New Signs Madoff's Family Knew

Ruby Washington, The New York Times / Redux

Within 90 days of Bernie Madoff's confession, friends and family withdrew $735 million, investigators have found. Allan Dodds Frank on a sign Madoff's circle was broader than originally thought.

The bankruptcy trustee hunting for Bernie Madoff’s assets suspects that some of Madoff’s relatives, employees, and hedge-fund associates may have known—or suspected—his Ponzi scheme was collapsing. It is the latest sign that the circle of people aware of at least aspects of the Madoff scheme may have been much broader than originally thought.

The Daily Beast has learned that in the 90 days leading to the collapse of Bernard L. Madoff Investment Securities, $735 million was withdrawn from accounts controlled by Madoff’s relatives, employees, and their relatives, and by people who fed billions of dollars of investors’ money to Madoff. The dollar amount has been previously known. What has not been reported until now is the unusually short period in which the withdrawals were made, and how close it was to the collapse of the Madoff firm and to his confession on December 10, 2008.

The bankruptcy trustee is not randomly trying to recover money from every Madoff investor—he’s looking for people who may be culpable.

The timing of those withdrawals prompted Irving Picard, the bankruptcy trustee, to send “clawback letters” in mid-April to 223 people among the more than 8,000 investors who had accounts with Madoff. What this shows is that the bankruptcy trustee is not randomly trying to recover money from every Madoff investor—he’s looking for people who may be culpable.

“If you were a close relative of Bernie or Ruth, you got a letter,” said David Sheehan, who is a leader of Picard’s legal team at Baker, Hostetler.

In an exclusive joint interview with The Daily Beast, Sheehan and Picard explained that the clawback letters asked for a return of the cash and an explanation of why the withdrawals occurred. "People who got the letter are in one way or another" related to people somehow linked to Madoff's investment advisory service, said Sheehan.

The rapid pace of withdrawals in the three months prior to Madoff’s arrest Dec. 11, 2008, “raised our level of concern that the monies were paid purposefully,” said Sheehan.

That is careful lawyer talk for saying: We wonder whether people knew Madoff’s collapse was imminent because they were enablers of the Ponzi scheme. It is a question federal prosecutors and Securities & Exchange Commission lawyers are trying to unscramble as they decide whether criminal and civil charges are warranted for Madoff’s wife, brother, two sons, niece, chief financial officer, secretaries, etc.

As part of his investigation, Picard is working through Madoff family trees. Picard is developing what I would call his “genealogy of greed” by examining money that flowed to Madoff’s relatives, his key employees, and the families and associates of money managers who made billions of dollars funneling investments to Madoff.

Bankruptcy laws allow the trustee to demand the return of monies paid out—sometimes as long as six years earlier—on the grounds that all investors must be able to recover evenly from the proceeds that have been recovered after the fraud is discovered. Bankruptcy laws also give trustees much stronger grounds for recovery of funds that were siphoned off within 90 days of the collapse of the fraud.

Picard and Sheehan also said they expect to file more lawsuits this week seeking recovery of hundreds of millions of dollars from some of the major money managers who had billions of dollars invested with Madoff. The bankruptcy trustee is clearly not buying the argument that the money managers are victims, too.

Among those in Picard’s sights, but not yet sued: the Fairfield Greenwich group, which lost $7.5 billion with Madoff; Tremont Group Holdings, which dropped more than $3 billion; and Maxam Capital, a $280 million loser.

In cases filed last week in U.S. Bankruptcy Court, Southern District of New York, Picard is seeking to recover $1 billion from California money manager Stanley Chais and nearly $558 million from Erza Merkin, who operated “feeder funds” in New York that funneled investors’ money to Madoff in exchange for lucrative commissions.

“We’re looking at money in, money out,” Sheehan said. “Given their knowledge, based on day-to-day operations, they had clear insight into what was occurring.”

Picard and Sheehan added that Madoff’s own behavior also should have put the money managers who advertised due diligence on notice. “Madoff was very, very secretive. He would not permit due diligence to take place,” Sheehan added.

In the complaint against Merkin, Picard says that Merkin ignored more than 500 trades supposedly done for his accounts by Madoff that were outside the range of prices for the stocks traded that day. Picard added Merkin also ignored advice from one of his advisers—a convicted felon—that Madoff was running a Ponzi scheme.

Many of the investors, such as relatives of Annette Bongiorno, who helped run Madoff’s investment service, and descendants of Saul Alpern, the father of Ruth Madoff, may well be innocent victims. Some of them had small accounts that may have been inherited. So far, few of the people who have received the letters have responded, although many are angry.

Dominick Bongiorno, a 58-year-old New Jersey resident who says he is disabled, is one of those angry investors who got a Picard demand letter. “I got laid off. I had to use the money to survive,” Bongiorno says. “ I lost my life savings.” He declined to comment to The Daily Beast about whether he is related to Annette, saying only that he got into Madoff because “I had a friend.” Without access to any money, Bongiorno says: “I am ignoring it [Picard’s letter]. I can’t afford to hire a lawyer, so I have to wait and see what happens.”

Last Friday, Picard announced a new “hardship” program to speed up possible recovery of the $500,000 per account guaranteed by SIPC. That would help those Madoff investors who cannot pay medical and housing bills or may soon face personal bankruptcy.

In fact, Picard tells The Daily Beast he is seeking to dispel the rumor going around on Madoff victim Web sites that he is motivated by a 3 percent override on money he is able to claw back.

“I do not get a percentage on any of the recoveries. This is not a commission case,” Picard said. “I am paid separately by SIPC and that has nothing to do with the money I recover or the money that is going to get distributed.”

Picard estimates that about $1 billion has been recovered so far. He and Sheehan declined to comment about whether Madoff—who is scheduled to be sentenced June 16—has actually told authorities where all the money he stole has gone.

Acknowledging that many investors are upset, Picard said that before last week’s Kentucky Derby, several investors called him, urging him to bet on one of the favorites. Unfortunately, the morning of the race, the horse was scratched with an ankle injury. His name: “I Want Revenge.”

Allan Dodds Frank is a business investigative correspondent who specializes in white-collar crime.