FBI Top Stories: Madoff Case

Madoff Also Pleads Guilty to Falsifying Books and Records and Making False Statements to Investors.

Preet Bharara, the United States Attorney for the Southern District of New York, Janice K. Fedarcyk, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), Toni Weirauch, the Acting Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service, Criminal Investigation (“IRS-CI”), Robert L. Panella, Special Agent-in-Charge for the New York Regional Office of the U.S. Department of Labor’s Office of the Inspector General, Office of Labor Racketeering and Fraud Investigations (“DOL-OIG”), and Jonathan Kay, the Director for the New York Regional Office of the U.S. Department of Labor, Employee Benefits Security Administration (“DOL-EBSA”), announced that PETER MADOFF, the former Chief Compliance Officer and Senior Managing Director of Bernard L. Madoff Investment Securities LLC (“BLMIS”), pled guilty today to a two-count Superseding Information charging him with, among other things, conspiracy to commit securities fraud, tax fraud, mail fraud, ERISA fraud and falsifying records of an investment advisor. The overt acts in the conspiracy count also include, among other things, making false statements to investors about BLMIS’s compliance program and the nature and scope of its Investment Advisory business. MADOFF pled guilty in Manhattan federal court before United States District Judge Laura Taylor Swain.

Manhattan U.S. Attorney Preet Bharara said: “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. 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.”

FBI Assistant Director-in-Charge Janice K. Fedarcyk said: “The Madoff investment empire, built on a foundation of deceit, was a house of cards that grew to skyscraper proportions. As Peter Madoff has admitted today, he was one of the chief architects. For years he certified that periodic reviews established the firm’s compliance with internal and regulatory rules. In fact, Peter Madoff conducted no reviews. He certified that his examination of the firm’s trading process established its integrity. He did not—indeed, he could not—conduct any such examination: Despite the façade, the investment advisory business did not actually trade any stocks. Peter Madoff played an essential enabling role in the largest investment fraud in U.S. history. He made a pretense of compliance; he was really about complicity.”

IRS-CI Acting Special Agent-in-Charge Toni Weirauch said: “This scheme relied on sophisticated teamwork to prevent its discovery by investors and law enforcement. One of the consequences of the concealment is that the IRS was hindered from performing its lawful duty, thus harming our nation’s law abiding taxpayers, along with the defrauded victims. IRS-Criminal Investigation is proud to bring our financial investigative skills to this complex joint investigation and be part of the team that is helping to untangle the web of lies and sort out the culpabilities of the individuals involved. Today’s plea represents an important step forward.”

DOL-OIG Special Agent-in-Charge Robert L. Panella said: “During today’s plea, Peter Madoff admitted to his role in a fraud scheme that harmed the savings of thousands of investors. The investigation that led to today’s guilty plea by Madoff serves as a stern warning to those who would knowingly undermine the financial well-being of workers. In addition, by conspiring to make false statements and to falsify documents required by the Employee Retirement Income Security Act, he failed to protect the integrity of employee benefit plan assets and personally benefited from proceeds gained as a result of these false statements. The OIG will continue to work tirelessly with the U.S. Attorney and our law enforcement partners to investigate such crimes.” DOL-EBSA New York Regional Director Jonathan Kay said: “Today’s plea is a testament to the good work and strong collaboration among multiple federal agencies. This agency remains committed to protecting worker benefit plans from those who would defraud them for personal gain.”

According to the Superseding Information to which MADOFF pled and other court filings:

MADOFF was employed at BLMIS from 1965 through at least December 11, 2008. Beginning in 1969, he became the Chief Compliance Officer (“CCO”) and Senior Managing Director of BLMIS. In his role as CCO, MADOFF created false and misleading BLMIS compliance documents, as well as false reports that were filed with the U.S. Securities and Exchange Commission (“SEC”) that materially misstated the nature and scope of BLMIS’s Investment Advisory (“IA”) business.

Specifically, in his capacity as CCO, MADOFF created numerous false compliance documents in which he stated that he had performed compliance reviews of the trading in the BLMIS IA business on a regular basis, when in reality, the reviews were never performed. The false statements were designed to mislead regulators, auditors, and IA clients.

Further, in August 2006, BLMIS registered as an investment adviser with the SEC. As a registered investment adviser, on at least an annual basis, BLMIS was required to file forms with the SEC that are used to guide the examination programs of investment advisors. Madoff was integrally involved with both the SEC registration process and in the creation of the forms, known as “Forms ADV,” which were materially false and misleading. The numerous false statements in the Forms ADV created the false appearance that BLMIS’s IA business had a small number of highly sophisticated clients and far fewer assets under management than was actually the case. For example, the Forms ADV stated that there were only 23 IA accounts under management at BLMIS when in fact there were more than 4,000 at the time of the firm’s collapse in 2008, and that its IA services were available “only to institutional and high net worth clients.” The Forms also stated that, in 2008, BLMIS had $17.1 billion in assets under management when, on paper, it had more than $65 billion at that time. MADOFF also misrepresented that he, as CCO, ensured that reviews of the IA trading were being performed.

In addition, from 1998 through 2008, MADOFF engaged in a tax fraud scheme involving the transfer of wealth within the Madoff family in ways that allowed him to avoid paying millions of dollars in required taxes to the IRS. Most, if not all of the “wealth,” came directly or indirectly from IA client funds held at BLMIS. The schemes in which he engaged also allowed Bernie Madoff to evade his tax obligations. The methods by which MADOFF engaged in tax fraud included the following:

■MADOFF received approximately $15,700,000 from Bernard L. Madoff and his wife, and executed sham promissory notes to make it appear that the transfers were loans, in order to avoid paying taxes;

■MADOFF gave approximately $9,900,000 to family members, and in order to avoid paying taxes, executed sham promissory notes to make it appear that the transfers of these funds were loans;

■MADOFF did not pay taxes on approximately $7,750,000 that he received from BLMIS;

■MADOFF received approximately $16,800,000 from Bernard L. Madoff from two sham trades, and disguised the proceeds of the trades as long-term stock transactions in order to take advantage of the lower tax rate for long-term capital gains;

■MADOFF charged approximately $175,000 in personal expenses to a corporate American Express card and did not report those expenses as income. MADOFF also arranged for his wife to have a “no-show” job at BLMIS from which she received between approximately $100,000 to $160,000 per year in salary, a 401(k), and other benefits to which she was not entitled.

In December 2008, when the collapse of BLMIS was virtually certain, MADOFF agreed with others to send the $300 million that remained in the IA accounts to preferred employees, family members and friends. BLMIS collapsed before the funds were ever disbursed. On December 10, 2008, one day prior to BLMIS’s collapse, MADOFF also withdrew $200,000 from BLMIS for his personal use.

MADOFF, 66, of Old Westbury, NY, faces a statutory maximum sentence of 10 years in prison. The statutory maximum sentences for each of the charged offenses are set forth in the attached chart. Pursuant to his plea agreement with the Government, MADOFF agrees not to seek a sentence of other than 10 years in prison. MADOFF is also subject to mandatory restitution and criminal forfeiture and faces criminal fines up to twice the gross gain or loss derived from the offense. He has agreed to forfeiture of more than $143.1 billion, including all of his real and personal property. This amount represents all of the investor funds paid into BLMIS from 1996—the start of MADOFF’s involvement in the conspiracy—through December 2008.

As part of the defendant’s forfeiture, the Government has entered into a settlement with MADOFF’s family that requires the forfeiture of all of his wife Marion’s and daughter Shana’s assets, and assets belonging to other family members. The surrendered assets include, among other things, several homes, a Ferrari and more than $10 million in cash and securities. Marion Madoff is being left with approximately $771,733 to live on for the rest of her life. The forfeited assets, including the net proceeds from the sale of the forfeited properties, will be used to compensate victims of the fraud, consistent with applicable Department of Justice regulations.

Judge SWAIN set a sentencing date for MADOFF of October 4, 2012 at 3:30 p.m.

Mr. Bharara praised the investigative work of the Federal Bureau of Investigation. He also thanked the U.S. Securities and Exchange Commission, the Internal Revenue Service and the U.S. Department of Labor for their assistance.

These cases were brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

The case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant United States Attorneys Lisa A. Baroni, Julian J. Moore, Matthew L. Schwartz, Arlo Devlin-Brown and Barbara A. Ward are in charge of the prosecution.