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Steve Madden: Crisis of the Sole

By that time, Gregory Coleman, an agent in the FBI's securities-fraud squad at 26 Federal Plaza, had been investigating Stratton for several years. In 1995, under instructions from federal prosecutors, Coleman sent out a flurry of subpoenas to some of Stratton's clients, including Madden, in an effort to create a panic that would culminate in a race to the government's door. It didn't work, but in the end, Coleman got lucky.

On a quiet night in 1995, a security guard at Queens Plaza noticed a Bentley and a limousine meeting in the parking lot, and the exchange of a bag. Thinking it a drug deal, the guard called the police, who arrested Todd Garrett, a martial-arts expert, with $200,000 in cash. (He was subsequently charged with possession of an illegal handgun.) As Belfort later testified, Garrett happened to be his drug dealer, but according to federal prosecutors, what Garrett was doing that night had nothing to do with drugs; rather, he was functioning as a clearinghouse for Porush and Belfort's illegal proceeds, disbursing them in cash to contacts who would secrete them in their luggage and launder them in Switzerland.

One year later, U.S. Customs officers in Miami arrested a young French private banker who worked for Union Banquaire Privée in Switzerland. The arrest was made as part of an unrelated money-laundering sting operation, but hoping to win a lighter sentence, the banker began to talk. By sheer coincidence, he had two clients who were of particular interest to the government: Jordan Belfort and Danny Porush.

On September 2, 1998, just a few minutes after pulling out of the driveway of his Old Brookville mansion to take his 5-year-old daughter to the video store, 36-year-old Jordan Ross Belfort was arrested for conspiracy to commit money laundering and securities fraud. The next day, 41-year-old Daniel Mark Porush was nabbed down in Boca Raton. Faced with maximum sentences of twenty years in prison, both men came to the same conclusion: After only a week in jail, they decided to flip.

"It was like taking down the heads of a major crime family," says former assistant U.S. attorney Joel Cohen, the prosecutor in the indictment. "But in this case, the organized crime was the brokerage business." Porush and Belfort secretly wore wires to record their friends and dragged down dozens in their wake: lawyers and accountants, bankers and brokers.

For the government, Steve Madden was one of the biggest catches in the dragnet. The shoe mogul had been a focus of the investigation for some time; the SEC had cited his company's IPO as one of those that had been manipulated, and believed that Madden was routinely getting, and flipping, stock in other Stratton deals.

Although some of Stratton's IPOs had grown into profitable businesses, only Madden's company had become a significant success. But according to Belfort, the celebrity CEO was also a "rat hole," a place to hide stock. Porush, his P.S.1 buddy, didn't hesitate to give him up either. Madden, as he recently testified at the trial of Stratton's former auditor, was "deep into the fraud with us."

According to the Madden indictments, the designer's personal connection to Stratton began in 1991, when Madden agreed to secretly buy and sell stock in Stratton deals on Porush's behalf with "the understanding that he would incur no risk." (Porush, as a principal of the firm, was restricted in his ability to trade stock in these companies.) The deal was that Madden would earn a "predetermined profit on each transaction," then kick back to Porush a significant portion of the proceeds, either in cash or by purchasing stock from Stratton that was deliberately overpriced. Once Belfort was barred from the securities industry in 1994, Madden allegedly entered a similar agreement with him regarding the Stratton spinoff Monroe Parker.

But according to the SEC, Madden wasn't only ripping off the general investing public, he was ripping off his own shareholders as well. In early 1993, the SEC alleges, Madden agreed that the IPO of his company would "be a manipulation similar to previous Stratton IPO manipulations . . . such as Master Glazier's Karate International." In exchange for his agreement to "follow Porush and Belfort's instructions," they allegedly promised "that even if SHOO . . . went bankrupt, Madden would make money on the SHOO IPO."

In addition, as Belfort recently testified at the Stratton auditor's trial, Belfort "had a secret deal with Steve Madden to maintain control of his company after it went public." Because Belfort and his partners had financed Steve Madden Limited's early development, they owned a majority stake in the company before it went public. But the National Association of Securities Dealers refused to list SHOO unless Belfort -- then under investigation for securities fraud -- dramatically reduced his stake. As Belfort testified, he agreed to sell his shares to a corporation controlled by Madden to placate the NASD, but it was a bogus transaction. "Under the secret deal which we had written down and legally signed," says Belfort, he was the true owner.

Belfort exerted an extraordinary influence over the company. Stratton's auditor, who was a friend of Belfort's, also became Madden's auditor. In 1994, after Belfort was kicked out of the securities industry, he even joined SHOO as a consultant. In addition, according to Porush's testimony, key Madden employees were given stock in Stratton IPOs as part of their compensation. (A Madden spokesperson denies such an arrangement existed.) As Porush explained, "Part of the package when we recruited people for Steve Madden was . . . because you're in with us, you'll make money on every new issue."

In 1997, the Belfort-Madden friendship ended abruptly around the time Belfort asked Madden to sell some of the SHOO stock he secretly owned. Madden refused, and the dispute quickly turned into a bitter lawsuit, during which Belfort produced the deal they had signed. Madden admitted the signature was his but insisted he had been "manipulated" and "tricked" into signing by someone he had "trusted as my friend, business associate, underwriter, and confidant." According to Madden, the demise of the friendship actually preceded the lawsuit, "when Belfort started showing up stoned for work."

"I have no intention of allowing Jordan Belfort to ruin SML's bright future by threatening me or by tarnishing the company's reputation," Madden vowed at the time. Ultimately, he settled the suit for $4.3 million in cash, an outcome that favored his adversary.

In the fall of 1999, around the time the government went public with the news that Porush and Belfort had been secretly cooperating, the U.S. Attorney's Office approached Madden's personal attorney, Joel Winograd, to discuss its case against his client. Soon, rumors that Madden might be indicted began wending their way around Wall Street.