into the nineteenth-floor conference room that was between Bernie’s and Peter’s offices. Madoff would position them so that through the room’s glass wall they would see the state-of-the-art trading operation and the hustle and bustle of traders buying and selling. Few ever realized that all the activity they were witnessing was completely unconnected to Madoff’s investment advisory business for wealthy clients, which was located on the seventeenth floor.

  “It was very impressive and high-tech looking,” recalled investment adviser Jim Hedges, who went to meet Madoff as part of a “due diligence review” for the client of a private bank considering an investment of hundreds of millions of dollars.

  “I was told that this was a great opportunity to meet the Wizard of Oz behind the green curtain. And I asked him, ‘There’s seventy-five people behind us. Can I meet some of these guys and understand what they’re doing? recalled Hedges. “And he said no, I couldn’t meet them.”

  According to Madoff, his legitimate trading business had $550 million in capital as of 2007, but former employees say given the small margins of profit on transactions, the business did not actually make that much money. It was, however, an excellent front or cover story for what was happening on the seventeenth floor, where lots of money was being made.

  The seventeenth floor was the inner sanctum of Madoff’s scam, the headquarters of the illegal operation, surrounded by great secrecy. No visitors, period. No one from the outside was going to be allowed to see behind this curtain.

  Even access for Madoff employees was limited to those with a special key card. “No one really was allowed to go down there,” said Eleanor.

  “They had to buzz you in, if you needed to drop something off,” remembered Little Rick.

  Unlike his obsession with the appearance of the eighteenth and nineteenth floors, Madoff did not seem to care how the seventeenth floor looked, as long as it churned out the phony trades and statements.

  None of the Madoff-mandated color schemes or desk codes applied on the seventeenth floor. People dressed like slobs. The desks and floor were always littered with stacks of papers and computer printouts.

  “It looked like your crazy aunt’s basement,” recalled former computer tech manager Bob McMahon.

  “It was just a junk shop, very dark, and it looked almost like a cave going in there because there were reams and reams of paper and stuff piled up and old computers and old screens,” said McMahon.

  Most of the people hired to work on the seventeenth floor had a connection to someone already employed by Madoff. It was a corporate organizational chart that read more like a family tree of wives, cousins, brothers-in-law, fiancés, lesbian lovers, neighbors, and ex-girlfriends. There were virtually no outside professionals.

  “Everybody brought somebody in,” recalled Little Rick, who started as a messenger in 1975 after being brought in to the Madoff office by a friend from Brooklyn. “If he trusted you, then he could trust who you brought.”

  Madoff had assembled a team he could trust and control. “Antisocial personalities cannot function unless they can control the people around them,” said former FBI agent Brad Garrett. “You bring in some smart guy, some CPA, he’s going to say ‘this isn’t right,’ you’re going to get caught.” No doubt the level of knowledge and culpability varied widely, but the seventeenth floor was the “back office” where checks from clients were processed, nonexistent trades were recorded, and the bogus monthly and quarterly account statements were prepared, printed, and mailed.

  While Madoff initially told the FBI he acted alone, someone had to generate the reams of paperwork necessary to fool clients and regulators into thinking everything was legitimate. These were the mechanics that made the scam possible. Investigators originally targeted between twenty-five and thirty employees, outside accountants, fund managers, and Madoff family members for possible criminal charges for their roles, even if they did not fully understand that the entire enterprise was a scam. “It would be like the prosecution of a Mafia family using the same statute,” said one lawyer involved in the case. Ultimately, in addition to Bernie and Peter Madoff, thirteen other employees and associates were charged by federal prosecutors. All of them were convicted. “It would be like the prosecution of a Mafia family using the same statute,” said one lawyer involved in the case. Ultimately, in addition to Bernie and Peter Madoff, thirteen other employees and associates were charged by federal prosecutors. All of them were convicted.

  Two longtime Madoff employees ran the seventeenth floor: Annette Bongiorno and Frank DiPascali. They both became multimillionaires in jobs that ordinarily pay no more than a few hundred thousand dol
lars a year.

  Annette started at Bernard L. Madoff Investment Securities as a nineteen-year-old high school graduate in the late 1960s. She was employed as Bernie’s private secretary or “administrative assistant,” as she liked to be known.

  Annette had a team of five or six women who were responsible for preparing the monthly statements sent to clients. Many of Madoff’s longtime clients would call Annette directly with questions about their accounts, and she later would earn commissions for steering new clients to Madoff through a company called RuAnn, short for her name and that of her husband, Rudy.

  Former employees say Annette would often personally hand out the monthly statements to all those in the firm who had accounts with Madoff.

  “She was always a welcome sight because she would be bringing the good news of another great month,” said one former Madoff trader. This trader, like so many of his colleagues, lost everything when the scheme collapsed.

  Referred to as the “toad” by other people in the office because she was short and overweight, Annette was once an attractive blonde whose familiar relationship with Madoff fueled rumors about what happened between them after office hours.

  “She was a cute little thing, blond hair,” recalled Little Rick, who said he briefly went out with her.

  Madoff allowed Annette to work from her home in Florida for months at a time, and former employees said she certainly acted as if she was protected by the boss. She acted like “the queen or the she-devil,” said Little Rick, who now says she used him as a “boy toy.”

  “As they made more money, they got more and more to become, you know, assholes,” he said of Annette and others on the seventeenth floor. “Come on, for God sakes, you know, I saw you naked. Give me a break.”

  She became a multimillionaire, with a $2 million home on Long Island and another million-dollar house in a gated community in Boca Raton, Florida. FBI agents told employees she had more than $70 million in investments. Among her cars are two Mercedes-Benzes and a Bentley, which sells new for $175,000. Her husband, Rudy, was an electrician for New York City’s Department of Transportation for more than twenty years. In 1996 he retired on medical disability and told friends he was trading in stocks.

  When an ABC News reporter approached Rudy Bongiorno outside his house following Madoff’s arrest, he angrily shouted, “Don’t come on my property.”

  Investigators came to believe that Annette was involved in the illegal scheme from the beginning of her employment, between 1967 and 1968. In her effort to cut a deal with the government, she reportedly said that “the same things she was doing in 2008 she was doing in her first year with Madoff.” Only Ruth and his brother, Peter, were with Madoff longer than Annette.

  Annette recruited Frank DiPascali, her next-door neighbor in the Italian working-class neighborhood of Howard Beach in Queens. According to investigators, DiPascali ultimately became even more important than Annette in the day-to-day running of the Madoff scheme. Former employees said DiPascali’s ascendancy led to friction with Annette, who resented losing some of her power to Frank.

  “He was a pimple-faced kid, you know?” said Little Rick, who was there when DiPascali first started working at the company in 1975 as an assistant to the managing director. “He was self-made there. He was molded there, in other words.”

  DiPascali worked his way up through Research and Option Trading. Titles did not mean much at the Madoff firm because they were given out on a random basis or often self-selected, but according to a résumé DiPascali submitted in 2002 to a New Jersey school system whose board he sought to join, he was promoted to chief financial officer in 1996. Investigators say that DiPascali’s salary in the final years ranged between $2.25 and $3 million.

  Former employees said that when Bernie came to the seventeenth floor, he would meet with Frank in one of the rooms that had the DO NOT ENTER and DO NOT CLEAN signs on the door.

  Investigators say DiPascali, with a team of five others, including his brother-in-law, Robert Cardile, was in charge of producing statements reflecting thousands of trades that were supposedly being executed for Madoff’s investment clients. In reality, there were no trades.

  When questions were raised by suspicious investors or government investigators, it was DiPascali who would be by Madoff’s side to offer elaborate fictions about the sophisticated “split strike conversion” trading strategy and computer systems supposedly being used on the seventeenth floor. He would not, however, offer any tours of his seventeenth-floor operation.

  Customers were told that Madoff “would carefully time purchases and sales to maximize value” in a “basket of fifty stocks” chosen from the Standard & Poor’s 100 Index, a collection of the one hundred largest publicly traded companies. The story went that sometimes Madoff would get “out of the market” and put everything in cash, in U.S. securities. To guard against a downturn, Madoff would supposedly hedge his bets by buying and selling “option contracts” matching the stocks in the basket. Under this fictional strategy, if the stocks went down, the value of the options would go up. In September 2008, DiPascali reassured one major hedge fund investor by telling him that Madoff used “twenty derivatives dealers and international banks” in their option trades. It was yet another lie.

  To hear Madoff and DiPascali tell it, they had found a foolproof strategy, all carried out in great secrecy on the seventeenth floor. Investors on average received between 12- and 20-percent returns, although certain Madoff clients were rewarded with much higher rates of return. One prominent investor earned as much as 950 percent one year. Madoff said he made his profit by charging $.04 per share commission on the stocks he traded and $1.00 for every option contract he purchased.

  Madoff was known to become irritated if someone asked too many questions, and he refused to answer standard industry inquiries about percentages held in cash, the amount of borrowed money, or the names of the “option counter parties.”

  Of course, the reason for this was that he had no good answers. The entire operation was a fabrication. No stocks were traded. No options were purchased. His profits were not coming from any $.04 stock or $1.00 option commissions.

  According to the investigators, what really happened on the seventeenth floor was relatively simple. Every day, DiPascali kept track of the closing prices of the Standard & Poor’s 100. Then, on a regular basis, DiPascali and Madoff would pick the stocks that had done well and create bogus trading records for their “basket of stocks.”

  They often got sloppy. Sometimes they recorded trades as if they had been made on weekend days or federal holidays, when the stock market was closed. None of the supposedly sophisticated investors or SEC regulators ever noticed.

  Investigators would later find a consistent pattern in which Madoff and DiPascali made their fictional trades at the precise high or low price of a stock each month, an amazing feat that generated “too good to be true” profits.

  Of course, it’s easy to master the timing and make a profit if you already know the winners—it’s like knowing which horse won the race and then placing a bet.

  To help hide the fact that no trades were taking place in New York, Madoff claimed all of the trading for the investment advisory business was being done through the London office, on the European markets. Madoff regularly transferred hundreds of millions of dollars to the London office, but investigators say the London office simply wired the hundreds of millions of dollars right back to New York without buying a single share for investors. Employees in the London office later told investigators they thought their job was to buy and sell stock for Bernie’s personal account. They had no idea they were supposed to be making billions in trades for the firm’s investors.

  Investigators say that, using a computer program, DiPascali and those who worked for him on the seventeenth floor would plug the fictional trades into the 4,900 accounts under their control. Sometimes clients needed losses for tax reasons, and Madoff and DiPascali could provide those just as easily.

&
nbsp; Like his former neighbor Annette, DiPascali had very flexible work hours. He would show up at the office in the late morning, hardly dressed like the chief financial officer of an investment firm managing $65 billion.

  “He looked to me like an electrician. He had gold chains on and he’s got his pack of Marlboros in his hand and he is whizzing through the office saying hi to this person or that person,” recalled the former computer tech, Bob McMahon.

  “I turned to a young lady I worked with and said, ‘Who is that?’ and she said, ‘Oh, that’s Frank. He works down on seventeen. He’s one of the muckety-mucks.’”

  Whenever SEC auditors or big investors were around, DiPascali would show up in a suit. People on the seventeenth floor knew “something was up” in the final few weeks before Madoff’s arrest because “Frankie was wearing a suit every single day.”

  DiPascali had long since moved from his home in Queens to a $1.3 million estate in New Jersey. He drove a Mercedes and had a large fishing boat, the Dorothy-Jo, with its own captain at a marina in New Jersey. According to investigators, DiPascali’s boat captain, Christopher Warrin, was on the Bernard L. Madoff Investment Securities payroll, at a salary greater than many of the staff who worked in the legal area of the company.

  After a long negotiation, DiPascali pleaded guilty to nine felony counts in August, 2009 and agreed to “name names and tell all” to federal prosecutors in exchange for a lighter sentence.

  Former employees said DiPascali’s right hand and confidante on the seventeenth floor was his deputy, JoAnn Crupi, a former waitress whom everyone called Jodi. She was a twenty-five-year veteran of the firm and arranged for her cousin, Erin Reardon, to be hired as Frank’s assistant.