The Life and Death of Jeffry Picower: Madoff’s Frenemy?

To pull from the vernacular of the modern urban lexicon, perhaps Jeffry Picower could best be described as Bernard Madoff’s Frenemey (a pormanteau of “friend” and “enemy”).  Madoff and the Picower’s seemed to have had a long and complex relationship to say the least. Rumored to be friends for years their relationship seemed to fall apart when Madoff turned himself in and the fraud was revealed. With the recent passing of Mr. Picower I thought a brief discussion look at Mr. Picower was in order. For those unfamiliar with Jeffry Picower and the somewhat murky details concerning his relationship with Madoff here is a bit of a summary.

Early History

Jeffry Picower was born in Bronx, New York. He received a bachelor’s degree from Pennsylvania State University, a master’s in business from Columbia University and a law degree from Brooklyn Law School. He was also a certified public accountant. He worked as an accountant at the firm of Laventhol & Horwath in the 1980s during which time he established a series of tax shelters. The IRS challenged the validity of these shelters and Picower (and his firm) was later sued by client. The case settled out of court.

In 1983 the SEC rebuked Picower for late disclosure of his greater than 5% position in a company which was involved in a merger.

Picower Institute for Medical Research

In 1991 Picower and Anthony Cerami established a charity, the Picower Institute for Medical Research at North Shore University Hospital in Manhasset, New York. The charity was initially established with an endowment of $10 million. Researchers at this institute made a promising discovery with possible applications for Crohn’s disease, multiple sclerosis and rheumatoid arthritis. With the potential profitability the company was spun off into a for profit company called, Cytokine Networks. Cytokine later merged with a privately-held company called PharmaSciences to form a new entity called Cytkine PharmaSciences. The problem was that Picower owned 76% of PharmaSchiences stock and actually controlled 86.2% which put him in a major conflict of interest situation. The St. Petersburg Times Mary Jacoby wrote an article which in part outlined the relationship between Picower’s charities and his for-profit companies entitled, “Complex web benefits foundation founder: Set up to give to charities, the Picower Foundation indirectly enriches a drug company.” There were a number of articles written about the situation at the time including pieces in Forbes and a follow up piece in the St. Petersburg Times. This post by Ms. Jacoby’s

has a good overview of the whole situation including a discussion of a mysterious whistleblower who wrote a dossier to the SEC which they allegedly ignored (big surprise). The dossier, called “The Anatomy of a Stock Play” features a Colorado Potato Beetle on the cover which Ms. Jacoby’s describes as, “a virulent crop pest that is resistant to pesticide.”

Investigation by Madoff Trustee

Here is a link to the complaint filed by Irving Picard (Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC) against a number of parties including Jeffry Picower (individually and as trustee for the Picower Foundation) and his wife Barbara Picower (individually and trustee for the Trust FBO Gabrielle H. Picower and the Picower Foundation). Gabrielle is Jeffry and Barbara’s daughter. Some highlights from this complaint include allegations that:

1) Since 1995 the Picower’s and other defendants profited from the Madoff Ponzi scheme via the withdrawal of more than $6.7 billion dollars

2) At least $5 billion of this $6.7 billion figure was other people’s money

3) Picower was one of a handful of Madoff’s clients with special access to information

4) Picower and/or his agent may have used backdated document to direct backtrades themselves

5) Picower was closely associated with Madoff on both a business and social level for the last 30 years

Here is a statement from the Picower’s lawyer, William D. Zabel, regarding the work of Mr. Picard which outlines, in part,:

1) They are encouraged to no longer be alleged to be Madoff co-conspirators

2) The Picower’s were deceived by Madoff

3) They have entered in good faith discussions in attempt to reach a settlement

Why settle if they did nothing wrong? Well the statement clarifies, “in order to avoid years of extensive litigation.” With that said here is a list detailing some the disbursements to the Picower’s.

Relationship With Madoff

Supporting the claims of a relationship between Madoff and Jeffry, the Wall St. Journal recently reported that Madoff persuaded the president of an exclusive Park Avenue New York City co-op to approve Picower’s purchase of a 5,000 square foot apartment which takes up an entire floor of the building. It is also being reported that Regina Mylan, who helped oversee the Picower Foundation’s grants earlier this decade, that Madoff made regular visits to the Picower Foundation’s office and the Picower’s would speak about traveling with the Madoff’s to Florida for the weekend.

The Picower Foundation has since closed as a result of the foundation losses due to investments with Madoff. The  foundation was the 71st largest in the nation and supported a number of institutions including the New York Public Library, Human Rights First and another Picower charity, The Picower Institute for Learning and Memory at the Massachusetts Institute of Technology.

Here is a chart outlining trends in the over 700 withdrawals the Picower’s made from Madoff from 1995 to 2008 which totaled over $5 billion:

Death of Mr. Picower

Unfortunately it seems the truth regarding the exact dealing between Mr. Madoff and the Picower’s may never be known. Here is a video (a bit jumpy) which provides some perspective on how much information may be lost by Picower’s death:

Mr. Picower drowned in his swimming pool on October 25, 2009. According to his lawyer, the same Mr. Zabel mentioned above, an autopsy revealed that Mr. Picower drowned due to a heart attack. The Wall St. Journal is also reporting that Mr. Picower suffered from Parkinson’s disease as well as unspecified heart-related problems. Here is a video reporting on Mr. Picower’s death:

A few words about Mr. Zabel. He is an estate-planning lawyer by trade who numbered among his clients include Doris Duke and some Rockefeller and Chrysler heirs. He is the “Zabel” in the big hedge fund law firm Schulte Roth & Zabel LLP. Mr. Zabel is also the author of a book published in 1996 entitled, “The Rich Die Richer and You Can Too.” In their review of his book Publishers Weekly stated in part Mr. Zabel, “explains tax-avoiding (not evading measure available to the very rich in all the technical complexity of a modern democratic society’s financial legalities- including certain confidential notions the IRS ‘need not be troubled by.‘ ” (emphasis added). The review further goes on to state that, “He deals plainly with common wills, trusts and annuities, and expertly more sophisticated maneuvers like intrafamily gift deductions, “defective grantor trusts” and “foreign asset protection” in the Isle of Man-along with such devices as adopting one’s mistress or companion.” (emphasis added). Incidentally, for fans of the television program The Simpsons, Mr. Zabel’s book is included in C. Montgomery Burns’s Amazon.com Wish List.

It is also interesting that Mr. Zabel is the Chairman of Human Rights First. Remember this is the same organization the Picower Foundation made charitable donations too. Here is a video of him talking about the International Criminal Court:

Perhaps Mr. Madoff should have heeded the tax advice in Mr. Zabel’s book by adopting his mistress, Sheryl Weinstein, with which he had an affair.

Or perhaps this video provides the most insightful perspective on the whole Madoff situation to date:

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Tags: Due Diligence, Fraud, Hedge Fund, Madoff, Operational Risk, Ponzi
Posted in Bernard Madoff Scandal, Due Diligence, Fund Liquidation, Operational Risk, Ponzi, SEC |