Bernie Madoff’s Brother Pleads Guilty to Conspiracy

By Patricia Hurtado, Bob Van Voris and Christie Smythe - Jun 29, 2012 9:33 AM PT

Peter Madoff Pleads Guilty to Role in Ponzi Scheme

Peter Madoff pleaded guilty to conspiracy in Manhattan federal court three years to the day after his brother Bernard was sentenced to 150 years in prison for directing the biggest Ponzi scheme in U.S. history.

A chief compliance officer of Bernard L. Madoff Investment Securities LLC who helped his brother run the firm for four decades, Peter Madoff, pleaded guilty today to one count of conspiracy to commit securities fraud and one count of falsifying records. He faces 10 years in prison.

“I was in shock and my world was destroyed,” he said today in federal court of when his brother Bernard informed him of the fraud. “I always looked up and admired him.”

Bernard Madoff’s account statements when he was arrested reflected 4,900 accounts with $65 billion in nonexistent balances. Investors were thought to have lost about $20 billion in principal. Peter Madoff, 66, a graduate of Fordham University Law School who began working at the Manhattan-based firm in 1965, agreed as part of his plea not to ask U.S. District Judge Laura Taylor Swain in New York for less than a 10-year term.

“The Madoff investment empire, built on a foundation of deceit, was a house of cards that grew to skyscraper proportions,” FBI Assistant Director Janice K. Fedarcyk said in a statement. “Peter Madoff played an essential enabling role in the largest investment fraud in U.S. history. He made a pretense of compliance; he was really about complicity.”

Madoff also agreed to forfeit $143.1 billion, including all of his real and personal property. The forfeiture calculation is based on the total funds that passed through the Madoff firm during the fraud.

‘Deeply Ashamed’

“I am deeply ashamed of my actions,” Peter Madoff said in his statement to the court. “I want to apologize to anyone who was harmed and to my family. And I’m here today to take responsibility.”

Swain accepted the plea agreement, and approved bail so Madoff can remain free before his Oct. 4 sentencing. He is to be freed on a $5 million personal recognizance bond secured by $1 million cash or property. His travel is restricted to the New York metropolitan area and surrounding counties, and he must give up his passport.

“People, especially the victims, will never be satisfied by this,” said Anthony Sabino, a law professor at St. John’s University in New York. He said the forfeiture amount is a formality: “We all know he doesn’t have that. The number is symbolic and meant to ensure there’s no loophole for him to enrich himself.”

Investigation Continues

Manhattan U.S. Attorney Preet Bharara said in a statement that Peter Madoff “enabled the largest fraud in human history. He will now be jailed well into old age, and he will forfeit virtually every penny he has.”

He added that the investigation is continuing.

“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,” Bharara said.

Bernard Madoff told a judge at his sentencing in the same courthouse that he deceived his brother, his two sons and wife, Ruth, about the multibillion-dollar fraud.

“Bernie Madoff claiming that he acted alone was ridiculous,” said Anthony Barkow, a former federal prosecutor in New York and a partner at Jenner & Block LLP. “His surrender was clearly a strategy to try to insulate his family and co- conspirators and made it more difficult for the government to make the case, so it’s taken time but they’ve shown that they’re clearly working on it.”

The Forfeiture

The forfeiture Madoff has agreed to gives the government a green light to pursue any and all assets it can tie to him.

“It’s an obscene amount of money, clearly designed to ensure that every dollar he ever earned and any asset he ever acquires is taken away from him and given to the victims,” Barkow said.

Such an amount isn’t unprecedented. U.S. District Judge Denny Chin, who presided over Bernard Madoff’s case, imposed an order upon the money manager requiring him to forfeit $170.8 billion in June 2009. The order “represented the amount of proceeds traceable to the commission of the offenses,” and a separate $799 million judgment representing the property involved in money-laundering offenses that Bernard Madoff pleaded guilty to committing.

Since then, federal authorities have been hunting for Madoff’s assets, seeking forfeiture of the billions of dollars they said moved through his firm since the fraud began in the 1980s.

Federal Prison

Bernard Madoff, 74, now at the federal prison in Butner, North Carolina, has a release date of Nov. 14, 2139, according to the Federal Bureau of Prisons.

Thirteen people have been charged with criminal wrongdoing in the almost four years since federal authorities began their investigation of Madoff’s firm. Peter Madoff is the eighth person and the highest-ranking employee other than his brother to plead guilty in the case.

Peter Madoff’s lawyer, John Wing, didn’t return a voice- mail message yesterday seeking comment on the plea agreement.

Swain is presiding over the cases of five other Madoff employees who have pleaded not guilty. No trial date has been set for them. Today is the first time since Bernard Madoff’s March 2009 guilty plea that a family member admitted wrongdoing while working at the firm.

Frustrated Victims

Stephen Miller, a partner at Cozen O’Connor in Philadelphia and also a former federal prosecutor, said Bernard Madoff’s guilty plea left many victims frustrated that he didn’t give more information about the workings of the decades-long Ponzi scheme. If Peter Madoff agrees to cooperate as part of his plea agreement, he will shed additional light on how the Madoff fraud operated, Miller said.

Over three decades, Bernard Madoff built a reputation as a brilliant stock picker who delivered steady returns through both bull and bear markets. He attracted an international client roster that included celebrities such as filmmaker Steven Spielberg, fund manager J. Ezra Merkin, charities, universities, friends, professional baseball team owners and European royalty.

The façade shattered on Dec. 11, 2008, when Madoff confessed to authorities that his firm was “one big lie.” In the wake of a rush of investor redemptions, Madoff admitted he used money from new investors to pay old ones.

‘Money is Gone’

“The money is gone,” Andrew Madoff quoted his father as telling the family in an authorized family biography published last year. “It’s all been one big lie. It’s a giant Ponzi scheme and it’s been going on for years, and there have been all these redemptions, and I can’t keep it going anymore. I can’t do it.”

Regulators later said his investment advisory business hadn’t made a trade in at least 13 years while thousands of investors lost their life savings.

At Madoff’s June 29, 2009, sentencing, his failure to identify accomplices was cited by Chin as a reason for a prison term six times longer than those meted out to the chief executives of WorldCom Inc. and Enron Corp., who perpetrated two of the larger corporate frauds in U.S. history.

For decades, Peter Madoff worked alongside his brother at an office in the lipstick-shaped building at 885 Third Avenue in midtown Manhattan, where Madoff Securities occupied three floors.

Shana Madoff Swanson

The brothers were joined by Peter Madoff’s daughter, Shana Madoff Swanson, a lawyer, and Bernard Madoff’s sons Andrew and Mark.

Both sons worked for the legitimate, market-making side of the business and said they had no knowledge of the fraud until the day their father confessed to them.

In the conspiracy, Peter Madoff admitted that, in his role as chief compliance officer at the firm, he schemed to commit securities fraud by making false statements to investors about the firm’s compliance program as well as the nature and scope of its investment advisory business.

He also pleaded guilty to falsifying business records of an investment adviser. Both charges carry a maximum statutory term of as long as five years in prison and a fine of at least $250,000.

Without citing any evidence that Peter Madoff knew of the fraud, the court-appointed trustee overseeing the recovery of funds and the liquidation of the firm has built a case against him and other family members in a series of amended complaints since the lawsuit was first filed in October 2009.

Experienced Professional

Peter Madoff was “an experienced investment professional” who “did not carry out this responsibility with any degree of diligence or integrity,” Irving Picard, the trustee, said in a court filing in May in his lawsuit against the family members.

Bernard Madoff’s sons, along with Peter Madoff and his daughter, treated the company as a “family piggy bank,” Picard said in court filings.

Peter Madoff paid tens of millions of dollars to himself, his family members and entities he controlled, according to Picard’s complaint.

Peter Madoff took $90.4 million from the firm, including $41.6 million in compensation, during his years there, according to Picard. His wife, Marion, was paid an additional $1.5 million for a no-show job at the firm, Picard said. Madoff used the money to pay off a mortgage on his house in Old Westbury, New York, and buy homes on Park Avenue in Manhattan and in Palm Beach, Florida, according to Picard.

Bought and Restored

In addition to an Aston Martin, bought and restored with company money, Peter Madoff bought a Ferrari and charged luxury clothes and wines to his and his wife’s American Express cards. Picard also accused him of backdating trades to withdraw a total of $19.3 million from his Madoff investment advisory accounts, which was more than he had deposited.

Madoff knew or should have known that the money was the result of phony, backdated trades, Picard said.

The trustee is trying to recoup the money and the assets, saying they belong to the firm’s former customers. In August, the 1958 Aston Martin MK III Drophead Coupe was sold at auction for $247,500 to benefit investors.

Picard said Peter Madoff either knew of the fraud, or was negligent in not examining the business. He said Madoff “failed miserably” in carrying out his well-defined legal obligations, costing customers more than $17 billion in lost principal.

Peter Madoff was a member of the board of governors of the National Stock Exchange, vice chairman of the Financial Industry Regulatory Authority Board of Governors, or FINRA, and was on the executive board at Nasdaq, Picard said.

‘Little Documentation’

Picard stated that he hadn’t located or identified “any evidence of meaningful compliance or supervisory activities” at the Madoff firm. “The fraud might have been revealed years earlier” if Peter Madoff had done his job properly, Picard said in the amended complaint in May.

Picard is now seeking $255.3 million from the Madoff family for the benefit of Bernard Madoff’s victims.

Peter Madoff’s duties at the firm included a weekly compliance meeting with its other registered investment professionals, an annual meeting with the chief executive, development of programs to test compliance with firm policies, an annual review of procedures, including the monitoring of risks and unusual activity in any account managed by the firm.

Picard said he found “no evidence” Peter Madoff regularly held required compliance meetings. The trustee said he found “little written documentation” showing Peter, Andrew or Mark Madoff regularly reviewed the firm’s London operation, where some of the money laundering which Bernard Madoff pleaded guilty to occurred.

‘Internal Supervision’

“Meaningful and accurate internal supervision and regulatory compliance never took place” within the investment advisory business, Picard said.

During the last year of the Ponzi scheme, the investment firm had 4,900 customer accounts with $68 billion under management, based on customer accounts reflecting fake profit on trades that never took place, Picard said.

Shana Madoff, a Fordham University Law School graduate who had worked at the firm since 1995, served as its in-house lawyer. She shared responsibilities with her father and uncle for all compliance-related activities at the firm, Picard alleged.

Peter and Shana Madoff helped to complete a 2008 filing with the U.S. Securities and Exchange Commission that portrayed the Madoff firm as having 23 customer accounts and managing $17.1 billion. She hasn’t been accused of wrongdoing.

Her lawyer, Mark Warren Smith, didn’t return a voice-mail message yesterday seeking comment on her father’s plea agreement.

Son’s Suicide

Andrew Madoff, who holds a bachelor’s degree from the Wharton School of the University of Pennsylvania, was controller of the U.K. entity, which helped “create the false impression” that Ponzi operator Bernard Madoff actively traded shares in customer accounts, when he was merely recording and paying profits with new deposits, Picard said.

Andrew and Mark Madoff ran the proprietary trading operations at Madoff’s firm. Mark Madoff committed suicide in Dec. 11, 2010, two years to the day after his father’s arrest.

Martin Flumenbaum, a lawyer representing Andrew Madoff and the estate of Mark Madoff, has previously said the brothers had no knowledge of the fraud until their father confessed to them the day before his arrest. Neither was charged with a crime. Flumenbaum didn’t return a voice-mail message seeking comment on Peter Madoff.

Bernard Madoff’s fraud was uncovered after his sons turned in their father to U.S. authorities, saying he told them he was operating a Ponzi scheme. They later reported their father for giving away watches and jewelry worth $1 million in alleged violation of a court asset-freeze order.

Ira Lee Sorkin, a lawyer for Bernard Madoff, didn’t return a call yesterday seeking comment on Peter Madoff.

The case is U.S. v. Madoff, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at pathurtado@bloomberg.net; Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net; Christie Smythe in Manhattan federal court at csmythe1@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; John Pickering at jpickering@bloomberg.net.

Bernie Madoff