Monday, December 24, 2012

Bernard L. Madoff

Ruby Washington/The New York TimesUpdated: Dec. 20, 2012


On Wall Street, his name was legendary. Now it is infamous.

With money Bernard L. Madoff had earned as a lifeguard on the beaches of Long Island, he built a trading powerhouse that prospered for more than four decades. By age 70, he had become an influential spokesman for the traders who are the hidden gears of the marketplace.

But on Dec. 11, 2008, Mr. Madoff was arrested at his Manhattan home by federal agents and charged in a 20-year Ponzi scheme that was the largest fraud in Wall Street history.

On March 12, 2009, Mr. Madoff pleaded guilty to all the federal charges filed against him — 11 felony counts, including securities fraud, money laundering and perjury.

A few months later, Judge Denny Chin of the federal district court in Manhattan imposed a term of 150 years on Mr. Madoff. In an interview in June 2011, Judge Chin said that prosecutors had suggested a sentence that might have allowed Mr. Madoff to be freed when he is in his 90s, but that he had concluded that his conduct had been “extraordinarily evil.’'

On the eve of the fraud’s collapse in 2008, the total shown on Madoff investor account statements was nearly $65 billion, the sum of fictional paper profits that had accumulated in some accounts for decades. Approximately $17.3 billion was actually invested by customers.

Irving H. Picard, the court-appointed trustee representing Mr. Madoff’s victims in the United States, filed more than 1,000 lawsuits seeking nearly $100 billion in damages and fictional profits. As of May 2012, he had reached settlement deals worth some $9 billion. However, he had delivered only $330 million to Mr. Madoff’s victims because so many of those settlements were being challenged in court.

In June 2012, the Supreme Court said it would not take up a dispute over how the claims of victims of Mr. Madoff’s huge Ponzi scheme should be calculated. Without comment, the high court declined to hear an appeal from lawyers for investors who got back all the cash they had invested with Mr. Madoff before his December 2008 arrest. They had urged the justices to order Mr. Picard to base victim claims on the final statements they received from Mr. Madoff in November 2008.

The decision by the Supreme Court means that rulings by a federal bankruptcy judge and a Federal Appeals Court in Manhattan upholding the method employed by Mr. Picard now stand.

2010: A Blizzard of Lawsuits

In December 2010, facing a deadline for the filing of claims, Mr. Picard initiated a blizzard of lawsuits. Claims were filed against members of Mr. Madoff’s immediate family, longtime individual investors like Jeffry Picower, and major feeder funds, including those operated by the Fairfield Greenwich Group and J. Ezra Merkin, a prominent Wall Street investment manager.

The largest of these was a $1.6 billion suit filed against Sonja Kohn, an Austrian banker. Mr. Picard called her Mr. Madoff’s “criminal soul mate,’' accusing her of masterminding a 23-year conspiracy that played a central role in financing the Ponzi scheme.


Yet another lawsuit contended that the owners of the Mets, Fred Wilpon and Saul Katz, used the profits from their investments in Madoff to establish personal fortunes, create dozens of family trusts and financially fuel their array of businesses, from the Mets to real estate to the creation of a cable sports network. The lawsuit originally sought $1 billion, but a ruling by Judge Jed Rakoff limited the claims to upwards of $300 million.

The suit accused the Mets owners of being so enamored of the enormous profits they earned while investing over decades with Mr. Madoff that they ignored repeated and specific warnings that he might have been operating a fraud. Mr. Wilpon and other Mets officials have denied the charges.

After more than a year of back and forth, on the verge of a jury trial, Mr. Wilpon and Mr. Katz agreed to a settlement of $162 million. The $162 million is to be paid out of money Mr. Wilpon and Mr. Katz expect to recover as a “net loser” of the Madoff scheme. As part of the settlement, Mr. Picard dropped the willful blindness claim against Mr. Wilpon and Mr. Katz.

Mr. Picard also filed multibillion-dollar lawsuits against JPMorgan, UBS and HSBC, adding $17.4 billion to the amount he was claiming on behalf of victims, for a total of more than $32 billion. That amount, which included demands for punitive damages, was 50 percent more than the $20 billion he estimated as the actual cash losses in the fraud. The 2010 lawsuits against the banks and other financial institutions accused them of willfullly turning a blind eye to evidence that Mr. Madoff was operating a fraud, thereby allowing it to continue and increasing the financial destruction it caused.

Internal JPMorgan Chase documents released as part of Mr. Picard’s lawsuit show that senior bank executives expressed serious doubts about the legitimacy of Mr. Madoff’s investment business more than 18 months before his Ponzi scheme collapsed but continued to do business with him.

In May 2010, about 720,000 Madoff investors outside the United States settled with their banks, receiving about $15.5 billion in all, according to law firms representing them.

2011: Many Setbacks and Some Support

Mr. Picard suffered a setback in July 2011 when a federal judge ruled that he did not have the right to sue banks and other third parties on behalf of the victims — a finding likely to reduce by billions of dollars how much the trustee may ultimately be able to recover.

But in August 2011 Mr. Picard had good news when the United States Court of Appeals for the Second Circuit sided with him, ruling that his approach on how to calculate investor losses in the case against Mr. Madoff was “legally sound” and fundamentally fair.”

The ruling upheld a formula that limits investor claims to the actual cash that they had lost in the scheme, not the fictional profits they believed had accumulated in their accounts over the years of the fraud. Under this approach, those who invested more than they received from Mr. Madoff’s Ponzi scheme, the net losers, can pursue claims for reimbursement, while those who took out more than they put in, the net winners, are subject to lawsuits to recoup their gains.

In September 2011, United States District Judge Jed Rakoff threw out all but two of the 11 claims filed by Mr. Picard against Fred Wilpon and Saul Katz, the owners of the New York Mets, ruling that he could seek no more than $386 million in fictional profits that Mr. Madoff paid out to Mr. Wilpon and Mr. Katz. That figure was based on the sum the men invested in the two years before the fraud was discovered in December 2008, the recovery window set by federal bankruptcy law. The trustee had been seeking $1 billion in fictional profits and principal paid out in the last six years of the fraud, as permitted under New York State law.

Judge Rakoff also threw out the trustee’s bid to recover so-called preference claims, the cash paid out to the team’s owners in the final 90 days of the fraud.

Mr. Picard had another setback in early November 2011, when a federal judge in Manhattan ruled that he did not have the legal right to pursue $20 billion in combined damage claims against JPMorgan Chase & Company and UBS, to help compensate Mr. Madoff’s victims.

The decision echoed the July ruling that barred Mr. Picard from seeking a combined $8.8 billion in similar damage claims against HSBC, the London-based banking giant, and UniCredit, one of Italy’s largest banking groups.

Only the Trustee Can Count On Being Paid

According to a Government Accountability Office report quoting the Securities Investor Protection Corporation, which hired Mr. Picard as the bankruptcy trustee, it is unlikely he will be able to pay back Mr. Madoff’s customers the $17.3 billion that he had said was his goal, let alone the $100 billion he originally sought.

Mr. Picard has been successful in seeking to claw back money from “net winners” — investors who walked away with more money than they started with — so he can pay the “net losers.” As of May 2012, he had reached settlement deals worth some $9 billion. However, he had delivered only $330 million to Mr. Madoff’s victims because so many of those settlements were being challenged in court. It was unclear whether some of the settlements, which were approved by a bankruptcy judge but were being challenged by others on appeal, would hold up.

Meanwhile, the legal fees keep piling up. At $850 an hour, Mr. Picard and his law firm, Baker & Hostetler, created a whopping $554 million in legal and other fees as of May 2012. The fees do not come out of the hide of the Mr. Madoff’s victims. They are paid from a fund overseen by SIPC, which provides a form of protection for investors against losses that arise when a broker-dealer fails. The nonprofit group is supported by charges paid by its broker-dealer members.

A Path of Financial Destruction

Mr. Madoff left a zigzagged path of financial destruction across the world, from HSBC bank to BNP Paribas, to industry leaders and celebrities in the United States, from Elie Wiesel and the Hollywood director Steven Spielberg to the publisher Mortimer B. Zuckerman and the real estate business of former New York governor Eliot Spitzer.

R. Thierry Magon de la Villehuchet, a prominent hedge fund manager who apparently had lost $1.4 billion with Mr. Madoff, was found dead in his office on Madison Avenue in December 2008, about 10 days after Mr. Madoff was arrested. The evidence pointed to suicide, the police said.

Mr. Madoff founded Bernard L. Madoff Investment Securities in 1960. By the early 1980s, his firm was one of the largest independent trading operations in the securities industry. The company had around $300 million in assets in 2000 at the height of the Internet bubble and ranked among the top trading and securities firms in the nation. According federal filings, Bernard L. Madoff Investment Securities operated more than two dozen funds overseeing $17 billion.

These funds had been widely marketed to wealthy investors, hedge funds and other institutional customers for more than a decade, although an S.E.C. filing in the case said the firm reported having 11 to 23 clients at the beginning of 2008.

A Promise of High Returns

Prosecutors said that Mr. Madoff — whose investors prized his steady single-digit annual returns — actually had promised select clients extraordinarily high returns, as much as 46 percent, to lure them in. One of Mr. Madoff’s more prominent investors, the Fairfield Sentry fund, reported having $7.3 billion in assets in October 2008 and claimed to have paid more than 11 percent interest each year through its 15-year track record. Angry victims began to charge that funds like Fairfield, which had built profitable businesses through providing access to Mr. Madoff’s investment vehicle, had failed to perform proper due diligence.

To sustain his fraud, Mr. Madoff assembled an ill-trained and inexperienced clerical staff, directed them to “generate false and fraudulent documents,” told lies and supplied false records to regulators, and shuffled hundreds of millions of dollars from bank to bank to create the illusion of active trading. The government said Mr. Madoff ordered multimillion-dollar bank transfers in part “to give the appearance that he was conducting securities transactions in Europe on behalf of the investors, when, in fact, he was not.”

Extending His Crime’s Shadow

In an accusation that extended his crime’s shadow to the edges of the business where his brother and sons worked, prosecutors accused Mr. Madoff of using some of the money he gathered through his Ponzi scheme to support the supposedly legitimate wholesale stock trading operation that made his name on Wall Street.

Specifically, prosecutors said that Mr. Madoff “caused more than $250 million” he collected through his Ponzi scheme from at least 2002 through 2008 “to be directed, through a series of wire transfers, to the operating accounts that funded the operations of these businesses.”

The government also charged that he had money transferred from his firm’s London office “to purchase property and services for the personal use and benefit” of himself, his family members and his associates.

Mr. Madoff ran the business with several family members, including his brother Peter, his nephew Charles, his niece Shana and his sons Mark and Andrew. His older son, Mark, 46, was found dead in December 2010 in his Manhattan apartment, hanging from a dog leash while his 2-year-old son slept in an adjoining room. David J. Sheehan, counsel to Mr. Picard, said Mr. Madoff’s apparent suicide would not affect the complaints filed against him, his brother, Andrew, and other relatives.

Peter Madoff Sentenced to 10 Years in Prison

In December 2012, Peter B. Madoff, the only brother of Bernard Madoff, was sentenced to 10 years in prison for his role in enabling the fraud. He served as the senior lawyer and chief compliance officer at his brother’s firm.

In June, Peter Madoff admitted to a range of crimes, including falsifying documents, lying to securities regulators, and filing sham tax returns. Prosecutors said that if he had implemented a proper compliance program, regulators would likely have detected the fraud years earlier.

His guilty plea did not include an admission that he ever knew about or participated in the Ponzi scheme.

Associates Plead Guilty

Frank DiPascali, a longtime aide to Mr. Madoff, admitted on Aug. 11, 2009, that for at least 20 years, he helped carry out the fraud. (He then pleaded guilty in Federal District Court in Manhattan to 10 felony counts, including conspiracy and tax evasion.)

He explained how he and others helped Mr. Madoff perpetuate the crime — using historical stock data from the Internet to create fake trade blotters, sending out fraudulent account statements to clients and arranging wire transfers between Mr. Madoff’s London and New York offices — to create the impression that the firm was earning commissions from stock trades.

To give the appearance that Mr. Madoff’s firm had mastered the markets, Mr. Madoff and his employees would track stock prices and then simply pretend to buy stocks whose trajectories matched the firm’s investment goals, Mr. DiPascali said.

According to court documents, Mr. DiPascali sorted clients into categories, each with its own pattern of fictional but plausible trading. He identified a subset of “special accounts” for which he created an extensive paper trail suitable for regulatory inspection. He communicated directly with some large investors and feeder funds.

And he arranged for additional fictional profits, up to 53 percent a year, to be invented for certain investors designated by Mr. Madoff, according to one filing.

On Nov. 3, 2009, David G. Friehling, Mr. Madoff’s independent auditor from 1991 until the fraud collapsed in December 2008, pleaded guilty to a total of nine criminal charges carrying a potential prison term of 114 years.

In essence, Mr. Friehling admitted that he had never adequately audited the Madoff operation and, as an investor in the scheme, had never been a truly independent auditor. Nevertheless, he produced the supposedly professional and independent audits that sustained the Madoff fraud year in and year out.

S.E.C. Lapses

On Oct. 30, 2009, the S.E.C.’s inspector general, H. David Kotz, released a trove of official exhibits gathered during the 10-month investigation of how the commission handled, and mishandled, numerous tips and warnings it received about Mr. Madoff over the years.

Mr. Kotz’s full report found the S.E.C had received six substantive complaints about Mr. Madoff since 1992 — and botched the investigation of every one of them. He found no evidence of any bribery, collusion or deliberate sabotage of those investigations.

In a jailhouse interview, Mr. Madoff said that the young investigators who pestered him over incidentals like e-mail messages should have just checked basics like his account with Wall Street’s central clearinghouse and his dealings with the firms that were supposedly handling his trades.

“If you’re looking at a Ponzi scheme, it’s the first thing you do,” he said.

Those simple steps, he added, could have revealed years earlier that he was running the largest Ponzi scheme ever, a crime that has now dragged the S.E.C. into the worst scandal in its 75-year history. “It would have been easy for them to see,” he added.

Mr. Madoff said that, on two occasions, he was certain it was only a matter of days or even hours before he would be caught. The first time, in 2004, he assumed the investigators would check his clearinghouse account. He said he was “astonished” that they did not, and theorized that they might have decided against doing so because of his stature in the industry.

In Mr. Madoff’s second close call in 2006, investigators actually asked for his clearinghouse account number on a Friday afternoon, but then never followed up. He said he firmly expected the following Monday would bring the curtain down on his crime. Again, nothing happened. He recalled thinking at the time: “After all this, I got away lucky.”

JPMorgan Chase’s Internal Doubts

In December 2010, David J. Sheehan, counsel to Mr. Picard, bluntly asserted that Mr. Madoff “would not have been able to commit the massive Ponzi scheme without Chase.” But with the case under seal, there was no way to gauge the documentation on which Mr. Picard based his $6.4 billion in claims against the bank.

In February 2011, internal bank documents released as part of Mr. Picard’s lawsuit show that senior bank executives expressed serious doubts about the legitimacy of Mr. Madoff’s investment business more than 18 months before his Ponzi scheme collapsed but continued to do business with him.

Prior to June 2007, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.” And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

Despite those suspicions and many more, the bank allowed Mr. Madoff to move billions of dollars of investors’ cash in and out of his Chase bank accounts right until the day of his arrest in December 2008 — although by then, the bank had withdrawn all but $35 million of the $276 million it had invested in Madoff-linked hedge funds, according to the litigation.

According to the trustee, the flow of money just between the Madoff accounts and this customer’s accounts should have set off warning bells at the bank. On a single day in 2002, Mr. Madoff initiated 318 separate payments of exactly $986,301 to the customer’s account for no apparent reason, the trustee reported. In December 2001, Mr. Madoff’s account received a $90 million check from the customer’s account “on a daily basis,” according to the lawsuit. The transfers should have caused the bank’s money-laundering software to start flashing, Mr. Picard’s complaint asserted.

For its part, the bank denied that it had known about or played any role in Mr. Madoff’s fraud and dismissed the claim that it turned a blind eye to his activities to retain income from his business.

Reflections and Accusations in Prison

In February 2011, in his first interview for publication since being arrested in December 2008, Mr. Madoff — looking noticeably thinner and rumpled in khaki prison garb — said family members knew nothing about his crimes. His family has faced stacks of lawsuits, the potential forfeiture of most of their assets, and relentless public suspicion and enmity that cut Mr. Madoff and his wife Ruth off from their children.

He also spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them. “They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. He did not assert that any specific bank or fund knew about or was an accomplice in his Ponzi scheme.

Mr. Madoff’s claims must be weighed against his tenuous credibility. After deceiving federal regulators and supposedly sophisticated investors for at least 16 years, he would certainly be branded as a liar by defense lawyers if he appeared as a witness against any defendant in a courtroom — a fact he acknowledged somewhat ruefully during the interview.

While Mr. Madoff said he was determined to aid the trustee’s efforts to recover assets, he was also critical of the trustee’s reach, claiming that Mr. Picard was seeking far more money than was needed to resolve valid investor claims.

In addition to the customer claims for the cash losses and the paper wealth that vanished, the Madoff estate also faces claims by general creditors, like unpaid vendors and landlords, who cannot recover until all the valid customer claims are paid.

In prison, Mr. Madoff’s access to the outside world is both limited and monitored. All visitors must be approved by prison authorities, who also screen his limited collect calls and his incoming and outgoing e-mails and letters, though interviews with lawyers like Mr. Picard and his colleagues are less restricted and can be conducted in private.

Highlights From the Archives
Scenes From the Madoff Masquerade
Bernard L. Madoff remained calm and seemingly in control as the financial crisis closed in around him, a new book says.

April 24, 2011businessNews From Prison, Madoff Says Banks ‘Had to Know’ of Fraud
In his first interview for publication since his arrest, Bernard L. Madoff insisted that his family knew nothing about his crimes, but some banks and hedge funds “had to know.”

February 16, 2011businessNews Madoff Is Sentenced to 150 Years for Ponzi Scheme
A federal judge sentenced Bernard L. Madoff to 150 years in prison for running a huge Ponzi scheme that devastated thousands of investors, calling his crimes “extraordinarily evil.”

June 30, 2009businessNews Madoff Goes to Jail After Guilty Pleas
Bernard L. Madoff was sent to jail to await sentencing after expressing remorse for his Ponzi scheme.

March 13, 2009businessNews Madoff to Plead Guilty; Charges Carry a Life Sentence
Lawyers for the disgraced financier Bernard L. Madoff told a federal judge that he is expected to plead guilty this week to charges that will result in a life sentence.

March 11, 2009businessNews Madoff Scheme Kept Rippling Outward, Across Borders
Bernard L. Madoff’s fraud, the first worldwide Ponzi scheme, lasted longer, reached wider and cut deeper than anything like it in history.

December 20, 2008businessNews Prominent Trader Accused of Defrauding Clients
Charges say the scheme engineered by Bernard L. Madoff caused $50 billion in losses.

December 12, 2008


Changing Face of Finance
The $8.2 billion deal for the New York Stock Exchange showed how the power base in finance has shifted. | Bernard L. Madoff's brother and former chief compliance officer is headed to prison for his role in aiding the Ponzi scheme. | The F.B.I. arrested a former bank executive in Los Angeles in connection with the the accounting scandal at Olympus. | It looks like we'll be heading into Christmas without a deal to avoid the so-called fiscal cliff.

December 21, 2012 Peter Madoff Is Sentenced to 10 Years for His Role in Fraud
Peter Madoff, Bernard L. Madoff's younger brother, was sentenced to 10 years in prison on Thursday for his role in enabling the extensive fraud that swindled investors out of billions of dollars.

December 20, 2012
MORE ON BERNARD L. MADOFF AND: Madoff, Bernard L, Investment Securities, Madoff, Bernard L, Madoff, Peter B, Swain, Laura Taylor, Sentences (Criminal), Ponzi and Pyramid Schemes, Frauds and Swindling When Wall Street Investors Favor Performance Over Ethics
Another former employee of SAC Capital Advisors has been accused of insider trading, but investors don’t seem to mind, as they continue to put money into the hedge fund in search of great returns.

December 12, 2012
MORE ON BERNARD L. MADOFF AND: SAC Capital Advisors, Cohen, Steven A, Insider Trading On ‘Madoff Day,’ Think About How to Avoid Becoming a Victim of Fraud
Here is a proposal for a new holiday, observed on Dec. 11, when people take a moment to make sure they’re doing enough to protect themselves from investment fraud.

December 8, 2012, Saturday
MORE ON BERNARD L. MADOFF AND: Stanford, Robert Allen, Madoff, Bernard L, Dreier, Marc S, Computer Security, Frauds and Swindling Longtime Madoff Employee Admits Decades of Fraud
One of Bernard Madoff's longest-serving employees pleaded guilty on Thursday to falsifying records, a conspiracy that a prosecutor said began in the 1970s at the start of the multibillion-dollar Ponzi scheme.

November 8, 2012, Thursday Charges Expand in a Madoff Case
Federal prosecutors filed more charges against five people who are accused of helping to defraud customers of Bernard L. Madoff’s investment firm, as far back as the 1970s.

October 2, 2012, Tuesday
MORE ON BERNARD L. MADOFF AND: Madoff, Bernard L, Frauds and Swindling, Ponzi and Pyramid Schemes As Madoff Money Is Distributed, Mets Wonder What Might Have Been
Fred Wilpon and Saul Katz, the owners of the Mets who are heavily in debt, will not receive a multi-million dollar payout connected with a settlement in the conviction of Bernard L. Madoff.

September 29, 2012, Saturday
MORE ON BERNARD L. MADOFF AND: New York Mets, Katz, Saul B, Wilpon, Fred, Picard, Irving H, Madoff, Bernard L, Baseball, Frauds and Swindling Guilty Plea Seen for Aide To Madoff
NEW YORK (Reuters) - One of Bernard Madoff's longest-serving employees is expected to plead guilty to criminal charges in the multibillion-dollar Ponzi scheme , U.S. prosecutors said, the latest among a dozen former employees to face charges. Irwin Lipkin, a former controller of Bernard L. Madoff Investment Securities LLC, will appear in Manhattan federal court on Thursday, prosecutors said in a letter to the judge.

September 13, 2012, Thursday
Irwin Lipkin, a former controller of Bernard L. Madoff Investment Securities, will plead guilty to conspiracy to commit securities fraud and falsifying documents, prosecutors told a judge.

September 13, 2012, Thursday
MORE ON BERNARD L. MADOFF AND: Madoff, Bernard L, Investment Securities, Lipkin, Eric S, Madoff, Bernard L, Stocks and Bonds, Frauds and Swindling, Manhattan (NYC) Longtime Madoff Employee to Plead Guilty
One of Bernard Madoff’s longest-serving employees is expected to plead guilty to criminal charges in the multibillion-dollar Ponzi scheme, U.S. prosecutors said.

September 12, 2012, Wednesday
MORE ON BERNARD L. MADOFF AND: Ponzi and Pyramid Schemes, Frauds and Swindling, Decisions and Verdicts, Lipkin, Eric S, Lipkin, Irwin, Madoff, Bernard L SEARCH 1289 ARTICLES ABOUT BERNARD L. MADOFF:

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