Madoff Is Guilty in Ponzi Scheme; Ordered to Jail
Madoff Is Guilty in Ponzi Scheme; Ordered to Jail


By David Glovin, David Voreacos, and Patricia Hurtado

March 12 (Bloomberg) -- Bernard Madoff was jailed after admitting he masterminded the largest Ponzi scheme in history, an epic swindle that may have reached $65 billion and made him the symbol of investor distrust in a global recession.

Madoff, 70, entered his guilty plea in Manhattan federal court three months after confessing to relatives that his firm, Bernard L. Madoff Investment Securities LLC, was “one big lie.” U.S. District Judge Denny Chin ordered that Madoff, who has been free on $10 million bond, should be jailed while awaiting sentencing, scheduled for June 16. He faces as much as 150 years in prison.

“I never invested the funds in securities as promised,” Madoff told Chin at a hearing today in a courtroom packed with victims and members of the media. He said he was “deeply sorry” and knew what he did was criminal.

Madoff told Chin that in the early 1990s, when the U.S. was in a recession, he felt “compelled’” to provide the returns he promised investors. He said when the Securities and Exchange Commission asked about it, he lied to the SEC.

Madoff’s guilty plea -- he repeated the word 11 times this morning -- marks the downfall of a once-acclaimed money manager who told the world his fortune came through an eponymous firm that specialized in making markets, trading securities and advising wealthy clients.

Client Roster

Over three decades, he built a reputation as a brilliant stock picker who delivered steady returns through both bull and bear markets, attracting an international client roster that included celebrities like filmmaker Steven Spielberg, fund managers like J. Ezra Merkin, charities, universities, friends, and even royalty.

Some of the thousands of his investors lost their life savings. Thierry Magon de La Villehuchet, chief executive officer of Access International Advisors, which managed $3 billion, was driven to suicide because of his firm’s Madoff- related losses, his brother, Bertrand Magon de la Villehuchet, said in January.

The scandal has cast scrutiny on the Securities and Exchange Commission, whose chief, Mary Schapiro, pledged to beef up staff and expedite enforcement cases. Harry Markopolos, a former money manager, told Congress that he tried to persuade the agency for nine years that Madoff was a fraud, and that most agency officials he dealt with suffered from “investigative ineptitude.”

No Deal

The case doesn’t end with Madoff’s plea. Investigators have seized control of his offices at the lipstick-shaped building at 885 Third Avenue in Manhattan, where Madoff Securities operated out of three floors. Prosecutors say his subordinates helped him swindle investors. A central issue for investigators is whether employees knew of the fraud. No one else has been charged.

Madoff didn’t sign a plea deal that would have granted him leniency or other consideration in exchange for cooperation with the government. He was forced to plead guilty to all 11 counts against him because he refused to admit to a conspiracy, a charge that would have required him to disclose co- conspirators, according to people familiar with the case.

Prosecutors are hunting for Madoff’s assets, as they seek forfeiture of the $170 billion they said moved through Madoff Securities since the fraud began in the 1980s. The firm’s bankruptcy trustee has found about $1 billion in cash and securities.

4,800 Investors

Madoff told 4,800 investors in November that their accounts held $64.8 billion, though their holdings were a “small fraction” of that, prosecutors said in court papers. Defense attorney Ira Sorkin said it’s unclear how much investors lost.

Madoff pleaded guilty to securities fraud, mail fraud, wire fraud, investment adviser fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan.

His scheme unraveled in early December amid a rush of investor redemptions, the government said. He told his sons Mark, who ran Madoff’s proprietary trading business, and Andrew, who was a director of the unit, that he wanted to pay bonuses two months earlier than usual, according to prosecutors.

There was “absolutely nothing,” and the business was “all just one big lie,” Madoff told his relatives, according to an affidavit filed in court on Dec. 11 by Federal Bureau of Investigation Agent Theodore Cacioppi.

Arrest

The sons turned their father in to federal authorities, according to their lawyer, Martin Flumenbaum. Neither is accused of any wrongdoing.

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 at his firm. Dogged by news cameras as he traveled to and from court, Madoff was allowed to remain free on $10 million bail and ordered to remain in his multimillion dollar apartment on Manhattan’s Upper East Side, under electronic and video surveillance and watched over by security guards.

The scheme centered on Madoff’s claim to investors that 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 said.

Madoff promised some investors returns of up to 46 percent and “created a broad infrastructure” to give the appearance of “a legitimate investment advisory business,” prosecutors said in court papers. His back-office staff had little or no experience and at Madoff’s direction misled clients about investments, the government said.

Manhattan Apartment

Madoff is being sent first to the 12-story Metropolitan Correctional Center in lower Manhattan, federal marshals said. Later he may be assigned to one of several U.S. facilities in the New York area, including the Federal Correctional Institution in Otisville, New York.

Madoff is joining a corps of aging white-collar convicts including former WorldCom Inc. Chief Executive Officer Bernard Ebbers, 67, now housed at the Federal Correctional Institution in Oakdale, Louisiana, and John Rigas, 84, the ex-CEO of Adelphia Communications Corp. who is imprisoned at the Federal Correctional Institution in Butner, North Carolina.

Last week, a different judge said in court papers in a related lawsuit by the SEC that Madoff’s lawyers claim that Madoff’s wife, Ruth, is the sole owner of the couple’s Manhattan apartment, $45 million in bonds and $17 million in cash. These assets are “unrelated” to Bernard Madoff’s alleged fraud scheme, his attorneys said, according to the judge.

It may ultimately be left to Chin to decide whether Ruth Madoff may keep the assets. She hasn’t been charged with a crime.

The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; David Voreacos in New York federal court at dvoreacos@bloomberg.net; Patricia Hurtado in New York federal court at pathurtado@bloomberg.net.

Last Updated: March 12, 2009 11:39 EDT

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