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12.10.09

The Bungling of the Madoff Case

A year after Bernie Madoff’s arrest in a multibillion-dollar Ponzi scheme, prosecutors have failed to build a case against his family, and the botched handling of the swindler’s right-hand man may have alienated cooperating witnesses.

On the first anniversary of Bernard Madoff’s arrest for stealing billions in the biggest Ponzi scheme ever, the prosecutors’ scorecard is close to blank—with just two people in jail and three more defendants awaiting their fates.

None of those last three is named Madoff. For now, Madoff’s wife, Ruth, his sons, Mark and Andrew, his brother, Peter, and Peter’s daughter, Shana—all employees of his securities firm—have not been criminally charged.

“The prosecutors can’t make the key cases—the family—and they are going around the edges.”

“I’d have 30 to 60 people charged by now,” said one former prosecutor familiar with the case. “I’m terribly disappointed.” Another eminent defense lawyer said: “The prosecutors can’t make the key cases—the family—and they are going around the edges. They have problems because nobody is giving them a case against the kids and maybe his brother. So far, they don’t have enough. You can’t blame them for not having a case. Maybe no case exists.”

Mansfield Frazier: Bernie Will Be Prison Royalty Another lawyer familiar with the family predicted that sooner or later, charges will be brought against Madoff’s relatives. Still, the lawyer said he is mystified about what’s taking so long: “It’s possible they don’t have enough manpower or they are being so careful because the last thing they want to do is bring charges and lose.”

The new U.S. attorney, Preet Bharara, and the assistants handling the case, Marc Litt and Lisa Baroni, declined to comment for this article.

(In a court filing December 11 after this article was posted, the U.S. Attorney’s Office for the first time confirmed it has a criminal investigation underway into feeder funds. The prosecutors asked for a six-month delay of discovery in a related civil case filed by the Securities & Exchange Commission against Stanley Chais and his funds, which had $1 billion invested with Madoff.)

The filing signed by Assistant U.S. Attorney William Stellmach said prosecutors need until June 2010 to decide whether “Chais and others have violated various criminal statutes, including, but not limited to, conspiracy, mail fraud, wire, fraud, schemes to defraud in connection with securities, conspiracy to commit securities fraud and money laundering.” Attorneys in criminal defense practice tell The Daily Beast this filing suggests other major so-called “hedge funds” that channeled billions of dollars from thousands of investors to Madoff also are under criminal investigation by the U.S. Attorney.)

The disappointment is palpable, said a defense lawyer, because the one other person in jail is Frank DiPascali Jr., who ran Madoff’s 17th-floor operations, where all the records were falsified. “If the so-called right-hand man doesn’t give them a case with the kids, where are they going?” he said.

Allan Dodds Frank: Madoff Secrets Go to the GraveDiPascali is so important that prosecutors have twice asked U.S. District Judge Richard Sullivan to allow him to stay out of jail while he helps the investigation. But the judge has said DiPascali belongs in jail and should have just as much incentive to cooperate if he ever wants his sentence reduced.

The former prosecutor said the judge’s tough stance with DiPascali may have the unintended consequence of halting what might have been a parade of cooperating witnesses. The judge, the one-time prosecutor said, has inadvertently hamstrung the investigation of possible Madoff co-conspirators—executives who collected billions of dollars in their so-called hedge funds.

“What the judge did was to protect the bad guys and make it a hard time for informants,” the former prosecutor said.

Although other judges could be assigned to new defendants, there is a fear among defense counsel that prosecutors can no longer deliver on promises to keep cooperators who plead guilty out of jail during the investigation.

Madoff, in federal prison in Butner, North Carolina, serving out a 150-year sentence, has been of no help. He has been sticking to his story that he alone concocted and pulled off the greatest heist ever.

His lawyer, Ira Lee Sorkin, told The Daily Beast not to expect Madoff to grant an exclusive jailhouse interview anytime soon: “He is not talking while the civil suits against his wife and sons are still going on.”

The Wall Street Journal reported Thursday that prosecutors could be looking at the case against Madoff’s outside accountant, David Friehling, as a possible source for backdoor criminal tax cases against Madoff family members. Such a tactic once worked for the government against Chicago gangster Al Capone, but defense attorneys told The Daily Beast the approach is a sign of government weakness.

The problem, it seems, lies with Bernard Madoff’s claim that he kept his family out of the con. “So far, the government has not been able to show that they were involved,” said a lawyer in the case. “You have got to be able to make quantum leaps, and the government so far has not been able to demonstrate [it can].”

The civil and criminal investigations also suffered a huge setback in late October, when Jeffry Picower, a close friend of Madoff’s, died of a heart attack in his Palm Beach swimming pool. Picower had claimed to be the swindler’s biggest victim, but investigators were unconvinced, as the investor had withdrawn $7.2 billion more from his Madoff accounts than he had put in.

If there is any visible progress for Madoff victims, it may be in the investigations launched by bankruptcy trustee Irving Picard, who could recover more than half of the $20 billion put in by Madoff investors.

Picard has said in court papers that Picower should give all his Madoff investment money back. People familiar with the negotiations say that any settlement would be billions more than the $2.4 billion the bankruptcy trustee claims Picower got in the last six years from Madoff.

Picower’s lawyer, William Zabel, told The Daily Beast he expects a settlement by February among the Picower estate, the bankruptcy trustee, the Internal Revenue Service, and the Securities and Exchange Commission. Before Picower died, Zabel said, the investor was not approached by prosecutors, nor did he receive any target letter or other notification that he was under investigation in the criminal case.

“I think we will be able to able to settle in a way that will please everyone, the Madoff investors, and hopefully refurbish the late Jeffry’s reputation,” said Zabel.

Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime. He also is President of the Overseas Press Club of America, one of the many journalism organizations that protests the arrests of journalists abroad and repression of freedom of speech.