Madoff Saps Fortune of Heirs of Wall Street 'King'

March 12th, 2009
By Miles Weiss
Bloomberg.com

March 12 (Bloomberg) -- Simon "Sy" Scheuer sought to ensure his fortune would outlive him. It did, and then some of it wound up with Bernard Madoff.

Little known outside Wall Street, where he was called "King of the Shrink," Scheuer amassed an estimated $500 million from the 1920s to the 1970s, buying New York real estate during the Great Depression and later stocks he considered undervalued. He arranged before his death in 1979 at age 88 to bequeath his estate to some 27 descendants and a charitable foundation through trusts to be overseen by a handpicked group of directors.

"Sy Scheuer was the embodiment of micromanagement," said Mark Schwartz, a Pennsylvania attorney who worked for the late Walter Scheuer, one of Sy's five children, who was an executive at the investment bank Oppenheimer & Co. "Bernard Madoff was the last person he would have ever invested with."

The Scheuer story is a parable for the consequences of failing to oversee an inheritance, Schwartz said.

"It's the curse of wealth," he said. "The first generation makes it, and the second and third generation screw it up."

Scheuer's name surfaced on Feb. 4 when the Securities Investor Protection Corp., created by the U.S. Congress to aid clients of bankrupt brokerage firms, filed documents identifying people who might have lost money with Madoff.

The list of possible victims showed that Madoff attracted an international client roster, including celebrities such as filmmaker Steven Spielberg and actor Kevin Bacon, fund managers like J. Ezra Merkin, and charities, universities, friends and even royalty.

Guilty Plea

Madoff, 70, admitted in Manhattan federal court today that he was the mastermind behind the largest Ponzi scheme in history, one that swindled investors out of as much as $65 billion and made him the symbol of investor distrust in a global recession. He pleaded guilty to 11 counts including securities fraud, wire fraud and money laundering.

U.S. District Judge Denny Chin ordered that Madoff, who had been free on $10 million bond, be jailed while awaiting sentencing, scheduled for June 16. He faces as much as 150 years in prison.

The S.H. and Helen R. Scheuer Family Foundation Inc., founded in 1943, was named in the SIPC court filing, which had more than 13,000 entries. Also listed was the New York investment firm 61 Associates LP, which manages the foundation's assets and oversees the trusts created by Scheuer's estate and the pension plan for East River Management Corp., a Scheuer family real estate company. A charitable trust under the name of Laura Scheuer, one of Scheuer's grandchildren, was also identified.

Connections

Some of the connections to Madoff were through C&M Trading, one of several similarly named investment vehicles run out of Madoff's office in New York. The foundation had $6.1 million or about 79 percent of its assets with C&M Trading as of Nov. 30, 2007, tax records show. The pension plan had $2.19 million or more than 90 percent of its holdings with a C&M Trading partnership, according to a U.S. Department of Labor filing.

Cohmad Securities Corp., co-founded and partly owned by Madoff, pitched clients C&M Trading managed accounts as a way to invest with Madoff's firm, according to court documents filed by the Massachusetts Securities Division. The agency wants to revoke Cohmad's state securities registration, claiming the brokerage failed to provide information about its relationship with Madoff.

Born in 1891, Scheuer sold most of his stock holdings before the market crash of 1929 and began investing in properties, including the four corner buildings of the London Terrace development in Manhattan's Chelsea district.

'The Shrink'

On Wall Street, Scheuer perfected a strategy known as "the shrink," also employed by oil baron J. Paul Getty, to gain control of companies without paying a takeover premium, according to "The Mind of Wall Street" (PublicAffairs, 2002), co-written by the late Leon Levy, who started Odyssey Partners LP with Jack Nash. Scheuer would acquire a stake in a company and then seek control by pushing for stock repurchases that would lessen the number of shares outstanding, the book said.

On his deathbed, Scheuer was after Rouse Co., the Columbia, Maryland, firm that developed Boston's Faneuil Hall Marketplace. Rouse learned on Oct. 23, 1979, that Scheuer had purchased a 7.5 percent stake in the company, only to receive a call 10 minutes later advising management that the financier was dead, according to a Washington Post article published at the time.

'Get Control'

Scheuer "would burrow into something, get control, and was a great believer that if a stock was cheap, the company should buy it and grow that way," Alan "Ace" Greenberg said in an interview. Greenberg, 81, the former chairman of the executive committee at Bear Stearns Cos., worked with Scheuer.

Giving money to a firm such as Madoff's "doesn't sound like anything he would do," Greenberg said.

Steven Scheuer, Sy's surviving son, said he was unaware of any Madoff investments. Amy Cohen, Scheuer's daughter, declined to comment.

The estate plan that Sy Scheuer left behind pitted his children against one another and the outside trustees and led to a lawsuit. The foundation made financial decisions "manifestly improper" for a philanthropic organization, Steven Scheuer said in the 1989 suit against eight directors, including his brother Richard, who died last November at 91, and his sister, who lives in Larchmont, New York.

Besides the late Walter Scheuer, who helped save Carnegie Hall in New York from the wrecking ball and produced the 1980 Academy Award-winning documentary "From Mao to Mozart" with violinist Isaac Stern, the other sibling was James Scheuer, who served 13 terms as a U.S. congressman representing different parts of New York City and Nassau County. He died in 2005.

Lawsuit Claims

The directors invested in "undercapitalized, illiquid" securities of a "speculative quality" including Resorts International and AOI Coal Co., losing almost $1.4 million on investments and incurring more than $1 million in commissions in two years through "excessive" trading, according to the suit.

The family resolved the conflict by having the charity distribute funds to foundations started by his children, allowing each to decide how to allocate the money. The foundation under Sy and Helen Scheuer's names had net assets of about $7.7 million on Nov. 30, 2007, according to the latest tax records available.

Until the SIPC court filing, the Scheuer name had "sort of disappeared," said James Tisch, the president and chief executive officer of Loews Corp. in New York. "All roads lead to Madoff."