Is the Madoff Scandal Paradigmatic?
Too Good to Be
True
Erin V. Arvedlund
New York, NY: Portfolio/Penguin, 2009
Betrayal
Andrew Kirtzman
New York, NY: Harper, 2009
No One Would
Listen
Harry Markopolos
New York: Wiley, 2010
Madoff With
The Money
Jerry Oppenheimer
New York: Wiley 2009
The Madoff
Chronicles
Brian Ross
New York, NY: Hyperion, 2009
Catastrophe
Deborah and Gerald Strober
Beverly Hills, CA: Phoenix Books, 2009
Madoff’s Other
Secret
Sheryl Weinstein
New York, NY: St
Martin’s Press, 2009
Reviewed by John
Graham and Kevin MacDonald
[Note: A print
version of this article will appear in the Summer, 2010 issue of The
Occidental Quarterly. Click
here for a pdf version of this article.]
Abstract:
Initially Bernard Madoff’s record-breaking $65 billion Ponzi scheme was
reported in terms of how much harm he had done fellow Jews. Subsequently
discussion focused on the ineptitude of the Securities and Exchange
Commission in not detecting and shutting down this fraud much earlier.
We
contend here that the now extensive literature reveals that the Madoff
phenomenon was in fact a massive shift of resources from non-Jews to Jews.
Prime beneficiaries extended beyond the Madoff family to a number of other
members of the Jewish elite. The scam utilized familiar Jewish social traits
to reach the size it did. Far from being protected by SEC ineptitude, it was
Madoff’s perceived position as part of the Jewish Establishment that put him
beyond the law — by intimidating the SEC. This was accentuated by
traditional Jewish inhibitions on reporting Jewish criminality. We suggest
that Madoff’s self-destructive as well as socially damaging behavior stemmed
ultimately from the conditionality inherent in the Jewish attitude to
society at large — and is not unique to him.
*
* *
In December 2008
the astonishing news broke of Bernard Madoff’s immense Ponzi scheme — the
biggest in history, apparently, with a notional value approaching $65
Billion. This was very rapidly followed by
loud complaints
by prominent Jewish leaders such as the Anti-Defamation League’s
Abe Foxman
and the American Jewish Committee’s
David Harris, to the effect that the media coverage of this
scandal was facilitating anti-Semitism by repeatedly noting that Madoff is
Jewish.
To the uninvolved
observer, these claims appeared paranoid. The news channels were choked with
pitiful and chilling stories of elderly Jews discovering they had been flung
into destitution by Madoff, and of Jewish Charities reeling from the blows
he had struck them. The well-known among the victims — such as Stephen
Spielberg, Mort Zuckerman, and New Jersey Senator Frank Lautenberg’s family
— seemed invariably Jewish. Initially the presence of non-Jewish victims was
not very apparent. The obvious question was: How could someone do
this to his own people? That question could not be asked without
acknowledging Madoff’s ethnicity.
For most, probably, the conclusion will have been
that this event resembled the depressing procession of stories about
clergymen of every creed being involved in pedophilia. Society generates
these positions involving trust and power, and from time to time they get
occupied by perverts who abuse them.
Subsequently, much fascinating detail has come to
light, including the seven books cited above. We suggest here that the
Madoff affair does in fact offer important lessons as to the nature of the
Jewish community, its relationship with the non-Jewish community, and its
influence on Public Policy.
The Madoff facts
need to be established.
Madoff founded Bernard L. Madoff Investment Securities right out of Hofstra
College (later University), in November 1960. He focused on dealing in the
shares of small firms, not listed on any Exchange — “Over-the-Counter” or
“Pink Sheet” stocks (the latter from the color of the daily publication
which listed the broker-dealers willing to quote prices in particular
equities over the phone). In 1971 a computerized communications network was
established which made the quoted prices easily visible (NASDAQ). This
evolved through several phases to the point at which it is now arguably as
efficient a marketplace as any. Bernard Madoff was in the thick of this
development, serving on many industry bodies including as Chairman of NASDAQ
itself. In the late 70s Madoff began offering competitive markets in stocks
listed on the New York Stock Exchange (which he never joined). By 1989
Arvedlund (45) reports Madoff’s firm was handing 5% of the NYSE volume
(others say it reached as high as 10% [Weinstein, 166]). In 2002 there was
talk of it being worth $1 billion (Kirtzman, 131).
·
This
firm was a genuine business and a considerable technological achievement.
There seems to be no evidence that the many non-family professionals
employed there ever had any inkling that the investment side of the business
was a fraud. It also provided perfect cover.
·
As
soon as he was able, Madoff began taking in “discretionary” accounts from
the public. These are accounts where the broker is authorized to act without
first consulting the client. Initially, funds were attracted by promising
high returns, but in the later years the pitch was fairly modest returns
with a very high degree of confidence (“low volatility” — the “Jewish T
Bill”). From raising money among New York-area relatives and friends, he
moved on to using agents to tap the wealthy across the country. Ultimately,
over the last two decades, Madoff was able to use some of the professional
fund-allocating operations which have developed with the hedge fund boom (“Funds
of Funds”).
Unlike the previous contributors, many of the owners of this money were not
American and not Jewish.
·
This
operation may well have been a fraud right from the start. There is no
evidence of trades for the investors for many years. The long number of
years involved and the power of compounding means that many of the accounts
were bloated with fictitious profits. Some suggest that something around $20
Billion may have been paid in over the years, of which a good deal was paid
out, so that most of the $65 Billion investors thought they had at the end
was fantasy.
·
Madoff’s claimed returns were intrinsically implausible, and in later years
numerous investment professionals believed that his activities were
fraudulent. This point of view was repeatedly and forcefully brought to the
attention of the SEC, in particular by a Boston-based analyst, Harry
Markopolos. In a fascinating response, in 2006 the
agency finally launched an investigation which scrupulously ignored the
investment operation and in November 2007 “found no evidence of fraud” (Arvedlund,
217). Why this absurdity happened is the Public Policy question addressed in
this essay.
Transferring Wealth from Non-Jews to Jews
From a sociobiological point of view, the first
thing to grasp about the Madoff phenomenon is that it was a large scale
transfer of wealth from non-Jews to Jews. This is because of the shift in
the Ponzi scheme funding basis at the beginning of the 1990s. The big
professional fund raisers (and consequently the biggest creditors) entered
then or later: Fairfield-Greenwich ($7.9B), Banco Santander ($3B), Banco
Medici ($2.1B), Access International ($1.4B), Tremont/Rye/Kingate ($5.8B)
and others. Arvedlund (142) reports these outfits in aggregate were owed
some $20 Billion; because of their comparatively late entry and accelerating
contributions, a much higher proportion of this loss would represent real
cash invested. In addition, the $659 million the Securities Investor
Protection Corporation (SIPC) has paid out to Madoff account owners should
be included — the SIPC is funded by its member broker-dealers, and so
ultimately by its customers.
Fairfield-Greenwich and Access International were
focused on the ultra wealthy jet-set/titled European crowd, but most of the
other European conduits accessed the general European public. Some Jewish
money may have been added via Bank Medici, the Vienna-based vehicle
established by one-time US resident and Orthodox Jewess Sonja Kohn, who is
rumored to have brought in some Russian Oligarchs (as a result of which she
is now in hiding). But even here, via complex arrangements with various
banks, the main contributions came from the general public in Europe.
Markopolos asserts
that the European losses were “substantially more than losses
in the United States” (114). His book has among its
illustrations a charming two-page map detailing the location of the 255
foreign funds of funds in over 40 countries who were Madoffed.
This has
effectively put the early investors with Madoff in a strange position. Over
the past 20 years, as Kirtzman (140) notes: “Hundreds of Bernie
Madoff’s investors were retiring early, moving into bigger houses, on the
money they made” Whatever else Madoff may have thought about
his large entourage of elderly early small investors and their descendents,
as Kirtzman says, he could
take the view that “he was taking care of all of
them in their old age” (251).
It is simply a fact that many people lived very
well for many years from the proceeds of Madoff’s depredations.
This is not to
suggest that they had the faintest idea their life styles were in any sense
illegitimate and were rooted in fraud. Nor does it mitigate the appalling
shock they went through in late 2008, discovering that their Guardian Angel
had devoured them. And while the Trustee may have legal logic behind his
stance that no recoveries can be obtained in the many cases (reported as
over 83%
of the
direct Madoff Securities accounts) where cash withdrawals exceed the amount
paid in, had their money been honestly invested, most could have expected
substantial gains, given the securities markets of the last generation. So
they have enormous opportunity losses and very real grievances.
But, nevertheless,
they were beneficiaries too.
The Jewish Ethnic Nexus That Enabled Madoff’s Fraud
Several writers
have discussed the arresting idea that the genetic mutations which supply
Ashkenazi Jews with their high intelligence are also those which cause the
ravaging of this group with cruel and lethal ailments such as Tay-Sachs and
Gaucher’s disease (see
here,
here,
and
here).
Bernard Madoff was like a Tay-Sachs occurrence within the Jewish community:
The characteristics which make them such formidable competitors for
resources also rendered them pathetically vulnerable to a Madoff.
Most salient of
these was the practice among this otherwise skeptical and independent
community to coalesce around rabbinical/guru figures, who are treated
virtually as gods, revered, unquestioned, and fiercely defended. Obvious
examples are found to this day among the Hasidim. Kevin MacDonald has
demonstrated in
The Culture of
Critique
how this pattern imposed itself on Western intellectual life, as seen in the
rise of Freudianism, Boasian Anthropology, and the Frankfort School, among
others, all equipped with their prophet. “Flying wedge” tactics and
conscious intra-group loyalty has made this characteristic exceptionally
valuable in seizing control of professional entities such as university
departments from the disorganized and atomistic non-Jews.
To many, Madoff
was such a deity. “He was like a God” Kirtzman quotes professional Holocaust
victim Elie Wiesel saying of Madoff (96). (Wiesel lost most of his savings
and his foundation’s endowment to Madoff.) “There was a myth
that he created around him. That everything was so special, so unique”
(Kirtzman, 96). Oppenheimer reports a member of an extended family long
involved with and heavily damaged by Madoff saying that they “regarded
Bernie like a messiah. He was spoken of as if godlike” (93).
The accounts of the stir he created attending Jewish gatherings are
almost comic: “He was received like visiting royalty,
mysterious and unapproachable” (Kirtzman, 89).
The consequence
was an extremely useful suspension of disbelief.
Infatuations of
this type are rare among whites generally, and usually mild and fleeting.
This makes them more difficult to organize — but less vulnerable to a
Madoff.
A consequence of
this ethnocentric infatuation was that would-be whistle-blowers were subject
to savage attack, if they were not simply tuned out.
Laura Goldman,
an investment advisor now resident in Israel, had come to negative
conclusions about Madoff and liquidated her own exposure to him. The
Strobers relate how when in 2001 both Barrons and the trade
publication MAR/Hedge published stories (here
and
here)
insinuating Madoff’s returns were incredible, she mailed copies to contacts
in Palm Beach (where the ultra-wealthy Jewish community had become a major
funding source for Madoff): “They said that the publications were
anti-Semitic — that Jews have more faith in Bernie Madoff than they do in
God” (81).
In her own book,
the author of the Barrons article (Arvedlund) reports that as a
result of her efforts Goldman “was promptly accused of being anti-Semitic by
Palm Beach residents… “And I live in Israel!” she noted” (252). This
response is a factor to remember when we consider the behavior of the SEC.
(The author of the MAR/Hedge article, Michael Ocrant, is
Jewish.)
Until quite late
in the history of his fraud, Madoff relied on drawing in funds from
(wealthier and wealthier) individuals. Mechanically, this was a remarkable
achievement. A value in the Madoff literature is the documentation it
supplies on the characteristic group loyalty from which Madoff benefitted.
Kirtzman notes:
He was a member of
the tribe. Jews of his generation were brought up to think of other Jews as
extended family members, with a shared responsibility to look out for one
another. They felt more comfortable going to Jewish doctors, Jewish lawyers,
Jewish accountants. Madoff became known as “the Jewish T-bill.” (73–74)
Kirtzman quotes
from a contemporary from Laurelton, Madoff’s home district of Queens:
The Jewish world
was very tight and highly networked. … Everything was done through “the
phone call”. My brother wanted to go into retailing, so a call was made to
Mr. Temona on the board of Lerners. I wanted to transfer to NYU and live in
one dorm: a call was made to Professor Levine. (74)
Of course, from
the point of view of a non-Jew, this kind of cohesive efficiency makes the
Jews lethal competitors in the zero-sum struggle for resources. In the case
of Madoff, however, the efficiency turned out to enable the fraud to spread
more widely and to be more damaging to the Jewish community itself.
Other
characteristics of his victims tended to amplify the Madoff damage. As a
broker, rather than a hedge fund, he supplied his clients with pages and
pages of transaction history — all fabricated — rather than an overview.
Over the years, thousands of hours were evidently sunk by his clients into
going through these statements looking for errors — Sheryl Weinstein, the
CFO of Hadassah had an assistant committed to the task (Weinstein, 97). A
good deal of fanatical seriousness about the investments was thus
sublimated. The modest, low double-digit but extremely reliable returns
offered in later years were accurately pitched to rational and careful
investors. And, sadly, it has to be said that the attitude many brought to
middle age from their upbringing increased their vulnerability. As
Kirtzman’s Laurelton informant said of her and Madoff’s hometown, “The more
money, the better your things…The more money, the more esteem. The more
money, the more people looked up to you” (27) — a revealing
comment on the importance of financial success within the Jewish community.
Like Weinstein, many long-standing Madoff clients refinanced their homes in
the easy credit conditions of recent years to maximize their Madoff
investments. Many apparently had virtually all their liquidity with Madoff —
hence the tales of desperate sales of jewelry in Palm Beach after the
arrest.
This passionate
intensity about money has worked well historically — but in the Madoff
situation, it led to utter disaster.
So did lack of
scruple. Kirtzman recounts how a Palm Beach Madoff client, dubious about
Madoff’s success, asked his accountant in the early 90s to investigate. The
accountant concluded that Madoff was most likely doing something fraudulent,
probably front-running (trading ahead of client orders). The client’s
response: “I don’t want to hear anything about it” (Kirtzman, 75–77).
Clearly, many Madoff accounts thought they were safely benefitting from
illegal activity — and did not care.
Jewish networking
was also crucial, perhaps ironically, to the Madoff financial Black Hole
spreading beyond the Jewish community. Fairfield-Greenwich Group, the
biggest funds allocator caught by the implosion, is generally presented as
haute WASP because of founder Walter Noel’s social image: but FGG was
brought to Madoff by Noel’s partner Jeffrey Tucker, who is Jewish. Arvedlund
suggests Tucker met Madoff via his in-laws the Schneiders of Allentown,
Pennsylvania, wealthy garment manufacturers (114). Similarly, she says,
access to the US annuity product and general hedge fund market came through
Tremont Capital Management and its affiliate Rye Investment Management, run
by Sandra Manzke and Bob Schulman (83–84). Manzke had other similar
interests, one of which, Kingate Global, brought in wealthy Italian
families. And also in Europe, besides Sonja Kohn of the imaginatively-named
“Bank Medici” already mentioned (Arvedlund, 129–137), there was Union
Bancaire Privee and the Safra Banking group run by Edgar de Picciotto and
Edmond Safra. Arvedlund says:
De Picciotto and
Safra shared similar backgrounds. They were both Sephardic Jews…and…more
than just bankers — they were gatekeepers to billions…Once these men had
signed off on someone, … the rest of the Swiss banking world would line up
to invest, practically without question. (139–140)
What Kirtzman sneeringly describes as “the princes and princesses, dukes and
duchesses” (254) who invested with Madoff through FFG and Access
International (the founder of which, Rene-Thierry Magnon de la Villehuchet,
actually was a French nobleman) and the other members of the “Swiss banking
world” who trusted Madoff’s prestigious endorsements were in fact following
the old European tradition of the
court Jew — “a general financial
confidant of a territorial sovereign” (see
here, p. 102; see also
here).
For centuries it was customary for aristocratic landowners, particularly in
Eastern Europe, to delegate the task of managing the businesses operations
on their estates to Jews, sometimes using the same families for generations.
Similarly, throughout German-speaking areas, court Jews typically managed
the financial affairs of the nobility, provisioned the military, arranged
for loans through Jewish banking families and collected revenues in the form
of taxes. Using a Madoff to manage their interests on America’s financial
steppes and interface with the barbarous Americans was quite consistent with
the long-standing behavior pattern of this social group.
Arvedlund notes that the European capital FGG attracted was of a type known
in the hedge fund world as “dumb money” because of its herding habits (117).
Of all the feeder fund leaders involved with Madoff, only Magnon de la
Villehuchet has committed suicide. Bertrand de la Villehuchet commented,
“Madoff wouldn’t understand the reaction of my brother. It was…honor, a word
that’s not in his vocabulary” (Ross, 160–161).
Another pattern noted by MacDonald in
his study
of Jewish social organization is a structural
tendency towards the enrichment of its elite. Wealth tended to flow upward
within the Jewish community to the upper, scholarly, rabbinical class.1
While these groupings can be plausibly argued to promote the overall
interests of the Jewish community as a whole, they also involve heavy
transfers of resources within the community from the mass of Jews to a
self-selected few — the Rabbinate, in the case of traditional society.
This was dramatically so in the case of the Madoff operation. Health Care
entrepreneur Jeffrey Picower holds the prize: Arvedlund reports he and his
family over many years withdrew “at least” $5.1 billion of phantom profits
as part of a total of $6.7 billion of disbursements (237)
(more recently the Madoff Trustee has
claimed $7.2 billion). According
to Oppenheimer, West Coast “money manager” Stanley Chais and his family are
accused
by the SEC of pulling out $500
million more than they ever put into Madoff themselves (77–78). (Chais did
not tell his clients he was simply placing their money — some $1 billion —
with Madoff.) Both Picower and Chais notionally had access to these funds
partly because of extraordinarily high un-Madoff-like returns which
conveniently appeared in their personal accounts. They also apparently were
able to use their Madoff accounts to generate fake tax losses when needed.
The late Norman F. Levy, a New York real estate mogul who died in 1995, is a
particularly colorful case. A long time intimate of Madoff’s, he was,
according to Kirtzman for some prolonged time getting a daily visit from a
Madoff driver carrying a check “usually for millions of dollars. Every now
and then they’d be for tens of millions.” What kind of legitimate
transaction necessitated this is hard to see. As Kirtzman says,
“it’s…plausible that Bernie was using his friend’s bank account to park
stolen money” (126–127). (In January, 2010 Levy’s daughters
agreed to pay $220 Million to
the Madoff liquidator to settle his claims against “the family and its
entities.”)
On October 25, 2009 Jeffrey Picower drowned in his Florida swimming pool
after a heart attack. This is eerily similar to the 1991 drowning death of
Robert
Maxwell, the Ruthenian-born Jew and UK
publishing entrepreneur, who was shortly afterwards discovered to have
looted the pension funds of his public companies of hundreds of millions of
pounds.2
As the result of his death, the investigation into Picower’s
activities is likely to be crippled. (Recent
reports suggest
the Picower estate is getting ready to pay the Madoff trustee $2 billion or
more to settle.)
Whether
Ezra Merkin, the long-time President of the socially elite
Fifth Avenue
Synagogue,
was a member of this small circle of massive Madoff beneficiaries is no
doubt a question of considerable interest to his fellow congregants. They
are reported to have $2B of exposure to Madoff, much of it through Merkin’s
hedge funds. Kirtzman reports that Merkin had $2.4B of his client’s money
with Madoff — including that of 30 Jewish charities — but “Of the $470
million in fees he earned from Madoff, Merkin allegedly invested just $9
million back” (Kirtzman, 98).
If not an “insider,” Merkin would belong to a
group that immediately came under fire in the aftermath of the collapse —
the fundraisers. Besides the professional operations mentioned previously,
these included a number of individuals like Robert Jaffe of Palm Beach and
the late “Mike” Engler of Minneapolis-St Paul who in Kirtzman’s words
were usually prominent members of the Jewish community, working out of
exclusive country clubs. While investors thought they were just friends…they
were actually getting a percentage of the business.
(89)
Because the apparent inside beneficiaries
generally controlled substantial charities which reported large losses to
Madoff, they initially escaped much of the opprobrium directed at the money
raisers. Possibly the concept of a rogue being a large charitable donor is
counterintuitive. But in principle there is no reason why a rogue would not
fund charities. Being a philanthropist is in a sense a luxury good and a
status symbol — a public marker of having arrived, particularly within the
Jewish community.
Jewish Ethnic Networking Props Up Madoff’s Fraud
A remarkable fact that emerges from surveying the
literature on Madoff was how widespread the belief was within the
professional investment community that the Madoff operation was crooked.
This opinion was spread far beyond the saga’s whistle-blowing hero, Harry
Markopolos who noted, “The industry knew, there’s no question about that”
(176) and his friends, about whom more later.
There were two Madoff theories. One was that
intelligence derived from watching the firm’s order flow to its large
trading operations gave the investment activity a crucial advantage (Graham
remembers being told this — by an ultimate victim — more than 25 years ago.)
If true, this would be front-running (taking advantage of a client’s
business) and quite illegal. Concern about being exploited in this manner
was doubtless why, according to Ross, such big brokerage firms as Merrill
Lynch, Goldman Sachs and Morgan Stanley would not do business with Madoff
Securities (80).
As it happens, this theory was wrong. Since Madoff
did not trade for his investment clients, he did not need this type of
inside information. So the SEC was quite safe to focus on this question in
its final investigation of 2006–7.
The other theory was that the Madoff Investment
arm was crooked because it was to some degree at least a Ponzi scheme.
Options specialists were led to this conclusion by realizing that Madoff’s
alleged “Collar” or “Split strike” activities
-
could not be replicated to produce the results
he claimed.
-
needed to be conducted on an impossibly large
scale to accommodate the size of money Madoff was employing
-
mysteriously left no trace at all in the
close-knit world of options dealing.
This view was apparently widely held. The Strobers
report the above-mentioned David Harris of the American Jewish Committee
saying after the arrest
the Madoff name had come up here in the AJC’s investment committee some
months ago when someone suggested we ought to explore investing … with
Madoff. And the chairman of our investment committee actually said, “No, I
think it’s a Ponzi scheme.” He actually used those words to the
ten or fifteen people in the meeting. (42)
Arvedlund reports an account by Harry Markopolos
of a meeting with Leon Gross, Citigroup’s global head of equity derivatives.
Gross told him that “Bernie is a fraud and there’s no way his purported
stock and options strategy can possibly beat Treasury bill returns. [Gross]
also can’t believe the guy hasn’t been exposed yet” (218).
The famed Jewish co-founder of the Odyssey Partners hedge fund, the late
Jack Nash, and his son, Joshua,
seem to have had a hobby of denouncing Madoff. Jack Nash liquidated a
less-than-two-year investment with Madoff in the early 90s after his son
reviewed the Madoff statements and smelled a rat. Arvedlund reports they
repeatedly told Ezra Merkin this over several years, to no avail (258–259).
Wall Street, of course, is an environment which
encourages intense and exclusive concentration on one’s immediate financial
activity. Furthermore, challenging Madoff was predictably dangerous.
Arvedlund reports a meeting between the head of Lehman Brother’s alternative
investment division and Merkin:
The Lehman guy fired first.
“C’mon, Ezra. You know what’s behind Madoff’s operation, don’t you? Don’t
act like you don’t” he said.
Merkin and the man nearly got into a fistfight … and Merkin left Lehman
Brothers in a huff. Not long after…the man at Lehman Brothers lost his job.
(98)
Sheryl Weinstein, CFO of Hadassah
(The
Women’s Zionist Organization of Amerca)
when it invested with Madoff, has a similarly informative story. In 1995,
after several years of Madoff managing their money, new members of the
investment committee became restless. “They were implying that maybe
Bernie’s methods weren’t quite kosher” (166). A meeting was
held in which Madoff succeeded in pacifying the all the board members except
one, who apparently himself ran some Hadassah capital.
He later tested Bernie’s investment technique with some of Hadassah’s money.
With results in hand, he told the board he could not replicate Bernie’s rate
of returns.
The board’s response was to stop using him (Weinstein, 168–169)
— not because his performance in his own style of investing was poor, but
apparently for having the temerity to question this lion of the Jewish
Establishment, Bernard Madoff.
(Hadassah’s case
illustrates the arithmetic of
long-time Madoff investors. The charity invested some $40 million in the
late 80s and early 90s. It withdrew a total $130 million and thought it had
$90 million when the end came.)
With so many prominent Jewish investment industry figures apparently aware
that something was wrong with Madoff, the question arises: Why did they not
turn him in? After all, a big scandal raising doubts about the integrity of
independent investment advisors would be bad for everyone’s business, Jew or
non-Jew (as it indeed proved to be). Because of Madoff’s high-level
social-networking fund-raising techniques, many must have been aware that a
great many fellow Jews were likely to be vulnerable (one third of the elite
Jewish Palm Beach Country Club are reported to have been Madoff investors (Kirtzman,
245). Some might even have thought such a scandal would
best be headed off by the Jews themselves for the sake of their community.
(David Harris and the Investment Committee of the American Jewish Committee
could also have taken this line — but they did not.) Furthermore, the
standing of some of these men was such that action by them would have
necessitated a serious response by the authorities.
MacDonald
has demonstrated that group
strategies forged in the stressful climate of Medieval Europe continue to be
highly influential in determining modern Jewish social behavior. For
centuries, it was absolutely forbidden to tell the Civil Authorities about
law-breaking by a fellow Jew, an offence known as
Mesirah [ broken link
- try
https://en.wikipedia.org/wiki/Mesirah ](informing). Some took
the view that informing should be punishable by death. The concept of
mesirah is
alive and
well amongst strongly traditional Jewish communities to
this day — for example recently, in
the community of Syrian Jews centered in Brooklyn
where a prominent rabbi renounced his son after the son had informed on
illegal financial activities within the community. A perusal of their web
sites suggests that while there is some thought that, in the modern
environment, informing about crimes of violence might be permissible, for
other “lesser” offences (such as financial wrongdoing) it is still
forbidden. There seems to be no concept that it might actually be a
citizen’s duty to report criminal behavior.
Harry Markopolos Exposes Corruption in High Places
Deeply ingrained traditions fade slowly. The clear
message of the facts of the Madoff scandal is that Americans generally
cannot rely on American Jews to halt financial fraud by someone who is
Jewish.
There was, however, a group who simply could not
have tried harder to secure action by the authorities on Madoff. The fate of
their efforts opens the most important public policy matter pertaining to
the Madoff story.
Professional competiveness was what drove Harry
Markopolos, a Boston-based options expert, to challenge Madoff. In 1999, he
was asked by his employer, which managed options strategies similar to those
claimed by Madoff, to figure out how Madoff was getting consistently
superior returns. Within hours he decided that the Madoff claims were
fraudulent.
Gathering around him an informal group of like-minded professionals,
Markopolos spent most of the next decade trying to get the Securities and
Exchange Commission to act. Numerous meetings with different officials as
well as providing extensive documentation and apparently scores of phone
calls and emails produced almost no response. Finally in November 2005
Markopolos submitted a report titled “The World’s Largest Hedge Fund is a
Fraud”
(on line
here
[PDF]).
This 19-page document is a nuclear bomb. No one even slightly used to
reviewing serious discussions of complex matters could fail to see that it
is written by an expert, very carefully thought out, and devastatingly
cogent. (Kirtzman — who appears to dislike Markopolos —
is quite wrong to describe it as “a dense, rambling thicket … of
mathematical formulas, and Wall Street jargon” [197].) One would have
thought anyone in the line of responsibility for regulating Madoff would
have been absolutely terrified.
The SEC did act. As noted above, in 2006 an
investigation was launched. Markopolos was not consulted in any way and
Arvedlund quotes a former SEC staff member:
When you look at the closing documents, it seems clear that the Markopolos
allegations of Madoff being a Ponzi scheme were never even investigated.
(216–217)
In the end the SEC paid itself a kind of fee by
demanding that Madoff register as an investment advisor, and in November
2007 terminated the probe — barely a year before the collapse.
What happened?
It has to be said that the SEC compliance operation has evolved into a
classical
rent-seeking
bureaucratic monster, happily and expensively papering files in cooperation
with a symbiotic tribe of functionaries inside investment operations and
their law firms. A parasite, it is not designed to actually do
anything substantive.
Furthermore, dark suspicions are increasingly common that large targets are
exempt. Arvedlund quotes Markopolos recounting the
remarks of a former SEC official: “The SEC is bureaucratic and political and
turns down slam-dunk cases all too often” (199).
But the Madoff case was obviously enormous and the
SEC had been presented with a very concrete and serious accusation — which
was not difficult to test. And this was only the last and most elaborate of
a series of investigations which inexplicably stopped (Ross, 34).
Now it is true that Madoff had ingratiated himself deeply with the SEC. And
he was prominent: already he had served 2 terms as NASDAQ chairman. Quite
possibly this explains the very odd lack of interest the SEC
showed in the Madoff investment management activity after having shut
down, in 1992, the unregistered fund-raising operation — exclusively for
Madoff — run by the accounting firm of Avellino & Bienes.
Over the previous 30 years, this outfit had developed into being Madoff’s
main funding source. Ross says:
According to a person involved with the firm at the time, SEC investigators
were looking into allegations that Avellino & Bienes were involved in a
Ponzi scheme. The investigators discovered that Madoff was handling the
investments … but they did not or would not connect the dots that would have
exposed Madoff’s role as the true master of the scheme. (134)
Instead, the SEC allowed A&B investors to switch
their funds to Madoff Securities directly — rendering nugatory the
settlement which required the pool to be returned to the investors.
In the 80s and early 90s, Bernard Madoff was
popular with the SEC because of the central role his firm was playing in
automating stock trading and competing with the New York Stock Exchange. But
by the late 2000s, that was ancient history. Furthermore, the SEC had almost
ten years of presentations from Harry Markopolos to consider — and,
Markopolos reveals, tips from others too. The scale of the matter was of the
first magnitude. Why was there no effective action?
We submit that the answer to this question is the same
as to why America is engaged in an unpopular
war with the Muslim world with no Congressional dissidence, and
why
nation-breaking immigration continues — in the midst of recession — with only
a little more dissent — and that after the topic had been virtually driven
out of public debate for several years. The Bernard Madoff matter was one
about which a significant segment of Jewish America cared very much — some
for financial reasons, others, perhaps, because of community pride and
loyalty. Challenging this group was well known to be extremely dangerous. As
in other matters, they awarded themselves a veto, and they used it — as it
happened in this case, to their cost. All in all, the Madoff affair and the
cover-up is another indication of Jewish power in America.
An insight into this process arose during the 2006–7 SEC investigation.
Harry Markopolos, accurately sensing a cover-up, contacted John Wilke, a
Wall Street Journal investigative reporter with an
exceptionally fine record. Kirtzman reports:
With characteristic overkill, Markopolos bombarded the reporter with
documents, contacts, questions for him to ask ….
But the Journal never did investigate Madoff. Markopolos
believed it was the fault of “senior editors” at the Journal
who “respected and feared” Madoff. (208)
Sadly, Wilke
died
on May 1st 2009 at 54, of pancreatic cancer. Oppenheimer reports
the then WSJ Managing Editor, Paul Steiger, flatly denying
having heard of the approach (157). Steiger now heads the heavily Jewish
Propublica Foundation,
set up by Herb and Marion Sandler who sold their Golden West mortgage
operation to Wachovia Bank with ruinous consequences for the latter.
Ironically, Propublica, established to promote investigative journalism, has
done some valuable work on the Madoff story, particularly the
Picower angle (although nothing recently).
In his book, Markopolos reveals that he actually
met with and had extensive discussions with Wilke, who seemed very
responsive. Throughout 2006, Wilke gave him to believe he was about to start
on the story. As late as November Markopolos wrote his “team” that “John
told me that his editor has read my Madoff analysis and is very, very
excited to start their investigation in January” (166).
But early in 2007 Wilke abruptly cooled off, never
actually refusing the story but now raising quibbles. Markopolos (who
continued to have a working relationship with Wilke on other stories) says
In my mind, at least, I was convinced that someone high up at the
Journal had decided it was too dangerous to go after Bernie Madoff. … I
was finally beginning to consider the possibility that Bernie Madoff was
untouchable — that he was simply too powerful to be brought down.” (Markopolos,
166–167)
This analysis — as a practical matter effectively
true in our opinion — is very different than the cover story generally
presented that Madoff survived because of SEC incompetence. And it is not
plausible that the Wall Street Journal’s management did not know what was
absorbing so much one of their best reporter’s time.
A
remarkable insight into how this power works appears in Markopolos’
No One Would Listen. When, in the aftermath, Markopolos was interviewed
by David Kotz, the new Inspector general of the SEC, he was surprised to be
told that the meeting was part of a criminal investigation and told to take
an oath. He was then asked what he knew about Senator Charles Schumer (D-NY)
calling the SEC about their Madoff investigation (243).
Markopolos knew nothing, but as he points out “for
a middle level SEC employee with ambitions, any case in which an important
politician is involved is a case he or she wants to stay far away from”
(141).
Bernie Madoff and his sons Andrew and Mark generally
maxed
out
contributing to Schumer’s campaigns. In more recent years Bernard had also
contributed significantly
to the Democratic Senatorial Campaign Committee and some other Democratic
candidates, mainly, like Schumer, Jewish.
But it gets stranger — and more ominous. In September, 2009, Markopolos
appeared before the Senate Banking Committee, scheduled to follow H. David
Kotz, SEC Inspector General, who was there to discuss his recently-published
investigation
(PDF) of the SEC’s Madoff failure. There was a
recess between the two testimonies and then:
Only Senators Chuck Schumer, who had made a phone call to the SEC, and Jeff
Merkley, a Democrat from Washington, returned. Schumer took over the
questioning …. The entire room was filled with SEC staffers …. The victims
had been shunted to a hearing room … to watch the proceedings on closed
circuit television. We couldn’t have picked a more adverse audience. (Markopolos,
261)
Schumer (who apparently felt no need to recuse
himself or even disclose that he had intervened on Madoff’s behalf) then ran
the session so that Markopolos would be able to speak as little as possible.
This became so extreme that the lawyer Markopolos had brought “started
handing me cards urging me, ‘Jump in whenever you can’” (Markopolos, 262).
There is nothing to suggest Schumer was actually involved with or even knew
Madoff: yet No One Would Listen makes it clear he treated
Markopolos with rudely dismissive curtness. Why deprive this genuine public
hero of his moment in the sun?
Similarly strange things had happened when Markopolos went (voluntarily) in
March 2009 to brief the newly appointed chief of the SEC, Mary Schapiro.
David Becker, the career Wall Street lawyer
imported
the previous month as SEC General Counsel, picked a quarrel over extraneous
trivia and threw a tantrum so violent that Markopolos’ lawyer “thought that
he was about to come right over that table and go for my throat” (Markopolos,
249). Consequently, the meeting was terminated.
In 1977 the actor Cliff Robertson, seeking to correct an erroneous report to
the IRS of income from Columbia Pictures, inadvertently triggered the
discovery that the (inevitably Jewish) head of the studio, David Begelman,
was a large scale embezzler. As a result, Robertson, then at the height of
his career, was
blacklisted
and got no major movie roles for several years. Evaluating Andrew Kirtzman’s
Madoff book Betrayal purely subjectively, one would think Harry
Markopolos was the villain. The Schumer and Becker performances are in the
same tradition: unrestrained rage against someone deemed to have caused
damage to a community member — quite regardless of the ethical facts.
Written after the Kotz report on the SEC/Madoff fiasco was published,
Markopolos’ No One Would Listen conveniently adds to the
evidence presented in the report, thereby destroying the idea that only
ineptitude and dislike of Harry Markopolos protected Madoff.
In fact, the SEC had had quite independent and very plausible inputs
suggesting Madoff was fraudulent:
-
“In
2003 … an unidentified fund of hedge funds manager alerted the SEC …
explaining during a conference call he … ‘couldn’t figure out
how he was earning his returns’ …. This was lost in the bureaucracy.” (our
emphasis)
-
An intelligent SEC examiner in 2004 looking (as
was his right) at internal correspondence at the fearsomely quantitative
Renaissance Technologies Hedge Fund pool headed by James Harris Simons
found a discussion concluding Madoff’s activities were “inexplicable.”
Evidently he forwarded this to his superiors with no result. (Renaissance
Technologies itself did nothing either.)
-
In 2005 an anonymous tipster claiming to have
withdrawn $5 million said he was “deeply concerned that Madoff is running
a very sophisticated fraudulent pyramid scheme.” They even got an
anonymous letter in 2008 alleging Madoff was keeping two sets of books! (Markopolos,
257–258)
Quite apart from all this, the SEC 2006–7
investigation itself did produce the information that Madoff had lied about
the number of clients he was handling — an issue which drastically alters
regulatory requirements. Markopolos says:
“What really bugs me is that the SEC caught Madoff lying to its
investigators repeatedly and making false statements to a federal official.
This is supposed to carry a five year … maximum sentence; yet they never
referred him to the Department of Justice for criminal prosecution.” (161)
Nothing was done.
We submit that the SEC failed to stop Madoff not
because it was incompetent, but because it was afraid — of the Jewish
Establishment.
Looking Like a Goy: Growing Up in the Jewish Community
While we are focused on the way the Madoff case
illuminates and reflects the relationships between Jews and non-Jews, there
is also the question of how Madoff the man related to the Jewish people.
Looking back, his childhood contemporaries have
realized Madoff could well have come to resent his own people — that he had,
in the words of an Oppenheimer informant, an “inner need to screw the
system” (87).
In the competitive, upwardly mobile Jewish society
of Laurelton, Queens in the 1950s, the Madoff family did not command much
respect. They were not prosperous, nor were they involved in a prestigious
profession. Bernard himself won no academic laurels — Kirtzman quotes a
middle school girlfriend recalling a poignant occasion with him sitting
silently through a school lunch at which his circle were comparing and
boasting about their report cards (21). He had nothing to boast about.
Shortly afterwards she broke up with him: “I didn’t think he was smart
enough” (23).
In fact, Madoff had a concrete reason to feel alienated — what Weinstein
describes as his “beautiful blue eyes” (25). These are not
necessarily appreciated in Jewish circles — Graham recalls being curtly told
they represented a fault in the bloodline when once asking a Jewish friend
about her eye color. Weinstein reports Madoff’s grandmother disliked his
High School girlfriend and future wife: “She thought she was a
“shiksa”…because Ruth was blond and had blue eyes” (61).
There was no doubt about Ruth Alpern’s Jewishness — the two families were in
the same town, virtually neighbors — but Oppenheimer reports a school friend
remembering of Ruth that a candy store proprietor was ““shocked —
shocked — to learn she wasn’t a gentile because of her goyish look.”
Ruth Alpern “looked like a shiksa. She did, absolutely…extremely shiksa
looking” (34).
Madoff’s choice of such a partner may have said
more about his attitude to his own community than his circle realized.
Weinstein reports the Madoffs were not at all observant, and in fact
frequently used Yom Kippur as a day to fly to their villa in France (47).
When the British tried to figure out what caused the socially elite and
privileged
Burgess/Maclean/Philby
circle to damage their country so much by spying for the Soviet Union, they
found that anguish about minor status blemishes could be argued to have
triggered this murderous resentment. Being on the margin of a highly
judgmental group can apparently cause extremely anti-social behavior.
Postscript: Where’s the Rest of the Money?
What will be the aftermath? Ross reports that
“Investigators believe there could be a billion dollars or more that Madoff
had stashed in foreign bank accounts” (207). He also quotes an investigator
who noted that
someone who plans ahead so well that he pre-positions his clothes around the
world, don’t you think he has some hidden bank accounts around the world
too? (89–90)
(Besides wardrobes at his four homes, Ross notes, Madoff maintained steamer
trunks of clothes at six hotels around the world.) A recent story in the
New York Post quotes a former fellow prisoner alleging Madoff
claims to have
$9
billion squirreled away.
Beyond the question of the Madoff loot, there is the — if anything even more
interesting — question of the apparent enrichment of the non-family
insiders, Picower, Chais, Levy — and perhaps others. (The Wall
Street Journal has reported a total of “at
least eight.”)
What was going on here? How did these men come to cooperate? What was
Madoff’s motive for cutting them in?
Our prediction is that nothing significant will ever emerge on these
questions. Observation of a long list of scandals, from 1967 Israeli attack
on the
USS
Liberty
to the dropping of the espionage prosecutions against the American Israel
Public Affairs Committee last year, leads inevitably to this conclusion.
Thoroughly investigated, the Madoff scandal has the potential to illuminate
the economic and political prerogatives usurped in late 20th-century
America by what can only be described as the new ruling class. That will not
be allowed to happen.
Indeed,
an article that appeared too
late to include in the print version questioned
"whether anyone
will be charged with being an accomplice to the fraud....Given the slow pace
of the investigation, it is questionable whether the government will ever be
able to show that there was anything more than a few willing enablers." This
is despite the fact that in at least some of these cases the defendants
knowingly committed fraud. For example, in one case, “each woman ‘knowingly perpetuated the
fraud,’ but there is no claim that they helped to perpetrate it. This means
that once again the government accuses defendants of enabling Mr. Madoff’s
fraud but not with having any responsibility for it. It is a bit puzzling
why this is only a civil case, and not a criminal indictment.”
If Bernard Madoff has a redeeming quality, it must
be the unflinching courage he has shown in refusing to implicate his family
in any way. Sheryl Weinstein, his mistress for some years, knew the score:
“From our very first lunch, I understood that Bernie was very wrapped up in
his family” (57).
So the question is, how could he do this to them?
Absent the almost unprecedented financial crisis
of late 2008, Madoff’s fraud might never have been revealed, as Arvedlund
reports (265). Markopolos told the House Subcommittee on Capital Markets
that Madoff could have gone to $100 Billion (Markopolos, 228). It would
probably have outlived him. With the remarkable renaissance in confidence in
Hedge Funds in 2009, he very likely would indeed have gone on to new
heights. But, eventually, the piper would have had to be paid — especially,
as seems plausible on the basis of the literature, if the sons did not know
exactly what their father was doing.
Was Madoff so extremely present-oriented that some
years in a very warm sun were worth decades of obloquy for his descendents?
Perspective is supplied by the case of one of the
most outspoken skeptics about Madoff in Florida, named by Arvedlund as
Salomon Konig, a “Fund of Funds” manager who “also hails from the Florida
Jewish community.” Konig’s penetrating critique of Madoff was well informed
for good reason, as Arvedlund discovered: he left Venezuela in 1993 and is
under indictment there for running a Ponzi scheme. Yet he has been able to
establish himself in his new country in the financial business (239–240).
Perhaps in the back of Madoff’s mind was the idea — possibly the instinct —
that after a few years, perhaps in a different country, maybe speaking a
different language, his family would live on, possibly with a new name
(surname changes are
under
way
among the Madoff kin) and perhaps with some portion of the loot.
Americans need to ask themselves if parties with this larcenous and nomadic
tradition are appropriate stewards of our national institutions.