The Madoff Chronicles Page 9

  Investigators planned to interview Amit Vijayvergiya, the chief risk officer of the Fairfield Greenwich Group, headquartered in New York City, with offices in Greenwich, Connecticut. Fairfield Greenwich Group is a giant hedge fund that had steered billions of dollars from its clients to Madoff. They were Madoff’s single biggest customer, with accounts totaling some $7.2 billion.

  Any close examination of the books would reveal lots of loose ends and contradictions about how Fairfield Greenwich’s money was invested by Madoff. If these records were pulled and pursued, Madoff knew it could be his undoing. It was essential that Madoff and Fairfield Greenwich get their stories straight.

  On the call with the worried Madoff was Vijayvergiya, from the Fairfield Greenwich offices in Bermuda, and McKeefrey, the Fairfield Greenwich general counsel and chief operating officer at the New York headquarters. Lawyers for Fairfield Greenwich had already disclosed to the SEC that they were going to contact Madoff. The SEC apparently had no objection, although it seems unlikely they would have approved the conversation that followed.

  Madoff took Vijayvergiya through what he should say in response to certain technical questions and advised him, most of all, to act casual with the SEC examiners.

  “With these guys, anything you can’t answer you basically just say I, you know, don’t answer. You know, you just say, you know, I’m not knowledgeable in that aspect of it,” Madoff advised as he spelled out how to deflect and bamboozle the SEC.

  “But as I say, with them, you don’t offer anything unless they…,” said Madoff, whose sentence was finished by the cooperative Vijayvergiya.

  “…unless they ask,” said Vijayvergiya.

  Among Madoff’s most important skills was his ability to co-opt, outwit, and calmly lie to the SEC and others who might have uncovered his fraud. He worked hard at infiltrating and ingratiating himself with the very government and industry agencies that were supposed to investigate him.

  Madoff had served as the chairman of the board of directors of the NASDAQ stock exchange for three one-year terms, and as chairman or member of nine other boards at the National Association of Securities Dealers (NASD). As such, he was a man to be reckoned with—especially by the industry regulators who worked for the NASD. NASD is now called the Financial Industry Regulatory Authority (FINRA).

  Either FINRA or NASD took “regulatory action” against Madoff’s broker-dealer trading operation for relatively minor procedural infractions in 1963, 1975, 2005, 2007, and 2008. Even though Madoff Investment Securities was all one big firm in the same building, FINRA said it had no jurisdiction to investigate the investment advisory side of the business. And so Madoff’s fraud continued unchecked.

  Madoff also made sure to be an active presence at another major industry group, the Securities Industry Association, where he chaired the trading committee. His brother, Peter, also served on the board of that group, which later merged to be known as the Securities Industry and Financial Markets Association. (Peter was forced to resign his position when Bernie was arrested.)

  Bernie and Peter reportedly provided tens of thousands of dollars for conferences set up by the Securities Industry Association. Who could ever suspect the man funding the industry oversight organization of wrongdoing?

  At an industry conference on regulation in 2007, Madoff spoke as if there was no way for any fraud to last for long. “If you read things in the newspaper, and you see somebody violate a rule you say, Well, they’re always doing this, but it’s impossible for a violation to go undetected. Certainly not for a considerable period of time,” said the man who, at the very same time, was decades into carrying out the largest fraud scheme in Wall Street history.

  Similarly, Madoff cultivated important relationships with the SEC and its top officials.

  In 2000 Madoff was asked to help an SEC advisory committee dealing with stock market rules in the wake of electronic trading.

  The Madoff “little black book”—the book of essential contacts that he never traveled without—also included the misspelled name of a senior SEC official, Mike Macchiaroli, and the correct, direct line number for his Washington office. He is the associate director in the office of Broker Dealer Finances, in the Trading and Market Division.

  Investigators were surprised to find Macchiaroli’s name in Madoff’s book, and wondered why a senior SEC official was considered one of Madoff’s “essential contacts.” They said that Macchiaroli had been a respected, behind-the-scenes presence at the SEC for years. “He was in market regulations, which doesn’t do the investigations, but when the enforcement people received a tip or a complaint about Madoff, he would have been the kind of person they might run it by,” said one of the investigators on the case.

  The question was whether Macchiaroli did anything to help Madoff. Did he come to Madoff’s defense? David Kotz, the SEC inspector general, received a copy of Madoff’s “little black book” from the FBI and was asking the same questions. Madoff had badly misspelled Macchiaroli’s name—Macrioli—so the relationship couldn’t have been that close, and investigators found that Madoff often made more of his connections to the SEC than there was in reality. Still, given the SEC missteps in the various investigations of Madoff, the appearance of Macchiaroli’s name in the book caused agents to wonder.

  When asked, Macchiaroli first said he had “nothing to do with enforcement” and denied that he had any “close relationship” with Madoff and had “only met him once or twice on the street.”

  Madoff’s secretary, Eleanor Squillari, said she doubts that. “He wouldn’t be in Bernie’s address book if Bernie didn’t need his number. If he only spoke to the man once, or only ran into him in the street, there’s no way he would be in that book. I’m not saying the man is lying, I’m just saying I know Bernie’s habits.”

  In a later conversation, Macchiaroli said it was no surprise that he would be in Madoff’s address book, and he recalled a more extensive set of contacts with Madoff—going back to at least 1987. “During the crash in ’87, for example, I called all of the firms. Madoff was one of the firms we called to see how they were doing, how they were coping, and Madoff knew me.” Macchiaroli said “I don’t recall” if anyone from the enforcement division had ever contacted him about Madoff, but he said he had always had a high opinion of Madoff. “I know the same things that other people know. You look at him, he looks like a grandfather, treats everybody very nicely.” But Macchiaroli was adamant that he was not involved in any way in helping Madoff avoid investigation by his agency.

  “What the hell would I have done for him?” asked Macchiaroli.

  Madoff had another, perhaps even more important, connection to the SEC, through his niece, Shana, who was the firm’s compliance lawyer. Shana’s love life became a focus of the investigation after her uncle’s arrest. In 2007, Shana married Eric Swanson, a ten-year veteran of the SEC, who was the assistant director in the Office of Compliance Inspections and Examinations’ market oversight unit in Washington. He supervised “the commission’s inspection program responsible for regulatory oversight of trading on the securities exchange.”

  In his official capacity, Swanson would have known Shana’s uncle well. His office conducted regular inspections of all broker-dealers, including Madoff, and Swanson was the SEC official who approved the 2003–2004 “front-running” investigation of Madoff that was abruptly halted. Swanson says another official had already taken over the case when it was stopped and that he played no role in that decision.

  In April 2006, friends say that Eric asked Shana out for a drink and it quickly became serious. At the time, the separate SEC investigation of the Ponzi scheme allegations was going full tilt in New York and investigators had already concluded that Shana’s uncle Bernie had “mislead” (sic) them.

  Shana and Eric had known each other from attending various industry conferences that dealt with the rather arcane SEC compliance rules relating to the Madoff firm’s legitimate trading operation. At the time of their first dat
e, Shana had spent the last year and a half attending to her dying brother, Roger, who was suffering from leukemia. He would die two weeks later.

  “Shana and Eric were really an unlikely match,” said one family friend. “He was a schmuck from the Midwest, and she was this divorced New York lawyer into yoga. But her brother’s death had a big impact on her, and she and Eric really found each other.”

  Four months after their first date, Swanson submitted his resignation to the SEC and moved to New York to live with Shana. They were married in September 2007. One Madoff family friend who attended the wedding recalled that “half of the frickin’ SEC seemed to be there. On one side there was the Madoff family, and on the other the SEC.”

  An employee from Madoff’s London office who attended the wedding said that Madoff looked at all the SEC officials in attendance and said, “That’s the enemy.”

  Former employees said that Shana was not everyone’s favorite in the office. “She appeared to be very spoiled,” said Eleanor, who had known her since she was a child and was actually fond of her. Shana’s uncle was the boss and her father, Peter, was second-in-command. “If you’re raised in that kind of an environment, and your parents spoil you, you’re gonna have a different way and a different air about you.”

  Her marriage to an SEC official was quite a coup for Madoff, and it came just two months before the SEC office in New York formally closed its investigation of the firm, finding no Ponzi scheme.

  Madoff boasted about the relationship between Shana and Eric at a 2007 industry conference on the markets and government regulators. “So there’s always this friction that goes on between the regulation side of the industry and the practitioners that say okay, where do you draw the line?” Madoff said. “I’m very close with the regulators so I’m not trying to say that what they do is bad. As a matter of fact, my niece just married one,” he said to laughter.

  “My condolences,” said trader Muriel Siebert, whose own trading company was on the same floor of the Lipstick Building with Madoff.

  “Did the SEC approve?” asked another panelist.

  “He’s an attorney,” Madoff said as the laughter continued.

  When Madoff’s scheme was exposed one year later and the failure of the SEC to detect it became known, the marriage was no longer a laughing matter.

  The SEC inspector general, David Kotz, launched a full investigation into the SEC’s failure to detect the crime and Madoff’s dealings with people at the agency, including Swanson. Kotz interviewed Madoff for three hours in New York in June 2009, and included questions about his niece’s marriage, but the inspector general told prosecutors that Madoff’s information was of little value and would not “shape and fortify the future of Wall Street regulation and oversight.”

  Friends said Swanson was devastated to be linked in any way to questions of corruption and he even hired a public relations adviser. “Swanson did not participate in New York’s investigation and didn’t seek to influence the outcome,” said family spokesman Eric Starkman of Starkman Associates.

  Even if the relationship was as innocent and unconnected to the SEC’s oversight as Swanson and Madoff maintain, it served to underscore the cozy relationship that Madoff’s firm enjoyed with the principal government regulator of financial institutions, the SEC.

  “He charmed the pants off of everybody, including everybody at the SEC. There came a point where the SEC would call me every year to have the interns come to take a tour of our office,” Eleanor said. “And we were more than happy to accommodate.” Bernie or Peter or one of Bernie’s sons would meet the interns and give them a full tour as a future generation of SEC auditors fell under the Madoff spell.

  When SEC investigators were in the building to conduct routine audits, Madoff insisted that they not leave the conference room they had been assigned to. They were told that they could have anything they wanted, but Madoff also told Eleanor to keep an eye on them. Their comings and goings were closely noted and reported to Madoff. “If any calls came into the office for them, they would go through me and I would let Bernie know who was calling,” Eleanor said. “If they were gonna make copies, I would offer to do the copies for them and let Bernie know what they were copying.” Other than the men’s room, they were not allowed to go anywhere else in the office. They also weren’t permitted to have any “unauthorized” discussions with any employees.

  Eleanor says that the SEC auditors accepted their role and did not complain.

  Out of their sight, however, Bernie would be a nervous wreck, appearing to his secretary to be preoccupied, “just staring out the window; just seemed to be waiting, waiting for them to finish.”

  Madoff knew better than anyone what was at stake. A simple slip or a glance at the wrong document could bring down his empire.

  “He always said, ‘My reputation is my business.’ Of course, now I know, and I got to tell you, even for somebody who was sitting there staring out into space, he remained pretty calm. I find that pretty incredible. I don’t know how the man slept at night,” Eleanor said.

  The investigation that began in 2005 and continued through all of 2006 and most of 2007 was a dangerous one for Madoff. At one point he thought he had been caught.

  The SEC opened what it called an “initial inquiry” in late 2005. It turned into a full investigation in January 2006, based on serious allegations from an “independent fraud investigator” who claimed that Madoff’s investment strategy was nothing but a Ponzi scheme, and from the SEC’s own staff, which reported that “Bernard L. Madoff—mislead [sic] the examination staff” about the nature of his investment strategy.

  The “independent fraud investigator” was Harry Markopolos, who first contacted the SEC Boston office about Madoff in May 2000 and continued to raise questions until he finally sent the SEC a twenty-page report entitled “The World’s Largest Hedge Fund Is a Fraud” in 2005.

  Markopolos became intrigued, and then puzzled, and then suspicious of Madoff’s unparalleled success. He worked for a Madoff rival who wanted Markopolos to figure out Bernie’s secret of success. When he and a colleague, Neil Chelo, tried to replicate trades using Madoff’s stated “split strike conversion” trading strategy, they found it was impossible.

  As he analyzed the public filings, Markopolos could not understand why Madoff had only had $160 million in U.S. Treasury notes when, in other documents, he claimed his portfolio had $1.147 billion in U.S. Treasury notes. “Where did the missing $1 billion go???” he wrote to Chelo. “There’s more holes in the Madoff portfolio than all the golf courses in Florida.”

  Markopolos and Chelo ran the numbers again and again and finally concluded the former chairman of the NASDAQ stock exchange was running a Ponzi scheme.

  “In less than four hours I knew I had proved mathematically that [Bernard Madoff] was a fraud,” Markopolos said.

  “You simply could not run that amount of money in that strategy and make those types of returns,” said Chelo.

  Chelo even challenged Amit Vijayvergiya, the risk manager at Fairfield Greenwich, who told him that Madoff was just exceptionally skilled. “Bernie is long when the markets go up and out of the market when it is not favorable,” Chelo said he was told. “So for seventeen years, he has had perfect market timing,” wrote Chelo. Nobody, ever, had been that good.

  Markopolos repeatedly submitted his findings and concerns to the SEC in Boston and New York. He later testified to Congress that “the SEC never called me. I had to call the SEC repeatedly in order to try to move the case forward and with little to no response.” He described the branch chief of the New York SEC office, Meaghan Cheung, as incompetent and rude. “Ms. Cheung also never grasped any of the concepts in my report, nor was she ambitious enough or courteous enough to ask questions of me. Her arrogance was highly unprofessional given my understanding of her responsibility and mandate.”

  At the SEC offices, Markopolos’s strident tone and claims that his life was in jeopardy did not help his credibility. Some t
hought he was a “kook” and “obsessed with Madoff.”

  Markopolos picked up on the skepticism at the SEC. “Every phone call to Meaghan Cheung made me feel diminished as a person,” he said.

  Finally, in late 2005, after years of ignoring him, the SEC launched an initial inquiry based on Markopolos’s twenty-page report sent on October 25. In the document, Markopolos concluded that Madoff was conducting one of two frauds. Either he was “front-running,” using knowledge of other trades to place his trades first, or, “highly likely,” wrote Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” He wrote that three full years before Madoff would be arrested.

  Even though the SEC could no longer ignore Markopolos’s well-documented findings, it still pulled its punches and continued to be skeptical that the esteemed Bernard Madoff could be a crook. Markopolos was characterized in the case file as “neither a BLM insider nor an aggrieved investor,” and members of the SEC said the commission only opened the investigation “in an abundance of caution.”

  Instead of issuing subpoenas for Madoff’s documents and records, the staff only requested “voluntary production of certain documents,” trusting Madoff to comply fully and honestly.

  According to e-mails discovered later by investigators, this gave Madoff plenty of time for the seventeenth floor to create reams of phony computer runs, which had the desired effect of fooling the SEC people in the office.

  The SEC staff also decided to conduct “voluntary interviews” with Madoff and his assistant, Frank DiPascali, as well as Amit Vijayvergiya at Fairfield Greenwich, who was being extensively coached by Madoff about what to say. For some reason, Fairfield Greenwich taped the phone conversation and turned over the tape when subpoenaed by the secretary of the commonwealth, who launched his own investigation because of the huge losses suffered by the people in his state. The tapes provided yet another example of Madoff trying to manipulate others to help him deceive the SEC.

  “Your position,” said Madoff at another point in the conversation, “is say, listen, Madoff has been in business for forty-five years; you know, he executes, you know, a huge percentage of the industry’s orders, he’s—you know, he’s a well-known broker. You know, we make the assumption that he’s—he’s doing everything properly.”