The Wizard of Lies: Bernie Madoff and the Death of Trust
Diana B Henriques
Henry Hold & Co/Times Books, 419 pages
Reviewed by Christopher Silvester
A PONZI SCHEME ‘is the crime of the egotist, not the sadist’, writes Diana B Henriques. Whereas others have depicted Bernie Madoff as a psychopath, in her estimation he was not a dastardly villain intent on causing pain to others. ‘Like every Ponzi schemer he was able to face his victims every day because they didn’t look like victims, not until the final days and weeks.’ Instead, on the basis of his enormous lie, he was deluded into thinking he was ‘helping, not hurting’.
The mystery at the heart of the book, which offers the most thorough, cold-light-of-day assessment of Madoff’s fraud, is about when exactly that fraud started, or indeed whether there were two separate frauds. For Henriques, who led the New York Times coverage of the scandal, reveals that when Madoff was starting out in the over-the-counter stock market at the beginning of the Sixties he borrowed $30,000 from his father-in-law to cover his clients’ losses rather than admit that he had recklessly risked their money in unsuitable new issues which were wiped out in a market collapse.
Thereafter, he began to build a reputation for market wizardry and ‘riskless’ arbitrage strategies based on technological innovation, becoming chairman of what was later renamed as the Nasdaq. Though no evidence of it has yet emerged, says Henriques, ‘the possibility that he was deceptively gilding his clients’ arbitrage profits in the 1970s cannot be ruled out’.
Madoff’s investment advisory business, as opposed to his legitimate trading arm, had started with a ‘friends and family’ network referred by an accountancy firm (Avellino & Bienes); then he had netted four wealthy Jewish entrepreneurs (Chais, Shapiro, Levy and Picower); then he rode the first wave of interest in offshore hedge funds (such as Tucker and Noel’s Fairfield Greenwich).
But a pivotal moment, it seems, was in the wake of Black Monday in October 1987. Sudden cash calls from his biggest clients put a strain on his liquidity at precisely the time when new ‘rivers of cash’ were pouring. Again, there is no proof, but it’s possible his Ponzi scheme started soon after 1987. ‘He got into a hole — possibly before 1980, more likely by the mid-1980s, but certainly by 1992 — and he just couldn’t get out again.’
It was a 1992 SEC investigation of Avellino & Bienes which first required Madoff’s firm to produce a falsified paper trail of trading activity. (Madoff’s chief co-conspirator, back-room boy Frank DiPascali, later created fake ‘live’ computer feeds showing supposed trades in real time and even replicated the database of an official government agency.) As the money continued to pour into the business from more hedge funds, from funds of hedge funds, and from European family offices and private banks, Madoff let it be known, though without giving away any details, that his secret investment strategy was something called a ‘split-strike conversion’.
Some of his clients weren’t convinced. They suspected him of ‘cherry-picking’, or creaming off profits from his wholesale customers and diverting them to his hedge-fund clients. The Securities and Exchange Commission, on the other hand, suspected him of ‘front-running’, or investing on his own account ahead of large trades placed for wholesale clients. Nobody suspected him of operating a Ponzi scheme — with the possible exception of Jeffry Picower, who withdrew $3.4 billion over four years, and Sonja Kohn, an Austrian private banker who received tens of millions in hidden fees for steering $9 billion into Madoff’s business.
Henriques is excellent at conveying the white-knuckle ride on the steep downward section of the roller-coaster as Madoff tried to borrow from some clients to keep the Ponzi scheme running in its final year, as well as the complexities of liquidating the business.
She absolves Madoff’s wife and brothers from any complicity in his crimes, in the absence of any compelling evidence against them, on the basis that if Madoff had fooled so many sophisticated investment professionals, ‘Why was it so implausible that he had hidden it from his wife, who had no official role in the firm, and from his sons, who worked in a separate part of the business?’ Indeed, Ruth, Mark and Andrew were ‘possibly his most damaged victims’ because they ‘had lost almost every cherished relationship in their lives, including their connections to one another’.