Bernie Madoff quietly slipped $2 million into a foundation created by son Mark as the walls started closing in. Was this part of a scheme to divert cash? Lucinda Franks investigates.
Authorities laboring to return to victims what is left of Bernard Madoff's ill-gotten gains have been discovering a web of maneuvers he used to divert millions of dollars of clients' money to his family. The fact that so many of these gifts and transfers were made in 2007 and 2008 suggests that Madoff knew his Ponzi scheme was about to collapse.
Now, it appears that Mark Madoff, who worked for his father’s firm but has not been charged with any crime, created a nonprofit foundation that served as a repository for some of Bernie’s scammed funds. An examination of the tax returns of both the foundation and the personal returns of Bernie revealed the following:
- In the last month of 2007, the Mark and Stephanie Madoff Foundation, as it is formally named, was established, but its tax return for that year, called a 990, is remarkably white. Most questions are left blank because the foundation did not do anything. It gave no grants, it employed no people, and it had only three board members—Mark, Stephanie, and Andrew Madoff—each of whom worked zero hours. The total assets declared were $2 million. But this number is puzzling.
“It looks as though Madoff could see the Ponzi scheme running out of steam much earlier than we thought and wanted to move as much money as he could out of his company so he could shield his fraudulent assets.”
- Mark’s name appears on the 990 form next to the $2 million contribution that served as the fund’s initial assets. But Bernie—whose personal tax returns have been made public—declared a gift of that amount to the foundation in 2007 and took a tax deduction for it. That gift saved him approximately $1 million in taxes. It’s unknown whether Bernie contributed the money but let Mark take public credit—perhaps as a way to mask it—or whether Mark claimed a tax deduction to match the money his foundation says he contributed, which would be a clear case of tax evasion if he did so without donating the funds. We don't have access to Mark’s return, because he has not been charged with a crime.
- Bernie's tax accountant, David Friehling, who is under indictment and cooperating with authorities, could not be reached for comment. Mark Madoff's accountant for 2007 referred me to another accountant, who also could not find any sign of Mark Madoff in the computer.
- There is no evidence of who or what The Mark and Stephanie Madoff Foundation was intended to serve. It gave away no money in 2007 and only $135,000 in 2008, which is slightly above the federally required minimum of 5 percent of the fund’s assets. The foundation does not appear in the 2007 and 2008 New York City phone books, and the number listed on the tax form is no longer active, so it is not clear whether the foundation has continued into 2009, or what happened to the $2 million. The tax returns of the foundation, which are public, have not yet been filed, thus we cannot know what its charitable contributions in 2008 were, how much is still in the fund, or, if the foundation has been dissolved, where its assets went.
- Instead of employing an accounting firm in New York, where the foundation was based, Mark’s foundation used Price Waterhouse in Pittsburgh. But when I tried to locate the accountant who had prepared and signed off on the foundation’s 2007 return, a staff member there failed to recognize Madoff’s name. After looking in what she said was every possible file, she said, "I just can't find any Mark Madoff Foundation in the computer."
- Finally, the Price Waterhouse staffer discovered a mention of the foundation, but only that it had been granted an extension of several months to file its 2008 tax return. She said perhaps the account had been turned over to Lehman Brothers with several others in 2008, "though we should have a record of their taxes." She put me on to a person at Lehman Brothers, who told me that the foundation gave out $135,000 in 2008, but not who the money went to. "Let me give you the number of the woman who prepared the foundation's 2008 tax returns," she said, citing the name Nancy Minami. Calls to Minami were never returned.
Bernie Madoff loaned more than $30 million to various family members in 2007 and 2008, including $6.5 million to Mark and Stephanie for a house in Nantucket and $9 million that he gave his brother, Peter Madoff, the firm's compliance officer, on December 12, 2008, just nine days before Bernie was arrested. Bernie also bought a $4.5 million New York apartment for his son Andrew. Although none of them have been charged with a crime, all the assets of Mark, Andrew, and Peter Madoff have now been frozen by the court. The trustee who has filed suit against many Madoff operatives to gather money to compensate the victims has not brought suit against the foundation.
When these family loans were pointed out to one prominent tax consultant, Jerry Curnutt, who previously ran a division of the IRS, he said, "It looks as though Madoff could see the Ponzi scheme running out of steam much earlier than we thought and wanted to move as much money as he could out of his company so he could shield his fraudulent assets.” Another sign that Bernie might have been looking into a crystal ball came in 2000, when he changed his business status from a single proprietorship to a single-member limited liability company, or LLC.
LLC status protected him to some degree from investors who might come after him."This designation also allowed him to file the tax returns for his company on his personal tax returns," Curnutt said. The details of the business' financial transactions, the profit and loss, are supposed to be attached in a "Schedule C." But this mandatory form was not filed with Bernie's personal return in 2007, Curnutt said. So "either he was trying to hide what he was doing, which should have brought the IRS down on him, or it was attached somewhere else, which would be very unusual."
Lucinda Franks is a Pulitzer Prize-winning journalist and author who was on the staff of the New York Times and has written for 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.