March 11 (Bloomberg) -- As Bernard Madoff prepares to plead guilty to the biggest Ponzi scheme ever, prosecutors shed new light on how subordinates may have helped him swindle clients across the globe out of $65 billion over at least two decades.

Madoff, 70, faces 11 charges including fraud and perjury for bilking 4,800 investors, from celebrities like filmmaker Steven Spielberg and Nobel laureate Elie Wiesel to universities and charities. Prosecutors said he told clients their accounts held $65 billion, though the true amount was a “small fraction.”

His employees created false account documents and trade confirmations of phony returns, the government said in papers filed yesterday before Madoff appeared in Manhattan federal court. He transferred funds worldwide while generating false financial statements for regulators, the U.S. said. Prosecutors seek forfeiture of the $170 billion they said moved through his company since the fraud began in the 1980s, though they have yet to find most of it.

“The issue will be whether the government can establish that they knew what in the paper was in fact phony,” Christopher Steskal, a former federal prosecutor, said of Madoff employees now under scrutiny. “If the facts show it, they will likely pursue those people. It seems improbable that he would do it alone.”

Plead Guilty Tomorrow

Madoff will plead guilty tomorrow, defense lawyer Ira Sorkin said. The charges against him include mail fraud, wire fraud, investment adviser fraud, three counts of money laundering, false statements, perjury, false filings with the Securities and Exchange Commission and theft from an employee benefit plan. Madoff, free on $10 million bond, may be jailed after his plea.

The government said the investigation is continuing. No employees have been charged with 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 New York-based firm, Bernard L. Madoff Investment Securities LLC. With the 10 counts added yesterday, he faces as much as 150 years in prison.

Madoff also channeled $250 million of client money through his London-based operation, Madoff Securities International Ltd., prosecutors said in their filing. The money was used to give “the appearance that he was conducting securities transactions in Europe on behalf of the investors when, in fact, he was not conducting such transactions,” according to court papers. Some of the money was also used by Madoff, his family members and other associates, prosecutors alleged.

Madoff’s Plan

In court yesterday, Sorkin disclosed Madoff’s plan to plead guilty during a hearing before U.S. District Judge Denny Chin, who asked Madoff if he would waive Sorkin’s possible conflicts of interest. Madoff, wearing a gray suit and wire-framed glasses, gave brief answers to more than 50 questions from Chin about the conflicts. Madoff didn’t discuss a guilty plea.

Assistant U.S. Attorney Marc Litt said Madoff doesn’t have a plea bargain. Through such deals, defendants often receive some benefit for pleading guilty, such as a reduced sentence, in return for providing details about a crime. The lack of a plea deal may suggest Madoff isn’t helping prosecutors determine who may have helped him in the fraud. Litt said Madoff will be required to plead guilty to all 11 counts.

Absence of Deal

The absence of a plea bargain is “unusual,” said Richard Strassberg, a lawyer with Goodwin Procter LLP in New York. He said the government probably didn’t offer a deal.

“If that’s what happened, the government viewed the scope of the conduct to be so egregious that a plea deal wasn’t warranted,” Strassberg said in an interview.

By not entering a plea deal, Madoff may be trying to protect employees of his firm, Steskal said.

Madoff’s brother Peter was chief compliance officer at the company, and his sons Mark and Andrew held senior positions in the market-making and proprietary trading businesses. None of Madoff’s family members have been accused of any wrongdoing.

Bernard Madoff’s wife, Ruth, who had been represented by Sorkin, will hire her own lawyer, Sorkin said yesterday.

An attorney for Peter Madoff, John “Rusty” Wing, didn’t return a call seeking comment. Martin Flumenbaum, an attorney for the sons, has said they “were not involved in the firm’s asset management business” and “had no knowledge whatsoever of the fraud.”

Annual Returns

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

“Certainly lower level employees are unlikely to be involved, but people with auditing function or authority to access accounts or make trades are more likely to have knowledge of the alleged fraud,” Steskal said.

Prosecutors and regulators have been probing whether the chief financial officer at the advisory firm, Frank DiPascali Jr., knew of the fraud, according to people familiar with the case. DiPascali has denied wrongdoing. His lawyer, Marc Mukasey, didn’t return a call seeking comment.

Andrew Lankler, a lawyer for Madoff’s auditor, David Friehling, declined to comment. A call to Madoff’s longtime aide, Annette Bongiorno, wasn’t immediately returned. They aren’t accused of wrongdoing.

‘Split-Strike’

Madoff was able to defraud his investors by claiming 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 in a statement.

The new allegations include a claim that Madoff “repeatedly lied” to the SEC in written submissions and sworn testimony during questioning in 2006. Prosecutors also said Madoff used $250 million from his advisory business to finance market-making and proprietary trading operations. Madoff stole $10 million from 35 labor union pension funds, prosecutors claimed.

In a separate court filing, the government said they will seek to force Madoff to forfeit more than $170 billion, representing “proceeds traceable” to the scheme. The figure represents funds that flowed through Madoff’s firm during the fraud’s operation, prosecutors said.

Sorkin said in a letter to Chin that the monies prosecutors seek are “grossly overstated -- and misleading -- even for a case of this magnitude.”

‘Highly Complex’

“The issues related to forfeiture, restitution and sentencing in this matter are highly complex and will require extensive time to resolve,” Sorkin wrote.

At yesterday’s hearing, Chin asked Madoff whether he understood that his lawyer might have a conflict of interest because Sorkin’s sons held an account that was invested with Madoff.

“I understand that potentially, in the issue of restitution, his interest might be divided and he might not defend me in a way that’s most beneficial to me,” Madoff said as he waived his lawyer’s conflict of interest.

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; Erik Larson in New York federal court at elarson4@bloomberg.net.

Last Updated: March 11, 2009 11:30 EDT