By Steve Rhodes
It’s been nearly three years since Bernard Madoff confessed to running a $65 billion Ponzi scheme – the largest financial fraud in history,” 60 Minutes reported Sunday night. “Thousands of trusting clients who felt safe investing with a financial genius were swindled. He hadn’t invested a penny.
While Madoff is serving 150 years in prison, his family has had to deal with the consequences of his crimes. His wife Ruth, divested of most of her great wealth – and derided by a suspicious world. Their son Mark – dead. Driven to suicide by shame and accusations of guilt. Their other son Andrew isolated – trying to live with the disgrace.
Are they innocent or were they willing partners? For the first time since Bernie Madoff’s arrest, his son Andrew and wife Ruth speak out about crime, punishment and the shame of being a Madoff.
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Madoff’s ties to Chicago go back a long way; as far back as 1990 the Sun-Times ran a story with the headline “Midwest Mad At New Yorker Madoff.”
Which was nothing compared to the Lake Forest millionaire who said “I hope they burn him” after his scheme was exposed.
Let’s take a look.
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“Unfair competition, a threat to the stock market. The Midwest Stock Exchange thinks the federal government should move in. If the government, that is, the Securities and Exchange Commission, won’t act, the Midwest is prepared to do battle on its own.
“Charles V. Doherty, the Midwest president, is talking about the activities of Bernard L. Madoff and Madoff Investment Securities of 885 Third Ave. in New York.
“For the past decade, Madoff has been competing against the Midwest and, for that matter, against the New York Stock Exchange and the other organized exchanges. Furthermore, he has been doing very well at it.
“Madoff Investment Securities is what might be called a super discounter. His firm proposes to buy or sell stock at a price better than the market, that is, better than the investor would be accorded if the trade moved through the normal stock market mechanism, from broker to the New York or the Midwest or one or another of the regional stock exchanges.
“Currently, Madoff is making a market in 244 stocks. They are name stocks listed on the Big Board and the Midwest. Buyers and sellers can take Madoff ‘s price or the auction price established through the trading on the exchanges. The Madoff firm, using highly sophisticated computer programming, sets out to shave the exchange price while still generating a profit for Madoff Investment Securities.
“But that’s not the crux of the matter, says the Midwest’s president. ‘What Madoff is doing is paying for order flow,’ Doherty says.
“‘Madoff will pay a brokerage firm 1 cent or half a cent a share for orders up to 2,000 shares,’ Doherty says. ‘That may be legal, but he’s not bound by any of the rules of the regulated exchanges designed to preserve orderly and fair markets.’
“Doherty’s point is that Madoff ‘s operation, carried on outside the rules governing the exchanges, is a destabilizing influence on the stock market . . .
“Doherty and Midwest Chairman John G. Weithers have dispatched a stiff letter to the SEC protesting Madoff ‘s operation. ‘We are trying to persuade the SEC that Madoff presents a major threat to the liquidity of the market.'”
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It turned out, as well, that Chicago options traders almost blew the whistle on Madoff in 2006.
“Options traders at the Chicago Board Options Exchange (CBOE) were so angry about Madoff’s scheme that they wanted the world to know he did not use their trading platforms,” the Guardian reported in 2009. “However, they did not tell regulators about their suspicions.
“The comments came to light in a 700-plus page dossier filed with the SEC by Harry Markopolos, the fraud investigator who tried to blow the whistle on Madoff for eight years . . . CBOE said that Matt Moran, one of the staff named in the dossier, spoke to Markopolos many times but does not recall a conversation about Madoff.”
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“Markopolos thought he had his biggest breakthrough in 2006 after talking to a Chicago Board Options Exchange official and learning its traders suspected Madoff was a fraud,” Government Executive reported.
“He noted the official, Matt Moran, received permission to talk to the SEC and the [Wall Street Journal], but neither organization followed any leads he provided.”
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In his testimony to the U.S. House of Representatives Committee on Financial Services in February 2009, Markopolos said:
“Perhaps the biggest breakthrough during the year was my September 29, 2006 telephone
call to Matt Moran, Esq., Vice President of Marketing, for the Chicago Board Options Exchange.
“Mr. Moran confirmed to me that several OEX Standard & Poor’s 100 index options traders were upset and believed that BM was a fraudster. Mr. Moran said he couldn’t talk to either the Wall Street Journal or the SEC without permission but that if these organizations went through proper channels and got permission from Lynn Howard, the CBOE’s Public Relations Head, then the CBOE staff and traders would be able to cooperate with an investigation and answer questions.
“This was exciting news! Unfortunately, neither the Wall Street Journal nor the SEC were inclined to even pick up a phone and dial any of the leads I had provided to them. It is a sickening thought but if the SEC had bothered to pick up the phone and spend even one hour contacting the leads, then BM could have been stopped in early 2006. One hour of phone calls was the difference between almost three more years of fraud and untold billions of additional investor losses. That’s how close we were and how far we were from busting this case wide open in 2006.”
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Tell that to Patti Gerber.
“Patti Gerber probably won’t find herself out on the sidewalk along with her toaster, teapots and other assorted possessions,” the Sun-Times reported in 2009. “But Gerber says she’s going to have to make serious adjustments after losing between $15 million and $20 million to Bernard Madoff, the New York financier accused of swindling several thousand clients out of more than $50 billion.”
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But David Greising reported for the Tribune in 2008 that Chicago’s elite by and large seemed to avoid getting sucked into the Madoff affair – largely because Madoff’s clientele was so exclusive that few Chicagoans seemed to qualify.
“So far as we can tell, Chicago investors are not among the first to emerge as victims of this mess,” Griesing wrote.
“Tom Pritzker will not comment on a report that Madoff recently made a pitch to manage some of his family’s money. The Crown family has offered no comment as well. The KattenMuchinRosenman law firm has set up a team to handle Madoff-related claims, but so far heard from only a few Chicagoans, none of them familiar names.
“The most high-profile Chicago victim, so far, is an immigrant-rights group that will lose most of a big donation because one of the agency’s key donors got caught up with Madoff. Turns out not all of Madoff’s alleged victims are among the elite.”
The Tribune would report a year later, though, that “dozens of Chicagoans” were among Madoff’s victims.
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In February 2009, the Tribune reported:
“Howard Gottlieb, a retired partner at the former investment firm Glenwood Partners, had Bernie Madoff figured out years ago. In the end, though, it didn’t matter.
“More than two decades ago, the hedge-fund manager invested with Madoff but didn’t like the look of the paperwork he got back, so he withdrew the funds.
“‘On close examination of the returns, the purported trading and all the rest of it, it didn’t add up as being a legitimate investment,’ said the Wilmette resident.
“Flash forward to a few years ago, when J. Ezra Merkin, a well-respected money manager, approached the Anne & Howard Gottlieb Foundation in Evanston seeking investors . . .
“The foundation invested some $500,000 with Merkin’s Ascot Partners LP, and it had grown to $576,801 by the end of 2007, according to documents the foundation filed with the Internal Revenue Service.
“Gottlieb never knew, as has been alleged, that Merkin was as a middleman for Madoff. According to published reports, Merkin in mid-December sent his clients a letter that stated he had delegated ‘substantially all’ of Ascot’s $1.8 billion to Madoff.”
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In a later report, the Trib wrote:
“‘How’s Uncle Bernie?’
“That phrase was an inside joke and a proud status symbol in wealthy enclaves from Chicago’s North Shore to West Palm Beach, Fla. Those in the know considered themselves lucky to be clients of New York financier Bernard Madoff, whose investment wizardry seemed to defy market downdrafts.
“Their greeting has been replaced by a new mantra.
“‘Can you believe he’s still in a penthouse?’ said William Baker of Chicago, among the thousands of investors globally who saw retirement nest eggs vanish amid Madoff’s alleged $50 billion Ponzi scheme.
“As the extent of the damage Madoff allegedly wrought in Chicago comes to light, singed investors here say their anger over lost fortunes and destroyed trust doesn’t compare with their rage that the disgraced former Nasdaq chairman is living under house arrest in his swanky Park Avenue digs in Manhattan . . .
“U.S. Bankruptcy Court documents released late Wednesday show that Madoff claimed dozens of victims in the Chicago area among the thousands prosecutors say he fleeced worldwide. While names include celebrities such as actors Kevin Bacon and John Malkovich and baseball legend Sandy Koufax, the list also includes Chicagoans, ranging from investment banker J. Ira Harris to Barbara Laird, who died in January at age 94 . . .
“Sharon Lohse, whose family is from the Chicago area, said that when she took over a $2.5 million investment portfolio established by her father, Harvey Van Lanen, she called Madoff’s office to ask why the investment statements looked so different from others in the portfolio.
“She remembers [a Madoff representative] telling her, ‘Look, if you don’t want your money here, just tell us and we’ll send it all back to you.’
“Lohse, who lives in Belle Mead, N.J., decided to better diversify the portfolio but said she kept $750,000 with Madoff, to her regret . . .
“Retired Chicago attorney Howard A. Weiss heard about Madoff through a friend 22 years ago and started investing some of his family foundation’s funds with him. Weiss thought he checked out. So did a lot of his friends.
“Weiss declined to disclose the extent of his foundation’s exposure but said he and his contemporaries are trying to put the loss in perspective.
“‘Lots of friends of mine were involved in this, maybe 50 or 60 people I know,’ Weiss said . . .
“Walter Greenberg’s grandfather knew Madoff through Jewish charities and started investing with him in the early 1990s.
“Greenberg [a part-time Chicago-area consultant to the financial-services industry], 53, followed suit in 2003. He said he invested under $5 million with Madoff. He assumes most of that money is gone, and figures he’ll be lucky to get back $750,000 . . . ”
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You can see all the Chicagoans on Madoff’s client list here.
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In the aftermath of the Madoff scandal, Multinational Monitor interviewed former SEC chairman and current Northwestern law professor David Ruder. Here is the key exchange.
MM: Do you believe the Madoff episode represents a failure by the SEC?
RUDER: One gets the impression that there were warning signals out there, that the SEC investigated, and didn’t do a thorough enough job in the investigation, but we can’t be certain. Apparently, Madoff had several sets of books, so that when the regulators came in they would be shown a false set of books when a private, more accurate set of books also existed.
We do not know whether the warning signals were strong enough so that an investigator should have found the fraud. Certainly, it looks like the regular complaints made by the money manager Harry Markopolos were enough that there should have been a more thorough investigation. It may very well be that whoever went up to Madoff’s office was not diligent enough, smart enough or alert enough to see that something bad was going on.
On the other hand, it may be that Madoff simply outsmarted the investigators. You had a man with a tremendously positive reputation on Wall Street. He was someone known to me in the early 1990s, and I certainly found him to be reputable and trustworthy. I think the entire regulatory community felt that way about him.
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Barbara Miller of the Australian Broadcast Company also interviewed Ruder.
MILLER: SEC officers were assigned to look into these complaints but their investigations, the report finds, were not thorough.
At one point unbeknownst to one another two officers were carrying out parallel investigations into Madoff’s activities.
EXTRACT FROM REPORT BY SECURITIES AND EXCHANGE COMMISSION: Astoundingly both examinations were open at the same time in different offices without either knowing the other one was conducting an identical examination.
In fact it was Madoff himself who informed one of the examination teams that the other examination team had already received the information they were seeking from him.
MILLER: David Ruder was the SEC chairman between 1987 and 1989.
RUDER: I think that the commission was understaffed and incompetent in what they did. It boils down to that for that particular area.
What happened was that the commission did not assign people with sufficient understanding of the securities markets to investigate the Madoff matter.
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Suspicions about Madoff were longstanding.
“Jon Najarian, an acquaintance of Madoff who has traded options for decades, said ‘Many of us questioned how that strategy could generate those kinds of returns so consistently.'”
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The New York Daily News also talked to Najarian:
“Investor Jon Najarian said he visited Madoff in 1995 in his offices in the Lipstick Building on Third Ave. to discuss a possible business deal and got an eerie feeling.
“‘He sat all alone on this vast, open trading floor facing the East River with computers and trading turrets but not a single trader in sight,’Najarian said.
“‘It was the middle of the day, but it was completely empty. You had the feeling of this Enron-esque place where he brought the people he was trying to dupe.'”
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Najarian also stated that the media was an unwitting accomplice.
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Finally, because much of the focus of the 60 Minutes segment was on Maddof’s wife, Ruth, let’s recall what University of Chicago cultural anthropologist Richard Shweder said in a 2009 New York Times article headlined “The Loneliest Woman in New York“:
“She’s perceived as the succubus to Bernie’s incubus. She was inside a circle of people whose wealth has been sucked out of the system.”
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Comments welcome.
Posted on October 30, 2011