These were moments to savour. Bernard Madoff sat at the head of the table and
looked at the two rows of respectful, expectant faces. The boy from Queens,
an unremarkable suburb of New York City, who dropped out of Alabama
University and Brooklyn Law School and finally scraped a degree from Hofstra
College, was now holding court to an awestruck audience of professors and
academics from Yeshiva University, the alma mater of countless leading
lawyers, financiers and Jewish community leaders.
They were all grateful to have Madoff as chairman of the board of the
university’s Sy Syms School of Business, and leading the search committee
for a new dean. The university had invested millions of dollars in his fund
and trusted him absolutely.
“He was in charge without question. That was understood. He didn’t shove it in
front of our faces, but there was a lot of respect on everyone’s part
towards him in the faculty and among other board members,” says Professor
Moses Pava, who teaches Jewish business ethics and sat on the search
committee during 2007. For the academics, the setting for the committee’s
meetings was almost intimidating. They taught business, Madoff practised it,
with impressive results. Bernard L. Madoff Investment Securities had its
headquarters on three floors of the Lipstick Building, an iconic skyscraper
in mid-town Manhattan. The committee met in the boardroom on the 19th floor.
“The elevator stopped and you stepped out into this incredible office; I've
never seen anything like it,” says Pava.
When Madoff spoke in his soft, thoughtful voice, the others listened. “He
wasn’t overbearing in any way, but people would not contradict him or have a
direct confrontation with him,” says Pava. Madoff was always polite to the
staff. On one occasion during the search for a dean, a secretary forgot to
bring in a candidate’s CV. A board member screamed at her, humiliating her.
“Madoff would never have done that. He was a gentleman, friendly and
charismatic. He gave generously of his time. This was not something central
to his being, but it was definitely something he took seriously. It was
enjoyable, I learnt from him, he asked good questions from all the
candidates. He gets an ‘A’ for what he did, not for the other activities,
but for this one.”
Pava, of course, like all the academics, had no idea that two floors down,
Madoff was plundering Yeshiva University’s investment. And how could he have
known? Madoff was a bastion of Wall Street and a pillar of New York’s Jewish
community. Rich, successful and respected, he was the man with the golden
touch, sought after by numerous charities, schools and universities for his
financial acumen. With his wavy, patrician silver hair, tailored suits and
avuncular manner, he looked like a favourite elderly relative, and indeed
was known to his investors as “Uncle Bernie”. They dubbed him the “Jewish
T-bill”, named after US Treasury Bills, the safest investment. “He was
really very likeable. He was self-deprecating and not imperious,” recalls Ed
Nicoll, a New York financier who has known Madoff for more than 20 years.
“It was a strange combination of being humble but also regal.”
Madoff was a financial criminal genius who ran the largest and most enduring
fraud in modern history. His $65 billion investment fund was a Ponzi scheme,
a type of pyramid fraud, run on the “rob Peter to pay Paul” principle. They
do not generate any revenue but rely on a steady stream of new investors
whose cash pays the profits promised to earlier investors. Eventually, when
the scheme’s obligations exceed its assets, it collapses. Madoff’s genius
was to reverse the Ponzi’s usual psychologica l appeal. Instead of
spectacular, short-term returns, he gave long-term, modest, but still above
average rewards, usually paying out about 10 or 12 per cent a year. Hedge
funds and high-tech stocks soared and plummeted, but Madoff’s fund kept
steadily rolling along, and when investors asked to withdraw some of their
money, they merely had to fill in a simple form. The dollars arrived,
without fail, a few days later. Madoff did not tout for business. Instead he
turned away potential customers, only increasing their ardour to invest with
him.
Madoff’s elaborately engineered scam, investigators believe, lasted for
decades. It reached from Wall Street and across America, to London, Geneva,
Vienna and farther East. Each month thousands of personal clients received
detailed accounts of stock trades that had never taken place, and account
balances that did not exist, none of which they questioned. His
institutional investors included well-respected banks and finance companies.
Madoff not only duped the Securities and Exchange Commission (SEC), which
regulates the American financial industry, he frequently sat on finance
industry committees. He helped to create America’s secondary stock exchange,
the NASDAQ (National Association of Securities Dealers Automated Quotations)
in 1971, and served as its chairman. He ran one of the largest and most
successful share trading firms in the US — a separate operation from his
investment fraud.
Respected by his peers, worshipped by his clients, Madoff became enormously
wealthy. He and his wife Ruth owned a duplex apartment on the Upper East
Side of Manhattan valued at $9.9 million, a holiday home in Palm Beach,
Florida, valued at $8.5 million, another in Montauk, Long Island, New York,
valued at $8.75 million, and an apartment in Cap d’Antibes, in the south of
France, valued at $1 million. He had a half interest in an aircraft worth
$12 million. He owned four boats, including a 27m Leopard yacht called Bull
moored in France worth $7 million.
Madoff was a master manipulator who, among his many victims, specifically
targeted his fellow American Jews in what the SEC defines as an “affinity
fraud”. This type of fraud targets the members of a specific religious or
ethnic group, abusing the trust and acceptance of insiders to defraud other
members. He developed a sophisticated network of contacts across Jewish
communal institutions, including charities, schools, universities,
synagogues and country clubs, and stole their money. He even defrauded Elie
Wiesel, the Nobel laureate and Holocaust survivor.
Every community puts up defences against potential predators, walls of
suspicion and distrust. But once a predator is through those walls and
accepted by his victims, he can prey freely among them. The walls that once
kept the predator out, now keep him in. Despite the vast sums flowing across
New York’s Jewish philanthropic networks, it is a small and very
inter-connected world, focused on the Upper East Side of Manhattan. There
individuals are separated not by six but often just one or two degrees of
separation. The forebears of many American Jews arrived from shtetls, small
villages in Eastern Europe. They brought with them the shtetls’ shared
values of trust, community and strong personal friendships.
As American Jews have prospered these values have endured, even flourished.
The close-knit nature of this world helped Madoff to perform a kind of
psychological jiujitsu among followers of his own religion. “If you are
willing to do that, to financially murder people who are close to you, then
they’re the easiest because they trust you,” says one worshipper at the
Fifth Avenue Synagogue, where numerous wealthy congregants invested with
Madoff. “There’s an element of trust and closeness that makes them easier
prey because they automatically take you at your word.”
One of Madoff’s most important entrees into Manhattan’s Jewish networks was a
financier called Ezra Merkin. Merkin’s funds, Gabriel, Ascot and Ariel, were
among Madoff’s largest feeders, channelling almost £2.5 billion to the Ponzi
scheme. Several civil lawsuits have been brought against Merkin but he has
not been charged with or convicted of any crime, and there is no evidence
that he knew of or participated in Madoff’s fraud.
Rich, respected and well connected, Merkin helped to open doors to people and
places that Madoff would otherwise have been unlikely to access.
The Merkin name carries great weight in Manhattan. Ezra’s father, Hermann,
fled Nazi Germany and arrived in the United States in 1940. He set up Merkin &
Co, a successful investment firm, and gave vast sums to charity. Hermann
Merkin was one of the founders of the Fifth Avenue Synagogue in 1958. He
served as president until 1976, continuing as chairman afterwards. Its
congregants include Wiesel and Mort Zuckerman, the property magnate and
publisher of the New York Daily News, both of whom lost substantial
sums with Madoff. Hermann Merkin also sat on the board of Yeshiva University
and served as its vice-chairman.
Yet despite his charitable giving Hermann Merkin was strict and often aloof
with his children. There were few hugs or open displays of affection. Like
every boy, Ezra sought his father’s praise and acclaim. He found that a
rich, successful father, prominent in public life, brings complex pressures
and demands: to be equally successful, prominent and to know how to perform.
On Friday evenings at Shabbat dinners Ezra would expound on that week’s
portion of the Torah, the five books of Moses, in front of distinguished
guests who could include a visiting Israeli leader or New York Jewish
power-brokers.
The Merkins lived on prestigious Park Avenue, the heart of the Upper East
Side. There was a chauffeur, a housekeeper, a cook and a laundress. But,
despite the live-in staff, the Merkin children had austere childhoods. There
was money for myriad good causes, but not for the family, says Ezra’s
sister, the writer Daphne Merkin. “Philanthropy was a way of cleansing the
money, and also a form of power. There was an enormous emphasis on giving
away the money in a hundred different ways. There was a withholding style in
my family, that the money must go here, there, everywhere; everywhere except
to us. It was all I heard about, to a degree that I felt charity should
begin at home.”
This sense of growing up among withheld riches created a “curious sense of
deprivation and anger all its own”, says Daphne Merkin, wryly, “with the
added problem that the plight of the unprivileged rich is innately
unsympathetic”.
Perhaps Madoff was a kind of father/uncle, benignly patriarchal figure to
Erza, she speculates, a warm and cordial mentor, a counterpoint to their
austere and distant father. “I wonder if that was some of the allure of
Madoff in general, and for my brother in particular, that he was so personal
and amiable.”
Ezra Merkin followed his father as president of the Fifth Avenue Synagogue,
and chaired the investment committee of Yeshiva University, which invested
in his Ascot fund, a Madoff feeder fund, for which he received commission.
The university invested in the Ascot fund with full disclosure to the board
of trustees, says a person familiar with the situation. The university asked
for and received a legal opinion that the situation was acceptable, and,
from 2007, Ezra Merkin agreed to make a donation to the university equal to
the fee he received.
Ezra Merkin has since stepped down from his positions at the Fifth Avenue
Synagogue and Yeshiva University. It is “overstating the case”, according to
someone with knowledge of the situation, to say that Ezra Merkin used his
connections to the synagogue or university to introduce new investors to
Madoff. “Ezra Merkin set up meetings for a number of investors in Ascot to
meet Madoff and conduct their own due diligence on his operations. There
were plenty of ways for people to meet with Madoff, it did not have to be
through Ezra Merkin.”
Still there was a yin and yang appeal between Madoff and Merkin, a certain
chemistry where rough-and-ready Queens met the smooth privilege of the Upper
East Side. Merkin exuded confidence, bolstered by his scholarly appearance
and large frame. He could debate the finer points of Talmudic law and
commentary with scholars and rabbis, talk finance with Wall Street’s finest,
or politics and current affairs with university professors. Despite his
lineage and erudition, Merkin could even laugh at himself, and his engaging
smile only helped to persuade more investors to trust him with their money.
As for Madoff, he soon realised that the Upper East Side was a kind of shtetl.
Once you were in, you were accepted and trusted. There was no better
introduction than the Merkin name. It was awash with money and Madoff began
to gather it in.
The Believers: How America Fell for Bernard Madoff’s $65 Billion Investment
Scam, by Adam LeBor, is published by Weidenfeld & Nicolson tomorrow,
£18.99. To order the book for £17.09 inc p&p call 0845 2712134
or visit timesonline.co.uk/booksfirst
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