Inquiry Finds No Signs Family Aided Madoff

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Inquiry Finds No Signs Family Aided Madoff

By ALEX BERENSON and DIANA B. HENRIQUES
Published: December 15, 2008
Federal investigators have found no evidence so far that members of Bernard L. Madoff’s family helped him carry out what may be the largest financial fraud in history, according to a person briefed on the case.

Mr. Madoff’s sons, Andrew and Mark, and his brother, Peter, all occupied senior positions at his firm, Bernard L. Madoff Investment Securities, whose assets were frozen after Mr. Madoff told law enforcement agents on Thursday that he had defrauded investors of up to $50 billion.

Although the enormous scale of the fraud prompted widespread questions about whether one person could concoct all the necessary paperwork such a fraud would entail, Mr. Madoff, 70, had insisted that his family was not involved in the Ponzi scheme. He said it was “all his fault,” according to a criminal complaint filed last week.

And so far, investigators have not uncovered evidence that contradicts those statements, according to the person briefed on the case, who was not at liberty to comment publicly on it.

The person cautioned that the investigation was in its earliest stages, and examiners could still unearth evidence that Mr. Madoff’s family knew about the fraud or even helped carry it out.

But employees of the firm have said that Mr. Madoff’s sons and brother all seemed shocked on Thursday after the fraud was disclosed and Mr. Madoff was arrested. One of Mr. Madoff’s sons had a substantial amount of money invested in the accounts that Mr. Madoff managed, investigators said.

John R. Wing, known as Rusty, a lawyer for Peter Madoff, said on Monday that investigators had not advised Peter that he was a target in the case, and that he expected to cooperate with investigators.

Peter Madoff, 62, reported to work on Monday to help investigators and a court-appointed receiver take control of the firm’s assets and examine the firm’s books, Mr. Wing said.

“As far as I know, Peter Madoff has been 100 percent cooperative,” Mr. Wing said.

Peter Madoff was the firm’s general counsel, while Andrew, 42, and Mark Madoff, 44, supervised the firm’s stock-trading desks, which have so far not been implicated in the fraud. Both have worked at the firm since their 20s.

A person with direct knowledge of the information who was not authorized to speak for the sons said that Andrew Madoff and Mark Madoff had been told by law enforcement authorities that they were not targets in the case.

“They are considered to be fact witnesses only, neither subjects nor targets,” the source said. “They are cooperating totally.”

A lawyer for Frank DiPascali, another senior Madoff employee, declined to comment on whether his client is being investigated or cooperating with authorities.

Madoff employees have said that Mr. DiPascali was the most important figure in the separate staff that worked closely with Bernard Madoff on the 17th floor of the firm’s office at the Third Avenue building known as the Lipstick Tower in Midtown Manhattan. That operation also had its own computer systems, and did not process its trades through the Madoff firm, they said.

Bernard Madoff told his sons that the trading was being done through European counterparties, according to several people familiar with the history of the firm.

The firm’s stock traders and other support staff worked on the 18th and 19th floors, where they were supervised by Peter, Andrew and Mark Madoff.

The complaint filed last week states that Bernard Madoff told two unidentified senior employees on Dec. 10 that he had defrauded the firm’s investors. Those senior employees were Andrew and Mark Madoff, according to several people knowledgeable about the case who were not at liberty to discuss it publicly.

They then called a friend, Martin Flumenbaum, who is a partner at the law firm of Paul, Weiss, those people said. After they told Mr. Flumenbaum about their father’s confession, he called federal prosecutors and the Securities and Exchange Commission.

On Thursday morning, Andrew and Mark Madoff met with federal authorities. The F.B.I. then sent two agents to their father’s apartment to interview him. He confessed and was arrested, according to documents filed in the case.

Since Thursday, Andrew and Mark have not been able to talk to their uncle or their father because they are considered witnesses in the case and must avoid pretrial discussions that might touch on their experiences.

One of Mr. Madoff’s sons had “a meaningful amount of money” invested with his father and got statements that were no different than those received by other investors, the people said. Andrew and Mark have told associates that their father’s confession suggested to them that the fraud had been going on for several years, one said.

Monday afternoon, a federal judge appointed a trustee to liquidate Bernard L. Madoff Investment Securities, the broker-dealer that was the core of Mr. Madoff’s business. The trustee, Irving H. Picard, was appointed at the request of the Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms.

“It is clear that the customers of the Madoff firm need the protections available under federal law,” said Stephen P. Harbeck, the president of the corporation.

But in a statement, the agency warned that “the scope of the misappropriations and the state of the defunct firm’s records will make this more difficult than in most prior brokerage firm insolvencies.”

Normally the agency can simply transfer a failing firm’s customer accounts to a solvent brokerage house. That may not be possible in this case, Mr. Harbeck said. Moreover, since the agency does not know how much money is actually missing, it cannot determine how to apportion any customer assets that are recovered. The protections provided through the agency is available on its Web site, sipc.org/how/sipcprotects.cfm.

More Articles in Business »A version of this article appeared in print on December 16, 2008, on page B1 of the New York edition.