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18. Madoff and me


We know, now, what happened: Bernie Madoff was running a Ponzi scheme. He got away with it for decades, but when the Great Recession hit, too many of his wealthy clients demanded their money, and it caused a run on the bank; Madoff couldn’t cover the nut. When his sons turned him in, Bernie Madoff overnight became one of the most infamous financial fraudsters in U.S. history.

I wrote earlier that I’d never heard the name Bernie Madoff until early December, 2008. It was then that I’d read the newspaper reports of his arrest. The billionaire investor, a former head of the Nasdaq, had been arrested by the FBI. Hmm, I thought, interesting…

The Background

The main reason I’d become a freelance wine writer in 1989 was because years previously, I’d been invited, by an uncle, to invest in a family fund we informally called “The Arbitrage.” Most of my relatives on my father’s side were in it. The interest rate was very high—averaging 14%-15% a year—and remarkably consistent. With that assured income for my retirement savings, I didn’t really need to make a lot of money from my job. I could afford to do something I loved.

None of my relatives knew quite how The Arbitrage worked, and my uncle was none too forthcoming in explaining it. All we knew was that it was run by “Mister Big,” supposedly a financial genius who’d developed an algorithm for beating the markets. If we pressed uncle for details, he got angry. Once, he said to me, “Look, if you’re not satisfied with the returns, you’re free to withdraw your money and invest it someplace else.”

I was satisfied with the returns.

After all, my family wasn’t depending on the trustworthiness of some third-party financial manager whom we barely knew. We were trusting our uncle; this was a man I’d known and liked all my life. He’d bounced Baby Stevie on his knee; his kids were my friends. We visited him and his family in their sprawling Santa Barbara estate many times. So when uncle told us not to worry, we didn’t.

We should have.

A few days after Madoff’s arrest, I came home from a San Francisco event late on the night of Dec. 10, 2008, to find an email from a cousin, who, like me, had invested her money in our family fund. BAD NEWS ABOUT THE ARBITRAGE, the subject line read. All our money was gone. It turned out that The  Arbitrage had actually been an elaborate ruse, run by an uber-rich L.A. Jewish philanthropist, who collected money from hundreds or thousands of California Jews, through middle men like my uncle, and then funneled it all to Bernie Madoff. That’s why we’d never heard Madoff’s name before.

Did my uncle know? He died years ago. So did his wife. His kids say he didn’t. We’ll never know.

What do you do when you find out, at the age of 62, that your life savings have been wiped out? I’d grown up with a major fear: being old and poor in America. I had no children to support me in my old age. I had no pension. I’d never been a big earner. The only thing I’d had was The Arbitrage.

Terrifying thoughts washed over me. I’d lose my home, have to live on the streets. I was in psychotherapy at the time. At my next session after the bad news hit, my therapist said he might have to call for my involuntary commitment because he feared I was suicidal. And I was. Maybe the only thing that talked me off the cliff was a long conversation with cousin Ellen (who’d also lost a bundle). She was a nurse. “Suicide,” she told me, “is a permanent solution to a temporary problem.”

A big part of my problem was that the Federal government has an insurance scheme, the Securities Investor Protection Corporation, or SIPC, that protected investors who had been defrauded in so-called “theft-loss” cases. SIPC would reimburse investors, up to a point, based on their “net equity”: If you invested more money than you withdrew from a fraudulent account, SIPC would pay you the difference. Similarly, if you’d withdrawn more money than you invested, SIPC would “claw back” the difference, using that money to pay “net losers.” Under this scheme, many thousands of Madoff investors did get money back.

But SIPC covered only “direct investors”—those who had sent their money directly to Bernie Madoff. We—my family and I and many other Californians—hadn’t invested directly with Madoff. We’d given our money to “Mister Big,” who forwarded it to Madoff, in a so-called “feeder fund.” We thus were “indirect investors” and not eligible for SIPC.

There was only one way my family could recoup some of our losses: The good old American pastime of a lawsuit. But sue whom? Madoff? Our uncle? We took a vote, my cousins and I, and decided to go after Mister Big. (I’m not identifying him, although his involvement is in the public record. I just feel like I don’t want to.)

Our lawsuit attracted a great deal of attention in legal circles. Many firms wanted to represent us, because there were billions of dollars at stake, and with their 30% contingency fee, they stood to make a fortune. We ultimately selected a high-powered Manhattan law firm. They asked me to be the lead plaintiff. They never explicitly told me why, but I think I know: I would be the most sympathetic to a jury, if it came to that: Old, broke, living in a tiny condo in working-class downtown Oakland—as opposed to, say, my Malibu cousin Ellen, much less Steven Spielberg.

The case dragged on for ten years. Mister Big’s estate fought it bitterly. There were endless piles of legal documents, depositions, phone conferences. We obtained copies of canceled checks from Madoff to Mister Big, to his children and to their various DBAs. I added them up: they totaled billions. In 2018 we finally won the suit. We got a little money. Not much, but it helped.

* * *

How do I personally feel about Madoff? Shortly after the debacle, CNBC interviewed me for their live morning business show. The reporter tried his best to get me to express peasants-with-pitchforks fury. Don’t you want to see him suffer? I’m afraid I frustrated him. No, I replied; I’m content to let the U.S. justice system deal with this. More recently, in March of 2020, Madoff asked the court for early release, and the authorities reached out to his victims asking for our opinion. Don’t release him, I replied. Let him spend the rest of his life in jail. I see no contradiction between my two positions.

Was I an idiot? Probably, but like I said, you have to see this from my point of view. Even if I’d withdrawn a great deal of money before the shit hit the fan, it’s probable that SIPC would have clawed it back from me, which easily could have forced me out of my home. So my mistake—our mistake—occurred at the very beginning, with our very first action: the initial deposit. That was the first cause in the karmic chain that led to the financial ruination of so many people around the world. In my case, after Dec. 10, 2008, I immediately stopped spending money on movies, restaurants, vacations, new clothes, fancy food and booze, the works. My overwhelming priority became making more money.

  1. Bob Rossi says:

    People often say to me (either directly, or just in comments to articles: “You should have a personal financial advisor. I have one, and I get X% return per year.”
    Well, I know that not every advisor is a Madoff or a Mr. Big, but I’d just as soon trust my own judgment (or that of Fidelity). So all or retirement money is in Fidelity funds. I’m satisfied with that, even if a financial advisor might be able to do a little better.

  2. As long as your portfolio is diversified, you’ll be fine!

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