The
party is over for Bernard L.Madoff. He was sentenced to
150 years in prison and all his property confiscated. His
crime was forging all the financial statements of his clients
so as to create the illusion that they were making steady
profits. In reality their money was being siphoned out of
their accounts and given to others. As is now clear from
recent court filings by the bankruptcy trustee, Irving Picard,
and the SEC, this amazing Ponzi scheme had both winners
and losers. While some 4,900 hapless investors, including
retirees, family trusts, and charities lost their nest egg,
a handful of financiers, all well versed in the arcana of
investing other people’s money, made huge fortunes
from Madoff’s notional book-keeping. The reason they
could profit so handsomely from this shell game, as the
Trustee explains in documents filed in U.S. bankruptcy court,
was that “The money received from investors was not
set aside to buy securities as purported, but instead was
primarily used to make the distributions to – or payments
on behalf of – other investors.” So people who
redeemed the imaginary profits in their account got the
actual funds put in by the new investors. According to a
lawyer involved in the bankruptcy case, the redemptions
in excess of investments, as calculated by the Trustee,
amount to over $10 billion. If so, the major redeemers took
home many billions of dollars. As it turns out, almost all
of fortunate redeemers turn out to be close business associates
of Madoff who had been involved in his money game for two
decades. Consider, for example, Jeffry Picower, who, as
a lawyer, accountant, deal-maker, and tax-shelter promoter,
who was well-experienced in financial arrangements, and
who had dealt with Madoff for more than 30 years. According
to the complaint of the Trustee for the bankruptcy of Bernard
Madoff’s firm, Picower had 24 Madoff accounts under
his control from which he withdrew a staggering $6.7 billion
from which he got, for himself and his entities, “at
a minimum, more than five billion dollars of other people’s
money.” Madoff kept meticulous records of correspondence
with his early investors which show that Picower, according
to the court filings of the Trustee, “was one of a
handful of clients with special access” to what Madoff
called his "targets" for profits each year. These
“targets” could be then achieved by since Madoff
since virtually all his trades were fictitious for each
accounts. So, If any of his clients with special access
requested a higher or lower number than his target for tax
or other purposes, Madoff simply adjusted the “profits”,
and, if necessary, backdated them Picower, the Trustee alleges,
frequently specified the profits he wanted for different
accounts and, in one case cited by the Trustee, even supplied
backdated documentation that Madoff then used in his fabricated
book-keeping. Madoff also allegedly shifted billions of
dollars of taxable income for Picower’s entities into
future years by phony trades. In December 1999, for example,
he trustee alleges that Madoff forged nearly $11 billion
in short sales in Picower’s accounts in December 1999
“to increase the net cash deficit across these accounts
by $2.5 billion” in tax-year 1999. And then reversed
these fake trades in January 2000. Such artful legerdemain
could defer taxable income and, by doing so, further enhance
the value of the $5 billion that Picower, and the entities
he controlled, walked away with.
Another intriguing winner, according to a civil fraud complaint
filed by the SEC this week (June 22nd), is Stanley Chais.
Chais, an unregistered investment advisor with a long roster
of wealthy clients in Beverly Hills, Hollywood and elsewhere,
also knew Madoff for some 30 years. He was indeed in such
close contact with Madoff that his name came up first on
Madoff’s office speed dial. Chais had, or controlled,
60 separate Madoff accounts. Some were for himself, his
family members, and his foundations; other were for outside
investors he had consolidated into 3 feeder funds The SEC
states in the complaint , that “unlike the thousands
of investors who lost money in the Madoff scheme, Madoff’s
enterprise ultimately proved to be extremely profitable
for Chais.” The SEC says that Chais, along with his
family and foundations, “withdrew approximately a
half billion dollars more than they had invested with Madoff.”
As for the outside investors, Chais levied a heavy performance
fee of 25% on their putative profits each year based on
Madoff’s performance. which, according the SEC complaint,
amounted to $269.7 million. Chais also had impressive access
to Madoff, according to the separate complaint filed by
the Trustee in bankruptcy court, that alleges that Chais
was able to specify the size of the “profits”
and “losses” in his different accounts “presumably
for tax purposes.” In all the entities under his control–
which includes his fees on :profits”, the Trustee
calculates Chais withdrew $1.2 billion.
A third winner, according to another SEC complaint filed
this week (June 22nd), is Robert Jaffe. A well-know investor
in Palm Beach and Boston, Jaffe is a son-in-law of Carl
Shapiro, a 95 year old multi-millionaire philanthropist,
who was one of Madoff’s earliest financial backers
in 1960. He has known Madoff for over 30 years and his brokerage
firm Cohmad, which was partially owned by Madoff, operated
out of Madoff’s offices in the Lipstick building.
The SEC alleges in the complaint it filed against Jaffe
and other members of Cohmad, that Jaffe received hidden
side payments directly Madoff of over $100 million for recruiting
more than $1 billion of investments from his social circles
in Florida and elsewhere for Cohmad (which put 99.7% of
its investments in Madoff’s scheme). According to
the SEC, Madoff channeled this money to Jaffe by crediting
his account with at least three times the “profits”
that he was crediting to Cohmad investors, and then allowing
Jaffe to redeem between 1996 and 2008 over $150 million.
Jaffe also made, according to the SEC, “specific requests”
to Madoff for “a specific dollar amount of gains for
a given period,” including ones for “long term
gains." A Madoff employee “would then insert
a backdated trade going back days, weeks or even months
that afforded Jaffe's account that particular gain.”
By transforming short term gains into capital gains, these
“trades” may have helped reduce Jaffe’s
tax bill on the $150 million he withdrew.
Picower, Chais, and Jaffe all deny via their lawyers that
they had any knowledge of the Ponzi scheme. If so, they
presumably believed that Madoff had been gifted with a Midas
touch– indeed one so deft it could produce the precise
results for which they wished . Was this willful blindness?
Financiers’ capacity for self-deception should never
be underestimated, especially when it serves to rationalize
hundreds of millions of dollars in profits. But to depict
such major redeemers as victims of Madoff’s Ponzi
scheme stands on its head Balzac’s dictum that “Behind
every great fortune is a crime.”
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