Irving H. Picard v. Saul B. Katz et al

Filing 105

DECLARATION of David C. Newman in Support re: 80 MOTION to Strike THE EXPERT REPORTS AND TESTIMONY OF STEVE POMERANTZ AND HARRISON J. GOLDIN.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F)(Seshens, Dana)

1

1

C O N F I D E N T I A L

2

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
11-CV-03605(JSR)(HBP)

3
4
5

--------------------------------x

6

IRVING H. PICARD, Trustee for
the Liquidation of Bernard L.
Madoff Investment Securities LLC,

7
8

Videotaped
Deposition of:

Plaintiff,
v.

DR. STEVE
POMERANTZ

9
SAUL B. KATZ, et al.,
10
Defendants.
11
--------------------------------x
12
13
14
15

TRANSCRIPT of testimony as taken by and before

16

NANCY C. BENDISH, Certified Court Reporter, RMR, CRR

17

and Notary Public of the States of New York and New

18

Jersey, at the offices of Davis, Polk & Wardwell,

19

450 Lexington Avenue, New York, New York on Sunday,

20

January 8, 2012, commencing at 9:27 a.m.

21
22
23
24
25

PICARD v. KATZ, et al.

CONFIDENTIAL

STEVE POMERANTZ 1/8/12
134

1
2

knows.
Q.

And the same would be true with

3

Mr. Wilpon; other than whatever went on with BLMIS,

4

you don't know that he has any other experience with

5

stock brokerage accounts?

6

A.

Well, I mean, there's an affiliation

7

with Sterling Stamos, and there's certainly a lot of

8

knowledge that is presented to general partners of

9

an entity like that.

10
11

So, there's plenty of

experience with those types of things.
Q.

Do you know what Mr. Wilpon's

12

connection to Sterling Stamos was, other than being

13

named a general partner?

14
15
16
17
18

A.
Q.
A.

I believe he was a general partner.
Right.

Other than that?

Other than what Sterling Stamos

offers his contribution to be, I don't know.
Q.

Do you know whether he ever attended

19

any of the investment management meetings at

20

Sterling Stamos?

21

A.

22
23
24
25

Q.

I don't know.
Do you know whether he ever purported

to pick investments at Sterling Stamos?
A.
Q.

I don't know.
How about Mr. Friedman, do you know
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1

Q.

2

A.

3
4

Q.

He was monitoring these accounts.
Was he making any investment

decisions with respect to them?

5
6

What was he doing?

A.

Ultimately the primary decision was

to place the money with BLMIS.

7

Q.

8

A.

9

Q.

And who made that decision?
The partnership.
Well, for instance, is it your

10

testimony that Gregory Katz, one of the people who

11

had an account that's at issue in this case, is it

12

your testimony that Mr. Friedman made the investment

13

decisions for Gregory Katz?

14

A.

The decision to invest in BLMIS is

15

made by the partnership, is made by Sterling

16

Equities partnership.

17

I talked about monitoring the accounts, I know for

18

sure that Mr. Friedman was involved in doing that.

19

Q.

As far as monitoring -- when

All right.

Let's put the monitoring

20

aside.

21

Do you know who was making the investment decisions

22

for the various individual accounts that were at

23

BLMIS?

24
25

I want to focus on the investment decision.

A.

Well, the purported investment

decisions within BLMIS?
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1

even have to learn how to do it.

2

words basically, you know, describe exactly what it

3

is.

4

example, you know, you'll see a form of peer

5

analysis.

6

401(k) plan that's being offered to Sterling

7

employees, you'll see some form of peer analysis,

8

peer review that's being do (sic).

9

performance to a benchmark is a standard, albeit

10

simplistic, but a standard form of peer analysis.

11
12

If you look at Sterling Stamos documents, for

Q.

15

If you look at a description of the

Comparing the

When you perform a peer analysis, do

you do quantitative assessments?

13
14

I think the two

A.

I think it requires both quantitative

and qualitative assessments.
Q.

Do you run computations to develop

16

numbers so that you can compare the performance of

17

one fund with another?

18
19

A.
Q.

Yeah, that's a part of it.
And are there standard computations,

20

ratios and the like, that people use in the

21

industry?

22

A.

I think there's a core set of

23

standards that everybody looks at.

Sterling Stamos

24

and I would look at the same set, same types of

25

things.
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1
2
3
4
5

Q.

For instance, there's something

called a Sharpe Ratio?
A.

Yes.

Q.

What's a Sharpe Ratio?

A.

A Sharpe Ratio is one of what's

6

called a measure of risk adjusted return.

It's to

7

not to just look at the returns that are experienced

8

by investment, but to somehow capture the amount of

9

risk as well within that investment.

The

10

mathematical definition is very simple, it's just

11

the return divided by the standard deviation.

12

a relatively simple formula.

13

Q.

It's

When you were at Berkeley, did you

14

take statistics?

15

A.

16

I taught statistics.

Q.

All right.

A standard deviation is

17

something that comes up in the study of statistics;

18

is that right?

19

A.

20

measure.

21

Q.

Comes up -- it's a statistical

22
23
24
25

A.
Q.
A.
everything.

It's a mathematical concept -Yeah.
-- that is used in statistics?
Well, I would say it's used in
It comes from the field of statistics.
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1

But it is -- the concept is applied to everything.

2

It's applied to finance, it's applied to physics,

3

I'm sure it's applied to real estate.

4
5

Q.

So did you learn about Sharpe Ratios

while you were at Berkeley?

6

A.

7

Sharpe Ratio was.

8

Q.

9

No.

I don't think I knew what a

How about a Sortino Ratio?

A.

That's like the Sharpe Ratio, it's

10

another standard statistical metric that's used in a

11

variety of industries as a measurement of

12

risk-adjusted return.

13
14

Q.

while you were at Berkeley?

15
16

Did you learn about the Sortino Ratio

A.
Q.

No.
That's something you learned over the

17

course of your time working in the financial

18

industry?

19

A.

Again, I think it's a very common

20

metric.

21

you would come across that would have it in there.

22

I think there are many publications that

Q.

Is it something that you learned

23

about after you started working in the financial

24

industry?

25

A.

Yes.
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1

an experienced investor?

2
3

MR. KORNFELD:

Object to form.

That's not what it says.

4

A.

I am assuming that Sterling Equities

5

is an experienced investor for reasons that I cite

6

within my report.

7

Q.

My question is:

Are the opinions

8

that you rendered in your report based on the

9

assumption that Sterling is an experienced investor?

10

A.

No.

No, definitely not.

If they're

11

not a sophisticated investor, then I would view them

12

as having an obligation to obtain counsel and have

13

an agent operate in that capacity.

14
15

Q.

What is the source of that

obligation?

16

A.

Well, I believe they're a fiduciary.

17

I believe that they are managing other people's

18

accounts or have the appearance of responsibility

19

for other people's accounts.

20

Q.

When you say they're a fiduciary,

21

you're referring to the 401(k) plan we talked about

22

earlier?

23
24
25

A.
Q.

At minimum, yes.
Do you know when that plan was

formed?
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1

Q.

You don't know whether in the United

2

States people are free to invest their own money as

3

they wish?

4
5

MR. KORNFELD:
A.

Object to form.

That's not what I'm saying.

There's

6

a lot of information that is disclosed as part of

7

the investment management industry.

8

prospectus, there are annual reports, there are

9

confirmations.

There is a

If people were free to completely

10

ignore everything, then there would be no reason to

11

disclose any of this information.

12

being disclosed is because it then imparts a

13

responsibility to an investor to understand and have

14

some basis for what's going on.

15

completely free to ignore everything and -- and then

16

not have some legal consequence to it.

17

Q.

The reason it's

You're not

And the opinions that you've rendered

18

in here are based upon the understanding that you've

19

just testified to?

20
21
22
23

MR. KORNFELD:
A.
Q.
A.

Object to form.

That's not what I said.
Well, are they?
No.

I said that -- I've said that I

24

view these defendants as sophisticated investors,

25

for reasons that I cite, mainly that I see them as
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1

having the indicia of sophisticated investors.

2

I furthermore think that as a result of that

3

sophistication, there are expectations.

4

Q.

5

A.

6

Q.

And

Expectations by whom?
The court.
So you think the law imposes an

7

expectation that investors will investigate their

8

investments?

9

MR. KORNFELD:

10

A.

Object to form.

That's not what I said.

I said that

11

they have indicia of sophisticated investors and the

12

court will react to that as it sees fit.

13
14

Q.

All right.

Let's look at some of the

other things you say here.

15

You refer throughout your opinion to

16

"Sterling," and I think if we go back to page, page

17

7 of your report, the bottom line in the text.

18

say, "similarly situated to Sterling Equities."

19

A.

20

Q.

You

Yes.
And then there's a parenthetical and

21

it says, quote, "Sterling," close quote; do you see

22

that?

23
24
25

A.
Q.

Yes.
So, I understand that you're adopting

the term "Sterling" to mean Sterling Equities; is
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1

that right?

2

A.

3

Q.

4

Yes.

entire report?

5

A.

6
7

Q.

And that's true throughout this

Yes.
So your report is with respect to

Sterling Equities?

8

A.

9

Q.

Yes.
And then the footnote, footnote 18

10

says:

11

dash, "collectively, the partners and entities that

12

they own, operate and control - will hereinafter be

13

referred to as Sterling."

14

"Sterling Equities," and then you have a

A.

15

Q.

Do you see that?

Yes.
So, your opinion is limited, if I

16

understand this correctly, the opinions you express

17

in here, are limited to Sterling Equities, the

18

partners of Sterling Equities, and the entities that

19

those partners own, operate and control.

20

right?

21
22

A.
Q.

Is that

Yes.
To the extent that there are accounts

23

which are at issue in this litigation that are not

24

accounts of Sterling Equities, and are not partners

25

of Sterling Equities, and are not entities owned,
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1

controlled or operated by Sterling Equities, your

2

opinions do not apply; is that correct?

3

A.

Well, I don't know.

They might, they

4

might apply.

5

know what you're referring to.

6

any entities that do not fall in that category --

7

I'm sorry, that do fall in that category.

8

mean...

9
10

Q.

I mean, I don't know that -- I don't
So, I don't know of

So, I

Well, how about Robin Wachtler, was

she a partner of Sterling Equities?

11

A.

12

No.

control."

13

Q.

14

But I said "own, operate and

the partners?

15

Well, is Ms. Wachtler owned by one of

A.

I believe that her assets are

16

controlled by the partnership.

17

testified, no money gets into BLMIS but through the

18

partnership.

19

Q.

Oh, I see.

Because as I've

So your view is, is that

20

because money was funneled through Sterling Equities

21

on its way to BLMIS, it was controlled by Sterling

22

Equities?

23

A.

24
25

Q.

Is that what you're saying?
In that particular case.
Well, how about all the other

defendant accounts?
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1

A.

Well, if there's a partnership

2

somewhere, if there's an entity somewhere in

3

Illinois that the partnership controls and the

4

assets of that entity are in BLMIS, it would be the

5

same thing for me.

6

Q.

Well, I'm trying to get your

7

understanding of what you mean -- this is your

8

report, right?

9

A.

10
11

Q.

Yes.
And you used the word "control,"

right?

12

A.

13
14

You wrote this, right?

Q.

Yes.
I'm just trying to understand what

you mean.

15

So, to you, anybody who invested in

16

BLMIS, and the money went through Mr. Friedman at

17

Sterling Equities, that in your terminology means

18

that Sterling Equities controlled that person and

19

his account?

20

A.

21

yes.

22

My report looks at those accounts,

accounts.

23

The opinions I offer have to do with those

Q.

But I mean, I'm just trying to

24

understand whether you are telling us that as you

25

wrote your report, you are assuming that anyone who
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1

invested with BLMIS through Sterling Equities, that

2

is the check went through Sterling Equities on its

3

way to BLMIS, in your view that person is controlled

4

by Sterling?

5

A.

6

Sterling.

7

Q.

Well, the assets are controlled by

What do you mean the assets are

8

controlled by Sterling?

Do you know whether that

9

person, for instance if they just decided, hey, I

10

made a bad decision, I want my money back, called up

11

Arthur Friedman and said, Arthur, you know that

12

money I sent you last week, I don't want to invest

13

it with BLMIS anymore, I want it back.

14

consider that to be control?

15

A.

Would you

Well, I mean, if that happened and

16

they got their money back, that doesn't matter.

17

talking about the pool of assets that got into BLMIS

18

through the partnership.

19

Q.

Well, that's what I said.

I'm

You're

20

testifying that in your way of looking at things, if

21

the assets got into BLMIS through Sterling, in your

22

view that's control, right?

23
24
25

A.
Q.
A.

Yes.
That's what you're saying?
Yes.
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1

Q.

Even if the individual account holder

2

at all times had the ability to decide to disinvest

3

that money, at any time?

4
5
6
7
8
9

A.
Q.

Yes.
And you still think that is money

that's controlled by Sterling Equities?
A.

They, they have controlled the flow

of that money into BLMIS.
Q.

They have certainly facilitated it,

10

but are you saying that notwithstanding the

11

individual investor, the individual account holder,

12

could at any time withdraw that money on demand,

13

that that individual account holder was no longer in

14

control of his account?

15
16
17

MR. KORNFELD:
A.

Object to form.

Q.

I'm not saying that.
Now, at page 10, going back to page

18

10, paragraph 25, you say that Sterling, using the

19

general term --

20
21

MR. KORNFELD:
Q.

Object to form.

Well, this term "Sterling" meaning

22

any account that was run through Sterling Equities.

23

Is that fair?

24

A.

25

Depends on the context of the

sentence.
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1
2

A.

I don't know, I don't know in detail

about other defendants.

3

Q.

All right.

And we agreed earlier

4

that you don't know what Mr. Wilpon studied in

5

college, right?

6

A.

7

Q.

I don't know that that's relevant.
You don't know whether that's

8

relevant to whether he had a high level of financial

9

expertise?

10
11

A.

and I had a PhD in math.

12
13

I didn't know what a Sharpe Ratio was

Q.

Do you know whether Mr. Wilpon knows

what a Sharpe Ratio is?

14

A.

15

Q.

16

A.

Yes.
You think he does?
Well, the notion is very common

17

throughout Sterling Stamos, it's common throughout

18

the industry.

19

firm.

20

investment adviser, I would hope that the general

21

partner would understand those things that he's

22

representing himself to know.

23
24
25

Again, he's a general partner of the

If I was investing my money with an

Q.
A.
Q.

Do you know what Sterling Stamos was?
It was a fund of funds.
Do you know why it was formed?
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1

Q.

And, two, monthly returns for the

2

feeder fund from 1997 to 2005.

3

Beacon's returns from '97 to 2005, right?

4
5

A.
Q.

So that would be

Yes.
And then using that information, you

6

performed various quantitative calculations

7

including peer analysis, performance attribution and

8

reverse engineering.

9

observed warning signs that Madoff was not engaged

10
11
12

And based on that, you

in the purported investment strategy, right?
A.
Q.

Yes.
Let me show you -- we're going to

13

show you some documents that were produced by Baker

14

Hostetler in response to our subpoena to you for

15

documents connected to this case.

16

going to see if we can do this fairly quickly

17

because there are a bunch of them.

18

by asking, do you recall receiving the subpoena for

19

the -- this examination today?

20
21
22
23
24
25

A.
Q.

And we're just

But let me begin

Yes.
And it called for various types of

documents?
A.
Q.

Yes.
Remember that?

And did you search

your files to see whether you had any of those
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1

confused.

2

this fund of funds client was done in 2005, reading

3

your report at page 6.

4

I thought that the work that you did for

A.

In 2000 -- 2005 was the first time

5

that I did a detailed due diligence on Beacon,

6

Bernie Madoff, and there are other documents that

7

we've yet to go through that illustrate that.

8

retained by that client to do many things over --

9

over the years.

10
11
12
13

I was

This is just another analysis that

I did in 2007, as just part of my overall retention.
Q.

So your client was still interested

in Mr. Madoff in 2007?
A.

Yeah.

My report identifies that my

14

client divested from Bernie Madoff but never

15

completely eliminated their holdings.

16

Q.

Well, when was the first time you

17

told your client you were suspicious that there was

18

a fraud going on in BLMIS?

19

MR. KORNFELD:

20

MR. WISE:

21
22
23

Q.

Object to form.

Withdrawn.

Did you ever tell your client that

you thought there was a fraud going on at BLMIS?
A.

Well, as I said in my report, in 2005

24

I had done some analysis that, that I think pointed

25

to some very suspicious results.
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1

Q.

2

A.

Did you ever tell your

client --

3

Okay.

4
5

Q.

-- that you thought -- when did you

first tell them that?

6

A.

7
8

Yes.

Q.

2005.
And in 2007 they were still invested

in Madoff; is that right?

9

A.

10

Q.

Yes.
And they were still asking you to do

11

work such as what we see in Exhibit 21; is that

12

fair?

13

A.

Well, I don't know that they asked me

14

to do this particular analysis.

15

analysis that I did in 2007.

16

they asked me to do this or if I had done this.

17

Q.

This is just an

But I don't recall if

I notice that things seemed to change

18

in January of 2001 on this exhibit.

We go from a

19

situation in which Madoff's percentage of the

20

portfolio was 100 percent to a declining percentage.

21

It starts out at 82.67, and then again, without

22

having checked all the numbers, it looks like it

23

declines, with a few exceptions.

24

occasionally, but it's basically on a declining

25

trend from then until the end of the -- the end of

It does bump up

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A.

2
3

Q.

No, no, they did not.
-- investments?

Were they still

holding some when Madoff went belly up?

4

A.

5

Q.

Yes.
After you had reached your conclusion

6

that Madoff was doing something fraudulent, did you

7

tell that to anyone else besides Mr. Gordon?

8
9

A.

of mine, basically expressing my, my concerns.

10

Q.

11
12

I had a conversation with a colleague

A.

A colleague at Duff & Phelps?
No, no, no.

Just someone I know in

the investment management industry.

13

Q.

14

A.

15

Q.

And who was that?
His name is Mitch Cantor.
Does he work for an investment

16

management firm?

17

A.

18
19

I don't -- right now I don't think he

does.
Q.

20

you know?

21

A.

Who was he working for in 2005, if

22
23
24
25

He was self-employed, running his own

money management firm.
Q.

Was there anyone else that you

mentioned Mr. Madoff to?
A.

No.
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1
2
3
4
5
6

Q.

Did you call anybody at the SEC?

A.

No.

Q.

Call anybody at FINRA?

A.

No.

Q.

Why not?

A.

Well, I wasn't a witness to a crime.

7

I didn't see what was going on.

I was not able to

8

get inside Bernie Madoff's operation to ask any

9

questions or do any diligence.

I was asked by a

10

client to offer my professional opinion about a set

11

of data.

12

which I did, and I offered my client my conclusion.

13

That in my professional judgment, this is something

14

that they should consider.

15

crime in any way.

16

I was asked to perform due diligence,

Q.

Well, you had concluded -- well, let

17

me back up.

18

money at that time.

19

A.

20

Q.

Mr. Madoff was running a great deal of
Did you know that?

I did not know how much money he was

running.

21

I'm not a witness to a

22
23
24
25

A.
Q.

Had you looked into that?
At the time, no.
Well, in 2006 you knew he became a

registered investment adviser; you know that, right?
A.

I wouldn't have known that in 2005.
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Q.

But we looked at an exhibit before

2

from 2007, right?

3

A.

4
5

Q.

Yes.
So you were still looking at

Mr. Madoff in 2007?

6

A.

Yeah, but it wouldn't be relevant to

7

me how much money he was running.

8

affect my opinion.

9

over a billion dollars.

10

Q.

I mean, I easily knew it was

All right.

11

A.

So he was running a lot

of money?

12

That wouldn't

13

Q.

14

Yes.

a fraud?

15

And you had concluded he was running

A.

I did not conclude he was running a

16

fraud.

17

things that I thought were suspicious based upon a

18

very, very limited piece of information.

19

big difference between that and concluding that

20

somebody is executing a fraud.

21

I offered my professional opinion about

Q.

I see.

There's a

So you had suspicions but you

22

didn't have a conclusion; is that what you're

23

saying?

24
25

A.

I had suspicions and I had a

professional level of judgment pursuant to those
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observations.

2

That's nothing more than my professional opinion

3

based upon a very limited piece of information.

4

Q.

That's not a legal conclusion.

In any event, you didn't feel

5

comfortable enough, based upon what you had seen, to

6

go to the authorities?

7
8
9

MR. KORNFELD:
Q.

Object to the form.

At the time?

A.

I did not -- it's not a question of

10

comfort.

11

my client to analyze two pieces of paper and give

12

them my professional judgment.

13

It's not my responsibility.

Q.

I'm asked by

Which is what I did.

At any time before December 2008 when

14

Mr. Madoff confessed, did you ever call anybody at

15

the SEC with your concerns?

16
17
18
19
20

A.
Q.

No.

A.

Anybody from FINRA?

Q.

No.

A.

Ever go to the media?

21

No.
MR. WISE:

All right.

Let's mark a

22

few more of these and then we'll move on to

23

something else.

24
25

MR. KORNFELD:

Why don't we grab a

few-minute break.
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2

Then you have a discussion in
paragraph 77 about VWAP?

3

A.

4
5

Q.

A.

7

Q.

Yes.
Do you know whether Mr. Friedman had

any familiarity with the concept of VWAP?

9

A.

10
11

The volume weighted average price,

VWAP?

6

8

Yes.

Q.

I don't know.
At page 32 you talk about impossible

transaction prices on options.

12

A.

13

Q.

Do you see that?

Yes.
And you discuss the pricing that you

14

found doing some analysis, you found that --

15

withdrawn.

16

You discuss in paragraph 78 some of

17

your conclusions based upon an analysis you did as

18

to what the options prices should have been; is that

19

right?

20
21
22
23

A.
Q.
did you use?
A.

Yes.
And to do that pricing analysis, what
Did you use a Black-Scholes model?
I did, but I want to say that with

24

respect to this one instance there was a handwritten

25

piece of paper by Mr. Friedman that had prices, and
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before I even employed a Black-Scholes pricing

2

model, I merely looked at the piece of paper, and I

3

said, this can't be right.

4

There's nothing more than my intuition, experience,

5

and just a very basic knowledge of options that told

6

me that these prices could not make sense.

7
8
9

Q.

These prices are wrong.

Do you know whether Mr. Friedman had

any experience trading derivatives?
A.

Well, he was overseeing all of these

10

accounts that were very heavily involved in

11

derivatives.

12
13
14

Q.

I understand that.

Do you know

whether he had any experience trading derivatives?
A.

I don't know his personal experience.

15

I mean, the notion of derivatives and options is

16

very common within the real estate industry.

17
18
19
20
21
22
23

Q.

Okay.

So you don't know whether he

had any experience or not?
A.

I don't know his particular

experience.
Q.

Do you know whether he knew how to

perform a Black-Scholes analysis?
A.

I'm sure that capability exists

24

within a real estate business.

It's a very common

25

calculation, it's a very common concept within the
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A.

I don't see that as relevant.

In

2

2002 something happens, that creates a concern.

3

don't know what the future entails.

4

Q.

Let me ask you this:

I

You have, at

5

page 40, you say, "Sterling's cumulative returns are

6

over 48 percent while the market's cumulative

7

returns are down 27 to 44 percent for a three-year

8

period."

9
10
11
12
13

Let me ask you this:

Is it possible

to make money in a down market?
A.
Q.
A.

Not with the purported strategy.
That -That was explained in the Gonder memo

14

exactly what the shortcomings of the strategy were

15

and when it would do good, when it would do bad.

16

So, yeah, there are some people who make money

17

during these periods, but not people who are

18

executing the strategy that Madoff purported to be

19

following.

20

Q.

And you found that out after you did

21

some of the analysis that we looked at earlier,

22

right, you tried to replicate it and you couldn't?

23

The reverse engineering I'm talking about.

24

A.

25

engineer.

No, I wouldn't even need to reverse
I understand what the strategy is.
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mean, read the Gonder memo.

2

conclusion with just by understanding what the

3

strategy is, you understand that it cannot make

4

money in a -- in a down market.

5

He reaches the same

The purpose of my reverse engineering

6

was actually not to examine whether Bernie could

7

make money, but really was to understand how stable

8

can Bernie's returns be.

9

the type of risk adjusted returns, can this strategy

Can this strategy produce

10

produce a stability of returns that is being

11

illustrated.

12

That was the purpose of the reverse

13

engineering that I described.

14

Mr. Gonder's observations had nothing to do with the

15

reverse engineering.

16

understanding of the strategy.

17
18

Q.

A.

20

Q.

21

A.

22

24
25

They're merely based upon his

Mr. Gonder is the man from Travelers,

right?

19

23

I believe

Q.

Yes.
The insurance company?
Yes.
Right?

The institutional investor,

right?
A.
Q.

Yes.
Do you know whether Mr. Friedman
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