Barely six months ago Bernard L. Madoff Investment Securities LLC of Manhattan was a family brokerage known on Wall Street primarily for two things: the innovative software that, in the early 1990s, enabled the firm to make legitimate markets in hundreds of stocks in competition with the mighty New York Stock Exchange; and an investment advisory service that, for the past 15 years or so, provided spectacular returns through good market cycles and bad. This reputation exploded in December when the firm’s founder and chief executive, Bernard Madoff, admitted to his brother and his sons that his multibillion-dollar hedge fund was actually a classic Ponzi scheme.
For at least 13 years, investigators say, Madoff’s highly touted hedge fund executed no trades at all. Instead, he took in money from investors and other feeder funds and used it to meet any withdrawals his investors requested. His investors were so impressed by the fictitious returns Madoff reported that few of them questioned his methods. In this manner more than 4,000 Madoff clients were fraudulently relieved of nearly $65 billion.
Madoff, 70, will probably spend the rest of his life in prison, but that punishment won’t repair the damage he caused. Only a tiny fraction of those lost billions is likely to be recovered. At least two of his clients have killed themselves. The Madoff name, which less than two decades ago stood for ingenuity and innovation, is likely to enter the permanent lexicon as a synonym for fraud.
That leaves one unanswered question, which only a publication like this one would think to ask: What has Madoff’s gargantuan scam done to his family and their family -business?
Anyone who perpetuates such a massive fraud inevitably casts suspicion on his relatives and associates—especially relatives who work in his office. Ruth Madoff, Bernie’s wife of nearly 50 years, helped him launch the firm in 1960 and apparently remained a frequent presence thereafter, both in the office and as a director. Bernie’s younger brother, Peter, joined the firm in 1970 and developed its innovative trading software; he held the title of chief compliance officer—that is, responsible for the firm’s compliance with SEC rules—and was left in charge of Madoff Investment Securities when Bernie traveled. Bernie’s sons, Mark and Andrew, together ran the trading desk at the firm’s brokerage arm. Peter’s daughter also worked at the firm as a compliance lawyer.
Did Bernie Madoff’s family know what he was up to all those years? Madoff has claimed he acted alone, and no evidence has yet surfaced that his relatives knew of his scam.
But some of their activity has aroused suspicion in retrospect. Ruth Madoff withdrew $15.5 million from Madoff’s legitimate brokerage firm in the weeks before her husband was arrested. Their son Mark withdrew his personal funds from Bernie’s fraudulent investment-advisory business sometime before 2000. These may have been innocent actions, but the disclosure of Bernie’s con game raises the question: Why was his family withdrawing their money from funds that that other investors were begging to get into?
If Bernie’s family members didn’t know what was going on, should they have known? That too is a legitimate question, especially when you consider how Bernie Madoff exploited them:
• In 2001, after an article in Barron’s raised questions about the firm’s practices, Mark Madoff addressed dozens of Madoff traders in the firm’s offices, arguing strongly that the Barron’s article was incorrect. Andrew Madoff stood nearby, implicitly endorsing his brother’s remarks by his presence.
• Ruth Madoff appears to have been an essential (if unwitting) company asset, humanizing her more reserved husband by her outgoing personality and drawing potential clients into his orbit. “Could she attract people to him?” a childhood friend (and Madoff client) remarked to the New York Times. “Yes. Was she out there shilling for him? I doubt it. But maybe.”
• The mere presence of a devoted wife, brother and sons in the business helped reassure clients who might otherwise have questioned Bernie’s methods. “He’s got this pleasant, sweet wife of 30 or 40 years—not some young chick,” one client explained. “It somehow added to his credibility.”
Instead of entering a plea bargain in the hope of reducing his sentence by implicating others, Bernie Madoff pleaded guilty in March to all 11 counts, accepted what is effectively a life sentence, and refused to cooperate with the government against any other individuals. That kind of behavior implies that Madoff is covering up for others. It points a finger of suspicion at his closest relatives even though they may indeed have been unaware of his criminal activity. And by confessing to his family before he confessed to the feds, Bernie effectively made his loved ones accessories to his crime, forcing them to turn him in, lest they be arrested as well.
To paraphrase that old radio detective, The Shadow: “Who knows what evil lurks in the mind of a man you lived with for decades and thought you knew and loved?”
I claim no special entrée to Madoff’s brain, but here’s what I think you’d find there:
Madoff was a man of massive self-delusion who deceived not only his investors but also his family and probably himself. He destroyed not only his clients’ fortunes but also his family’s good name so thoroughly that neither can be recovered. He created a situation in which his presumably loving family members were suddenly mired in subpoenas and forced to communicate with each other through their lawyers.
He violated the family members who loved him as recklessly as he violated the faithful investors who trusted him. He exposed his family to embarrassment much as Richard Nixon did during the Watergate scandal, when the president dispatched his devoted daughter Julie Eisenhower across the country to vouch for his innocence even though he knew (as she did not) that the charges against him were true.
The Madoff case was a job for a prosecutor, to be sure. But it’s also a job for a family therapist.
Back in 1996, before Barack Obama entered politics, he and his wife were interviewed for a project about American couples. What sustains his marriage, Obama said then, is “that tension between familiarity and mystery that makes for something strong, because, even as you build a life of trust and comfort and mutual support, you retain some sense of surprise or wonder about the other person.” The Madoff saga raises a disturbing question: Even after half a century, can you ever know another person well enough to trust him completely—even your own flesh and blood?
Good news for family felons
A footnote to the above: According to court documents, Bernie Madoff first confessed his huge fraud scheme to his brother, Peter, on December 9, the evening before he confessed to his sons. As the firm’s chief compliance officer, Peter was legally required to report the confession immediately, according to some securities law experts. But Peter hesitated.
On the other hand, when Bernie confessed to his sons the next day, they immediately sought advice from a lawyer, who advised them to report their father’s crime right away. They did, and Bernie Madoff was arrested on December 11.
Did Peter’s inaction make him an accessory to his brother’s crime? Not necessarily. Even Justice Department manuals acknowledge that family relationships are different, according to former federal prosecutor Lilly Ann Sanchez. “He may just have needed a night to sleep on it,” she told the New York Times. “It was his brother, after all.”
Two lessons from Pat Knopf
Alfred A. (Pat) Knopf Jr., who died in February at the age of 90, bore a family name that was famous in book-publishing circles. But instead of working for his family firm, he wound up competing with it. Therein lies a tale with two lessons.
The Alfred A. Knopf house was founded in 1915 and published some of America’s most distinguished authors, among them Willa Cather, John Hersey and John Cheever. Pat Knopf was working there in 1959 when he approached his father about hiring Simon Michael Bessie as the Knopfs’ eventual successor. When his father refused, blaming his mother’s resistance (apparently she didn’t like Bessie), Pat quit the firm and joined forces with Bessie to launch a rival house, Atheneum, which quickly produced three major successes that Bessie had acquired: Theodore H. White’s The Making of the President 1960, Frederic Morton’s The Rothschilds, and André Schwarz-Bart’s The Last of the Just.
Lesson No. 1: Don’t be so quick to reject your children’s ideas. They hold the key to your future.
As an adolescent in the ’30s, Pat Knopf ran away from home after being rejected by Princeton University. He subsequently turned up “barefoot, hungry and broke” in Salt Lake City. After completing three years of college, he was inspired (by a movie) to join the Air Force in time for World War II. When he was discharged, his father asked what he planned to do for a career.
“I guess I’m going to work for you,” Pat replied, and he did.
Lesson No. 2: If you make it too easy for your kids to join the family firm, they may find it easy to leave the firm, too.