Madoff investment scandal

Template:Current court case The Madoff investment scandal occurred after the discovery that the asset management business of former NASDAQ chairman Bernard Madoff was actually a giant Ponzi scheme. Federal authorities arrested Madoff on December 11, 2008 and on March 12, 2009, Madoff pled guilty to 11 felonies and admitted to operating the largest investor fraud ever committed by an individual. According to a federal criminal complaint, client statements showing $65 billion in stock holdings were fictitious, and that no stocks were ever purchased since the scheme began in the 1980s.

Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest. According to the original federal charges, Madoff said that his firm had "liabilities of approximately US$50 billion." Prosecutors increased their estimate of the size of the fraud from $50 billion to $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients on November 30, 2008. The SEC has also come under fire for not investigating Madoff more thoroughly; questions about his firm had been raised as early as 1999. Madoff's firm, which is in the process of liquidation, was one of the top market maker businesses on Wall Street. The firm also had an investment management and advisory division that is now the focus of the fraud investigation. The freeze of Madoff's and his firm's assets have had effects on businesses and charities around the world, some of which were forced to close as a consequence of the fraud.

Background

Madoff started his firm in 1960 as a penny stock trader with $5,000. His fledgling business began to grow with the assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and their families. Initially, the firm made markets (quoted bid and ask prices) via the National Quotation Bureau's Pink Sheets. In order to compete with firms that were members of the New York Stock Exchange trading on the stock exchange's floor, his firm began using innovative computer information technology to disseminate its quotes. After a trial run, the technology that the firm helped develop became the NASDAQ. At one point, Madoff Securities was the largest buying-and-selling "market maker" at the NASDAQ.

He was active in the National Association of Securities Dealers (NASD), a self-regulatory securities industry organization. His firm was one of the five most active in the development of the NASDAQ. Federal investigators believe the fraud in the investment management division and advisory division may have begun in the 1970s. However, Madoff himself stated his fraudulent activities began in the 1990s. In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on the New York Stock Exchange. Madoff was "the first prominent practitioner" who paid a broker to execute a customer's order through his brokerage, called a "legal kickback", which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume. Madoff Securities was one of the top traders of securities in the USA by the year 2000, holding approximately $300 million in assets. Madoff ran a branch office in London, separate from Madoff Securities, handling investments for his family of approximately £80 million.

Methods of operation

In March 2009, Madoff said that the returns had been fabricated since the early 1990s, but no earlier. In 1992, Madoff explained his strategy to The Wall Street Journal: In the 1970s, he had placed invested funds in "convertible arbitrage positions in large-cap stocks, with promised investment returns of 18% to 20%," and in 1982, he began using futures contracts on the stock index, and then, placed "puts" on futures during the 1987 stock market crash. A few analysts performing due diligence had been unable to replicate the Madoff fund's past returns using historic price data for U.S. stocks and options on the indexes. Barron's raised the possibility that Madoff's returns were most likely due to front running his firm's brokerage clients. Mitchell Zuckoff, professor of journalism at Boston University and author of Ponzi's Scheme: The True Story of a Financial Legend, says that "the 5% payout rule," a federal law requiring foundations to pay out 5% of their funds each year, allowed Madoff's Ponzi scheme to go undetected for a long period since he managed money mainly for charities. Zuckoff notes, "For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he was not making real investments, at that rate the principal would last 20 years. By targeting charities, Madoff could avoid the threat of sudden or unexpected withdrawals." Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as "too complicated for outsiders to understand." He was secretive about the firm’s business, and kept his financial statements closely guarded. The New York Post reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach". The New York Times reported that Madoff courted many prominent Jewish executives and organizations; according to the Associated Press, they "trusted [Madoff] because he is Jewish." One of the most prominent promoters was J. Ezra Merkin, whose fund Ascot Partners steered $1.8 billion towards Madoff's firm. A scheme that targets members of a particular religious or ethnic community is a type of affinity fraud, and a Newsweek article identified Madoff's scheme as "an affinity Ponzi".

Madoff's annual returns were "unusually consistent", around 10%, and were a key factor in perpetuating the fraud. Even at the end of November 2008, amid a general market collapse, the same fund reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-stock index had been negative 38%. An unnamed investor remarked, "The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That's why we were all so stunned."

Previous investigations

Madoff Securities LLC was investigated at least eight times over a 16-year period by the United States Securities and Exchange Commission (SEC) and other regulatory authorities.

Avellino and Bienes

In 1992, the SEC investigated one of Madoff's feeder funds, Avellino & Bienes (principals Frank Avellino and Michael Bienes and his wife Dianne Bienes). Bienes began his career working as an accountant for Madoff's father-in-law, Sol Alpern. Then, he became a partner in the accounting firm Alpern, Avellino and Bienes. In 1962, the firm began advising its clients about investing all of their money with Madoff. When Alpern retired at the end of 1974, the firm became Avellino and Bienes and continued to invest solely with Madoff.

Represented by Ira Sorkin, Madoff's present attorney, Avellino & Bienes were accused of selling unregistered securities, and in its report the SEC mentioned the fund's "curiously steady" yearly returns to investors of 13.5% to 20%. However, the SEC did not look any more deeply into the matter. Through Sorkin, who once oversaw the SEC’s New York office, Avellino & Bienes agreed to return the money to investors, shut down their firm, undergo an audit, and pay a fine of $350,000. Avellino complained to the presiding Federal Judge, John E. Sprizzo, that Price Waterhouse fees were excessive, but the judge ordered him to pay the bill of $428,679 in full. Madoff said that he did not realize the feeder fund was operating illegally, and that his own investment returns tracked the previous 10 years of the S&P 500. The SEC investigation came right in the middle of Madoff's three terms as the powerful chairman of the NASDAQ stock market board.

Bernard L. Madoff Securities LLC: 1999, 2000, 2004, 2005, and 2006

The SEC investigated Madoff in 1999 about concerns that the firm was hiding its customers' orders from other traders, for which Madoff then took corrective measures. That same year, financial analyst and whistleblower Harry Markopolos complained to the SEC telling the SEC staff they should investigate Madoff because it was impossible legally to make the profits Madoff claimed using the investment strategies that he claimed to use. In 2001, an SEC official met with financial investigator Markopolos at the SEC's Boston office to go over Markopolos's allegations that Madoff's firm was engaged in fraudulent practices. The SEC also said it conducted two other inquiries into Madoff in the last several years, and did not find major problems. In 2004, after published articles appeared accusing the firm of front running, the SEC's Washington branch cleared Madoff of that accusation. An SEC statement detailed that inspectors examined Madoff's brokerage operation in 2005 after sending the 2004 inquiry to the New York office, finding three violations: the strategy he used for customer accounts, the requirement of brokers to obtain the best possible price for customer orders, and violating SEC rules by operating as an unregistered investment adviser. He was registered as a broker-dealer, but acting as an asset manager. "The staff found no evidence of fraud", according to the SEC case memo. Madoff agreed to register his business that September, and the SEC did not make its findings public. Markopolos disagreed however filing a seventeen page memo with twenty-nine various red flags. In 2007, SEC enforcement staff completed an investigation which began on January 6, 2006, into Ponzi scheme allegations which resulted in neither a finding of fraud, nor a referral to the SEC Commissioners for legal action.

Other reports of fraud

Outside analysts raised concerns about Madoff's firm for years. An article in Barron's and another in MarHedge in 2001 accused Madoff of front running to achieve his gains. Hedge funds that invested with him were not allowed to mention his name in their marketing materials. And to further maintain secrecy, when large investors were thinking of putting in money, but wanted to examine Madoff's books in order to do due diligence, Madoff would not allow the examination, claiming a desire not to have proprietary strategies disclosed to anyone else.

Among the suspicious signs was the fact that Madoff's company avoided filing disclosures of its holdings with the SEC by selling its holdings for cash at the end of each period. Such a tactic is highly unusual. A call for an outside audit of the company was rejected by Madoff with the statement that the company's Chief Compliance Officer, his brother Peter Madoff, was the only person allowed to do that, "for reasons of secrecy.". Additionally, despite the supposed size of his portfolio, Madoff was audited by Friehling and Horowitz, a small three-person firm with only one active accountant.

Markopolos later testified to Congress that in order to deliver 12% annual returns to the investor, Madoff needed to earn 16% gross so he could pass on 4% to the feeder fund managers, who would lure in new victims, be "willfully blind, and not get too intrusive." In 2007, hedge fund advisory fund firm Aksia LLC advised its clients not to invest with Madoff, because of the appearance of limited accounting service personnel.

Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996", and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible." A 2001 story in MARHedge interviewed traders who questioned how Madoff could have 72 gaining months in a row, saying that type of stock success had never occurred before.

Investigation into involvement of others

Investigators are looking for others involved in the scheme, despite Madoff's assertion that he alone was responsible for the large-scale operation. Harry Sussman, an attorney representing several clients of the firm, stated that "someone had to create the appearance that there were returns," and further suggested that there must have been a team buying and selling stocks, forging books, and filing reports. James Ratley, president of the Association of Certified Fraud Examiners said, “In order for him to have done this by himself, he would have had to have been at work night and day, no vacation and no time off. He would have had to nurture the Ponzi scheme daily."

“Simply from an administrative perspective, the act of putting together the various account statements, which did show trading activity, has to involve a number of people. “You would need office and support personnel, people who actually knew what the market prices were for the securities that were being traded. You would need accountants so that the internal documents reconcile with the documents being sent to customers at least on a superficial basis,” said Tom Dewey, a securities lawyer.

Madoff Securities International Ltd.

Authorities in the U.K. are seeking evidence of money laundering involving the London business, Madoff Securities International Ltd., which opened in 1983 as a separate legal entity from Mr. Madoff's U.S. New York office. In 2000, Madoff began to add staff and expand the operation. He hired traders, and loaned the business $62.5 million. Family members with shares included Mark and Andrew Madoff, Peter Madoff, and Bernard himself. Ruth Madoff, Bernard Madoff's wife, also held shares.

Non-family members with shares included Maurice J. "Sonny" Cohn. Madoff and Cohn were shareholders in Cohmad Securities, which steered investors to Mr. Madoff's advisory business. in 1987, Mr. Cohn had shares of Madoff Holdings Ltd., a predecessor to the current London firm. In 1998, Mr. Cohn held 35,624 nonvoting shares, some of which he transferred to "BL Madoff" in 1998 and the rest that he "disposed of" in 2004.

Paul Konigsberg, a New York City accountant and a longtime friend, who prepared the Madoff Family Foundation tax returns, received the nonvoting shares. He did work for the London office when it was first opened.

Ruth Madoff

Ruth Madoff's combined assets with her husband is a net worth of between $823 million and $826 million. She has $92.6 million in assets listed in her own name. The SEC is working with federal prosecutors, who have filed a notice with the Federal Court to seek forfeiture of all listed ill-gotton assets.

She has been named in two civil actions. She withdrew $10 million on December 10, 2008, and $5.5 million on November 25, 2008, from her brokerage account at Cohmad, a feeder fund which had an office in Madoff’s headquarters and was part-owned by him.

On January 30, 2009, a CBS News investigation discovered that the Madoffs were moving assets during the 2006 SEC investigation. Madoff had purchased their $9.5 million Palm Beach mansion in March 1994 in his wife's name. Not until December 10, 2006, did she apply for "homestead" status, shielding their home from creditors. Her initial application was rejected because there was no proof it was her primary residence. On September 18, 2008, she reapplied and it was granted on January 12, 2009, after Madoff's arrest. On November 8, 2006, Peter Madoff transferred the title to his $4.6 million neighboring mansion to his wife, Marion, which made her the sole legal owner of the home. On December 28, 2006, Marion also received homestead exemption.

On March 2, 2009, U.S. District Judge Louis Stanton, presiding over the SEC case, filed an order modifying the property asset freeze: "Only Ruth Madoff has a beneficial ownership” to a Manhattan apartment; about $45 million in municipal bonds deposited at Cohmad Securities Corp., and approximately $17 million in cash in another account, at Wachovia Bank NA. Ruth Madoff says these assets are “unrelated” to the alleged fraud, Stanton also wrote without a ruling on her claim.

Mark and Andrew Madoff

Madoff's sons Mark, 45 and Andrew, 42 worked in the trading arm in the New York office. In 1998, the sons became directors of the London office, Madoff Securities International Ltd. and took stakes in the business. They were given loans by the New York office to buy their shares. Interest on the loans was paid by dividends made by the London operation. At the time of Mark's divorce, in 2000, his interest was valued at $5 million. Other family members with shares in the business were Bernard's wife, Ruth, and brother, Peter.

Frank DiPascali

Federal investigators have discovered apparently fraudulent documents and records in Madoff's Manhattan offices, and are looking into who prepared them. DiPascali is represented by Marc Mukasey, the son of former U.S. Attorney General Michael Mukasey, who recused himself of any involvement in the case. DiPascali joined Madoff's operation in 1975, having been introduced by a neighbor in Howard Beach, Queens, New York. He researched stocks for the Madoff firm's trading desk before joining Madoff's separate investment-advisory business. DiPascali provided investors with instructions for wiring money. He referred to himself as "director of options trading" and also as "chief financial officer." Madoff told investors DiPascali executed trades. However, a court-appointed trustee found that no trading had occurred for at least 13 years. Prosecutors have asked at least three employees, Eric Lipkin, JoAnn Crupi and Robert Cardile, who is Mr. DiPascali's brother-in-law, about his role in the firm. Investors spoke to these other employees and would fax orders if they needed to withdraw money. DiPascali's name was sometimes given as an alternate contact. According to an SEC memo, DiPascali "responded evasively" to questioning following Madoff's arrest.

Annette Bongiorno

Annette Bongiorno is a long time personal secretary and aide to Madoff. She is accused of directing two assistants, Semone Anderson and Winnie Jackson, to generate fictitious trading tickets for customer accounts. During the 1980s, Bongiorno recruited small investors from Howard Beach, Queens, where she grew up next door to DiPascali. Their money was held in accounts called "RuAnn" (named after Annette and her husband Rudy). Madoff paid for her honeymoon airfare. She owns homes in Manhasset, New York and Boca Raton, Florida, with a combined assessment of $ 3.85 million, and two Mercedes Benzes. Her husband worked as an electrician for the New York City Department of Transportation from 1975 to 1996.

Friehling and Horowitz

Madoff's "listed" accountant was David G. Friehling, the only active accountant at Friehling & Horowitz. Although required, Friehling was not registered with the Public Company Accounting Oversight Board, which was created under the Sarbanes-Oxley Act of 2002 to help detect fraud. Nor was the firm "peer reviewed," in which auditors check out one another for quality control. According to the American Institute of Certified Public Accountants (AICPA), Friehling was enrolled in their peer-review program, but was not required to participate because he advised the group that he had not conducted audits for 15 years.

Sosnik Bell and Co.

Even before Sosnik and Bell took over a small New Jersey accounting firm in the early 1990s, Madoff and his affiliate, Cohmad Securities, encouraged hundreds of individual investors to retain the firm for an annual fee of $800 for routine recordkeeping to handle their monthly statements. The firm compiled profits, losses, and gains, and prepared tax-summary statements and schedules to be used by a client's regular accountant for income tax returns, producing one-page monthly statements and a quarterly statement.

Fairfield Greenwich Group

Fairfield Greenwich Group, based in Greenwich, Connecticut, had a "Fairfield Sentry" fund which was one of many feeder funds that gave investors portals to Madoff. Fairfield, in turn, set up further feeder funds such as "Lion Fairfield Capital Management" in Singapore and "Stellar US Absolute Return," all conduits to Madoff, directing a total of $7.5 billion.

Madoff was able to pitch his business in Europe and South America indirectly through Fairfield fund's founder, Walter Noel's son-in-law Andrés Piedrahita. Another Noel son-in-law's territory included Asia. Madoff began advertising openly, contrary to his initial strategy of handpicking investors. The company is listed as a defendant in an investor lawsuit filed in Miami.

J. Ezra Merkin

J. Ezra Merkin, a prominent investment advisor and philanthropist, has been sued for his role in running a "feeder fund" for Madoff. Merkin informed investors in his $1.8 billion Ascot Partners fund on December 11 that he was among those who suffered substantial personal losses, since all of the fund's money was invested with Madoff. The Connecticut Attorney General Richard Blumenthal is examining the role boards of nonprofits played, in possibly not conducting due diligence on donors' contributions. On January 15, 2009, as part of a probe into Madoff and New York nonprofits which claim they were defrauded, New York State Attorney General Andrew Cuomo issued subpoenas to three investment funds run by Merkin, and 15 nonprofits which say they lost money due to Merkin and Madoff.

Cohmad Securities Corp.

Regulators are looking into a brokerage firm, Cohmad Securities (taken from the names "Cohn" and "Madoff"), which is largely owned by Maurice "Sonny" Cohn and his daughter Marcia, who serves as president and chief compliance officer. Madoff shares 10-20% ownership stakes, and the brokerage firm lists its address as Madoff's firm's address in New York City. Cohmad employs Robert Jaffe, whose ownership was less than 5%, as vice president. Jaffe is married to Ellen Shapiro, daughter of Boston philanthropist Carl J. Shapiro, the founder and former chairman of apparel company Kay Windsor Inc., and an early investor and close friend of Madoff. Jaffe reportedly convinced the elder Shapiro to invest $250 million with Madoff just 10 days before Madoff's arrest.

Jaffe, a philanthropist, "worked the Palm Beach, Florida circuit, and attracted many Palm Beach Country Club members as investors." Jaffe said he received a commission of 1% to 2% from an investor's first profit after he guided their money to Madoff. Jaffe paid commissions to financial advisers who steered cash to Madoff's fund.

Richard Spring, of Boca Raton, Florida, received payments from Cohmad for many years in exchange for bringing investors and investment ideas to Madoff. Alvin J. "Sonny" Delaire, Jr. also recruited clients for Madoff's advisory business. Cohmad had fewer than 650 client accounts, and made 99.7% of its sales from brokerage services to Madoff's larger broker-dealer. In its audited financial statements for the 12 months ending June 30, 2008, Cohmad said revenue from Madoff Securities totaled $3,736,829. Its total sales for the same period were $3,748,397.

On January 14, 2009, William Galvin, Secretary of the Commonwealth of Massachusetts, who is in charge of the state's securities issues, filed suit against Jaffe, who promoted Madoff's funds to wealthy investors in Massachusetts and Florida. On February 4, compelled to testify, Jaffe invoked his Fifth Amendment right. Marcia Cohn, Maurice Cohn, and Alvin Delaire, Jr. failed to appear. On February 11, 2009, Galvin filed a complaint seeking to revoke the Massachusetts license of Cohmad Securities Corp., an accounting of all Massachusetts investors Cohmad referred to Madoff’s company, all the fees it earned doing so (more than $67 million), and a fine. It cited $526,000 in referral fees paid from Madoff Investments, to Cohmad, to Vienna Bank Medici majority owner, Sonja Kohn, which she subsequently denied.

On March 15, 2009, Federal prosecutors filed a notice in federal court declaring its intent to seek the forfeiture of the Madoffs' interests in Cohmad Securities.

Stanley Chais, the Brighton Company

Stanley Chais, 82, a wealthy investment advisor from Beverly Hills, California, was accused of steering money to private interests, including Madoff, through Chais's Brighton Co., a limited partnership formed to manage money. He took about 3.8% of the profits as management fees. His Chais Family Foundation, which in 2007 reported assets of $178 million and charitable contributions of nearly $8.2 million, was wiped out and has shut down. He had a home in Beverly Hills, and an apartment in New York. Michael Chaleff, a former Justice Department lawyer, was part of a 50-member investment group named CMG that lost $75 million to $80 million it gave to Chais' Brighton Co. Chaleff has filed a $250-million class action federal lawsuit against Chais in Los Angeles, as has screenwriter Eric Roth. New Jersey State Senator Loretta Weinberg lost her entire life savings in Chais' "Arbitrage Partnerships" fund.

Charges

The criminal case is U.S.A. v. Madoff, 1:08-mJ-02735.

The SEC case is Securities and Exchange Commission v. Madoff, 1:08-cv- 10791, both U.S. District Court, Southern District of New York (Manhattan). The cases against Fairfield Greenwich Group et al. are consolidated as 09-118 in U.S. District Court for the Southern District of New York (Manhattan)

Criminal complaint

U.S. v. Madoff, 08-MAG-02735.

The original criminal complaint estimated that investors lost $50 billion through the scheme, though The Wall Street Journal reports "that figure includes the alleged false profits that Mr. Madoff's firm reported to its customers for decades. It is unclear exactly how much investors deposited into the firm." He was originally charged with a single count of securities fraud and faced up to 20 years in prison, and a fine of $5 million if convicted.

Court papers indicate that Madoff's firm had about 4,800 investment client accounts as of November 30, 2008, and issued statements for that month reporting that client accounts held a total balance of about $64.8 billion, but actually "held only a small fraction" of that balance for clients.

Madoff was arrested by the Federal Bureau of Investigation (FBI) on December 11, 2008, on a criminal charge of securities fraud. Madoff was released on the same day of his arrest after posting $10 million bail. Madoff and his wife surrendered their passports, and he was subject to travel restrictions, a 7 p.m. curfew at his co-op, and electronic monitoring as a condition of bail. A judge allowed him free on bail but ordered him confined to his apartment. Madoff has reportedly received death threats that have been referred to the FBI, and the SEC referred to fears of "harm or flight" in its request for Madoff to be confined to his Upper East Side apartment. Cameras monitored his apartment's doors, its communication devices sent signals to the FBI, and his wife was required to pay for additional security.

On March 10, 2009, the United States Attorney for the Southern District of New York filed an 11-count criminal information, or complaint, charging Madoff with 11 felonies: securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, making false filings with the SEC, and theft from an employee benefit plan. The complaint stated that Madoff had defrauded his clients of almost $65 billion--thus spelling out the largest Ponzi scheme in history, as well as the largest investor fraud committed by a single person.

Madoff pled guilty to three counts of money laundering. Prosecutors allege that he used the London Office, Madoff Securities International Ltd. to launder more than $250 million of client money by transferring client money from the investment-advisory business in New York to London and then back to the U.S. to support the U.S. trading operation of Bernard L. Madoff Investment Securities LLC. Madoff gave the appearance that he was trading in Europe for his clients.

Plea proceeding

On March 12, 2009, Madoff appeared in court in a plea proceeding, and pled guilty to all charges. There was no plea agreement between the government and Madoff; he simply pleaded guilty and signed a waiver of indictment. He faces a statutory maximum sentence of 150 years' incarceration, and is also subject to mandatory restitution and fines up to twice the gross gain or loss derived from the offenses. If the government's estimate is correct, Madoff will have to pay $170 billion in restitution.

In his pleading allocution, Madoff admitted to running a Ponzi scheme, and expressed regret for his "criminal acts". He stated that he had begun his scheme some time in the early 1990s. He wished to satisfy his clients' expectations of high returns he had promised, even though it was during an economic recession. He admitted that he hadn't invested any of his clients' money since the inception of his scheme, but instead, deposited money in a business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC returns. When clients requested account withdrawals, he paid them from the Chase account, claiming the profits were the result of his own unique "split-strike conversion strategy". He said he had every intention of terminating the scheme, but it proved "difficult, and ultimately impossible" to extricate himself.

Only two of at least 25 victims who had requested to be heard at the hearing spoke in open court against accepting Madoff's plea of guilt.

Judge Denny Chin accepted his guilty plea and remanded him to incarceration at the Manhattan Metropolitan Correctional Center until sentencing scheduled for June 16, 2009. Chin said that Madoff was now a substantial flight risk given his age, wealth and the possibility of spending the rest of his life in prison. Madoff's attorneys have filed an appeal with two motions, which will be heard by a three-judge panel on March 19, to release him back to his penthouse arrest until sentencing and to reinstate his bail conditions.

Civil proceedings

SEC complaint

On February 9, 2009, a partial judgment in the December 11, 2008, civil suit by the U.S. Securities and Exchange Commission, case SEC v. Madoff, 08-10791 in U.S. District Court, Southern District of New York (Manhattan) was made permanent. As part of the judgment, Madoff was banned from the securities industry. He also agreed that his assets would remain frozen and not violate any securities laws. The agreement did not require Madoff to admit or deny any allegations against him. It also left the issues of any civil fines and repayments to be imposed against Madoff for a later time. The agreement was unrelated to any plea or indictment in the criminal matter.

Investor Civil lawsuits

The victims of the fraud are considering how to best recover some of their investments.

About 120 Madoff-related class actions have been filed – mainly suits on behalf of investors who indirectly invested when they entrusted their money to funds-of-funds like Fairfield Greenwich Group, (Case No: 09-118) in U.S. District Court for the Southern District of New York (Manhattan) Kingate Management, Tremont Group, or J. Ezra Merkin's Ascot, Gabriel and Ariel Partners. The contingency fee to the attorney is usually 25% or more of the recovery.

In 1994, the Supreme Court ruled that investors may not sue advisers – investment banks, lawyers, accountants – that aid and abet a securities fraud. However, if Madoff made secret kickbacks to one or more feeder funds, to bring in more cash, and he confesses to it, that evidence of fraud could commence a federal lawsuit. Except in New York (as of July 1977), investors can claim in State courts that the feeder funds breached their fiduciary duty, which doesn’t require proof of fraudulent intent. The Martin Act allows only the Attorney General to file claims under New York securities laws.

Recovery of funds

Assets

Madoff's combined assets are about $826 million and have been frozen. Madoff provided a confidential list of his, and his firm's assets to the SEC on December 31, which was subsequently disclosed on March 13, 2009 in a court filing. Madoff had no IRAs, no 401k, no Keogh plan, no other pension plan and no annuities. He owned less than a combined $200,000 in securities in Lehman Brothers, Morgan Stanley, Fidelity, Bear Stearns, and M&T. No offshore or Swiss Bank accounts were listed.

On March 2, 2009, Judge Louis Stanton modified an existing freeze order to surrender assets Madoff owns: his securities firm, real estate, artwork, and entertainment tickets, and granted a request by prosecutors that the existing freeze remain in place for the Manhattan apartment, and vacation homes in Montauk, New York, and Palm Beach, Florida. He has also agreed to surrender his interest in Primex Holdings LLC, a joint venture between Madoff Securities and several large brokerages, designed to replicate the auction process on the New York Stock Exchange. Bernard and Ruth Madoff are worth up to $826 million, according to a court filing.

Prof. John Coffee, of Columbia University Law School, said that much of Madoff's money may be in offshore funds. The SEC believed keeping the assets secret would prevent them from being seized by foreign regulators and foreign creditors.

Irving Picard, Trustee

The court-appointed trustee of the Madoff firm, Irving Picard, and lawyers from his firm, Baker Hostetler LLP (a Cleveland-based firm Picard joined the week before he was appointed), are locating assets for distribution to investors. U.S. District Judge Lawrence McKenna gave Picard power to seize assets and records, demand documents, summon witnesses, and enter Madoff’s residences around the world, including the apartment where he is under house arrest. As of February 4, 2009, Picard has reported that approximately $946.4 million in cash and securities has been recovered, which includes $301,407,190 of The Bank of New York Mellon's funds in one Madoff company account, and $233,500,000 of JP Morgan Chase's funds in three other accounts. Picard will terminate Madoff's leases totaling $ 117,359 of a 2007 Land Rover, 2008 Cadillac, 2007, 2008, and 2009 Mercedes-Benzes, and a 2006 Lexus. On January 2, he sent letters to 8,000 potential claimants – customers who have until March 2, and creditors until July 2, to place claims.

On February 20, 2009, Picard, at a meeting with Madoff creditors who include individual investors, banks, charities. and others, indicated that his investigation has to date not found any evidence that any securities were purchased on behalf of customers in at least 13 years. It was “cash in and cash out.” He identified more than $830 million in liquid assets that may be subject to recovery. David Sheehan, a lawyer working for Picard, indicated: "We are looking at every member of the Madoff family."

On October 31, 2008, Craig Kugel, human resource employee, was "designated" a trustee by Peter Madoff, who told him to sign a lease for his brother, as guarantor for a Mercedes S-550, because Madoff refused to provide the requisite company credit information. A Bankruptcy Court Judge Burton Lifland denied Kugel’s estimated remaining $ 58,212 lease liability.

The use of the legal doctrine of fraudulent conveyance in bankruptcy proceedings might mean that investors who withdrew their money before the fraud was revealed might be forced to return their profits or even part of their initial investments. Returning funds would be uncontroversial for clients who knew that Madoff's business was fraudulent, but would not be so clear for clients who were unaware of Madoff's activities. For example, Hadassah may be forced by New York State law to return some portion of the $130 million it withdrew from the funds it invested with Madoff.

SIPC

The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

On January 6, 2009, Picard and lawyers from his firm said some investors may get cash advances from SIPC well before March 4, 2009.

The Securities Investor Protection Corporation (SIPC), a securities-industry fund formed by Congress to help customers of failed brokerage firms. SIPC has $1.7 billion in assets, $1 billion in credit available from the U.S. Treasury, and another credit line from several international banks. Investors may each receive a maximum of $500,000 from SIPC, but only for cash or securities that are missing from their accounts. It could take several years before all investigations into the scandal are concluded and some investors are able to file claims.

On February 20, 2009, Picard, at a meeting with Madoff creditors who include individual investors, banks, charities. and others, confirmed that customers can each recover up to the $500,000 under the Securities Investor Protection Act. David Sheehan, a lawyer working for Picard, indicated that the SIPC will be trying to recover “false profits” earned by some investors. “It was all just made up. ... You got somebody else’s money.”

Taxes

Victims may also file suit to have taxes already paid on "fictitious income", restored to them.

On February 25, 2009, U.S. Rep. Gary Ackerman (D-N.Y.), a member of the House Financial Services Committee, said he has sent a letter to Internal Revenue Service Commissioner Douglas Shulman: “Given this confirmation that Madoff Securities made no investments with its clients’ money, I believe it would be appropriate for the Internal Revenue Service to immediately issue guidance and allow Madoff’s victims to both claim theft loss on their 2008 tax returns and amend their tax returns dating back to at least 1995.” The Internal Revenue Code presently mandates that a tax refund must be requested within three years of the filing of the return or, if later, within two years of the payment of taxes owed. Otherwise, the refund will be considered untimely and denied. Madoff investors actually paid taxes on "phantom" income which never existed.

Affected clients

Main article: List of investors in Bernard L. Madoff Securities

On February 4, 2009, the U.S. Bankruptcy Court in Manhattan released a 162-page client list with at least 13,500 different accounts, but without listing the amounts invested. Individual investors who invested through Fairfield Greenwich Group, Ascot Partners, and Chais Investments were not included on the list.

Clients included banks, hedge funds, charities, universities, and wealthy individuals who have disclosed about $41 billion invested with Bernard L. Madoff Investment Securities LLC, according to a Bloomberg News tally, which may include double counting of investors in feeder funds.

Although Madoff filed a report with the SEC in 2008 stating that his advisory business had only 11–25 clients and about $17.1 billion in assets, thousands of investors have reported losses, and Madoff estimated the fund's assets at $50 billion.

Other notable clients included former Salomon Brothers economist Henry Kaufman, Steven Spielberg, Jeffrey Katzenberg, actors Kevin Bacon, Kyra Sedgwick, John Malkovich, and Zsa Zsa Gabor, Mortimer Zuckerman, Jerome Fisher (co-founder of Nine West Shoes), Baseball Hall of Fame pitcher Sandy Koufax, broadcaster Larry King, World Trade Center developer Larry Silverstein, and Senator Frank Lautenberg's family foundation The Elie Wiesel Foundation for Humanity lost $15.2 million, and Wiesel and his wife, Marion, lost their life savings.

Largest stake-holders

According to The Wall Street Journal the investors with the largest potential losses, including feeder funds, are:

• Fairfield Greenwich Group, $7.50 billion
• Tremont Capital Management, $3.30 billion
• Banco Santander, $2.87 billion
• Bank Medici, $2.10 billion
• Ascot Partners, $1.80 billion
• Access International Advisors, $1.40 billion
• Fortis, $1.35 billion
• HSBC, $1.00 billion

The potential losses of these eight investors total $21.32 billion.

Eleven investors had potential losses between $100 million and $1 billion:

• Natixis SA
• Carl J. Shapiro (a 95-year-old Boston philanthropist)
• Royal Bank of Scotland Group PLC
• BNP Paribas
• BBVA
• Man Group PLC
• Reichmuth & Co.
• Nomura Holdings
• Maxam Capital Management
• EIM SA
• Union Bancaire Privée

Twenty-three investors with potential losses of $500,000 to $100 million were also listed, with a total potential loss of $540 million. The grand total potential loss in the Wall Street Journal table is $26.9 billion.

Some investors have amended their initial estimates of losses to include only their original investment, since the profits Madoff reported to them which they were including were most likely fraudulent. Yeshiva University, for instance, said its actual incurred loss was its invested $14.5 million, not the $110 million initially estimated, which included falsified profits reported to the university by Madoff.

IRS penalties

It is estimated the potential tax penalties for foundations invested with Madoff are $1 billion.

Although foundations are exempt from federal income taxes, they are subject to an excise tax, for failing to vet Madoff's proposed investments properly, to heed red flags, or to diversify prudently. Penalties may range from 10% of the amount invested during a tax year, to 25% if they fail to try to recover the funds. The foundation’s officers, directors, and trustees face up to a 15% penalty, with up to $20,000 fines for individual managers, per investment.

Impact and aftermath

Grupo Santander

Clients primarily located in South America who invested with Madoff through the Spanish Grupo Santander, filed a class action against Santander in Miami. Santander proposed a settlement which would give the clients $2 billion worth of preferred stock in Santander based on each client's original investment. The shares pay a 2% dividend. Seventy percent of the Madoff/Santander investors accepted the offer.

Bank Medici

Bank Medici is an Austrian bank founded by Sonja Kohn, who met Madoff in 1985 while living in New York. Ninety percent of the bank's income was generated from Madoff investments. In December 2008, Medici reported that two of its funds -- Herald USA Fund and Herald Luxemburg Fund -- were exposed to Madoff losses. On January 2, 2009, FMA, the Austria banking regulator, took control of Bank Medici and appointed a supervisor to control the bank. Bank Medici, and its Austrian banking license is now for sale and has been sued by its customers both in the United States and in Austria. The Vienna State Prosecutor has launched a criminal investigation of Bank Medici and Kohn, who had invested an estimated $2.1 billion with Madoff.

Theft of Statue

A $100,000 statue was stolen from Madoff's estate in late 2008. It was later returned to a country club Madoff belonged to. The statue was found with an attached note saying, "Bernie the Swindler, Lesson: Return Stolen Property to rightful owners. Signed by - The Educators." This act is believed to be an act inspired by Golden Palm Award-winning German film The Edukators, in which a group of young German citizens break into homes of the wealthy and vandalize without doing any damage to teach them a lesson about being greedy.

External links

• Criminal complaint, transcripts of hearings and other documents from the United States Department of Justice
• SEC civil complaint
• SEC press release and update for investors
• Bernard L. Madoff Investment Securities The front page is now a placeholder for information on the case. (Archive)
• "The Owner's Name is on the Door". Archived from the original on 2008-12-14.
• Jewish charities hit by Madoff scandal BBC
• Continuously updated table of Madoff's clients from The New York Times
• Madoff Scandal ongoing coverage from the Financial Times
• Ruth Madoff Biography Ruth Madoff biography and photos.