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January 14, 2009

Madoff mania continues as government presses bail issue

This new Reuters piece provides the latest news in the still on-going saga of Bernard Madoff's bail situation. Here are the basics:

Accused swindler Bernard Madoff will be back in court on Wednesday as U.S. prosecutors again try to persuade a judge to end his house arrest at his luxury apartment and toss him in jail.  A hearing is scheduled for 2:30 p.m. in Manhattan federal court....

The government wants Madoff jailed pending trial or a guilty plea, saying he had sent at least $1 million in valuables, including diamond watches, to family and friends in violation of a court order....

A judge on Monday rejected the government's request to jail Madoff, but prosecutors have appealed that ruling. The appeal will be heard by a different judge, U.S. District Judge Lawrence McKenna. Madoff "should not be trusted with a second chance to dissipate assets," Assistant U.S. Attorneys Marc Litt and Lisa Baroni wrote in appeal papers filed late on Tuesday....

Madoff investors are fuming that he remains on bail and holed up in his luxurious home. But legal experts say white-collar defendants typically are granted bail pending trial as long as they are not risks of flight or dangers to the community.

Whatever ruling comes from Judge McKenna, I suspect that the losing party might take this issue all the way up to the Second Circuit.

January 14, 2009 at 09:36 AM | Permalink

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This whole scandal I think is going to some of the highest levels of government. It just boggles my mind that he could get away with something like this without having someone helping to cover it up in the FED somewhere. We may never know the full extent of the corruption.

Posted by: Hal | Jan 14, 2009 2:05:05 PM

As a former fraud investigator with over 25 years of experience in financial fraud, I thought some readers might be interested in my reactions to this story.

The evidence shows Bernie Madoff did not act alone, that key perpetrators include other Madoff family members, that these family members are likely to now control off-shore accounts containing substantial stolen funds.

The Madoff fraud was, without a doubt, a group effort. Bernie Madoff could not have done it all himself. At a minimum he needed three types of support:

1. Computer Systems; unless Bernie hand typed customer statements each and every month, he had computer systems support. Systems support was necessary to track customer accounts, produce false trade reports, and the myriad of other tasks necessary to create the impression among clients of a real hedge fund.
2. Accounting; two sets of books are more than twice as hard to maintain as a single set. Real accounting systems benefit from automated importing of data from bank and stock trading accounts. In a fraud scheme all this data must be manufactured Off-the-shelf accounting systems send up many red flags when data is not consistent. Fraudulent accounting creates an impression of such consistency where none exists. This is a major task.
3. Tax and Government Reporting: although Madoff went to great lengths to escape government regulation, nonetheless the scheme was bound to standard income and tax reporting requirements. The usual sources for such reporting did not exist—actual income and taxes paid—therefore fake data needed to be manufactured and reported by individuals expert in these isssues.

Therefore, it is certain Bernie Madoff did not act alone and, at a minimum, had knowledgeable coconspirators in computer systems, accounting and tax and government reporting. It is highly likely that the conspiracy involved a much larger group.

It is also highly likely that fraud scheme was a family enterprise. Like the Mafia, the family is the basic unit of most organized fraud schemes. The reason is simple—outsiders create a substantial risk of defection or blackmail. There is no honor among thieves. Bernie Madoff’s business was a family enterprise family members heading up all major functions including, computer systems, accounting and tax and government reporting.

In his warning to the SEC Harry Markopolos listed 29 red flags that the Madoff hedge fund was a Ponzi scheme. All of these flags were visible to family members working in the firm every day. They had to have known a great deal more including the fact that all the trades Bernie Madoff claimed to be making never occurred. Close-up views of every fraud scheme I have ever investigated made it clear the emperor has no clothes. The most that can plausibly be claimed is that family members knew what was happening and did nothing.

Bernie’s story is that at the last minute he informed his wife, his brother, and his sons that all was not well and that acting alone he had for seventeen years perpetrated the largest Ponzi scheme in history. Being shocked, shocked that fraud was going on the sons went to the authorities the very next day. None of this is in anyway believable. That the sons participated in this charade is evidence of long-term involvement

Third it is likely that a significant portion of the lost billions are in hidden accounts or bonds controlled by family members. Money laundering is not difficult given time and financial sophistication. The Madoff scheme had a great deal of both.

All Ponzi schemes come to an end sooner or later. Therefore, the perpetrators inevitably develop exist strategies. I cannot believe the Madoff perpetrators did not do the same. New alternative identities are almost as easy to create as money is to launder.

Given these facts, I suspect that prosecutors will concentrate Madoff family members as the most promising method of recovering stolen funds. Without perpetrator cooperation laundered funds are seldom found. Bernie Madoff will be spending the rest of his life in jail, therefore there is no plea bargain possible to gain cooperation. The fate of other family members creates much greater leverage. In return of full recovery and accounting of all Madoff Ponzi scheme funds, the prosecutors are likely to trade leniency for some family members.

In the absence of such a full accounting and recovery I predict that, in a few years, when things a quieted down, one or more Madoff family members will quietly disappear and then a new mega-yacht will appear in St Tropiz owned by an Americans with a vague backgrounds.

Posted by: Daniel Finnegan | Jan 15, 2009 10:00:04 PM

As a former fraud investigator with over 25 years of experience in financial fraud, I thought some readers might be interested in my reactions to this story.

The evidence shows Bernie Madoff did not act alone, that key perpetrators include other Madoff family members, that these family members are likely to now control off-shore accounts containing substantial stolen funds.

The Madoff fraud was, without a doubt, a group effort. Bernie Madoff could not have done it all himself. At a minimum he needed three types of support:

1. Computer Systems; unless Bernie hand typed customer statements each and every month, he had computer systems support. Systems support was necessary to track customer accounts, produce false trade reports, and the myriad of other tasks necessary to create the impression among clients of a real hedge fund.
2. Accounting; two sets of books are more than twice as hard to maintain as a single set. Real accounting systems benefit from automated importing of data from bank and stock trading accounts. In a fraud scheme all this data must be manufactured Off-the-shelf accounting systems send up many red flags when data is not consistent. Fraudulent accounting creates an impression of such consistency where none exists. This is a major task.
3. Tax and Government Reporting: although Madoff went to great lengths to escape government regulation, nonetheless the scheme was bound to standard income and tax reporting requirements. The usual sources for such reporting did not exist—actual income and taxes paid—therefore fake data needed to be manufactured and reported by individuals expert in these isssues.

Therefore, it is certain Bernie Madoff did not act alone and, at a minimum, had knowledgeable coconspirators in computer systems, accounting and tax and government reporting. It is highly likely that the conspiracy involved a much larger group.

It is also highly likely that fraud scheme was a family enterprise. Like the Mafia, the family is the basic unit of most organized fraud schemes. The reason is simple—outsiders create a substantial risk of defection or blackmail. There is no honor among thieves. Bernie Madoff’s business was a family enterprise family members heading up all major functions including, computer systems, accounting and tax and government reporting.

In his warning to the SEC Harry Markopolos listed 29 red flags that the Madoff hedge fund was a Ponzi scheme. All of these flags were visible to family members working in the firm every day. They had to have known a great deal more including the fact that all the trades Bernie Madoff claimed to be making never occurred. Close-up views of every fraud scheme I have ever investigated made it clear the emperor has no clothes. The most that can plausibly be claimed is that family members knew what was happening and did nothing.

Bernie’s story is that at the last minute he informed his wife, his brother, and his sons that all was not well and that acting alone he had for seventeen years perpetrated the largest Ponzi scheme in history. Being shocked, shocked that fraud was going on the sons went to the authorities the very next day. None of this is in anyway believable. That the sons participated in this charade is evidence of long-term involvement

Third it is likely that a significant portion of the lost billions are in hidden accounts or bonds controlled by family members. Money laundering is not difficult given time and financial sophistication. The Madoff scheme had a great deal of both.

All Ponzi schemes come to an end sooner or later. Therefore, the perpetrators inevitably develop exist strategies. I cannot believe the Madoff perpetrators did not do the same. New alternative identities are almost as easy to create as money is to launder.

Given these facts, I suspect that prosecutors will concentrate Madoff family members as the most promising method of recovering stolen funds. Without perpetrator cooperation laundered funds are seldom found. Bernie Madoff will be spending the rest of his life in jail, therefore there is no plea bargain possible to gain cooperation. The fate of other family members creates much greater leverage. In return of full recovery and accounting of all Madoff Ponzi scheme funds, the prosecutors are likely to trade leniency for some family members.

In the absence of such a full accounting and recovery I predict that, in a few years, when things a quieted down, one or more Madoff family members will quietly disappear and then a new mega-yacht will appear in St Tropiz owned by an Americans with a vague backgrounds.

Posted by: Daniel Finnegan | Jan 15, 2009 10:00:29 PM

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