Wall Street Confidential

The Money Vanishes

September 26, 2010

by Edward Jay Epstein

The black hole into which Bernie Madoff pumped $7.9 billion of other people’s grew even darker with the death of Jeffry Picower and Stanley Chais, the only two available witnesses to the laundering of these mystery funds. Both men had been charged in separate fraud suits by the SEC aimed at uncovering the myriad offshore and onshore accounts into which this $7.9 had been ultimately channeled into what the bankruptcy trustee describes as “ a labyrinth of interrelated international funds, institutions, and entities of almost unparalleled complexity and breadth.” It was one of the greatest disappearance act in financial history but neither case will ever come to trial. Picower died in presumed swimming pool accident on October 25, 2009 in Florida and Chais died of a rare blood disease on September 26, 2010.
Both men had been involved with Madoff since well before he began his Ponzi scheme. And they both enjoyed special access to Madoff’s operation. According to the SEC complaint, Picower was advised in advance of Madoff’s monthly profit “targets,” or the amounts with which Madoff planned to pad Picower’s accounts, and, through this knowledge, he or his assistant could request higher or lower “profits” for various accounts. Moreover, to amplify Picower’s fictional profits to accommodate this siphoning off, Madoff extended him so much fictional credit that his accounts had , according to the bankruptcy trustee’s analysis, a “negative net cash balance of approximately $6 billion at the time of Madoff’s arrest.” Picower collaborated in his spectacular, if fictitious, profits by faxing Madoff back-dated letters to support fabricated trades. In some of the faked trades, Picower’s reported profits ran as high as 550% . As a result, the Picower was able to withdraw over $2.4 billion just between 2002 and 2008.
Like Picower, Chais had a close working relation with Madoff (so close that his name came up first on Madoff’s office speed dial.) According to the SEC
complaint, Chais withdrew $1.15 billion from 60 accounts for himself, family members,
corporations in which he held interests, funds into which he consolidated his clients, and other
entities. Madoff enabled him to make such massive withdrawals by giving him inexplicably high phantom profits, with rates of returns in some accounts in excess of 300% a year.

According to the reckoning of the bankruptcy trustee, Picower and Chais together withdrew a total of $7.9 billion between 1995 and 2008 from the phantom profits that Madoff allocated to them. Why were such staggering notional profits systematically credited to the Picower and Chais accounts and then systematically and purposefully siphoned out of these accounts?
Were Picower and Chais following instructions in re-depositing the billions that they withdrew? All Ponzi schemes need an exit strategy. Unfortunately, with the death of Picower and Chais, we may never unravel the secret of where that money ended up..