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Madoff’s Tactics Date to 1960s When Father-in-Law Was Recruiter

Date: Thursday, January 29, 2009
Author: Linda Sandler and Allan Dodds Frank, Bloomberg

Bernard Madoff’s practice of promising investors double-digit returns dates to the founding of his firm in 1960 when his father-in-law steered clients to him, according to court records and customers.

Madoff, accused by the U.S. of running a $50 billion Ponzi scheme, got a boost in his early years from accountant Saul Alpern, the father of his wife Ruth. Alpern referred friends and their relatives who spent winters in North Miami Beach and summers at the Sunny Oaks Hotel in New York’s Catskill Mountains in the 1960s, according to Cynthia Arenson, the hotel owner.

“His son-in-law just opened a firm, and he was doing very well,” said Arenson, 68, who lost at least $1.25 million with Madoff. “Wouldn’t you encourage your friends to invest with him? Sometimes they got 18 percent, sometimes they got 19 percent.”

Madoff, 70, was charged with securities fraud Dec. 11 after admitting to the Ponzi scheme, according to his arrest complaint. U.S. prosecutors and regulators are probing whether misconduct at his firm, Bernard L. Madoff Investment Securities LLC, spanned decades, according to people familiar with the matter. U.S. investigators said they found evidence of misconduct dating back to the 1970s, the people said last month.

Victims of the alleged fraud range from New York University to philanthropist Carl Shapiro.

No one in Madoff’s family has been charged with wrongdoing. Alpern died in 1999 at age 95. Ira Sorkin, a lawyer for Madoff and his wife, declined to comment. Madoff has not responded to the charge against him.

Recruiting Circuit

Sunny Oaks, in Woodridge, New York, was part of a recruiting circuit for Madoff associates that included clubs in Palm Beach, Florida, and Long Island, New York. They exploited an atmosphere of trust to rope in investors, Arenson and other Madoff customers said.

The hotel, a collection of old wooden bungalows, treated guests like family, she said. They became “fertile ground” for Madoff, an occasional guest, according to a comment in CLL Diary, a blog written by Arenson’s stepson David.

Madoff’s name was synonymous with “bank,” David Arenson wrote in the blog. Most of Arenson’s family had Madoff accounts, which “radiated out through the guest population, through our distant relatives and the distant relatives of guests. I can think of a dozen people I know who are collectively out at least $5 million.”

Arenson lost $65,000 after taking out money over 20 years to pay expenses, he said.

“None of us had a clue that anything was amiss,” Arenson said in an interview. “Madoff had wormed his way into the system to such an extent that we felt comfortable with him.”

Retired Investors

Madoff’s early investors often were retired, entrusting him with amounts ranging from $5,000 to $50,000, said Arenson and other victims. Many gave Madoff money after their parents or other relatives or friends invested with him, she said.

Arenson came to Madoff by following her parents, who were “best friends” of Alpern, she said. Her father was a retired attorney, and his friends were retired teachers, said Arenson, who inherited Sunny Oaks, which closed in 1999, from her parents.

Joyce Greenberg, a retired Houston stockbroker, said she and six other family members gave money to Madoff because her stepmother’s first cousin, Carl Shapiro, had confidence in him. Her family lost “multiple millions” of dollars, she said.

Boston philanthropist Carl Shapiro’s charitable foundation had about 40 percent of its assets invested with Madoff, spokeswoman Diana Pisciotta said. “The impact of that is still being determined,” she said. The foundation last reported assets of $345 million in 2007, she said.

Learned Lesson

Greenberg, who worked for a Houston stockbroker that later became part of Societe Generale, said she never referred clients to Madoff. She said she learned her lesson about referrals after recommending an investment adviser who lost money.

“There was no Madoff smallpox in Houston,” she said.

Other recruits became unpaid solicitors for Madoff, either by expressing confidence in him or by taking a more active role. Arenson said she called Madoff about five years ago to introduce a cousin. The price of entry was higher by then, she said.

“We called Bernie, and Bernie was very nice,” she said. “He let them go in with a million. Hopefully they will get some of their money back.”

Accountant Frank Avellino also began recruiting clients for Madoff in 1962, according to a Securities and Exchange Commission lawsuit filed in 1992 against Avellino & Bienes, his firm. The firm had evolved from Alpern & Heller, the firm run by Madoff’s father-in-law, according to court records filed in the SEC case.

Same Tactics

By October 1992, Avellino’s firm had issued $441 million in unregistered notes to 3,200 people and entities promised returns of 13.5 percent to 20 percent, according to the SEC complaint. Avellino paid himself by taking what was left after giving investors an agreed-upon return on their Madoff accounts, according to court documents.

Avellino and Bienes agreed to close the business and refund the money invested by customers, the SEC said.

After getting money back from Avellino, some clients, including Arenson, put it right back with Madoff, Arenson said.

Gary Woodfield, a lawyer for Avellino, declined to comment.

As Madoff’s network broadened and became international, his recruiting network grew larger. For example, Hedge fund Fairfield Greenwich Group got fees as it directed assets to Madoff, according to a proposed class action filed Jan. 8 in Manhattan federal court against the company.

Thomas Mulligan, a Fairfield Greenwich spokesman, said the firm performed “extensive due diligence” before investing.

The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Allan Dodds Frank in New York, at allanfrank@bloomberg.net.