Madoff Employees Helped Dupe Investors, U.S. Prosecutors Say
By David Glovin, David Voreacos and Erik Larson
U.S. prosecutors shed new light yesterday on how they believe Bernard Madoff’s subordinates helped him operate a $64.8 billion Ponzi scheme, without saying whether those employees knew they were defrauding investors.
Madoff, 70, will plead guilty tomorrow to fraud, money laundering and perjury charges, his lawyer said yesterday. Madoff told 4,800 investors in November that their accounts held $64.8 billion, though their holdings were a “small fraction” of that, prosecutors alleged in 11 charges filed in Manhattan federal court.
The money manager told his employees to create false account documents and trade confirmations reflecting phony returns so as to transfer funds while giving the appearance of legitimate trades, and to generate false financial statements for regulators, prosecutors said. Those actions gave the appearance of a “legitimate investment advisory business,” according to the government, which said the investigation of the largest Ponzi scheme in U.S. history is continuing. No employees have been charged with any wrongdoing.
“The issue will be whether the government can establish that they knew what in the paper was in fact phony,” Christopher Steskal, a former federal prosecutor, said in a telephone interview. “If the facts show it, they will likely pursue those people. It seems improbable that he would do it alone.”
Madoff was arrested Dec. 11 and charged with one count of securities fraud for using billions of dollars from new investors to pay off old ones. Investors in Madoff’s New York-based firm, Bernard L. Madoff Investment Securities LLC, included celebrities, charities and money managers from around the world.
150-Year Sentence
Madoff is charged with securities fraud, mail fraud, wire fraud, investment adviser fraud, three counts of money laundering, false statements, perjury, false filings with the U.S. Securities and Exchange Commission and theft from an employee benefit plan. Madoff, who is free on $10 million bond, faces a prison sentence of as long as 150 years, prosecutors said.
In court yesterday, defense attorney Ira Sorkin disclosed Madoff’s plan to plead guilty. U.S. District Judge Denny Chin held a hearing to ask Madoff if he would waive Sorkin’s possible conflicts of interest. Madoff, wearing a gray suit and wire- framed glasses, gave brief answers to more than 50 questions from Chin about the alleged conflicts. Madoff didn’t discuss a guilty plea.
No Plea Bargain
Assistant U.S. Attorney Marc Litt said Madoff doesn’t have a plea bargain. Through such deals, defendants often receive some benefit for pleading guilty, such as a reduced sentence, in return for providing details about a crime. The lack of a plea deal may suggest Madoff isn’t helping prosecutors determine who may have helped him in the alleged fraud. Litt said Madoff will be required to plead guilty to all 11 counts.
The absence of a plea bargain is “unusual,” said Richard Strassberg, a lawyer with Goodwin Procter LLP in New York. He said the government probably didn’t offer a deal.
“If that’s what happened, the government viewed the scope of the conduct to be so egregious that a plea deal wasn’t warranted,” Strassberg said in an interview.
By not entering a plea deal, Madoff may be trying to protect employees of his firm, Steskal said.
Madoff’s brother Peter was chief compliance officer at the company, and his sons Mark and Andrew held senior positions in the market-making and proprietary trading businesses. None of Madoff’s family members have been accused of any wrongdoing.
Her Own Lawyer
Bernard Madoff’s wife, Ruth, who had been represented by Sorkin, will hire her own lawyer, Sorkin said yesterday.
An attorney for Peter Madoff, John “Rusty” Wing, didn’t return a call seeking comment. Martin Flumenbaum, an attorney for the sons, has said they “were not involved in the firm’s asset management business” and “had no knowledge whatsoever of the fraud.”
Madoff, who promised annual returns of up to 46 percent, “created a broad infrastructure” to give the appearance of “a legitimate investment advisory business,” according to new charges filed against him yesterday. His back-office staff had little or no experience and at Madoff’s direction misled clients about investments, prosecutors alleged in court papers.
“Certainly lower level employees are unlikely to be involved, but people with auditing function or authority to access accounts or make trades are more likely to have knowledge of the alleged fraud,” Steskal said.
Prosecutors and regulators have been probing whether the chief financial officer at the advisory firm, Frank DiPascali Jr., knew of the fraud, according to people familiar with the case. DiPascali has denied wrongdoing. His lawyer, Marc Mukasey, didn’t return a call seeking comment.
Madoff’s Auditor
Andrew Lankler, a lawyer for Madoff’s auditor, David Friehling, declined to comment. A call to Madoff’s longtime aide, Annette Bongiorno, wasn’t immediately returned. They aren’t accused of wrongdoing.
Madoff was able to defraud his investors by claiming he used a “split-strike conversion strategy” in which he promised to invest in stocks that mimicked the price movement of the Standard & Poor’s 100 Index, while “opportunistically” timing purchases, Acting Manhattan U.S. Attorney Lev Dassin alleged in a statement.
The new allegations include a claim that Madoff “repeatedly lied” to the SEC in written submissions and sworn testimony during questioning in 2006. Prosecutors also said Madoff used $250 million from his advisory business to finance market-making and proprietary trading operations. Madoff stole $10 million from 35 labor union pension funds, prosecutors alleged.
$170 Billion
In a separate court filing, the government said they will seek to force Madoff to forfeit more than $170 billion, representing “proceeds traceable” to the alleged scheme. The figure represents funds that flowed through Madoff’s firm during its operation, prosecutors said.
Sorkin said in a letter to Chin that the monies prosecutors seek are “grossly overstated -- and misleading -- even for a case of this magnitude.”
“The issues related to forfeiture, restitution and sentencing in this matter are highly complex and will require extensive time to resolve,” Sorkin wrote.
At yesterday’s hearing, Chin asked Madoff whether he understood that his lawyer might have a conflict of interest because Sorkin’s sons held an account that was invested with Madoff.
“I understand that potentially, in the issue of restitution, his interest might be divided and he might not defend me in a way that’s most beneficial to me,” Madoff said as he waived his lawyer’s conflict of interest.
The criminal case is U.S. v. Madoff, 08-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).
source :Bloomberg
