The knowledge that offshore funds were so heavily invested in Madoff staggered me, absolutely staggered me. It wasn’t until this trip that I realized that my life was in danger. People kill to protect their money, and if my team was successful, a lot of people were going to lose a lot of money. And while I didn’t know the names of these investors, I felt quite certain that if these people discovered what I was doing they would have to try to take me out. I was the most active threat to them. Even Bernie Madoff, the respected Mr. Madoff, was potentially a threat to my life. He was playing a dangerous game of unimaginable complexity. How was he going to respond if he found out that I was trying to bring him down? Was it better for Bernie to get rid of me or let these offshore investors get rid of him?
This wasn’t paranoia. Everybody in the money business has heard stories and rumors about what happened to people who made bad decisions and created problems. Some of them may be apocryphal—but a lot of them aren’t. I remembered the story Frank Casey had told me about a problem he’d had early in his career. In 1980 he had devised a strategy that fell into that gray area of legality. Its legality depended completely on an interpretation of the tax law. It was called a commodities straddle, a very complicated, highly leveraged strategy that allowed him to move money from one tax year to the next for individuals who needed that done, and then convert it to long-term capital gains. Basically it involved buying a commodity in December and taking all the tax benefits, then selling it the following year. These were riskless trades designed solely to create short-term losses for one tax year while providing long-term capital gains for the following year. Wall Street firms were doing it for their wealthy clients with a variety of commodities, ranging from silver to soybeans. And like the product I created, it could go south quickly. If it worked it was beautiful—it would save clients about 30 percent of their taxable dollars. The product Frank designed was slightly different. While his product had the same benefits—it would save clients about 30 percent—it also included some risk, which made it ethical and completely legal. And even if it blew up, the way Frank hedged it the most his clients could lose was 10 percent. So it had a 3:1 reward-to-risk ratio, a very nice ratio.
In late November 1980 a Merrill Lynch broker who specialized in private wealth management asked Frank to meet several of his clients in Carteret, New Jersey. The clients wanted to do a commodity tax straddle; for tax purposes they wanted to move income into the following year. Because Frank’s strategy depended on some market volatility for success, he normally started by early September, which gave the market plenty of time to move. Beginning too late in the year was risky, because if the market stayed flat the strategy wouldn’t work.
As Frank described this meeting, “Four guys with no necks were sitting there and one of them is a lawyer. It seemed obvious to me that the other three men were not exactly legitimate businessmen. I didn’t care. This investment was legal and ethical and was going to be reported as required. The lawyer explained that they had flipped some property and ended up with a one-and-a-half-million-dollar short-term capital gains liability that they wanted stretched into the following year. I told them the risks—that if the market flatlined there was nothing I could do about it. They agreed to pay me a fifty-thousand-dollar commission, which I would split with the broker.
“I set up the strategy and the market went flat. Nothing happened, no movement. The lawyer with no neck began calling me every day. ‘How much did we save today?’ he’d ask. When I’d tell him, ‘Nothing,’ I could hear the silence.
“Finally, the second week in December he called me and said pretty clearly, ‘Frank, you gotta make something happen. I don’t think you understand the situation. There are extenuating circumstances. We can’t be caught flat-footed like this. This money cannot be on the books. You need to create a million-two in losses.’
“I reminded him that I’d warned his clients about this possibility. That there was nothing ...
“ ‘Frank, that is not an answer. And if I don’t get the right answer I’m gonna put a bullet in you.’
“I didn’t think I heard that correctly, or maybe I was just hoping I hadn’t heard it right. ‘Excuse me?’ I said.
“ ‘I said you either do this thing right or we’re gonna put a bullet in you.’
“But the market didn’t move and I was trapped. Late one afternoon they showed up at my office. ‘Do something now,’ the lawyer said. The whole scenario was out of a bad movie. These were just dumpy-looking guys, wearing brown suits. They looked like anybody out of the neighborhood, except they seemed serious about shooting me. I went to my boss and I told him I had to lever up my position about five to one over what I had already leveraged, knowing I could get at least some movement out of that. I told the people from Carteret that I needed another twenty-five grand, which they handed over, and I put this monster position on. I warned them that they easily could lose thirty percent of their money on this deal.
“It did occur to me they had no intention of losing any money.”
Frank had been through military Ranger training; he was capable and experienced with a weapon. So he began carrying a .357 with hollow-point bullets. This was a pretty tough time in his life. He was going through a difficult divorce, he had started drinking heavily, and four mob guys
