Living In Madoff's Wake

By Elan Ronen

Allan Goldstein lost more than just his life savings to Bernard Madoff. He lost his confidence in the Securities and Exchange Commission. He lost the security of knowing his retirement years would be comfortable. And if he is forced to move into his daughter’s house in two months he may lose one more thing: his independence.

“At this stage in my life, the thought of living in my children’s home is very sad, it’s terrible,” Goldstein said. “That’s how I have to end up living my life, living from the benefits of my children.”

Goldstein, 76, has lived in upstate New York since his retirement from the textile industry 16 years ago. He and his wife lived off returns from what they though was an IRA account at Madoff’s firm — Madoff Investments Securities LLC — worth about $4.2 million. But in December, when Madoff’s $50 billion Ponzi scheme collapsed, Goldstein’s learned that his IRA account never existed. The account’s steady returns— about 10 percent annually — were coming from other investors in Madoff’s scheme.

Goldstein came to Washington D.C. on January 5th to tell his story to the House Financial Services Committee. He said he was forced to cash in his life insurance policy to pay for his mortgage and living expenses. The housing market is so bad in the Taconic Mountain region of New York, where Goldstein lives, that he may not be able to sell his house. He will be forced into foreclosure. When his life insurance money is exhausted in two months, Goldstein might have to move into his daughter’s house in California. 

Goldstein’s is the epitome of a self-made man. He was born and raised in the Flatbush section of Brooklyn in a one-bedroom apartment with his parents and sister.  While attending New York University, Goldstein worked two jobs to pay the tuition.  After college, he spent two years in the Army, including 16 months in Korea.  His first job as a drapery fabric salesman paid $200 a month. After saving his money for 7 years, he co-founded a textile company that became fairly successful.

Goldstein moved $1.5 million in IRA savings to Madoff’s securities in the late 80’s and added $1 million more in the mid ‘90s. Goldstein had no qualms about investing with Madoff’s firm because his accountant told him that the company employed a conservative trading strategy. He had previously only put his earnings in relatively safe money market accounts.

Over two decades, Goldstein’s hard-earned $2.5 million dollars grew by about 10% a year, on paper at least. In November, Goldstein had $4.2 million in his IRA, according to monthly financial statements from Madoff Securities. On December 11th Madoff was arrested, and Goldstein learned that his life savings had disappeared.

“Everything that I worked for over a 50-year career is gone,” he said.

A Time for Resilience and Introspection 

The full shape and scale of Madoff’s deceit is still unknown. There may be several thousand victims. On January 2nd, Irving Picard, the federally appointed Trustee for the liquidation of Madoff’s firm, sent out over 8,000 claim forms to customers, broker-dealers and general creditors who had business ties with Madoff. Investors affected by the scam may receive up to $500,000 dollars from the Securities Investor Protection Corporation (SIPC).

Hundreds of victims are also seeking legal counsel to see if they can get back even a small percentage of their investments. Two New York City Law Firms, Milberg LLP and Seeger Weiss LLP, will represent more than 100 Madoff victims that were defrauded of at least $500 million dollars collectively.

“We are very busy,” said Daniel Fleshler, spokesperson for Milberg LLP. “There are ten to twenty people coming in the door every day now.”

The list of Jewish organizations, schools and individuals who lost money with Madoff is long. Some of the financial blows were glancing, others were devastating. The Chais Family Foundation in California, the Robert I. Lappin Charitable Foundation based in Massachusetts, the Picower foundation in Florida and JEHT based in New York were all shut down. Several Jewish schools, including Yeshiva University and Ramaz School in York, had multi-million dollar investments with Madoff, but will survive. 

Even in the face of large financial losses and a faltering economy, some dedicated donors continue to give. Rabbi Daniel Allen is the CEO of the American Friends of Magen David Adom (AFMDA), the organization which helps fund MDA, Israel’s equivalent of the Red Cross. Allen said he has been “heartened” by the dedication of his donors.

“I can’t emphasize enough how absolutely amazing it’s been to hear people who have lost significant funds, but who have said ‘but for you, the people of Israel, I will complete what I promised, and I will do what I said I would do,’” he said.

Allen made specific mention of Joseph Gurwin, a longtime donor to Jewish organizations. Gurwin had significant funds invested with Madoff, but will still plans to continue with a million dollar challenge, in which Gurwin will donate a million dollars and will be matched dollar-for-dollar by AFMDA.

The Madoff scam is a blow to the Jewish community but not a death knell, according to Allen.  He said the Jewish community is a strong, vibrant enterprise, which has endured hardships much graver than Madoff. Though Allen acknowledges that individuals will be affected, collectively, he is sure the community will rebound. Allen said that when thinks about Madoff’s fraud he recalls his father-in-law’s saying, ‘if its only money it can be fixed.’

Judah Lifschitz, Co-President of Washington, D.C. law firm Shapiro, Lifschitz & Schram, said the Madoff incident will have dramatic short and long-term effects on the Jewish community, despite its resilience historically.

“I do believe there will be people who step up and try to cushion the loss of this, but we are talking about huge sums,” Lifschitz said.

He said charity workers should now ask themselves two questions.  First, should they be putting funds into riskier, high-yield investments, or should they be putting funds into more conservative, low-yield investments? Second, what procedures do the charities have, and how well or poorly did they work to protect the organizations from the Madoff fallout? 

Lifschitz said the failure that may result from a lack of checks-and-balances within an organization may also result from a lack of qualified manpower — a chronic problem that plagues non-for-profits. As a consequence of not having highly qualified employees put in the necessary hours, workers tend to take shortcuts.

Gary Tobin, President of the Institute for Jewish & Community Research, said that while some organizations may be at fault for not doing their due diligence, most are not. He said another misconception about the Madoff scandal is that Jewish wealth has been significantly damaged.

“For some hundreds of people, it’s a tragedy,” Tobin said. “But in terms of the overall wealth of the Jewish community, this won’t make a dent. Just the hundred richest Jews on the Forbes list, are worth 400 billion dollars. The financial part, while serious is not the biggest part of the story.”

Tobin said synagogues, Jewish Community Centers, and Jewish vocational services, and the vast Jewish organizational network as whole were largely unscathed by Madoff.  He said the general community will hurt more, because Jews are generous givers to society.  He used the now closed Picower Foundation as an example. The foundation gave about $268 million to organizations like the Children’s Health Fund, which provides health care to the nation’s most medically underserved children.

Tobin said the exaggeration in the media about the loss of Jewish wealth is the result of the emotional shock of an insider betraying the community.  The effects of the recession have been far more profound.

“It is the biggest scandal in Wall Street, and it is going to be the biggest scandal in American philanthropic history and it is going to be the biggest scandal in Jewish philanthropic history,” Tobin said.  “But the first two overshadow the first, for everybody except the Jews.”

Understanding the Regulatory Failure

When the House Financial Services Committee convened on January 5th, Paul Kanjorski, D-PA, called out the federal regulators of the financial industry.

“We now know that our security regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments, like derivatives,” he said. “But they have also missed the chance to protect them against the simplest of schemes, the Ponzi scheme.”

But after the 5 hour meeting, two things became clear: Madoff’s scheme was anything but simple, and the regulatory failures that allowed it to perpetuate for more than two decades may have been numerous.

The first warning of trouble came from Harry Markopolos, the former financial executive who wrote a letter to the SEC’s Boston office in May 1999 stating why he thought Madoff was a fraud.  In November, 2005 Markopolos gave a 19-page report to the SEC, concluding that Madoff was guilty of insider trading, or running a massive Ponzi scheme. One of the 29 red flags Markopolos outlined in his report entitled, “The World’s Largest Hedge Fund Is a Fraud,” was the fact that Madoff only lost money briefly, in one month intervals.  He analyzed an investment the hedge fund Fairfield Sentry Limited had with Madoff’s firm, and found that the account only lost money in seven isolated months out of the 14 and a half years it had been managed by Madoff.

Markopolos’s complaint never made it to the top authorities at the SEC. Inspector general David Kotz, whose office began investigating the SEC on December 17, will be interviewing Markopolos this month. In his testimony before the House Financial Services Committee, Kotz said the chairman of the SEC, Christopher Cox, was concerned that the Markopolos’s report never made to his or the other commissioners attention. 

Kotz will also be looking into allegations that Madoff’s status and relationships with SEC members may have influenced the regulators. Madoff served on SEC advisory committees and had social relationships with SEC officials. Madoff’s niece, Shana Madoff began dating Eric Swanson, a former director of compliance at the SEC, just as he was about to leave the SEC in 2006. The couple later married in December 2006.

In an article published in the Wall Street Journal the Former SEC Chairman Arthur Levitt Jr. said the size of the SEC enforcement division has not kept pace with the number of investment advisors, such as Madoff Securities, which have increased by 50 percent since 2002. SEC enforcement division personnel were cut by 146, to 1,192 in 2007 from 1,338 in 2005.

“As a result, only about 10 percent of investment advisers can expect to be examined every three years,” Levitt said. “And the goal of inspecting every adviser once every five years — laughably light oversight in its own right — has been abandoned.”

The big question lawmakers tried to answer on January 5th was how to fix the regulatory system, if indeed the SEC was to blame.  The members of the House Financial Services Committee split on ideological lines. Republicans like Ron Paul, R-Tex., and Scott Garret, R- NJ, said they view the Madoff scandal as an incident that reflects the impotence of the current regulatory system, but did not think additional regulation would solve the problem.  Paul went further and suggested that the SEC was part of the problem because it gave people the illusion of security.  He suggested getting rid of it all together, and instead adopting principles of “self reliance and self-policing.”

Both Democrats and Republicans argued for reforming the regulatory system to the needs of the 21st century. But some Democrats, like Paul Hodes, D- NH, were stunned that their Republican colleagues still favored deregulation.

“I am interested to hear my colleagues on the other side of the aisle apparently arguing that we don’t need more regulations or oversight, and I don’t know what world they might be living in,” Hodes said. “Because in the world we are living in, with a global financial collapse, people who have lost their savings, the Madoff scandal is really like the cherry on a bad sundae.”

The Endgame

So if Madoff was caught, where is all the money? 

Some of it never existed in the first place. Goldstein for example, though Madoff put his IRA money into stocks like Walmart, Johnson and Johnson, Exxon and Intel, but the money never went into the market, so it never made any real earnings. Similarly, Yeshiva University put 14.5 million into Madoff’s scheme, but their portfolio indicated that they held 110 million. Only the loss of 14.5 million dollars was real.

 Harbeck, SIPC’s president and CEO, told lawmakers that between $830 and $850 million of Madoff’s liquid assets would soon be acquired by Irving Picard, the federally-appointed trustee.  It is unclear whether this includes the money Madoff was planning to send out to family members, employees and friends soon before the scheme collapsed. One hundred checks were found in his desk the day of his arrest, totaling approximately $173 million.

For Goldstein, any money he recovers in five or six months may be too late. In two months he will run out of money and be forced from his home.  Meanwhile, Madoff is still waiting for trial in his $7 million penthouse on the Upper East Side. Prosecutors failed to send him to jail on Jan 12th, even after Madoff violating a court-ordered asset freeze by mailing packages of jewels to immediate family members. But Goldstein said he no longer cares what happens to Madoff. He said he had to get rid of his anger for the man or it would consume him. His wife already suffered an emotional breakdown.

“I just want to have a normal life, being in my own home, giving my wife some peace of mind every night, so she can go to sleep without a pill,” Goldstein said. That’s what I want in my life.”

Goldstein called on Congress to make a restitution fund for Madoff’s victims, and said they were partly to blame for the scandal.  He said he was prepared for losses from market volatility, but he thought the SEC would protect him from fraud.

“Somewhere inside of me was the thought that this was a regulated industry, and the government was behind the regulation,” Goldstein said. “And it wasn’t, it wasn’t. The red flags, the warning, the letters, were all just pushed aside. So the end result is that people like me are suffering.”