Syracuse, NY - Sam Capitano couldn't take the suspense any longer.
Four days after news broke that Bernard Madoff stole $50 billion from investors, the business manager of an Upstate laborers union called John Jeanneret, his union's investment manager from Syracuse.
Jeanneret had persuaded Capitano's union and three dozen other Upstate labor funds to invest about $180 million of pension money in Madoff's hedge fund.
"Jeanneret was devastated," recalled Capitano, business manager of Local 210 in Buffalo. "He was apologetic."
Capitano broke the bad news to the rank and file at their annual Christmas party, then his union fired Jeanneret.
Since those days, Jeanneret has been on the defensive, trying to keep his clients, take stock of the damage and explain how he got taken by Madoff. What Jeanneret hasn't done is offer to return to the unions the $4 million a year in fees he collected to invest their money wisely.
Some of the Upstate bricklayers and plumbers wonder why Jeanneret didn't see the danger signs of Madoff's scheme.
Madoff snookered thousands, including such celebrities as Steven Spielberg, but financial industry experts say that a careful, experienced investment adviser should have spotted danger and steered clear.
One giveaway: Madoff was claiming to be earning 10 to 14 percent returns even when the market was down, said David Tittsworth, executive director of the Investment Adviser Association.
"If it sounds too good to be true, it probably is," said Tittsworth, whose association represents 500 firms.
Jeanneret (pronounced jen-er-RAY) said he did his homework.
"I am confident that the facts will reveal to our clients that J.P. Jeanneret Associates at all times fulfilled its duties to them and that we were a victim of (Madoff's) fraud just as they were," Jeanneret, 65, said in a letter.
Some of Jeanneret's clients are preparing to sue him. "I think Jeanneret's going to be a defendant," said James Sarbella, a lawyer hired by Syracuse plumbers Local 267, which lost about $7 million. "You pay people like that to use their expertise so you don't have to."
Others swear by Jeanneret. "Jeanneret continues to be, as far as I'm concerned, a well-respected money manager," said John Love, fund administrator for Watertown electricians Local 910, which lost about $5 million. "I'm sure the trustees would consider (hiring) him again."
Danger signs
Dalton Givens saw the warning signs.
Madoff's sons wined and dined Givens, then a senior vice president of Wachovia Securities, at a steakhouse in Charlotte, N.C., to try to persuade Wachovia to invest in Madoff's hedge fund.
Givens, now retired from the firm and living in Boonville, said he took a few sniffs and didn't like the aroma.
Among the red flags cited by Givens and others:
- Madoff ran a multibillion-dollar hedge fund, but he hired a one-man accounting firm to audit his books.
- Instead of depositing investors' money with an independent third party, Madoff used his own firm as the custodian.
- Madoff wouldn't share much detail about his investment strategy with potential investors, claiming he had to keep it a secret to maintain his advantage.
- Madoff purportedly used his brokerage firm to execute trades, while other hedge funds typically use a third-party broker to increase accountability.
- Madoff's wife, sons and brother filled key jobs at his brokerage.
"Generally, when you have someone that controls everything about the fund, most (investment) firms wouldn't have anything to do with it," Givens said. "I don't know why (Jeanneret) would have had that much trouble recognizing it."
Eric Weber, managing director of Freeman & Co., a Wall Street investment bank, said a diligent investment adviser would have quickly become suspicious of Madoff and taken extra precautions. The adviser would have visited Madoff's auditor's office, quizzing the auditor and spot-checking the audit report data; arranged to watch Madoff's staff conduct trades; asked other financial experts if they could duplicate the returns Madoff claimed to be achieving; and independently verified Madoff actually made the trades he claimed.
The careful investment managers walked away, Weber said.
"Greed will make you overlook a lot of things that you should have paid attention to," Givens said. "It will make you cut short your investigation and due diligence into investments."
Roots in labor law firm
Jeanneret got his introduction to many of the region's labor leaders three decades ago working as an economist and investment adviser for Blitman & King, a Syracuse labor law firm.
After Jeanneret resigned to open J.P. Jeanneret Associates in 1988, many of the law firm's union clients also hired Jeanneret.
Leaders at some of his unions call him "Doc," because Jeanneret earned a doctorate in economics from SUNY Binghamton.
Initially, some unions hired Jeanneret to review investments made by other managers, said Robert Boreanaz, a Buffalo attorney who represents Buffalo-area unions that Madoff defrauded.
But in the early 1990s, Jeanneret began pitching Madoff's fund, and unions began hiring him to handle their finances.
Jeanneret said the Madoff investments were safe, would outperform the market when the market was down, and would be less volatile than the market itself, said Boreanaz, who sat in union meetings with Jeanneret.
"He'd go from plumbers in Syracuse or Albany to the Rochester plumbers. He'd say, 'I've got something here your sister local in Syracuse thinks is good,'" Boreanaz said.
Many of the unions paid Jeanneret an annual performance-based fee if the investments reported higher returns, Boreanaz said.
In that way, Madoff's fake returns boosted Jeanneret's income, Boreanaz said.
Checking out Madoff
Jeanneret said he first connected with Madoff in 1989.
Before he invested, Jeanneret said, he met Madoff in person, reviewed information about Madoff's investment strategy, talked with other investment advisers and researched Madoff's background.
After investing the unions' money -- and his own firm's 401(k) plan -- in Madoff, Jeanneret said, he continued to meet with Madoff at Madoff's Manhattan office. Jeanneret said he once reached Madoff with a question on a golf course in Germany.
"If you needed a million bucks or two million bucks out of an account to pay pension benefits or other benefits, the money was there in a day or two," Jeanneret said. "There was no issue of liquidity."
Madoff's staff sent Jeanneret trade tickets that documented trades. They turned out to be phony. Jeanneret said he checked monthly statements Madoff provided, which also were phony.
He reviewed yearly financial statements from Madoff's auditor. Federal authorities charged the auditor this month with fraud.
In his last conversation with Madoff in October, Jeanneret said he asked about who would succeed Madoff, 70.
Jeanneret said the warning signs depicted in the Madoff news coverage are wrong.
"With respect to certain items that have been raised as so-called 'red flags' since Madoff admitted to his crimes, many of the assumptions in the materials we have read are incorrect and in some instances misleading," Jeanneret said.
Jeanneret said Madoff never paid him or his firm any sales commissions or bonuses. Unlike some of Madoff's wealthy investors, Jeanneret said he had no social relationship with Madoff.
"I never had dinner with the guy once. I never went out to a movie with him, or to a play, or anything," he said.
For about a decade, beginning around 1997, Madoff refused to accept any more money from Jeanneret's clients, explaining he had reached capacity, Jeanneret said.
That made him trust Madoff more, Jeanneret said.
"We figured if there was ever anything wrong with anybody they're going to continue to take money from you," he said.
In the last half of 2008, Madoff let Jeanneret's clients buy more shares.
Then came Dec. 11, when FBI agents arrested Madoff.
Cleaning up the mess
On two days last week, Jeanneret worked in his office until 7:30 p.m. Long after his employees went home, he exited alone. Minutes later, the janitor left.
He declined an in-depth interview for this story, but sent a letter and gave several brief phone interviews.
Jeanneret, who lives in a $447,000 house in Clay, talks of attracting new clients to his business.
He is in the process of liquidating the non-Madoff investments in the fund he ran. The fund's investors --primarily the unions -- will begin receiving their shares in April, with future quarterly withdrawals to follow.
Any recovery would ease the pain for thousands of Upstate trades union workers whose losses will in some cases mean delayed retirements, reduced health benefits and damaged nest eggs.
In Buffalo, the laborers of Local 210 lost about $24 million because of Jeanneret's investments in Madoff. They haven't recovered a penny yet.
"You're talking about a lot of hardworking men and women, and the blood, sweat and tears they put into their careers," Capitano said.
Reach Charley Hannagan at channagan@syracuse.com or 315-470-2161 and Mike McAndrew at mmcandrew@syracuse.com or 315-470-3016.