Dec 13th 2013
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By Teresa Ambord, Correspondent
You'd think a man who masterminded the biggest Ponzi scheme in history would have ice water in his veins. The name Bernard Madoff has become synonymous with investment scams after his firm defrauded investors of $20 billion in investments and $47 billion in fake profit his clients believed they had.
He lived opulently and made some of his employees wealthy, by steering the investments of about 4,800 individuals who trusted him. He sat coolly across the desk from investors – which included friends, employees, families of employees, and celebrities, and stripped them of the money they entrusted to him. Yet, when the collapse of the firm was inevitable, he broke down and cried. Once he realized he could no longer stop the crash, he instead orchestrated it so that he could avoid being arrested in public.
First to testify
Earlier this month, Frank DiPascali testified at the first criminal trial stemming from Madoff's scheme. The highest-ranking former Madoff executive to testify so far, DiPascali told the jury how in early December 2008, his boss had been "staring out the window all day," Bloomberg Personal Finance reported. "He turned to me and said, crying, 'I'm at the end of my rope.'"
When DiPascali asked what that meant, Madoff told him he was broke and admitted his investment business was all "a fraud," a Ponzi scheme, and the money was all gone.
DiPascali described how Madoff had gone to extraordinary lengths to create the appearance of massive wealth from investments of client cash, money that was put into real estate deals around the world or into French banks. Occasionally, said DiPascali, Madoff would carefully craft a "prop" that would hint at the existence of successful investments and leave it where employees could see it. The props, he said, suggested "private placements on very big real estate deals around the world."
Even so, DiPascali admitted he knew there was fraud going on. He knew the investors were being lied to, but he didn't know it was a Ponzi scheme and that the company had run out of money.
The Securities and Exchange Commission defines a Ponzi scheme and its demise this way:
An investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.
With little or no legitimate earnings, Ponzi schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.
The collapse was in sight
DiPascali told the jury that after admitting to the scheme, Madoff explained that some major investors were asking to redeem their investments, which would topple the firm if paid out. One was asking for a wire transfer of $250 million. Realizing that would "cause the house of cards to collapse," he held them off. By the time those investors figured out the Ponzi scheme, said Madoff, it would be too late.
Madoff went on to say that his own wife, Ruth Madoff, had houses and about $30 million of her own and would be okay when he went to prison. Then he inquired about DiPascali's wife, asking whether she had resources, which was Madoff's way of asking if she'd be all right when DiPascali was in jail. DiPascali told the jury, "My knees were buckling." At that point, he realized he was going to jail.
DiPascali testified he recruited Annette Bongiorno (who ran the investment advisory business at the center of the fraud and who is also on trial) to help cut checks for Madoff employees and their family members with the last of the firm's money, which was less than $300 million.
Finally, Madoff told DiPascali he'd arranged to avoid being arrested at his office, saying, "I can't let that happen – I have to do this on my terms"
Madoff was arrested one week later at his Manhattan apartment on December 11, 2008, although not everything went according to his plan. He had hoped to put off the arrest till after Christmas, saying, "I don't want to spoil anyone's holidays."
Eventually, five other employees would be arrested for participating in the fraud that made them all wealthy.
Madoff, now age seventy-five, is serving 150 years at the Butner Federal Correctional Complex at Butner, North Carolina.
For his part, DiPascali could be looking at 125 years in prison, but he's hoping for a "substantial" reduction for his cooperation.