Madoff Said to Use Unregistered Side-Unit for Clients

Date: Monday, December 15, 2008
Author: David Scheer and David Glovin, Bloomberg

Federal investigators working through the weekend to unravel Bernard Madoff’s alleged $50 billion Ponzi scheme found evidence he ran an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries, two people with knowledge of the inquiry said.

Clients of the undisclosed unit may have included hedge funds, according to the people, who declined to be identified or to name the funds because the probe isn’t public. Investigators from the U.S. Securities and Exchange Commission are looking for signs that others participated in the alleged fraud and are examining why Madoff’s wife’s name appeared on documents linked to transactions under scrutiny, the people said. His wife, Ruth Madoff, has not been accused of any wrongdoing.

Ira “Ike” Sorkin, a lawyer at Dickstein Shapiro LLP in New York representing Madoff, declined to comment. Calls to residences listed in the Madoffs’ names in Manhattan, Montauk, New York, and Palm Beach, Florida, weren’t answered. John Heine, an SEC spokesman, also declined to comment.

Sorkin said on Dec. 13 that the situation was “a tragedy.”

More than a dozen SEC inspectors have been working around the clock examining records at Bernard L. Madoff Investment Securities LLC in New York after his sons told authorities Dec. 10 he’d confessed to orchestrating a Ponzi scheme with more than $50 billion in losses, the biggest in history. People with knowledge of the probe who initially said they suspected the loss estimate was too high now say it may be roughly accurate.

Wilpon, BNP Paribas

The $50 billion figure may reflect the amounts of money clients were told they had in their accounts at the firm, not the amounts they originally invested, two of the people said. Customers who believed they had amassed investment gains over time may have been misled, the people said.

Clients facing losses range from New York Mets owner Fred Wilpon’s Sterling Equities Inc. to hedge funds such as Fairfield Sentry Ltd. The alleged scam has ensnared more than 25 companies, including some of the biggest financial-services firms such as BNP Paribas SA in Paris and Nomura Holdings Inc. in Tokyo, which have said they may lose money because of trading or lending tied to Madoff’s firm. In all, companies, individuals and foundations have disclosed about $24 billion of investments with Madoff, according to data compiled by Bloomberg and media reports.

Where Money Went

Investigators are still trying to figure out where customers’ money went. Madoff, 70, told his sons last week he had as much as $300 million left, according to an SEC lawsuit filed in federal court in Manhattan. The agency is looking for additional money that may be recovered for victims, two people said. In a regulatory filing in January, Madoff’s firm listed $17 billion in assets under management.

Details of the side business that the SEC is scrutinizing -- including how much client money it held, who besides Madoff may have been involved and how it was kept separate from the firm’s registered investment-advisory unit -- couldn’t be determined.

The SEC’s complaint said he conducted “certain investment advisory business” on a separate floor and that he was “cryptic” about those activities when talking with other employees. In registration documents, the company said its advisory unit served between 11 and 25 clients, yet many times that number of people, firms and funds have said they entrusted their savings to Madoff.

Advisory Activities

His advisory activities were a mystery to most people at the company, said two employees who declined to be identified, citing concern that they might be drawn into the probe. The firm on Third Avenue in midtown Manhattan occupied several floors, with market-making and proprietary trading units on the 19th floor, and back-office functions on the 18th, the employees said. The advisory operations were on the 17th floor.

While traffic flowed between the 18th and 19th floors, the 17th floor wasn’t linked to the others and there was virtually no interaction between the groups, according to the employees.

Madoff’s sons, who ran the market-making and proprietary units, told employees their father kept them in the dark about the advisory unit, the employees said. While Madoff seldom appeared on the 18th and 19th floors during the workday, he was known to inspect during the evening for sloppy desks or window shades that weren’t fully drawn, one of the employees said.

The only person the employee recalled seeing Madoff consult with on the 17th floor was an executive known by his first name, Frank.

Reached by phone at home, Madoff official Frank DiPascali referred calls to his lawyer, Marc Mukasey, a former federal prosecutor now at Bracewell & Giuliani in New York, who declined to comment. His father is U.S. Attorney General Michael Mukasey, a former New York federal judge.

Black Mercedes

No one answered the door today at DiPascali’s home in Bridgewater, New Jersey, which tax records show was assessed at $1.38 million this year. A black Mercedes sat on the circular driveway in the almost seven-acre parcel, which includes a pond. A project to replace siding on the house is in progress and a construction permit in DiPascali’s name hung in a front window.

In court documents, U.S. criminal prosecutors and the SEC said Madoff confessed that his advisory business, which catered to rich people and institutional investors as well as hedge funds, was “all just one big lie.” The business had been insolvent for years, according to the SEC’s account of his statement. In a Ponzi scheme early investors are paid with money raised from subsequent victims.

Sons

Madoff made the admissions to his sons, Mark and Andrew, who turned him in to U.S. authorities, according to Martin Flumenbaum, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York who represents the brothers.

He was arrested Dec. 11 and charged at federal court in Manhattan with a single count of securities fraud. Madoff was released that day on a $10 million bond guaranteed by his wife and secured by his Manhattan apartment. A day later, a federal court froze the firm’s assets and appointed Lee Richards, an attorney at Richards Kibbe & Orbe LLP in New York, as a receiver.

The Securities Investor Protection Corp. announced today that it is liquidating Madoff’s brokerage and named Irving Picard, a lawyer at Gibbons PC in New York, trustee to return cash and securities to customers. While the Washington-based SIPC provides as much as $500,000 in insurance for any missing money in individual brokerage accounts, it does not protect against investment losses.

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; David Glovin in U.S. District Court in New York at dglovin@bloomberg.net.