Oct. 3 (Bloomberg) -- Bernard Madoff’s brother, sons and niece were sued by a liquidator over claims they spent $198.7 million of victims’ money and treated the con man’s investment firm as their personal bank.

The lawsuit against the brother, Peter Madoff, sons Andrew and Mark Madoff and niece Shana Madoff Swanson, all of whom held positions at the defunct firm, was filed yesterday by trustee Irving Picard in U.S. Bankruptcy Court in New York.

“If the family members had been doing their jobs, honestly and faithfully, the Madoff Ponzi scheme might never have succeeded, or continued for so long,” Picard, a lawyer with the firm Baker & Hostetler LLP, said in a statement.

The group took “huge sums” of money out of the New York- based firm to finance their business ventures, pay credit card bills for restaurants, vacations and clothing, and buy cars, boats and multimillion-dollar vacation homes, Picard said.

Peter Madoff was chief compliance officer at Bernard L. Madoff Investment Securities LLC. Madoff’s sons, Andrew and Mark, were co-directors of trading at the investment firm, and Shana Madoff was compliance director, according to Picard.

The four family members’ responsibilities “extended through trading operations, customer relationships, and legal and regulatory compliance, yet they were completely derelict in these duties and responsibilities,” Picard said in his statement.

Clawback Lawsuits

Bernard Madoff, 71, now serving a 150-year sentence, said in June that he deceived his brother and sons about his $65 billion Ponzi scheme. Picard has filed so-called clawback suits against Madoff insiders to force the return of years’ worth of profit to help repay victims.

In July, the trustee sued Bernard Madoff’s wife, Ruth Madoff, for $44.8 million and won a court order forcing her to report all expenses of more than $100. Investors Jeffry Picower and Stanley Chais were sued for a total of more than $8.2 billion. Offshore hedge funds and so-called feeder funds, firms that channeled investors’ money to Madoff, also were sued.

Mark Madoff, 45, and Andrew Madoff, 43, in December turned in their father to 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 an alleged violation of a court asset-freeze order.

Martin Flumenbaum, an attorney for the sons, has said the brothers had no knowledge of the fraud until their father confessed to them on Dec. 10, one day before his arrest.

‘Baseless’ Complaint

Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison LLP called yesterday’s lawsuit “baseless.” He said in an e-mail that his clients saved victims from $170 million of additional losses by turning in their father when they heard about the scheme.

The brothers “suffered substantial economic losses as a result of their father’s crimes, and we believe it is legally appropriate that these losses be taken into account,” Flumenbaum said. “Mark and Andrew continue to cooperate fully with the authorities.”

Peter Madoff’s lawyer, John “Rusty” Wing of Lankler Siffert & Wohl LLP, didn’t return a call seeking comment yesterday.

Shana Madoff’s spokesman, Eric Starkman, said in an e-mail that “Ms. Madoff intends to cooperate with the trustee and hopes that they can reach a satisfactory resolution.”

Over the years, Peter Madoff, 63, paid $60 million to himself, his family members and entities he controlled, and used the money to buy a home on Park Avenue in Manhattan and in Palm Beach, Florida, according to the complaint. He is also accused of backdating trades to withdraw more money from his accounts than he deposited.

Sons’ Pay

Mark Madoff was paid $29.3 million for his services from 2001 to 2008 and improperly received $66.8 million for himself, his family and entities on his behalf, according to yesterday’s complaint. He’s also accused of falsifying transactions to withdraw $18.1 million from his account into which he deposited about $745,500.

During the same period, Andrew Madoff was paid $30.1 million and improperly received another $60.6 million, according to the complaint. He allegedly withdrew $17.1 million from his accounts after investing about $912,000. He also received more than $11 million to pay for luxury apartments in Manhattan, Picard said.

Picard said in the complaint that Shana Madoff improperly received more than $10.6 million in customer funds for herself or for entities on her behalf. That included almost $3 million to buy a Long Island home in East Hampton, New York, less than one year before Madoff’s arrest, according to the complaint.

Lawyer Niece

Shana Madoff had worked at her uncle’s firm since 1995, after graduating from Fordham University Law School, according to the complaint. She was once the firm’s in-house counsel and held outside roles including membership in the NASD market- regulation committee, Picard said.

Mark Madoff joined his father’s brokerage in 1986 and rose to become director of listed trading. He accumulated a net worth of $8.3 million working for his father by the time he filed for divorce in 1999, according to public records.

When the fraud unraveled, Mark Madoff owned a $6 million New York apartment and a $2.3 million home in Greenwich, Connecticut, according to the records. In 2000, at the time of his divorce, he was earning about $770,000 a year and had just bought a second home, the records show.

The brothers and their cousin, Shana, started a separate energy-exploration company in early 2007, according to public records and their attorney. After hiring geologists and other employees, they began financing oil and gas projects, including well drilling in Texas.

‘Decadent Lifestyle’

Bernard Madoff’s personal accounts were intertwined with those of his firm, allowing him to dole out hundreds of millions of dollars for personal loans and real estate transactions and for the “decadent lifestyle afforded Madoff and his family solely because of his fraud,” Picard said in a court filing in May.

In the complaint against Ruth Madoff, Picard details 111 wire transfers from her husband’s firm to her personal bank accounts or to companies that the financier’s wife of 49 years invested in. Some of the money was used to pay Ruth Madoff’s credit-card bill and to buy a yacht for her family’s use, Picard said.

Ruth Madoff is fighting Picard’s lawsuit. After giving up her apartment and its contents, she was given $2.5 million as part of a settlement of the government’s criminal case against her husband.

Picower and Chais, philanthropists and longtime Madoff investors, are among the biggest clawback defendants.

Fake Profits

Picower was sued in May and accused of taking fake profits of $6.7 billion for himself and his affiliates over a 20-year period. Picard’s demand increased to $7.2 billion on Sept. 30.

Chais, sued for about $1 billion, told a judge that Madoff almost wiped him out and that he can’t afford to defend himself against Picard’s claims.

Bernard Madoff pleaded guilty in March and was sentenced to prison June 29. He is in a medium-security prison in Butner, North Carolina. His finance chief, Frank DiPascali, is in jail after pleading guilty in August.

$13 Billion

Prosecutors identified about $13 billion in actual losses in the fraud, compared with about $14 billion sought in the clawback suits. Picard in July said he and his team had recovered $1.08 billion to help victims.

Only Madoff, DiPascali and the firm’s outside accountant, David Friehling, have been charged so far with crimes. Friehling pleaded not guilty to charges of fraud and making false statements to the U.S. Securities and Exchange Commission.

Harry Markopolos, a certified fraud examiner, told Congress that Bernard Madoff rejected an investment fund’s demand for an outside audit of his performance and that only Peter Madoff was allowed to perform the task, “for reasons of secrecy.”

The case is Irving H. Picard v. Madoff, 09-01503, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: October 3, 2009 13:30 EDT