How Madoff Fleeced the Palm Beach Elite

Palm Beach is ground zero of the Madoff affair. The posh sliver of land is home to a high concentration of those bilked by the brazen alleged Ponzi artist. Bernard Madoff maintained an 8,700-square-foot mansion north of town, and prospected for marks at the exclusive Palm Beach Country Club, where he was a member. I spent last week in the area—hardship duty, I know—and it left me thinking that this is as much an anthropological story as it is a financial one. For Madoff was able to separate so many smart-money types from their hard-earned cash by fiendishly exploiting the unique, clubby culture of Palm Beach, Fla.—and of the global jet set that congregates there.

Palm Beach is one of those places where having a nine-figure net worth is no big deal. "It's easy to make money," a part-time resident billionaire told me a few years ago, as we sat in the home office of his oceanfront mansion—a Rubens on one wall, a Gainsborough on the other. Discreet elbow jabs and subtle nods alert visitors to the presence of the famous rich—Ronald Perelman! Rod Stewart! Matt Lauer!—and to the more anonymous local magnates. The guy sitting by the pool might own a sports team, or his own fashion label.

As a result, in Palm Beach, people are defined as much by the company they keep as by the companies they own. To really be somebody, it's not enough simply to have a fat wallet. You have to donate to the right charities, belong to the right club and, then, to the exclusive club within the club. Just so, to be one of Madoff's marks, you first had to be one of his investors—which wasn't easy.

Many of the alleged fraudster's biggest investors—European industrialists, South American socialites, well-connected American business people—believed that getting Madoff to manage their money was like gaining admittance to a hoity-toity club. They knew that money and social cachet could afford them access to exclusive services and experiences—private jets, club seats at sporting events, invitations to state dinners. Similarly, many believed a high fabulousness quotient entitled them to Madoff's too-good-to-be-true service—consistent market-beating returns without volatility, all without big charges. On the beach a few miles south of Palm Beach, I ran into a hedge-fund manager who was mystified that nobody caught on—not because of the steady returns, but because of the apparently low cost. "Madoff didn't charge any fees!" he practically yelled, piercing the calm of the gentle waves. And nobody—from shoe shiners to CEOs of investment banks—on Wall Street does anything without collecting a fee. Hedge funds, which are supposed to beat the market but usually end up matching it, take management fees of 2 percent plus 20 percent of the profits. Madoff charged nada. (The theory was that he paid himself by executing clients' trades through his own brokerage firm.)

Of course, it turns out that many of Madoff's victims were paying fees—just not to Madoff. Eager investors were routinely turned down when they asked Madoff to let them into his gilded circle. But a host of intermediaries around the world—Austrian banks, funds of funds in New York—who had connections charged investors to help get them past the velvet ropes. Like the island of Palm Beach itself, Madoff's funds weren't open to the masses. You had to know somebody to get in. Robert Jaffe, a local stockbroker with a dandy's taste in suits, was one of the biggest local promoters of Madoff's funds. Like many of the people who wrangled cash for what is now alleged to have been a Ponzi scheme, Jaffe invested personal and family funds with Madoff and has claimed he's a blameless victim.

Madoff's biggest offense, aside from destroying people's life savings, was the way he did it—by fleecing members of the club. Since the scandal broke, I've found that his name is pronounced—in New York and Florida, and probably in financial capitals around the world—with a quasi-ritualistic spit, the way Nixon's once was in many households.

F. Scott Fitzgerald—just think what he would have made of the Madoff mess—said that "The rich are different than you and me." Indeed, they are. Many of the ultrawealthy investors who were taken by Madoff didn't follow certain basic rules. The intermediaries who held themselves out as careful stewards of other people's money trusted without verifying. They didn't bother to ask or find out how Madoff racked up his reliable returns, and didn't demand statements audited by a reputable accounting firm. They didn't need to. After all, they knew Madoff personally and played golf with him. This alleged fraud is the sort of thing you can ordinarily get away with only if your victims are trusting friends and family.

There is something Gatsby-esque about the whole story. Madoff is a clear proxy for Meyer Wolfsheim, the vulpine, self-satisfied criminal seducer. And the affair has produced some of the violent tragedy that courses through the great American novel—an aristocratic French money manager who had entrusted $1.4 billion of funds belonging to him and his clients to Madoff committed suicide in his Manhattan office on Dec. 22. But the only act of vengeance taken locally against Madoff was a prank. The same night, thieves made off with a $10,000 copper sculpture—it depicted two lifeguards—from his home, only to drop it off near the Palm Beach Country Club. A note was attached: "Return stolen property to rightful owners."