The Madoff Exiles

"I feel like roadkill—just left on the side of the road."
Maureen Ebel Lost: $7.3 million
Photo: Marco Grob

Maureen Ebel started the year working five jobs. She took care of a friend’s elderly mother in the morning, then cleaned the woman’s house in the afternoon. She worked for another friend in her clothing store, drove people to the airport and on errands, and worked the cash register at a food stand. “I said, ‘If I can earn $25 tonight, that’s $25 I didn’t have before.’ ”

She sold some jewelry, an Oriental rug, a favorite painting. Friends gave her envelopes with cash, unsolicited, as much as $2,000. Every trip to the grocery store became an exercise in money-saving. “Two-for-one was my favorite thing: I’d go down the aisles, looking for canned goods.” With winter coming, she bought an electric blanket to keep the price of heat down. She has a gas fireplace, but the tank is empty, and she’s not sure she wants to spend $200 to fill it. “That’s something that makes you say, ‘Well.’ ”

She planned on enrolling in a class to reactivate her nurse’s license—she was 60 years old and had let it lapse years earlier—but then another friend called. “His secretary of eighteen and a half years got sick and could no longer work, and he said, ‘Would you like to try it?’ And I said absolutely, even though I didn’t know Excel, or Word, or PowerPoint, or QuickBooks. I said, ‘I can learn. I can make it work.’ ” Ebel makes $42,000 a year now. “I’m very grateful for my job,” she says. “But I sit in a windowless office from 8:30 in the morning until five at night. It’s the windowless part of it that gets to me.”

Made-Off Read Daily Intel’s ongoing coverage of the Madoff saga.

Ebel has spent a lot of time with her lawyer this year. She has felt by turns angry, depressed, and helpless. She’s been touched by the kindness of friends, but also shocked at how judgmental people can be. And she is consumed by the process of getting justice, even as she’s lost faith that such a thing is possible. “I’ll tell you what feels deep to the bone,” she says. “The failure of the government. The conspiracy. That’s the worst thing.”

For most of us, the Madoff matter is over. The man is in jail for the rest of his life, his associates have lawyered up, his wife is a pariah. But for those victimized by Madoff, the story is just beginning. There are several kinds of Madoff victims, of course. Some are wealthy beyond imagination and hardly affected at all. Others are clear hardship cases, people living in squalor after losing everything, and the government has reached out to many of them. But then there is a middle population—Ebel and thousands like her—who led quiet lives building savings only to watch it vanish. For these people, the Madoff fraud sent them into a spiral of downward mobility. They lost virtually all of their money, had to recalibrate their dreams, and suffered the public embarrassment of having fallen for one of history’s biggest frauds. Now this group is experiencing a second phase of victimhood, a wave of financial, legal, and emotional aftershocks. Perhaps most of all, they feel abandoned by the public and the officials who they believe should be helping them. Cast out and left to stew in their own anger and humiliation, they are a population in exile. “I feel like roadkill,” Ebel says. “Just left on the side of the road.”

If at first, the Madoff victims’ chief concern was seeing that he receive the maximum punishment, now their main focus is restitution. One of the fundamental principles of the American justice system is the notion of sovereign immunity—the idea that citizens don’t, in most cases, have the right to sue the government. Without such a rule, governing would be impossible. And yet if the Madoff victims have any hope of getting a significant amount of their investment back, suing the government is what they may have to do. Much of Madoff’s purported $65 billion fund probably never existed, and little of what was real is likely to be located. There are scores of Madoff-related lawsuits already pending, and whatever money is recovered is liable to be sliced and diced to the point of insignificance.

The best bet for Madoff investors seeking government relief was thought to be a nonprofit entity called the Securities Investor Protection Corporation. Congress created SIPC in 1970 as an investor’s first line of defense in the event that a brokerage company failed. Before Madoff, SIPC was considered to be the securities-industry equivalent of the FDIC, a body that would guarantee an investor’s money, in this case up to $500,000. SIPC may have been created by the government and partially overseen by the Securities and Exchange Commission, but it’s not a government entity, doesn’t oversee brokers, and is not technically even an insurer. It’s a fund replenished by broker fees designed to partially reimburse victims of securities crimes. So far, SIPC has received some 16,000 claims from Madoff investors.

In the Madoff matter, however, SIPC has enraged many victims by adopting what they see as a draconian policy on who can be compensated and how much. The amount one was entitled to had typically been based on the investor’s “net equity,” or what was printed on his last statement before a crime was revealed. An investor with a balance of $20 million was said to have a net equity of $20 million and was therefore entitled to the maximum $500,000 payout. But the trustee of the Madoff bankruptcy, a lawyer named Irving Picard, is using another way of calculating net equity. Now, Picard said, net equity would comprise only the money an investor had actually deposited into his Madoff accounts, not including any appreciation in value. What’s more, any funds withdrawn from the accounts over the years would be excluded. If the investor with the $20 million statement originally gave Madoff $1 million (and nothing thereafter), but over the years had withdrawn $800,000, his net equity would now be defined as $200,000. That would be the amount SIPC would reimburse.

To base net equity on the number printed on one’s last statement, Picard said, was to base it on a lie. “In a Ponzi scheme,” he has said, “fictitious profits cannot be part of an equitable plan for distribution to customers.” Because the numbers appearing on the statements were simply made up by Madoff, using those statements to calculate restitution, he said, would be the same as to “allow the thief to pick the winners and losers.”

Many Madoff victims, however, say Picard’s definition runs contrary to the statute that created SIPC, and that his decision is purely about expediency. Since Picard has only recovered a little more than $1 billion of Madoff money, they argue, Picard needs to find ways to justify smaller payouts. “These companies paid for the privilege of using the SIPC label on their statements,” says one Madoff investor. “It’s about the securities industry not living up to what’s expected of them.”

Maureen Ebel applied for emergency funds from SIPC under a hardship program designed for dire cases. Her claim was approved, but she was asked to sign away her right to disagree with Picard’s definition of net equity. Picard eventually withdrew that condition. But Ebel says a second letter came announcing that because she had withdrawn $102,000 from her Madoff account within 90 days of the filing, SIPC didn’t have to pay her the full $500,000, just $398,000. Ebel filed a lawsuit against Picard, one of two challenging the definition of net equity. Picard eventually granted her the full $500,000, and a judge dismissed her case. Now she’s appealing, seeking damages for the delayed payment, and trying to head off the possibility that Picard may ask for some of the money back. There is talk that investors who earned money with Madoff and then withdrew some of it may actually be subject to “clawbacks” and forced to repay it. “Those customers who withdrew more than they put in and withdrew fictitious profits, even unknowingly, actually received someone else’s money,” Picard has argued. Ebel is keeping up the fight, she says, “for all the elderly people like my uncle. He’s 80 years old. He lived on his Madoff money. He took more money out than he put in, but according to Picard he’s entitled to nothing. It’s not right.”

As discouraging as SIPC has proved to be, it’s barely even an option for the thousands of people who invested with Madoff through a feeder fund. These indirect investors, as they’re called, are not considered by SIPC to be entitled to reimbursement at all. Under the letter of the law, they’re not Madoff investors; they’re investors in whatever fund they signed up with. An investor who put $1 million into, say, Fairfield Greenwich Group, only to lose it all, could sue Fairfield Greenwich for restitution, but that process could take years and the outcome is far from clear. Picard, meanwhile, has already sued three of Fairfield Greenwich’s funds, in his role as Madoff trustee, arguing that the funds were aware of the scam, or should have been, and must reimburse SIPC. If Picard is successful, any money he gets from the feeder funds will not go back to indirect investors but into the SIPC general fund, which would reimburse the direct investors first. Picard has advised indirect investors to submit an SIPC claim and let the courts decide if it is valid. But that process could also take years. Victims say the distinction between direct and indirect investors is bogus. “If you went to the bank and gave your money to the teller,” one indirect investor says, “didn’t you give the money to the bank?”

Many other Madoff victims are trying to recover taxes they paid on what turned out to be false earnings from their Madoff investments. Last spring, the IRS extended the “carry back” period for tax-related losses for Madoff victims from three to five years. But certain states like New Jersey have not followed suit. And short-term extensions are of little help to those who had money in Madoff for decades. “The government collected untold billions in taxes on money that people never really earned,” one victim says. “This is about the government being the beneficiary of a fraud.” There are bills pending in the House that would provide more tax relief, but the Madoff victims have no money and little lobbying leverage.

Perhaps most maddening of all, victims say, is the possibility of the clawbacks. Richard Friedman and his wife, Cyndee, built a modest middle-class life together on Long Island. Richard learned about Madoff in the eighties, when some of the clients of the accounting firm he ran with his father began investing with him. Richard and his father began tracking the fund’s progress, eventually going all-in themselves. Richard had planned to retire in June of this year. Now he still punches in, struggling to keep his accounting practice afloat. Richard’s father died several years ago. His mother, now 84, and suffering from Alzheimer’s, had inherited her husband’s IRA. But her husband had been required to take out minimal distributions ever since he was 70. A lot of times, he’d use that distribution to pay the taxes on his taxable Madoff earnings. “He had to withdraw money by law!” says Cyndee. “And now she’s susceptible to clawbacks?”

Phyllis Molchatsky—born in Manhattan, raised in Brooklyn, now 62 and living in Rockland County—scrimped and saved her whole life, working as an administrative manager for a financial-services firm. Both her parents died before she was 22, forcing her to fend for herself. In her early fifties, she was diagnosed with Parkinson’s disease, and her doctor told her to avoid any stressful situations that might aggravate her condition. “He said it would not necessarily add years to my life,” she says, “but quality to the years that I have.”

Molchatsky took approximately $2 million, everything she had saved, and asked a stockbroker where she should invest it. The broker recommended a fund and showed her how it had fared recently. “The performance was nothing remarkable,” she said. “It was anywhere from 9 to 14 percent, but usually about 10 percent. What was remarkable was that there was virtually no volatility. It was just what the doctor ordered.” She invested half in October 2001 and the second half a month later. “I only have so much money,” she told her broker. “This has to keep me for the rest of my life.”

Molchatsky fell in love, moved in with her partner, and adopted a baby boy. Over the years, she had learned from chats with her broker that her fund’s money was being managed by someone named Bernie. On paper, her nest egg had grown to almost $4 million. Then came last December 11, when she got a phone call from her broker telling her to turn on the TV. He told her who Bernie Madoff was and delivered the news that her money had been invested in a Madoff feeder fund, and that she had just lost nearly every penny she’d ever earned. “My head exploded,” Molchatsky says. “I went crazy. I remember sitting down and mumbling, ‘I have nothing. Nothing.’ ”

A few days later, a friend put Molchatsky in touch with a lawyer named Howard Elisofon, who began his career as a trial lawyer for the SEC and went on to defend Wall Street companies from SEC scrutiny. Now at the law firm of Herrick, Feinstein, Elisofon began fielding dozens of calls from Madoff victims asking if it was possible to sue the SEC. “I said no to about the first nineteen people that asked,” he says. “Then when the twentieth person asked, and the 21st and the 22nd and the 23rd, I stopped saying no and I said maybe.”

Elisofon began researching the subject of sovereign immunity, in search of a precedent for suing a federal agency. He already knew that until 1946, the only way to obtain the right to sue the government was by an act of Congress. Then came the Federal Tort Claims Act, which allows an aggrieved person to sue the government for negligence and money damages. Under that act, the government still can’t be sued for bad policy—people swindled by a hedge fund typically can’t take action against the SEC just because the SEC decided as a matter of policy not to regulate hedge funds—but the government can be sued if it made a policy and then failed to carry it out.

"I am completely jaded," says Cyndee. "These congressmen, they speak in these sound bites about helping the victims. You know they don't mean it."
Richard and Cyndee Friedman Lost: $3 million
Photo: Marco Grob

On December 16, then–SEC chairman Christopher Cox issued a statement acknowledging “credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999,” and “apparent multiple failures over at least a decade to thoroughly investigate these allegations.” As Elisofon saw it, Cox was not just talking about incompetence but negligence. “He didn’t just say that ‘we sucked at our jobs,’ ” Elisofon says of Cox. “He said they had repeated warnings, multiple failures, breakdowns in his system. It’s at that point that I became convinced.” Cox’s admissions were reinforced, Elisofon says, by a bombshell inspector general’s report filed in August chronicling seventeen years of SEC oversight failures in the Madoff matter. Now after exhausting an administrative claim against the SEC, Phyllis Molchatsky is poised to become the plaintiff in a lawsuit seeking $1.7 million from the federal government. “It will be a long fight,” Elisofon says. “But if a case like this is dismissed, my view is we might as well repeal the Federal Tort Claims Act and go back to sovereign immunity. If this is not a classic case of negligence, then none exists.”

“The lawsuit is an uphill battle,” Molchatsky says, “but it’s something that in my heart I actually believe. You know, they really wronged a lot of people.” Then again, she admits, “It’s probably one of the only ways I could go.”

In the weeks after Madoff’s fraud was revealed, a community of victim-activists began to mobilize online. First came a member’s-only Google group called Madoff Survivors, created to help victims find and support one another emotionally. Since then, that group and a spin-off, a private site called, also have become information clearinghouses and conduits for lobbying. Says one member of both sites, “It’s everything from ‘Let’s write a cookbook together’ to ‘Did you see the updates on Picard’s site?’ to ‘I sent an e-mail to this congressman, and I got a response on this.’ ”

Ron Stein is a financial planner and investment adviser from Long Island. His father-in-law sold a family business in 1995 and transferred the proceeds to Madoff accounts that he distributed to his kids, including Stein’s wife, Barbara. This year, Stein set up his own website,, putting his professional expertise to use by offering advice on filing for relief and hosting seminars on legal strategies. “I realized there needed to be somebody who could put this information in some kind of a tangible form so people could begin to get their hands around some of the complex issues and get some advice on how to move forward.” He also hoped that by bringing people together, “pressure could be placed on the powers-that-be to bring about restitution.” Members of all three sites are now working to get the IRS to extend the carry-back window and Congress to address the net-equity question.

Instead of identifying as victims, the more politically active Madoff investors are now recasting themselves as agents of change. “The 9/11 widows—and no way do we ever really want to compare ourselves to them—they were able to effect change for the greater good,” says Ilene Kent, a member of Madoff Survivors. “We’re not asking to be made whole. It’s about the government living up to its promise to protect and defend. We want to get across to Middle America that this is us today, you tomorrow.” Ronnie Sue Ambrosino, who helps run, has started calling her group the Madoff Coalition for Investor Protection for this very reason. “First we wanted to take the word victims out of our name, because victims are people who just sit on their butt. And then we added the words investor protection because—and this was a tough realization for me—nobody really cares about Madoff victims. We realized we are not the only victims here. Every American investor is not protected. Everybody lost money in the market. We just lost it all at once.”

The different victims’ websites share many members, but as the lobbying effort steps up, tensions have begun to simmer. The site Ambrosino helps to run, says one victim, “has to do more with Ronnie Sue’s need to be perceived as a leader of a group than with anything else.” Ambrosino is unapologetic about her zeal. “It wasn’t my intent to become a recognized name in all this,” she says. “But it had to be done, and I did it. I think I can get our point across well, so I guess I’ll keep doing it.”

The Madoff victims are cycling through some of the same emotions any trauma victim would—denial, anger, depression. Audrey Freshman, a social worker who is conducting a study of Madoff survivors, says her preliminary findings indicate that Madoff victims are up to ten times more likely than the general population to suffer from anxiety and depression.

But the Madoff victims have their own unique problems. Many feel the public is unsympathetic to them. “They thought we were all greedy and rich, which is so far from the truth,” says Cyndee Friedman. “It’s very hard being lumped in with the Kevin Bacons and Steven Spielbergs, whom it’s nothing for. They move on.”

In March, after a snowstorm on Long Island, Richard Friedman decided to save his mother $100 by shoveling her driveway. He threw out his back and wound up in New York-Presbyterian Hospital. In the ER, Richard lay on a gurney in an area roped off by a curtain. On the other side were two women. They were talking about Madoff—how the investors must have known, how greedy they must have been, how anybody could have figured it out. Cyndee thought about lashing out at them. “But Richard was sitting there in pain,” she says, shaking her head. “They thought they knew everything. They thought they were experts.”

There are moments, naturally, when some victims wonder if they should have known better. “I really felt like I made a terrible mistake and I ruined my life personally,” says Allan Goldstein, a retired textile-company owner who lost his entire IRA. He and his wife, Ruth, now live with their daughter in the San Fernando Valley, thousands of miles away from their old life in the Berkshires. “Everybody has some kind of feelings of Why did I do it?” But Ron Stein insists it would have been next to impossible for an individual to detect the fraud. “I’m an investment adviser, and once I saw that Madoff’s firm was an SIPC entity, and had been SEC investigated, it was absolutely clear to me that this guy was doing what he said he was doing. There’s no way he should have been able to get away with a Ponzi scheme through even the most basic investigation.”

Madoff victims reserve a special place in hell for Madoff himself. But there’s not much they can do now with that anger. He’s been convicted, sentenced, and all but executed in the court of public opinion. Perhaps because of that, many victims now direct their ire toward larger forces. “Growing up in the Vietnam era, we were always more skeptical than our parents were about America,” says Cyndee Friedman. “But now I am completely jaded. You see these congressmen when they pull the SEC in—they speak in these sound bites about helping the victims. You know they don’t mean it. Greenspan says, ‘I thought they would be honest.’ Give me a break. Wall Street, honest? When there’s a buck to be paid? Congress is not working for America. They’re working for their own self-interests. We don’t believe in Obama anymore, because he’s always about doing the right thing, blah blah. The right thing would be to tell the SEC and SIPC to act responsibly and follow the law. And nobody wants to hear from us. We just get cold shoulders from everybody. It’s very disheartening.”

Ron Stein says regulators should not have allowed Madoff to manage retirement money in the first place. “IRA custodians have to be vetted and have to go through a strict set of guidelines—theoretically.” He also has questions about the National Association of Securities Dealers and the Financial Industry Regulatory Authority—“because they were the ones that were undertaking annual audits, those are the firms that are responsible for assessing on a regular basis broker-dealers. That’s their job. And in my opinion they are the ones that failed most miserably. And the fact that SIPC and FINRA work so closely together?” Many victims have suspicions about the SEC: the five different blown chances it had to bust Madoff; its inability to even confirm Madoff’s trading records; Madoff’s own astonishment from prison that he wasn’t caught sooner. “Picard would not have taken the position that he has taken on net equity unless he had tacit or explicit support from at least the lower levels of the SEC and SIPC,” says Stein. “He wouldn’t have been so strategically naïve to make that misstep, knowing that there was a strong possibility that four or five months down the road the SEC was going to undermine it. It’s clear that he has been working to some degree in cahoots. The SEC was an unwitting co-conspirator in this fraud. The government essentially drove the getaway car on this.” Picard would not comment for this story. An SEC spokesman would only say the agency is considering its position regarding the net-equity question and has not yet settled on a recommendation.

Maureen Ebel, for her part, is trying to move past anger and blame—to get on with her life, however different it is now. “I’m Irish Catholic, one of six children. I worked hard for everything I got, and that’s what I’m doing again.” She even sees something of a silver lining. “I have such an appreciation,” she says, “for the truly poor.”

But not everyone is so sanguine. “It may sound self-serving, but I didn’t feel like I needed to grow,” says Ronnie Sue Ambrosino. “My husband and I would wake up almost every morning and pinch ourselves and say. ‘We are so blessed.’ And we appreciated it. We still know that now. But there’s such a black cloud over it.”

The Madoff Exiles