June 30 (Bloomberg) -- Peter Madoff pleaded guilty to enabling his brother Bernard Madoff to pull off the biggest Ponzi scheme in U.S. history -- though Peter denied knowing the business was a sham until the firm collapsed.
The chief compliance officer of Bernard L. Madoff Investment Securities LLC, or BLMIS, who helped his brother run the firm for four decades, Peter Madoff pleaded guilty yesterday in Manhattan federal court to one count of conspiracy to commit securities fraud and one count of falsifying records. The plea came three years to the day after his brother was sentenced to 150 years in prison.
Madoff, 66, told the court he had no knowledge of his brother’s scheme until Dec. 9, 2008, the night Bernard Madoff confessed to him that the investment business was a sham. Bernard Madoff would be arrested and confess to authorities two days later, on Dec. 11, 2008.
“When my brother told me about his fraud, I was in shock and my world was destroyed,” Peter Madoff said in court during his plea. “I lost my reputation and any future ability to support my family financially. My family was torn apart as a result of my brother’s atrocious conduct, and I became reviled by strangers as well as former friends who assumed that I had known about the Ponzi scheme.”
Peter Madoff, a graduate of Fordham University Law School who began working at the Manhattan firm in 1965, agreed in his plea not to ask U.S. District Judge Laura Taylor Swain in New York for less than a 10-year term.
Peter Madoff claimed in regulatory filings that the business had 23 client accounts when in reality it had more than 4,000 accounts with $65 billion in nonexistent balances. Investors were thought to have lost $20 billion in principal, though the firm’s trustee has said the figure is closer to $17 billion.
The regulatory statements he filed were designed to create the false appearance that the investment advisory business run by Bernard Madoff had a small number of sophisticated clients and fewer assets under management in order to avoid scrutiny by the U.S. Securities and Exchange Commission, Assistant U.S. Attorney Lisa Baroni told the judge yesterday.
“The evidence would show that had Peter Madoff actually done the compliance work that he claimed he did, he would have found that there were no real trades in the investment advisory business,” Baroni said.
Madoff insisted yesterday that he had no idea about his brother’s fraud and viewed him as a successful trader, as had others on Wall Street.
“I was in total shock, unable to absorb the full import of the words I was hearing,” Madoff said, describing his reaction upon hearing his brother’s confession.
“My brother was widely viewed as one of the most honorable as well as the most successful traders of our time, and no one believed it more than I did. I revered him and trusted him implicitly.”
Madoff, who was wearing a brown suit, blue tie and Gucci loafers, apologized to the court and his victims. He told Swain he was under a doctor’s care and was being treated for stress and anxiety. The judge later ordered him to participate in a mental health treatment program before his sentencing.
“I am deeply ashamed of my actions,” he said, his voice choking with emotion. “And I am here today to take responsibility for my conduct.”
Unlike court proceedings for his brother, none of the victims spoke in court yesterday about the effect of the Ponzi scheme on them.
Peter Madoff, who came and left the Lower Manhattan courthouse accompanied by his lawyers, declined to comment to reporters.
During his allocution, Peter Madoff said he helped his brother structure financial transactions to avoid payments to the Internal Revenue Service and received income he didn’t report. This included fringe benefits including free meals, a no-show job for his wife, country club membership and life insurance premiums.
He said his brother never offered to give him a share of the firm, and made it clear he would never be a partner.
“I revered him and trusted him implicitly,” Peter Madoff said. “There was no doubt that Bernie was the boss.”
Peter Madoff admitted he didn’t have any experience with rules governing registered investment advisers and that he failed to test his brother’s claims that he was trading in client accounts. He said he falsely certified an annual review of the firm’s compliance with investment advisory laws.
Peter Madoff said he allowed his brother to file an investment advisory registration that included false statements, including that the firm had only 23 accounts, as opposed to the 4,900 reflected on the firm’s statements in 2008.
After learning of the Ponzi scheme, he said he helped his brother parcel out the $300 million remaining in the firm to select friends and family members.
“I was devastated, but nevertheless I did as my brother said, as I consistently had done for decades,” he said.
Baroni told Swain that Peter Madoff conspired to choose which clients should get the remaining money at the firm before its collapse. After finding out that federal authorities had frozen his assets, he pocketed $200,000 he had withdrawn from the firm to give to charity, she said.
Without citing evidence that Peter Madoff knew of the fraud, the court-appointed trustee overseeing the recovery of funds and the liquidation of the firm has built a case against him and other family members in a series of amended complaints since the lawsuit was first filed in October 2009.
Manhattan U.S. Attorney Preet Bharara vowed the government’s investigation, started almost four years ago with the fund manager’s confession, would continue.
“We are not yet finished calling to account everyone responsible for the epic fraud of Bernard Madoff and the epic pain of his many victims,” Bharara said in a statement.
Peter Madoff “enabled the largest fraud in human history. He will now be jailed well into old age, and he will forfeit virtually every penny he has,” Bharara said.
Madoff, who was also sued by the U.S. Securities and Exchange Commission, agreed to forfeit $143.1 billion, including all real and personal property. The forfeiture calculation is based on the total funds that passed through the Madoff firm during the fraud.
Homes, Cars, Rolex
Peter Madoff didn’t agree to cooperate in the investigation, according to court documents. A forfeiture order that he agreed to requires him to turn over all his assets, including cash, homes, cars and a Rolex watch, to the government.
A settlement reached with his family requires the forfeiture of assets held by his wife, Marion, his daughter, Shana Madoff Swanson, and other family members, Bharara’s office said in a statement.
“Marion Madoff is being left with approximately $771,733 to live on for the rest of her life,” Bharara said in the statement.
“Peter Madoff played an essential enabling role in the largest investment fraud in U.S. history,” FBI Assistant Director Janice K. Fedarcyk said in a statement. “He made a pretense of compliance; he was really about complicity.”
Swain accepted the plea agreement and approved bail, allowing Madoff to remain free before his Oct. 4 sentencing. He was released this afternoon on a $5 million personal recognizance bond secured by $1 million cash or property and six co-signers. Swain restricted his travel to the New York metropolitan area and surrounding counties, and he and his wife were ordered to surrender their passports.
Peter Madoff’s lawyer, John Wing, declined to comment as he left the courthouse with his client.
“People, especially the victims, will never be satisfied by this,” said Anthony Sabino, a law professor at St. John’s University in New York. He said the forfeiture amount is a formality: “We all know he doesn’t have that. The number is symbolic and meant to ensure there’s no loophole for him to enrich himself.”
Bernard Madoff told a judge at his sentencing in the same courthouse that he deceived his brother, his two sons and wife, Ruth, about the multibillion-dollar fraud.
“Bernie Madoff claiming that he acted alone was ridiculous,” said Anthony Barkow, a former federal prosecutor in New York and a partner at Jenner & Block LLP. “His surrender was clearly a strategy to try to insulate his family and co-conspirators and made it more difficult for the government to make the case, so it’s taken time but they’ve shown that they’re clearly working on it.”
The forfeiture Peter Madoff agreed to gives the government a green light to pursue any and all assets it can tie to him.
“It’s an obscene amount of money, clearly designed to ensure that every dollar he ever earned and any asset he ever acquires is taken away from him and given to the victims,” Barkow said.
Denny Chin, then the U.S. district judge who presided over Bernard Madoff’s case, imposed an order upon the money manager requiring him to forfeit $170.8 billion in June 2009. The amount “represented the amount of proceeds traceable to the commission of the offenses,” and a judgment representing the property involved in money-laundering offenses that Bernard Madoff pleaded guilty to committing.
Since then, federal authorities have been hunting for Madoff’s assets, seeking forfeiture of the billions of dollars they said moved through his firm since the fraud began in the 1980s.
Bernard Madoff, 74, now at the federal prison in Butner, North Carolina, has a release date of Nov. 14, 2139, according to the Federal Bureau of Prisons.
Thirteen people have been charged with criminal wrongdoing in the almost four years since federal authorities began their investigation of Madoff’s firm. Peter Madoff is the eighth person and the highest-ranking employee other than his brother to plead guilty in the case.
Swain is also presiding over the cases of five other Madoff employees who have pleaded not guilty. No trial date has been set for them. Yesterday was the first time since Bernard Madoff’s March 2009 guilty plea that a family member admitted wrongdoing while working at the firm.
Stephen Miller, a partner at Cozen O’Connor in Philadelphia and also a former federal prosecutor, said Bernard Madoff’s guilty plea left many victims frustrated that he didn’t give more information about the workings of the decades-long Ponzi scheme.
Over three decades, Bernard Madoff built a reputation as a brilliant stock picker who delivered steady returns through both bull and bear markets. He attracted an international client roster that included celebrities such as filmmaker Steven Spielberg, fund manager J. Ezra Merkin, charities, universities, friends, professional baseball team owners and European royalty.
The facade collapsed on Dec. 11, 2008, when Madoff confessed to authorities that his firm was a sham. After a rush of investor redemptions, Madoff admitted he used money from new investors to pay old ones.
‘Money is Gone’
“The money is gone,” Andrew Madoff quoted his father as telling the family in an authorized family biography published last year. “It’s all been one big lie. It’s a giant Ponzi scheme and it’s been going on for years, and there have been all these redemptions, and I can’t keep it going anymore. I can’t do it.”
Regulators later said his investment advisory business hadn’t made a trade in at least 13 years while thousands of investors lost their life savings.
At Madoff’s June 29, 2009, sentencing, his failure to identify accomplices was cited by Chin as a reason for a prison term six times longer than those meted out to the chief executives of WorldCom Inc. and Enron Corp., who perpetrated two of the larger corporate frauds in U.S. history.
For decades, Peter Madoff worked alongside his brother at an office in the lipstick-shaped building at 885 Third Avenue in midtown Manhattan, where Madoff Securities occupied three floors.
The brothers were joined by Peter Madoff’s daughter, Shana, a lawyer, and Bernard Madoff’s sons Andrew and Mark.
Both sons worked for the legitimate, market-making side of the business and said they had no knowledge of the fraud until the day their father confessed to them.
Peter Madoff admitted that, in his role as chief compliance officer at the firm, he schemed to commit securities fraud by making false statements to investors about the firm’s compliance program as well as the nature and scope of its investment advisory business.
He also pleaded guilty to falsifying business records of an investment adviser. Both charges carry a maximum statutory term of as long as five years in prison and a fine of at least $250,000.
“It’s important for your honor to know that at no point before December 2008 was I aware that he was involved in any kind of Ponzi scheme,” Peter Madoff said yesterday. “I truly believed my brother was a brilliant investor and trader.”
‘Family Piggy Bank’
Bernard Madoff’s sons, along with Peter Madoff and his daughter, treated the company as a “family piggy bank,” Irving Picard, the trustee, said in a lawsuit against Madoff family members.
Peter Madoff took $90.4 million from the firm, including $41.6 million in compensation, during his years there, according to Picard. His wife, Marion, was paid an additional $1.5 million for a no-show job at the firm, Picard said. Madoff used the money to pay off a mortgage on his house in Old Westbury, New York, and buy homes on Park Avenue in Manhattan and in Palm Beach, Florida, according to Picard.
In addition to an Aston Martin, bought and restored with company money, Peter Madoff bought a Ferrari and charged luxury clothes and wines to his and his wife’s American Express cards. Picard also accused him of backdating trades to withdraw a total of $19.3 million from his Madoff investment advisory accounts, which was more than he had deposited.
Picard is now seeking $255.3 million from the Madoff family for the benefit of Bernard Madoff’s victims.
Shana Madoff Swanson, also a Fordham University Law School graduate, served as the firm’s in-house lawyer and shared responsibilities with her father and uncle for all compliance-related activities, Picard alleged.
Peter and Shana Madoff helped to complete the 2008 filing with the U.S. Securities and Exchange Commission that portrayed the Madoff firm as having 23 customer accounts and managing $17.1 billion. She hasn’t been accused of wrongdoing.
Her lawyer, Mark Warren Smith, didn’t return a June 28 voice-mail message seeking comment on her father’s plea agreement.
Andrew Madoff, who holds a bachelor’s degree from the Wharton School of the University of Pennsylvania, was controller of the U.K. entity, which helped “create the false impression” that Bernard Madoff actively traded shares in customer accounts, when he was merely recording and paying profits with new deposits, Picard said.
Mark Madoff committed suicide in Dec. 11, 2010, two years to the day after his father’s arrest.
Martin Flumenbaum, a lawyer representing Andrew Madoff and the estate of Mark Madoff, previously said the brothers had no knowledge of the fraud until their father confessed to them the day before his arrest. Neither was charged with a crime. Flumenbaum didn’t return a voice-mail message seeking comment on Peter Madoff.
Bernard Madoff’s fraud came to light after his sons turned him in to U.S. 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 alleged violation of a court asset-freeze order.
Ira Lee Sorkin, a lawyer for Bernard Madoff, didn’t return a call on June 28 seeking comment on Peter Madoff.
The case is U.S. v. Madoff, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at firstname.lastname@example.org; Bob Van Voris in Manhattan federal court at email@example.com; Christie Smythe in Manhattan federal court at firstname.lastname@example.org.
To contact the editor responsible for this story: Michael Hytha at email@example.com.