Feb. 13 (Bloomberg) -- Bernard Madoff’s defense attorney, Ira “Ike” Sorkin, may have a conflict of interest defending his client in a $50 billion fraud case because the lawyer’s parents invested with Madoff until 2007, according to ethics experts.

The investment, which came to light as part of a list of Madoff clients filed in federal court, was an individual retirement account opened by Sorkin’s father and inherited by his mother in 2001, Sorkin said. When his mother died in 2007, the IRA was cashed out. Madoff’s alleged Ponzi scheme, the largest in history, went back at least to the 1970s, according to people familiar with the case.

“If one of his close family members was the recipient of that money and essentially benefited from that fraud scheme, it’s something an attorney would clearly have to consider,” said Joan Meyer, a former prosecutor who is now a partner at Baker & McKenzie LLP. Sorkin said he didn’t get the money, declining further comment on who did. The Wall Street Journal reported that the account was divided between his sons, Roger and Peter.

Madoff can waive such a conflict to retain Sorkin as his lawyer, Meyer said. On the other hand, defendants who sign such waivers who are later convicted have been known to claim the waiver was obtained without sufficient information or was sought for conflicts that can’t be waived, potentially leading to “a litigation issue in the future,” she said.

Sorkin, 65, declined to say whether Madoff had signed a waiver acknowledging the connection. Sorkin earlier said there could be no conflict because he hadn’t personally invested with Madoff and declined to discuss any other aspect of the IRA.

“It’s not an issue,” the lawyer said in an interview.

Lots of Questions

“No living relative of mine today has ever had an account as a customer, client, investor -- or a beneficial interest in any account at Bernard L. Madoff Investment Securities LLC,” Sorkin said. That statement “leaves lots of questions, I’m sure,” he added.

The potential conflict can be waived “if Sorkin explains fully to Madoff the disadvantages of his representation, which include that, even unconsciously, he might not be as zealous or effective as he might otherwise be,” said Monroe Freedman, a legal ethics professor at Hofstra University Law School in Hempstead, New York.

Sorkin’s name and those of his parents appeared among thousands of Madoff customers on a 162-page list filed Dec. 4 in U.S. Bankruptcy Court in Manhattan, where Madoff’s investment advisory firm is being liquidated.

Securities Fraud

Madoff, 70, was charged with securities fraud after allegedly confessing to running the massive scheme, which prosecutors said paid off early investors with money from later participants. Under house arrest in his Manhattan apartment, Madoff hasn’t formally responded to the charge and hasn’t been indicted. He faces as much as 20 years in prison if convicted.

Madoff’s alleged victims “may see Sorkin’s interests as aligned with their own and they may conclude, wrongly perhaps, that Sorkin will be as interested in vindicating his family’s financial interests as they are in vindicating theirs,” said Stephen Gillers, a professor of legal ethics at New York University.

A conflict may only exist if Sorkin’s father’s IRA was valued in the mid-five-figures or higher, Gillers said.

“It begins to look like an amount that could influence a lawyer’s judgment,” he said.

The government “wants to have an air-tight conviction if it gets one,” Gillers said. “They should be finding out the amount and insisting on an appropriate and informed consent from Madoff to protect any conviction they get.”

Haunt the Government

Gillers said that even a waiver of the possible conflict-of- interest may come back to haunt the government if Madoff is convicted and later decides to appeal any aspect of the case.

“Sometimes, when a defendant waives a conflict and accepts a lawyer who would otherwise be conflicted -- and is then convicted -- the defendant comes back to court” and claims that his lawyer’s conflict made the defense ineffective, Gillers said.

The recipient of the cashed-out IRA, and thousands of other customers who withdrew funds before Madoff’s Dec. 11 arrest, may have to return all or part of their profit to the court-appointed trustee of Madoff’s firm through a so-called clawback to help repay victims, according to Meyer.

Rebekah Carmichael, a spokeswoman for Assistant U.S. Attorney Marc Litt, who is prosecuting Madoff in the criminal case, declined to comment on the Sorkin IRA or say whether the government was aware of the lawyer’s financial connection to Madoff’s firm. Roger Sorkin declined to comment when reached by phone. Peter Sorkin couldn’t be immediately reached for comment.

Other Connections

Sorkin, a lawyer with Dickstein Shapiro LLP in New York, has other connections to Madoff. They met in the 1980s through one of Madoff’s longtime friends, Howard Squadron, the founding partner of New York law firm Squadron Ellenoff Plesent & Sheinfeld LLP, Sorkin said. Squadron hired Sorkin in 1977 and again in 1997.

Squadron, who died in 2001, invested his personal estate with Madoff, while his wife, Anne, continued as a Madoff client after her husband’s death, according to court records. The law firm’s retirement plan and at least three of its wealthy clients were also on the court-filed list of Madoff’s customers.

Stanley Plesent and Elliot Sagor, two other lawyers from Squadron Ellenoff, were also Madoff customers, according to the filing. The men, who are now both at Washington law firm Hogan & Hartson, declined to comment. Squadron Ellenoff merged with Hogan & Hartson in 2002 following Squadron’s death.

Additionally, Sorkin was director of the U.S. Securities and Exchange Commission’s New York regional office from 1984 to 1986, well after Madoff’s alleged scheme had begun, according to the people familiar with the case.

Regional Office

Sorkin declined in an interview to say whether the SEC regional office had any information about Madoff’s alleged fraud during his time as director. The regulator is under pressure in Washington as lawmakers try to determine how Madoff’s alleged fraud went undetected for so long.

Sorkin crossed paths with Madoff in 1991, when the lawyer was in private practice representing two Florida accountants who were sued by the SEC for selling unregistered securities. The accountants, Frank Avellino and Michael Bienes, invested their money solely with Madoff’s firm, which was never implicated in the case.

Sorkin was born in Manhattan and raised mostly in Manhasset, on New York’s Long Island. He earned a bachelor’s degree from Tulane University in New Orleans in 1965 and graduated from George Washington University Law School in Washington in 1968 with an interest in securities fraud, he said during an interview in his 38th-floor corner office near Manhattan’s Times Square.

Revolving Door

Sorkin became an SEC trial attorney in New York from 1968 to 1971, handling insider-trading cases and probes of suspected stock manipulation. He left the agency to become an assistant U.S. attorney in Manhattan, handling criminal securities fraud cases. He later became deputy chief of the criminal division.

Seeking better pay and new challenges, Sorkin said he left government work for private practice in 1977, when he joined Squadron Ellenoff.

“I believe in the revolving door,” the lawyer said. “I believe experience as a prosecutor will make you a better defense lawyer, and experience as a defense lawyer will make you a better prosecutor.”

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

Last Updated: February 13, 2009 09:36 EST