Madoff Used Firm Funds for Worker, Family Expenses

/Home/How Madoff Did it

Madoff Used Firm Funds for Worker, Family Expenses


By Christopher Scinta and David Glovin

May 6 (Bloomberg) -- Convicted conman Bernard Madoff turned his investment firm into his “personal piggy bank,” using tens of millions of dollars in client funds to cover costs for employees and family members, court papers say.

Madoff used money from his firm, Bernard L. Madoff Investment Securities LLC, to pay loans, satisfy capital calls, fund real-estate purchases and hire employees for his children, wife, brother and workers, according to a filing by Irving Picard, the trustee liquidating Madoff Securities.

“He essentially used BLMIS as his “personal piggy bank,” having BLMIS pay for his lavish lifestyle and that of his family,” David Sheehan, a lawyer for Picard, wrote in a legal brief filed in U.S. Bankruptcy Court in New York. “Madoff used BLMIS to siphon funds which were, in reality, other people’s money, for his personal use and the benefit of his inner circle. Plain and simple, he stole it.”

The filing is part of a request by Picard to consolidate the bankruptcy proceedings of the business with the bankruptcy of Madoff’s estate. Picard cited Madoff’s expenses as a basis to join the cases, saying spending by Madoff and his business were so entangled that they can’t be unraveled.

Picard also said he’s seeking the return of “billions of dollars” from so-called feeder funds that funneled money to Madoff. Last month, he told 223 other investors to return as much as $735 million or face legal action. He’s already launched three cases seeking to reverse transfer of funds out of Madoff firm accounts, he said.

Family Loans

According to the filing, Madoff Securities loaned $9 million to Madoff’s brother Peter; gave $5.5 million to Madoff Technologies LLC, in which family members owned a majority stake; and provided a $1.7 million capital contribution to Madoff Energy Holdings, which was owned by his sons Mark and Andrew and niece Shana.

Madoff Securities used $4.5 million in client money to satisfy capital calls on behalf of wife Ruth to funds in which she invested; paid $11.5 million for two yachts his family used; and sent $4.4 million to law firms on behalf of Andrew Madoff and another $6.4 million to law firms on behalf of Mark Madoff, the filing says. Money for his children was used for real-estate purchases, the filing says.

“BLMIS received no apparent benefit” for the funds, Michael Slattery, a Picard investigator, wrote in an affidavit that was part of the court filing.

Real-Estate Deal

Madoff’s employees also benefited from the firm’s largess, the filing says. Madoff sent $2.7 million last year from his business to a law firm representing 25-year employee JoAnn Crupi as part of a real-estate deal, the documents say.

Madoff also placed on the payroll of Madoff Securities several individuals “for whom there was no evidence that they worked” at the firm, Slattery wrote. One of them was the captain of a boat owned by Frank DiPascali, his chief aide in his advisory business, the documents say.

John “Rusty” Wing, who represents Peter Madoff; Martin Flumenbaum, a lawyer for Mark and Andrew Madoff; and lawyers for DiPascali and Crupi didn’t immediately return calls seeking comment. Bernard Madoff’s attorney, Ira Sorkin, and Ruth Madoff’s lawyer, Peter Chavkin, declined to comment. Except for Bernard Madoff, none has been accused of wrongdoing.

Prison

Madoff, 71, pleaded guilty March 12 to fraud by using money from new investors to pay off old ones in the largest Ponzi scheme in U.S. history. Before his Dec. 11 arrest, he had told his thousands of clients that they had about $65 billion in accounts with him, prosecutors said. He faces a prison sentence of as many as 150 years.

Andrew Madoff was director of proprietary trading at Madoff’s firm. Mark Madoff was a director. Peter Madoff was chief compliance officer.

Picard, a lawyer with Baker & Hostetler LLP in New York, has recovered about $1 billion for investors in Madoff’s money- management business.

Madoff Securities had two primary bank accounts, one at Bank of New York Mellon Corp. and one at JPMorgan Chase & Co., Slattery said. The Bank of New York account was the firm’s primary cash account to fund operating and other expenses. The JPMorgan account held Madoff customer deposits, he said.

“To date, our investigation has not uncovered any other significant source of income for Madoff aside from BLMIS,” Slattery said.

Separately, U.S. Bankruptcy Judge Burton Lifland today ordered the bankruptcy case of the Madoff business’s U.K. unit, Madoff Securities International Ltd., transferred to New York from Florida, a court order said. Madoff International filed for Chapter 15 bankruptcy in West Palm Beach, Florida, on April 14 and sued Peter Madoff to recover a $200,000 Aston Martin car.

The bankruptcy case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net; David Glovin in federal court in New York at dglovin@bloomberg.net.

Last Updated: May 6, 2009 18:38 EDT