MOB RULE: Russian Mafia, Bernie Madoff & a Long Trail of Dirty Money (Flashback)

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“… I learned more about Bernie Madoff’s criminal operation, and it was beginning to look a lot like a massive market manipulation enterprise that catered to Russian oligarchs, the Mafia, and other people who are likely hostile to the United States”

The Russians, Their Friends, & Bernie Madoff’s Bear Market

As Bernie Madoff’s former secretary noted in an article that she wrote for Vanity Fair magazine, right before Madoff turned himself over to the FBI, he made a point of flying to Switzerland to meet with Marc Rich. In fact, Marc Rich, the fellow who had been indicted for trading with Iran, was the last person Madoff met before going to jail.

Marc Rich

Madoff and Rich would have had much to discuss. They had done business together for decades, going back to the time in the 1980s when Rich and a man named Edmund Safra were among the most important Western business partners of the regimes in Iran and Russia.

Safra first came to fame in the Iran-Contra affair, which saw him selling his contacts with the Iranian regime to the Israelis, and he later became a billionaire due largely to the business he conducted with Marc Rich in Russia.

In the 1990s, Safra controlled the Republic National Bank and countless other financial entities that were heavily focused on Russia. And much of the business that Safra and Rich conducted in Russia was done with the people who were the real power in Russia, the people who make Russia’s foreign policy and direct its economic activities. Safra has been widely credited with having been among the small clique of billionaires who orchestrated the 1999 rise to power of Russian president (now prime minister) Vladimir Putin.

That clique was led by two Russian oligarchs, Boris Berezovsky and Roman Abramovich. At the time, Berezovsky was the most powerful man in Russia, famously named the “Godfather of the Kremlin” by Forbes journalist Paul Klebnikov, who authored a book by that name and was then murdered on the street outside his Moscow offices.

In 1999, Abramovich was relatively obscure, but he was an important business partner for Berezovsky. The two men effective co-managed a single business empire. They were, as we will see, also involved in various ventures with the Russian Mafia kingpin Semion Mogilevich. Abramovich, like Mogilevich, earned billions siphoning money (with the apparent consent of Vladimir Putin) from the Russian state oil firm, Gazprom.

It should be understood that Gazprom is much more than an oil company. It is one of the most important instruments of state power in Russia, a key tool of Putin’s foreign policy and the source of cash that Putin uses to cement relationships between himself and shady businessmen, most notably Abramovich and Mogilevich.

Moscow police arrested Mogilevich in 2008, and some interpreted this as a sign that President Dmitry Medvedev was asserting his power by taking on the friends of Prime Minister Putin. More likely, the arrest was meant to placate the United States, which, after all, had Mogilevich as #2 on its Most Wanted list. Either way, Mogilevich was quickly released, with the Russian Interior Minister announcing that the charges against the world’s most notorious Mafia boss were “not of a particularly grave nature.”

Semion Mogilevich

As of 2011, reports from Moscow suggest that Mogilevich may face no charges whatsoever. This was not a surprise, given Mogilevich’s importance to the Russian government. As I mentioned, Mogilevich was implicated in massive money laundering scheme that saw more than $7 billion laundered through the Bank of New York.

Much of that money was said by prosecutors to have been filched by Russian government officials, including president Boris Yeltsin, who had just named Vladimir Putin as his successor, thanks in large part to the support of Abramovich, Berezovsky, and quite likely, Mogilevich.

More recently, U.S. diplomatic cables obtained by Wikileaks in 2010 reinforced the statements (which I quoted at the outset of this story) of National Intelligence Director Admiral Blair that the Russian government and organized crime outfits (the most prominent of which is the Mogilevich organization) are closely intertwined.

As one cable from the U.S. embassy in Moscow noted, the Russian government “operates more as a kleptocracy than a government. Criminal elements enjoy a ‘kryshna’ (a term from the criminal/mafia world literally meaning roof or protection) that runs through the police [and] the Federal Security Service [Russia’s spy agency]…”

Edmund Safra

Until his death, Edmund Safra was clearly part of this nexus. His Republic National Bank was among those that were implicated (though never charged) in the Russian Mafia and money laundering scandal that focused on the Bank of New York.

Soon after that scandal became big news in 1999, two masked men arrived at Safra’s home in Monaco, locked him in a bathroom, lit the place on fire, and left Safra to die a terrible death from smoke inhalation.

That murder has never been solved, but one theory is that it was part of the Russian government’s effort to cover up a money laundering and stock manipulation network that was, in fact, much bigger than the Bank of New York scandal that broke in 1999. As we will see in an upcoming chapter, that theory is correct.

Many of the people involved were among Michael Milken’s closest associates. Two of these associates were Bruce Rappaport and Abbas Gokal, owners of Inter Maritime Bank, which became the Bank of New York affiliate most responsible for building ties to Russia.

Gokal, you will recall, was also a key BCCI figure, closely linked to Pakistan’s spy services and tied up in the Iran-Contra scandal. Later, Gokal (in addition to being an official advisor to the regime in Iran) would also be implicated in assisting Pakistan’s nuclear weapons proliferation, including the transfer of nuclear weapons expertise to Iran.

Mikhail Fridman

One of the Russian oligarchs whom Gokal and Rappaport introduced to Bank of New York was Mikhail Fridman, head of Alfa Bank, who is a close associate of Abramovich and Mogilevich.

Currently, Fridman and Alfa Bank are the principal financiers of Iran’s Buhsher nuclear facility, which is widely believed to be part of Iran’s efforts to obtain nuclear weapons. In 1999, Fridman, like Safra, was among the small clique of billionaires (led by Berezovsky and Abramovich) who orchestrated Vladimir Putin’s rise to power.

After the Bank of New York scandal hit the front pages in 1999, Berezovsky purportedly had a falling out with Putin and went into “exile” in London. Some Russian journalists, noting that Putin has met with Berezovsky since then, argue that the falling out was not real – that it was yet another example of the smoke and mirrors that Putin uses to conceal the nature of his relationships. Aside from the meetings, there is no strong evidence to support this theory, but anything is possible when it comes to the affairs of Russia.

Whatever the case, Berezovsky and Abramovich split up their business empire in 1999 in a deal that is still being mediated by Abu Dhabi royal Sheikh Sultan bin Khalifa al Nahyan (he of the same family that co-founded BCCI). That same year, Putin’s government charged Berezovsky with various crimes, and Berezovsky emerged as the leading figure in “the London Circle”, a strange group of Russian exiles that seems to be opposed to Putin’s regime.

Abramovich remained in Russia, and is now perhaps that nation’s most powerful man. He is Russia’s fourth richest oligarch, having earned billions not only from siphoning money from the Russian state oil company, Gazprom, but also from companies that are involved in everything from financial services to radioactive isotopes. And he maintains a private army of at least 100 former KGB operatives and mercenaries.

Such private armies are not mere security companies; they are the bonds that tie oligarchs like Abramovich to the siloveki – the former KGB operatives and current spies who feature prominently in Putin’s government. Putin himself is a former KGB operative, and before becoming president, he was the head of the KGB’s successor outfit, the FSB.

People like Mogilevich and Abramovich should be viewed as being part of the intelligence apparatus that controls Russia. Indeed, Russian commentators note that Putin and Abramovich have something approximating a father-son relationship, with there being some dispute as to which man is the father figure.

Roman Abramovich

In 2010, I began to take an interest in Abramovich because he seemed to be tied to a network of brokerages in the United States, including the criminal operation run by Bernard Madoff, and also, Tuco Trading, the little, unregistered brokerage that employed the jihadi Zuhair Karam (whom I introduced at the outset of this story).

Indeed, I had taken such a close interest that I was beginning to wonder whether someone was going to put radioactive polonium in my tea.

Of course, I joke – that seemed unlikely, but there was the odd case of a former KGB operative named Alexander Litvinenko, who had been an employee of Berezovsky and a member of the London Circle. In 2006, Litvinenko was making what seemed like outrageous claims about Putin, stating, for example, that Putin’s government had extensive contacts with Al Qaeda.

Putin’s government responded that it was, in fact, Litvinenko and Berezovsky who were funding jihadis, including the same Al Qaeda-tied Chechen terrorists who had, in 2004, taken hostage hundreds of children (many of whom were subsequently killed when Russian forces attacked the hostage-takers) at a school in the Russian city of Beslam.

Alexander Litvinenko

Litvinenko, in turn, said that the Russian intelligence services had orchestrated the “Chechen” terrorist attacks as part of an effort to enhance Putin’s power — the theory being that the Russian people would embrace a strongman like Putin if they believed their children were being killed by Chechens.

Litvinenko’s claims were echoed by Russia’s most prominent journalist, Anna Politkovskaya, who was promptly murdered in the elevator of her apartment building.

Since then, it has been concluded even by the Russian courts that the Russian intelligence services did stage at least one Chechen “terrorist attack”, a bombing that killed an unspecified number of people and collapsed a bridge. The FSB says that it was merely a training exercise to prepare Russia’s intelligence operatives for real Chechen attacks. As for the other attacks, the evidence remains circumstantial, and the truth may never be known.

Whatever the truth, though, Litvinenko (who was on close terms with Chechen nationalists) claimed again in 2006 that he had evidence that the Russian government had developed a working relationship with Al Qaeda.

Soon before he was to release this evidence (or, at any rate, soon before the date on which he claimed he was going to release this evidence) Litvinenko was poisoned by radioactive substance called polonium-210, which had apparently been dropped in his tea. Two weeks later, in November 2006, Litvinenko was dead.

Berezovsky’s spokesman said the murder was the work of Putin’s thugs. Others said it was the work of Abramovich. Moscow newspapers aligned with Putin duly accused Berezovsky of orchestrating the radioactive polonium attack as part of a conspiracy to discredit the Russian government. Still others said that Litvinenko had been trying to blackmail some powerful business people in Moscow and was killed as a result.

Meanwhile, the Russian government claimed that Litvinenko was building a nuclear bomb for Al Qaeda and accidentally poisoned himself with the polonium.

None of these theories have been supported by solid proof. Such are the mysteries of present day Russia. But even more concerning than the murder itself is the fact that the murderers were able to easily smuggle polonium 210 into Britain, suggesting that this substance could quite easily get into the hands of people such as “Specially Designated Global Terrorist” Yasin al Qadi (Osama bin Laden’s favorite financier), Al Qaeda Golden Chain member Sheikh Mahfouz, and all the jihadis who not only supported outfits such as Benevolence International (which was in contact with people shopping for nukes) but also have close business relationships with leading Russians, including Abramovich and Berezovsky.

In 2003, the Nuclear Regulatory Commission issued a lengthy report on the real possibility that terrorists could deploy “dirty bombs” made of radioactive material. The report listed polonium 210 (the substance used to kill Litvinenko) as one of the 10 radioactive materials of “greatest concern”. A dirty bomb would not be nearly as lethal as a full-fledged nuclear device, but one dirty bomb could contaminate much of lower Manhattan with cancer-causing radiation and precipitate wide-spread panic, with millions of people fleeing major cities.

A dirty bomb coupled with an effective attack on the financial markets could potentially bring the United States to its knees.

This is why I think it is generally a good idea to be on the lookout for people who are in any way mixed up with both radioactive polonium poisonings and unregistered little brokerages, like Tuco Trading, which transacted manipulative trading equal to twenty percent of the volume of the biggest brokerage on the planet. And this is why I kept telephoning Zuhair Karam, the jihadi who worked for Tuco Trading.

I really did believe Zuhair when he said he was “just one of the little guys”, but I figured he knew something about the big guys who were trading through Tuco in the month before the collapse of Bear Stearns in 2008. I also suspected that this trading might have been connected to trading through a larger network of brokerages that included not just Madoff’s crooked operation, but also ostensibly upstanding outfits like Credit Suisse, the giant investment bank.

In fact, the New York district attorney’s ongoing investigation of Assa Corporation seems to overlap with a current Justice Department investigation focused on Credit Suisse.

The Assa Corporation, recall, is the Iranian espionage and business outfit indicted in 2009 for funding Iran’s nuclear program. It was a unit of the Alavi Foundation, which owned the building that had housed the offices of Ivan Boesky and Marc Rich.

The Iranian agents who ran Alavi and Assa Corp., we know, took their orders from diplomats working out of Iran’s mission to the United Nations in New York.

The misdeeds of Credit Suisse could fill several books, but for our purposes, it is enough to know that the bank had several key relationships. One was with Bernard Madoff. Credit Suisse’s raised at least $1 billion for Madoff’s scam (the bank denies that it knew that it was a scam).

Meanwhile, Credit Suisse’s most important client was Leon Black (the Milken crony whose father fell through a plate glass window in the Pan Am building). The relationship between Black and Credit Suisse is, to this day, so close that Black has played a role in deciding which executives should run its key departments.

Credit Suisse’s other key relationship is with the regime in Iran. Indeed, it is fair to say that the Islamic Republic has had few better friends than the executives of Credit Suisse. In December 2009, Credit Suisse was fined $536 million, or around 10 percent of the bank’s profits for that year, for deliberately helping Iranian banks, including Bank Melli and Bank Saderat, hide their identities and conduct secret transactions valued at more than $1 billion. Amazingly, however, no Credit Suisse executives faced criminal charges.

It is amazing because Credit Suisse’s executives conducted these secret transactions for Iran knowing full well that they were transferring the $1 billion directly to the Atomic Energy Organization of Iran and the Aerospace Industries Organization, the Iranian government entities responsible for the regime’s covert production of nuclear weapons and long-range missiles.

According to the U.S. Treasury Department, while Credit Suisse was helping to finance Iran’s nuclear weapons program, the bank was also using code names to conceal securities trading though other brokerages on behalf of financial firms in Sudan and Libya.

A former employee of the Manhattan district attorney’s office (who now runs a private intelligence firm that specializes in tracking suspicious financial transactions) suspects that the Libya and Sudan trading was tied to similar trading originating out of Iran and involving executives of the Alavi Foundation and the Assa Corporation, the Islamic Republic’s espionage and business operations in New York.

So far, the Justice Department has not described the nature of that trading, nor has it revealed the names of the Credit Suisse employees and the other brokerages involved. But when I called Zuhair Karam of Tuco Trading, I knew that his family was on close terms with Palestinian Islamic Jihad leader Sami al Arian, the fellow who was, like the Assa Corp, taking directions from Iranian operatives working out of the UN headquarters in New York. I also had received a tip that much of the massive volume that went through Tuco in 2008 was tied to a certain Iranian fellow who was an associate of the Palestinian Islamic Jihad leadership and Iran’s Revolutionary Guard.

I figured Zuhair could tell me more about this, but he was not cooperative. Not yet, anyway. At this stage in 2010, I knew only that the report by Tuco’s bankruptcy receiver stated that 2,000 anonymous accounts in China and one other account had traded 2 billion shares through Tuco in the month before the March, 2008 collapse of Bear Stearns.

In fact, Tuco certainly traded far more shares than that, but the receiver’s report only mentioned the trading out of the 2,000 anonymous accounts in China and that one other account. In any case, those 2 billion shares alone were, I must stress, equal to around 20 percent of the volume of the largest brokerage on the planet.

I knew that the people behind those anonymous accounts were not Chinese, and I suspected that Zuhair Karam could tell me more about the people who were behind the accounts. But, as I say, Zuhair was not initially cooperative. Only later would he provide the confirmation I needed to know the full story.

But while Zuhair was still refusing to cooperate, I had begun a discussion with another person tied to Tuco, a trader in Moscow by the name of Alexey Ivin, who, along with several other Russian traders, held an account at Tuco called “Orange Diviner.” We do not know how many shares were traded through this account because Tuco’s bankruptcy receiver had a stroke before he could finish his report, but Orange Diviner was interesting on many levels.

For starters, it seemed surprising to me that Tuco, an obscure, little brokerage in Chicago that had not even bothered to register with the authorities, had attained such international prominence . When Orange Diviner came on board at the beginning of 2008, Tuco had been in business for only a few months. And the international attention that Tuco had received was by no means insignificant. The Orange Diviner group was comprised of some seriously heavy players, most of whom appeared to be top henchmen of either Roman Abramovich (Putin’s right-hand man) or Semion Mogilevich (the Russian Mafia kingpin).

One of the “Orange Diviner” Tuco traders was named Sergey Maksimov, and according to a man familiar with Orange Diviner, this was the same Sergey Maksimov (sometimes spelled “Sergei Maximov”) who worked at a high level for Semion Mogilevich at an outfit called YBM Magnex, which was a massive stock fraud and one of the big reasons why Mogilevich ended up in second place on the FBI’s Most Wanted list, just below Osama Bin Laden. YBM Magnex was tied to the larger stock manipulation and money laundering network that was identified after the Bank of New York scandal became public.

An FBI report from 1999 (since declassified) noted that Czech authorities had reported that Sergey Maksimov was dead, the victim of an execution-style murder. However, he is alive and well. With help from Russian journalists and an organized crime expert in Boston who has provided assistance to the Deep Capture investigation, we located him in Ukraine, where he now runs a big financial institution called VAB Bank.

I couldn’t get in touch with Mr. Maksimov, but Alexey Ivin agreed to answer my questions about Tuco and Orange Diviner with the stipulation that his answers would be translated into English by his girlfriend. His answers – well, to summarize, he said everything at Tuco was on the up and up, so far as he knew.

Later, I sent Mr. Ivin an email with the following question: “I notice that other people in Orange Diviner [all of whom had accounts at Tuco] include Sergey Maksimov of VAB Bank, Sergey Pavlov of EvrazRuda, and Evgeny Potapov, formerly of Evrazruda, and Alesandr Romanov of Evraz Group. A few others — altogether an impressive group. How did you all come together to form Orange Diviner?”

Mr. Ivin responded, “sergey maksimov – he was my friend who invite my person from orange-diviner and he is my partner of business. sergey pavlov and evgeny potapov – they was investors in orange-diviner. romanov was just a student. other people—was just students too, they don’t have enough experience in trading business.”

I couldn’t think of any clever way to get more information out of Mr. Ivin, and though it seemed that he was lying about the students, I felt like he might be willing to help me, so I asked him rather bluntly, “Since Sergey Maksimov previously worked with Semion Mogilevich, do you think you could help me learn more about Mogilevich and mafia involvement in U.S. markets. I know this would be risky for you, but it would be a good deed…”

Mr. Ivin replied, “Maksimov never was work with Mogilevich, and we (maksimov and i) don’t know this man…I don’t know what you toking [sic] about”. When I wrote back to Mr. Ivin, noting that he had not disputed that Maksimov worked for VAB Bank, and the Maksimov who worked for VAB was definitely the same Maksimov who worked for Mogilevich, Mr. Ivin replied that the Maksimov in Orange Diviner did not work for VAB Bank after all. Then Mr. Ivin sent me an email that said, “Sergey Mikhaylov, Timofeyev’s heir to the leadership of Orekhovskaya, Igor “Max” Maksimov, was killed in February…”

I do not know what that was supposed to mean, and to make a long story short, I never did get to the bottom of this. But I’ll go out on a limb, and say that since Mr. Ivin did not initially dispute that Maksimov worked for VAB Bank, and since I am certain that Maksimov at VAB is the same guy who worked for Mogilevich, and since Mr. Ivin refused to tell me where his Maksimov currently worked (if not at VAB), it is likely the case that the Maksimov who co-founded Orange Diviner was, indeed, a top Russian Mafia boss with links to the Russian government.

As I continued to ask questions about the other members of Orange Diviner, Mr. Ivin became even less communicative, saying at one point that he had never heard of a fellow, Alexandr Lyssenko, who was listed clearly in Tuco’s account books as being a member of Orange Diviner. When I followed up with questions stating that the other members of Orange Diviner were not students, but had, in fact, worked at high levels for Roman Abramovich’s most important companies, including the Evraz Group, Mr. Ivin did not deny it. Rather, he answered vaguely, “I don’t know about cooperation between [Orange Diviner] and Evraz.”

In fact, one of the Orange Diviner traders at this obscure, unregistered brokerage in Chicago was the Moscow-based Evgeny Potapov. He had been president of Abramovich’s Evraz Group. That is, he was the top-henchman to Russian prime minister Vladimir Putin’s right-hand man, Roman Abramovich (the fellow who is like a father to Putin). Potapov has also served as a board member and head of overseas assets for the giant Russian metals concern Norilsk Nickel. In that capacity, Potapov had Norlisk launch a program in 2007 with the Russian foreign ministry to combat terrorism and organized crime.

That a metals company suspected of having ties to the Mafia and to jihadis (who use Russian metals like they use diamonds – as currency) is directing the Russian foreign ministry’s battle against organized crime and terrorism should give you an idea of how things work in Russia.

Another member of Orange Diviner, Alesandr Romanov, had been the director of transportation at Abramovich’s Evraz Group. Meanwhile, Orange Diviner member Sergey Pavlov had been both head of investment planning at Evraz, and head of investments at Rusal, another big company then owned by Abramovich.

As for Alexandr Lyssenko, the fellow whose name did not ring a bell with Mr. Ivin – he was working for Alfa Group, the outfit run by Mikhail Fridman. Alfa is best known for having helped Iraq skirt UN sanctions during the reign of Saddam Hussein. But, as I mentioned, Fridman, a close associate of Abramovich and Mogilevich, is also the principal financier and developer of Iran’s Bushehr nuclear power plant, the facility that has much of the Western world in hysterics because it is assumed to be a front for the Islamic Republic’s secret efforts to acquire nuclear bombs in preparation for the coming of the Hidden Imam.

Yet another member of the Orange Diviner Tuco Trading group was Evgeny Chernov, who was working for ITP Rus AG, a company that has been linked to Gazprom scandals. Mr. Chernov also served for some time as Russia’s deputy trade representative in Armenia. Then there was Orange Diviner member Maxim Mishin, who was working for MDM Group, a company that was implicated in the scandal that saw Mogilevich and the Russian government manipulating the markets and laundering money through the Bank of New York.

As for Mr. Ivin himself, he works as the “head of international” for BrokerKreditServis (BKS, sometimes called BCS), a Moscow brokerage that is a joint venture with Russia’s state development bank, Vnesheconombank, or VEB. According to the Heritage Foundation, a respected think tank, VEB is an instrument of Russia’s intelligence services. BKS’s chief operating officer, Dmitry Peshnev Podolskiy was formerly the head of the above-mentioned Alfa Group, Iran’s favorite nuclear proliferator.

All in all, this was an interesting group of “day traders” – traders who should be watched closely, especially given that they were, in 2008, availing themselves of the services of this strange brokerage in Chicago, Tuco Trading. Since Tuco Trading was shut down by an “Emergency Order” of the SEC soon after the Orange Diviner account was set up, it is possible that the account did not have a chance to conduct much trading through Tuco.

But, as we will see, there is good reason to believe that it might have done so, and even better reason to believe that these same people transacted large volumes through Tuco’s partner brokerages, which were not shut down by the SEC.

In any case, we have to wonder why a group of illustrious Russians who sat at the nexus of the Russian Mafia-intelligence apparatus (an apparatus that also happens to have extensive ties to Iran) was involved with this obscure brokerage in Chicago.

So, yes, in the Fall of 2010, I found this odd, and I turned my attention back to trying to figure out who was behind those anonymous accounts in China. I was intrigued by the tip I had received that it was an Iranian with ties to the Revolutionary Guard, but it would be another couple months before Zuhair Karam would help me confirm the identity of this Iranian, and his ties to the Russian Mafia.

Meanwhile, I learned more about Bernie Madoff’s criminal operation, and it was beginning to look a lot like a massive market manipulation enterprise that catered to Russian oligarchs, the Mafia, and other people who are likely hostile to the United States.

Thiery Magon de la Villehuchet

In December, 2008, shortly after Bernard Madoff went to lengths to pay one last visit to Marc Rich (friend of Iran) then turned himself in to the FBI, a Frenchman named Thiery Magon de la Villehuchet was found dead in his Manhattan office, Xanax on the desk, his wrists slit open, blood drained into a carefully placed garbage can. The police ruled it a suicide.

Monsieur de la Villehuchet has been described in the press as a “victim” of Bernard Madoff’s famous Ponzi scheme. In other words, he put a lot of money into Madoff’s hedge fund, lost all that money, and couldn’t take the stress. As matter of honor, he killed himself, and did so with such composure that he thought to position that garbage can so nobody would have to clean up after him.

A few months after Monsieur de la Villehuchet’s death, another man, Jeffrey Picower, was found dead, floating in the swimming pool at his Palm Beach mansion. They said it was a heart attack. The press reported that Picower was another “victim” of the Madoff Ponzi scheme.

Meanwhile, the press continued to report that while Madoff’s Ponzi scheme was a colossal fraud, his giant brokerage and market making operation was legitimate. After all, Bernard Madoff was a “prominent” businessman. For a time, he had been the chairman of the Nasdaq stock exchange, and he even roamed the halls of the SEC, which invited him to help it write some of its rules governing brokerages and hedge funds. Surely, Madoff’s rise to “prominence” suggested that his best-known business, the brokerage, was on the up and up.

This recalls Mark Twain’s observation that “it has become a sarcastic proverb that a thing must be true if you saw it in a newspaper.” Indeed, as Twain saw it, the fact that people believed what they read in the newspapers was evidence that civilization was in decline. I think it is fair to say that civilization has, indeed, taken a beating since the time of Twain, and unless the media gets its act together, things will only become worse.

The truth is, Picower and Monsieur de la Villehuchet were not victims – they were perpetrators.

As we now know from multiple lawsuits that have been filed against the Madoff estate, Picower alone personally pocketed more than $5 billion from the Madoff Ponzi fraud. Monsieur de la Villehuchet and Marc Rich also profited from Madoff’s criminal operation.

Michael Milken

What these men had in common was that they were, of course, among Michael Milken’s closest associates. Monsieur de la Villehuchet had co-founded Apollo Management with Leon Black, the fellow who had helped Milken run Drexel, Burnham.

This is the same Leon Black whose fund employs Lance Milken (Michael’s son), and does business with Felix Sater, the Russian Mafia boss who was ostensibly going to buy Stinger missiles from Osama bin Laden.

In addition to knowing how to get in touch with Al Qaeda, Felix has relationships with other powerful people. For a time, he was trying to broker a deal whereby the U.S. investment bank Salomon Brothers would be bought by Felix’s friend Boris Berezovsky (then still the “Godfather of the Kremlin” and Roman Abramovich’s key business partner).

Nothing came of the Salomon deal, but Felix’s partner says the deal almost closed, and Felix has not disputed this account.

Mr. Picower, the fellow found floating in his swimming pool, had formerly been the largest investor in the arbitrage fund run by Milken’s famous criminal co-conspirator, Ivan Boesky, who, with Marc Rich, had been among the biggest investors in the fund run by Michael Steinhardt (son of the “biggest Mafia fence in America”). Boesky and Rich, recall, also both worked out of the offices owned by the Alavi Foundation, the Iranian espionage outfit.

After Boesky was released from prison in the 1990s, he headed to Moscow and hooked up with Berezovsky, Abramovich and members of the Mogilevich organization.

Sources close to Felix Sater tell Deep Capture that as of 2008, Boesky, Felix and other Russian Mafia characters to be introduced shortly had become the key clients of an offshore hedge fund called Lines Overseas Management. Lines Overseas, meanwhile, was a key feeder to the Madoff criminal operation.

Another key client of Lines Overseas Management was Ali Nazerali, the fellow who once worked at a high-level for the Gokal family (tied to the Iranian regime and Pakistani intelligence). This is the same fellow who ran the BCCI outfit First Commerce Securities with his relatives, one being the BCCI treasurer who set up the Capcom Saudi intelligence outfit that manipulated the U.S. markets in the 1980s with help from Michael Milken.

Another key Lines Overseas client, introduced by Nazerali, was Christopher Metsos, who was a Russian spy. In 2010, the FBI arrested Metsos along with nine other Russian spies, all of whom were charged with espionage and deported back to Moscow.

I realize that at this stage in the story, the mention of Russian spies, Milken cronies, the Mafia, and BCCI in the same breath will seem a bit nutty. But read on, and you will see that such relationships are by no means unusual or incidental.

Bernie Madoff and Ezra Merkin

Another person who helped perpetrate Madoff’s fraud was Ezra Merkin, who fed billions into the Ponzi scheme while concurrently running Cerberus Capital, the hedge fund founded by Stephen Feinberg, who had formerly been one of Michael Milken’s top employees at Drexel Burnham before being reassigned to work with Felix Sater at Gruntal.

We also know that other big Madoff feeders included “made” members of the Mafia, such as Ralph Mafrici (perpetrator of “The Barbershop Hit”), who had a joint account with Madoff’s hedge fund in the name of Eleanor Cardile, a relative of Madoff’s right hand man, Frank DiPascali.

Meanwhile, one of the biggest feeders to the Madoff fraud was Bank Medici, an outfit in Austria that catered mostly to shady characters tied to Russian prime minister Vladimir Putin. One of Bank Medici’s big clients – and a likely participant in the larger Madoff operation – was Roman Abramovich (the guy whose relationship with Putin is like that of a “son” or a “father”, depending on whom you ask; the same guy whose top henchmen, along with some Mogilevich henchman, had those odd accounts at Tuco Trading).

Medici Bank, Operngasse, Wien

After Madoff’s fraud was exposed and Bank Medici was implicated in the fraud, its founder, Sonja Kohn, disappeared. The Wall Street Journal speculated that she feared being killed by her Russian clients, who had lost money in Madoff’s Ponzi scheme.

The speculation, however, was false. Ms. Kohn might well have been targeted for assassination, if only because she knew a great deal about Madoff’s larger operation, but her Russian clients did not lose a dime in the Ponzi scheme. Nor did Sonja Kohn herself.

According to the Secretary of the Commonwealth of Massachusetts, in fact, Ms. Kohn and Bank Medici were receiving large payments from an outfit called Cohmad Securities, which was a unit of Madoff’s brokerage.

That is an extremely important piece of information. It is one of several pieces of information that show that the Madoff’s brokerage was tied into the criminal activities of Madoff’s Ponzi scheme.

Cohmad Securities was co-owned by Madoff partner Robert Jaffe, and played an instrumental role in managing Madoff’s brokerage services. According to the Boston Globe, Jaffe was a once a key money manager for the Angiulo Brothers, who were then the bosses of the Genovese Mafia family in Boston.

Frank DiPascali

The other key figure in the Madoff brokerage was Genovese Mafia capo Ralph Mafrici’s pal, Frank DiPascali, who seems to have been a point man for Madoff’s larger criminal operation.

Jaffe also helped raise money for the Ponzi scheme. And, importantly, it is clear that a lot of the money from the Ponzi was used to finance the operations of Madoff’s brokerage.

By piecing together numbers cited in just a few lawsuits, it seems that at least $1 billion was diverted from the Ponzi to Madoff’s brokerage. And since I haven’t come close to getting through all the paperwork that has emerged from the Madoff case, it seems fair to assume that the figure might well be, in fact, much larger than $1 billion.

Why would Madoff transfer money from his fund to his brokerage? One hypothesis is that some of the Ponzi’s feeders (i.e. the people whom I have just named and their clients) wanted Madoff’s brokerage to engage in manipulative naked short selling, generating phantom stock to drive down the markets.

Indeed, an off-shore businessman who has seen some of Madoff’s records says that Madoff’s investment fund (his Ponzi) would place orders for stock, and these orders would be filled by Madoff’s market making operation (his brokerage), which would sell the stock to the “buyer” without first purchasing or borrowing it, thereby creating phantom supply.

Such naked short selling, though, creates large liabilities in the form of “securities sold but not yet delivered.” The fraud that brought down the giant brokerage, Refco, in 2005, saw Refco CEO Santo Maggio hide precisely the same sorts of naked short selling liabilities with help from an Austrian Bank called BAWAG (another operation tied to Roman Abramovich, the Mogilevich organization, and other Milken cronies whom we will meet in an upcoming chapter).

Just as Refco tried to hide its naked short liabilities with help from the Austrian bank BAWAG, so too did Madoff, most likely with help from Bank Medici, which was receiving payments from Cohmad, a key component of the Madoff brokerage.

There are several other reasons to believe that the $1 billion or more that was transferred from the Madoff Ponzi to the Madoff brokerage was used to cover up naked short selling liabilities.

One reason is that Madoff’s “stock loan” department (as Madoff’s former secretary has testified) was housed on the same floor of the Lipstick building as his Ponzi fund. Multiple former employees of the Madoff operation have said that visitors were prohibited from visiting that floor, precisely because it was the center of Madoff’s criminal enterprise. And “stock loan” – i.e. the brokerage function that was responsible for borrowing (or, in the criminal scenario, not borrowing) stock for (naked) short sellers — would have been key to any phantom stock scheme perpetrated in league with the Ponzi.

As confirmation that Madoff’s brokerage was a criminal outfit dependent on the Ponzi, we need only know that Daniel Bonventre, the brokerage’s director of operations, was charged in February 2010 with helping to ensure that “more than $750 million of [the Ponzi] investor fund were used to support [Madoff’s] market making [i.e. brokerage] and proprietary trading operations, but were accounted…so as to conceal the true source of the funds.” And Bonventre’s chief function at Madoff’s operation was, according to his indictment, to supervise “settlement and clearing of trades executed by the market making and proprietary trading operations.”

In other words, the guy who secretly transferred a lot of the “Ponzi” cash to the brokerage seemed to be doing so specifically to cover “settlement and clearing” – i.e. to hide the fact that stock was not “settling and clearing” because it was stock that had been sold “naked.” That is, it was stock that had been sold even though Madoff and his clients had not purchased or borrowed any stock to sell. It was phantom supply, meant to manipulate (and perhaps even crash) the markets.

No doubt, it was not a coincidence that Madoff had long courted the SEC and had even managed to wangle himself into the position of actually writing some of the SEC’s most important rules governing short selling. Indeed, SEC officials named one of its short selling rules after the SEC’s favorite crony – Bernard Madoff. The rule was called “The Madoff Exemption” – and it permitted market makers, such as Madoff, to sell short on a downtick.

The SEC rule prohibiting others to short sell on a downtick (which was scrapped entirely, at the behest of Madoff and others in his network, right at the inopportune moment in 2007 when the markets had begun to weaken) was meant to prevent traders from inducing death spirals and crashing the markets. But thanks to “The Madoff Exemption”, the clients of Madoff could induce death spirals without a word from the SEC.

Madoff also helped write the SEC rule that allowed market makers, such as Madoff, to engage in naked short selling so long as the purpose was to maintain “liquidity” in the markets, and so long as real stock was eventually delivered. Given that Madoff was, after all, a criminal of monumental proportions, it boggles the mind that neither the SEC nor the media ask whether Madoff might have “rented out” his market making exemption to hedge funds wishing to use naked short selling to drive down the markets.

It is more than likely that Madoff not only rented out his exemption, but abused it, never “clearing”, or delivering the stock he had “temporarily” sold naked.

The fact that Madoff actually helped write the SEC rules governing short selling (rules that contained precisely the sort of loopholes that would allow miscreant traders to crash the markets) should give you a sense of just what sort of agency the SEC was in 2008. In fact, the utter failure of the SEC and the all-important Depository Trust and Clearing Corporation, or DTCC, to prevent naked short selling caught the attention of the people who were hired by the Defense Department Irregular Warfare Support program to analyze the causes of the 2008 financial crisis.

The report that was produced for the Defense Department (the same report I cited at the outset of this story) states that there is a possibility that the SEC and the DTCC (a self-regulating body responsible for ensuring settlement of short sales and other transactions) were compromised by organized crime or even foreign enemies of the state. The report concludes: “Implications that these parties [the SEC, the DTCC, and other Wall Street institutions] have been complicit [in acts of financial terrorism] or otherwise co-opted cannot be ruled out.”

That statement is not preposterous. Bernard Madoff was not the only suspect character roaming the halls of the nation’s regulatory bodies. We have seen that Sheikh DeLorenzo (he with the Al Qaeda partner linked to the military spy scandal) also received favorable treatment from the SEC, which allowed him to set up Al Safi Trust’s naked short selling machine in 2007. And as we will see, there were still other, equally dangerous people who “captured” officials at both the DTCC and the SEC.


Abu Dhabi

Given the people whom Bernard Madoff serviced, it is clear that he was not just a monumental criminal, he was also a threat to national security. Consider that he had just a few other key “feeders” who profited from his scam, one of whom was the Abu Dhabi royal family, another of whom was Al Qaeda Golden Chain member Sheikh Mahfouz.

The Abu Dhabi royals and Sheikh Mahfouz, of course, came to be on close terms with Madoff and his network when they were perpetrating the BCCI criminal enterprise.

Sheikh Mahfouz is the man who set up Blessed Relief (an Al Qaeda front) with “Specially Designated Global Terrorist” Yasin al Qadi (Osama bin Laden’s favorite financier). Remember that he also had ties to the folks at Benevolence International (who tried to obtain nukes for Al Qaeda). Sheikh Mahfouz fed the Madoff Ponzi through EFG Bank in Dubai, an outfit with close ties to Dubai’s ruler, Sheikh Mo, who, in 2007, helped set up Al Safi Trust’s naked short machine with Sheikh DeLorenzo.

Some associates of the Milken network say that Sheikh Mahfouz had some ownership stake in EFG (which, like the other feeders, claims, improbably, to have been a “victim”), but I have been unable to confirm that. Whatever the case, in 2010, EFG’s affiliate, EFG Hermes, bought Credit Libonais, a bank that was majority-owned by Sheikh Mahfouz’s family.

Given that the feeders to Madoff’s Ponzi were likely participating in this fraud in order to help cover up naked short selling, it seems probable that Sheikh Mahfouz and the Abu Dhabi royals were among Madoff’s short selling clients in 2008.

It is also likely that some of the naked short selling handled by Madoff’s brokerage originated from Tuco Trading (the little outfit tied to the jihadi Zuhair Karam, the Russians and others to be discussed). This is because Tuco Trading had a partnership with Man Financial, which was a unit of Man Group, a giant hedge fund that was (though it, too, claims to be a “victim”) one of the principal feeders to the Madoff Ponzi fund. Man Financial also had member accounts at Tuco and provided Tuco with one of its trading platforms.

The managing director of the Man Group, also known as MF Global, is Thomas Harte, and he (like Shiekh Mahfouz and the other Madoff feeders) is one of Michael Milken’s closest associates. Mr. Harte had been a vice president of Milken’s operation at Drexel Burnham.

A number of MF Global’s other top executives, such as senior vice presidents Fred Demler and Fred Ulmann, are also Drexel alumnae. Further evidence that the Man Group is part of the Milken network emerged when the media published reports in 2010 that the Man Group was thinking about buying Steve Cohen’s SAC Capital.

Steve Cohen, we know, was investigated in the 1980s for trading on inside information given to him by Milken’s shop while Cohen was running Gruntal Securities with Felix Sater, Feinberg and others. Nowadays, the media is reporting that Cohen is the main target of the largest FBI insider trading investigation in history. Most likely Man Group’s stated plan to buy SAC Capital was designed to discourage the FBI from investigating the hedge fund and its role in a larger criminal enterprise.

This, we will see, is a familiar pattern – members of the Milken network purchasing or offering to purchase funds and companies run by other Milken cronies who are under federal investigation. The idea seems to be to keep investigators focused on individuals rather than the funds or companies. Once the funds or companies are purchased, investigators tend to assume the new owners will run them in a more honest fashion.

As for the Man Group’s credentials, it is worth noting that its subsidiary, Man Financial, not only had a partnership with Tuco Trading, but also had a similar partnership with BrokerKreditServis, the Russian outfit where Orange Diviner’s Mr. Ivin works as “head of international.” BrokerKreditServis, you will recall, is run by the former head of Alfa Bank (financier to Iran’s nuclear program), and Orange Diviner’s other traders were henchmen of Roman Abramovich and Mogilevich.

Meanwhile, Man Financial had other key clients. One key client was the Lucchese Mafia family. This has been well documented by lawyers representing a company called Eagletech, and it has been confirmed by others.

Another key Man Financial client in 2008 – Al Qaeda.

Must Read: Completing the Criminal Takeover of the United States (updated)


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