The Madoff saga is far from over

Jul 02, 2012



As Peter B. Madoff pleaded guilty last Friday, he tried to sell a doubting world the “Baby Brother” defense, painting himself as a victim, blinded by his big brother Bernie’s brilliance, beneficence and bullying.

Three and a half years after the world learned of Bernard L. Madoff's 20-year Ponzi scheme, the Greek saga underlying the largest fraud in Wall Street history is not quite over. On March 12, 2009, Mr. Madoff pleaded guilty to all the federal charges filed against him, eventually receiving a 150-year prison term. Now, the supporting cast is having its turn.

In effect, his brother Peter's defense was a preview of the one his daughter, Shana Madoff Swanson, and his nephew, Andrew, Bernie’s surviving son, may soon be offering for public consumption as prosecutors drag them into the spotlight. If the guilty plea performances by Bernie and Peter instruct them, the younger Madoffs will be offering variations of the “Daddy Done Me Wrong and Kept Me in the Dark” defense as they hope for deals that might carry only five-year sentences, such as a one-count charge of tax evasion.

Without naming Shana or Andrew, U.S. Attorney Preet Bharara upped the heat on them, declaring: “We are not yet finished calling to account everyone responsible for the epic fraud of Bernard Madoff and the epic pain of his many victims.” Few court observers believe the prosecutor was referring to the five former employees still awaiting trial or the eight employees and associates who have pleaded guilty and mostly await sentencing.

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"The prosecutors have spent a lot of time on this," explains Columbia University Law Professor John Coffee. "They have done the low-hanging fruit; they are now reaching to the medium-level fruit… Beyond the two kids, I do not know how much farther they will want to go.”

Peter, the former Chief Compliance Officer of the Madoff enterprise, confessed to a decade’s worth of fabricating documents designed to evade tens of millions in taxes and to help Bernard L. Madoff Investment Securities (BLMIS) evade Securities and Exchange Commission scrutiny.

During his 17-minute allocution -- the often-scripted little speech defendants give to tell the judge they are sorry -- Peter Madoff explained his falsification of documents as a function of trying to please his brother. “On several occasions, my brother and I engaged in money transfers in ways specifically designed to avoid payment of taxes," he said. "I knew this was wrong. In addition, at my request, my wife was placed on the BLMIS payroll and for many years received compensation for a no-show job. At no time, however, did I suspect that my brother had stolen from anyone or that my family and I were receiving money that belonged to customers.”

Madoff insisted to U.S. District Judge Laura Taylor Swain that he had labored under the handicap of being seven years younger than Bernie and kept clueless about the Ponzi scheme until December 2008. “There was no doubt Bernie was the boss,” said the younger brother who had started working for the elder's lawn sprinkler business in high school and collected more than $150 million over the course of their working relationship. “He never gave me any financial interest in the firm.”

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Both junior Madoffs -- Shana and Andrew -- held significant jobs at the firm, while collecting millions of dollars that prosecutors can prove came directly from criminal enterprise. Each, as senior officers of the firm, may have committed acts that could be classified as criminal. So far, many of the allegations against them have been made public only in the civil complaints filed by Madoff bankruptcy trustee Irving Picard, who seeks to recover more than $255 million from the Madoff family.

The Justice Department deal limited Peter Madoff’s prison time to 10 years in prison on two criminal counts and forced him to surrender all his assets as well as most belonging to his wife Marion and their daughter Shana, who also was a compliance officer at the Madoff firm. Marion Madoff gave up claims to their Park Avenue apartment, house in Old Westbury, Long Island, New York and their Palm Beach, Fla. mansion in exchange for being left with “approximately $771,733 to live on for the rest of her life.”

Peter Madoff’s forfeiture deal also surrendered $2.26 million of Shana’s money from selling her five-bedroom week-end house with a gunite swimming pool in the woods of East Hampton, New York.

Like her father, Shana graduated from Fordham University Law School and collected hundreds of thousands of dollars a year after joining uncle Bernie’s firm in 1995 as a compliance counsel. Later elevated to BLMIS compliance director, both she and her father signed documents assuring the SEC that Madoff’s investment advisory business records were truthful and accurate. They certified to the government that the company’s investment advisory arm -- the heart of the Ponzi scheme -- had 23 clients and $17.1 billion under management, rather than the 4,900 customers whose statements purported to represent investments of $68 billion.

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As the bankruptcy trustee put it, “It would seem impossible for her to carry out her compliance duties, year in and year out, without questioning or considering whether BLMIS’s IA (investment advisory business) was a fraud.” Speaking about the father-and-daughter act compliance team, the trustee’s suit continues: “Either they failed completely to carry out their required supervisory/compliance roles, or they knew about the fraud, but covered it up.”

Professor Coffee, a securities law expert, says: “Prosecutors can use the same charges as they did against her father, maybe not seeking 10 years, but I could see them giving her the choice of pleading to a felony conviction on the same grounds. She is a lawyer; lawyers don’t get the benefit of the doubt.They could say you knew this (SEC filing) was false, even if you did not know it was a Ponzi scheme.”

Andrew Madoff and his brother Mark, who committed suicide on the second anniversary of their father’s arrest, were co-directors of trading for the brokerage, market-making and propriety trading parts of the firm, which they have claimed were consistently profitable. They also were controllers and directors of the related firm, Madoff Securities International, Ltd.

In fact, court documents filed by the bankruptcy trustee, the SEC and the Justice Department have described the business segments overseen by Andrew and Mark and Peter as underwater for years and kept afloat by transfers of hundreds of millions of dollars from the firm’s London office and from its advisory business from at least 2000 through 2008. The money, authorities say, was investors’ money falsely shown as profits of the firm’s securities trading, which actually was non-existent.

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As the trustee Picard states, “Perhaps most obviously, as co-directors of trading, Andrew and Mark were – or should have been –aware that no one was effecting trades within the IA (investment advisory) business, either in London or New York.” The brothers also knew, Picard says, that there was a “material inconsistency” because the business segments that they ran did not generate net income that was anything close to the profits being declared by Madoff.

While Shana Madoff faces the problem of having signed false documents to the SEC, Andrew Madoff may be more concerned about possible testimony from Enrica Cotellessa-Pitz, the controller for BLMIS who has pleaded guilty to four counts and is co-operating with prosecutors in hopes of getting a light sentence. According to court papers, she worked primarily for the businesses run by Bernie’s sons, proprietary trading and market-making, and cooked the books to make those units appear more profitable.

The bankruptcy trustee says Andrew Madoff took out nearly $74 million from the firm, including more than $14 million in profits from fake stock trades that never occurred. In those investment advisory accounts held by Andrew and his family, documents also were created to make it appear that profits were generated by capital gains, rather than ordinary income. Tax evasion of that sort can carry a five-year sentence.

Lawyers for Shana Madoff Swanson and Andrew Madoff did not respond to requests by Fortune for comment.

Sentencing for Peter Madoff is scheduled for Oct. 4, 2012.

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