03.16.09 12:14 AM ET
Feds Zero In on Bernie's Inner Circle
With Bernie Madoff locked away, the next big challenge for investigators is to continue piecing together how he pulled off the massive fraud—and who helped him. As they examine the inner workings of his firm and attempt to trace his assets, according to sources from various investigative agencies, their focus is now on the following:
• The exorbitant salaries Madoff paid to family members and employees of Bernard L. Madoff Investment Securities LLC, creating rich incentives not to question the firm’s procedures. Bernie’s brother Peter, as chief compliance officer, was paid "millions" for a job that usually commands a salary of $150,000- $250,000, according to a source who worked in payroll. A compliance lawyer often earns even less, but Peter’s daughter Shana received more than half a million dollars a year with that title. "Back office" staff in the fraudulent investment-advisory wing on the 17th floor had salaries in the hundreds of thousands of dollars, according to the employee, although the criminal complaint against Madoff notes they had little or no prior pertinent training or experience in the securities industry.
Ruth claims a house in Montauk was given to her by her father in the early 80s, according to a federal source: "This is one of her recent fabrications. "
• Investigators say there is mounting circumstantial evidence that Peter, Shana, and Ruth, who was the bookkeeper, minded the store when Bernie was away and oversaw the generation of false trades. Just as the teller who is bilking the bank comes in early, leaves late, and doesn't take vacations because he can't afford to have a replacement scrutinize his activities, investigators say they believe Madoff must have had a small inner circle who could keep the scheme running in his absence.
• Ruth Madoff has not yet been questioned by investigators, according to sources on the defense team. A source close to the case says "they are going after family and associates with a vengeance, but in their own way, by indirection." The many assets put in her name over the years—including real estate, yachts, jewelry and cash—have been frozen, but now the government is moving to try to seize the $69 million worth of real estate and cash and bonds in Ruth’s name that she says are unrelated to the Ponzi scheme. For example, Ruth claims a house in Montauk was given to her by her father in the early '80s, according to a federal source: "This is one of her recent fabrications. She darn well knows her father had no money. He didn't give it to her, Bernie did." The US Attorney's office will find it quite a hurdle to seize these assets. They will have to go to trial; both sides will require depositions and discovery; and the whole thing could take months. It will also be difficult to convince foreign governments to turn over the multi-million dollar houses that Ruth owns in Europe. "Many of them would just laugh at a US court order," declares a Gibraltar observer of the case.
• The millions of dollars that Madoff salted away in banks around the world. "He lied so blatantly about his financial assets, in addition to the fiction that he carried out this ruse alone, I thought that he was going to come into court and enter an insanity plea," said a federal investigator. A money-laundering investigation that is being conducted jointly by British and US authorities has found that investors’ capital was moved from international bank to international bank so that it couldn't be traced. So far, at least six banks are involved in the scheme, in Luxembourg, Gibraltar, Switzerland, Ireland, England, and Chile, and probably Austria and Italy.
• The possibility that Madoff, an innovator when electronic trading came to Wall Street in the ‘60s, created special software to generate false trading data and client statements.
• Meanwhile, some in the New York US attorney's office are lobbying to give any recovered assets to the US Treasury rather than to the fund for victims of the Ponzi scheme. By law, forfeiture money collected from a federal crime can be seized by the Department of Justice, but the trustee charged with returning capital to the duped investors strongly argues that all Madoff monies should be given to them.
"It is outrageous and it is silly," said one source involved in the case. "For the feds to say 'We want it!' is short-sighted and territorial."
The US Attorney's office has not yet refused the monies to the trustee, but there is tension between the various agencies investigating the fraud."The FBI and federal agents won't share information, they operate behind closed doors," said one examiner in the case. "They should be working with the trustee so they can find the hidden assets together and then turn them over to the fund for the benefit of the victims."
Lucinda Franks is a Pulitzer Prize-winning journalist and author who was on the staff of the New York Times and has written for several publications including the New Yorker and the New York Times Book Review and Magazine. Her latest book is My Father's Secret War, about her father, who was a spy for the OSS during World War II.