Bernard
Madoff did not merely plead guilty to running a multi-billion
dollar Ponzi Scheme. He’ also pleaded guilty to multiple
counts of “international money laundering.”
This latter criminal enterprise has not fully come to light
because while Madoff talked freely to prosecutors about
the mechanics of the swindle itself, he stonewalled the
court-appointed Trustee Irving Picard’s effort to
unravel his tangle of money laundering to the extent that
his counsel, David
Sheehan, wrote the court just before his sentencing that
Madoff has “not provided meaningful cooperation or
assistance to the trustee since his arrest.” So even
looking at a 150 year prison sentence, his money laundering
operation therefore remains a crucial missing piece in the
puzzle. At stake is the $13.2 billion that his investors
lost.
The Ponzi scheme itself was relatively simple. Madoff had
investors wire their funds into his bank account at JP Morgan
Chase for him it for them through his proprietary strategies
in the stock market. But he made no investments. Instead
he forged trading tickets providing them with a fictional
profit in their account. These imaginary profits exceeded
$50 billion by the time the scheme was exposed in December
2008. As far as the actual money went, Madoff shuffled between
two different bank accounts, siphoning off some of it to
pay the clients who withdrew their money. He also wrote
checks to pay for his life style and operating expenses
(both licit and
illicit). These banking records as well as the checks he
wrote and credit card bills are now in the
hands of the Trustee’s forensic accountants. Their
analysis shows that all the money that Madoff withdrew for
himself and family members, including everything from his
expenditures on yachts, country clubs, real estate, plane
and travel to loans to his children, gifts, and capital
calls on his wife’s private equity investments, amount
to less than one percent of the stolen money. The money
Madoff withdrew from all his bank accounts to run his scam,
including rent for his offices in the Lipstick building
in Manhattan, his payroll (which included his boat crew),
commercial taxes, accounting, legal bills, and even the
surreptitious kickbacks to fund managers through his London
subsidiary amounts to, at most, another 4 percent. He paid
these expenses by wiring money to his London subsidiary
which then wired it back to his account at Bank Of New York
Mellon. So the money he withdrew from all his banks account
for himself and his business expenses amount to less than
5 percent of the missing $13.2 billion. What happened to
the other 95 percent of the looted money? “That is
the $13 billion question”, a lawyer involved in the
liquidation process answered, adding “Lets not forget
Madoff was a truly ingenious money launderer.”
Madoff’‘s notional system of book-keeping that
provided an ideal way to launder money.
Unlike the classic Ponzi scheme in which all investors are
credited with uniform “profits,” Madoff favored
some accounts with what the Trustee called “implausibly
high” profits and allowed through large redemptions
to convert imaginary to real profits (which of course came
out
of other investors’ money). This money could then
be deposited some place else, such as a numbered account
in a off-shore haven. There is no doubt Madoff had some
purpose in stuffing some accounts with notional profits.
For example, according to a SEC civil fraud action filed
in
June against the brokerage firm Cohmad (which operated out
of his Madoff’s own offices), Madoff padded the account
of one close associate with $100 million in fake profits
by awarding him roughly triple the putative return others
were getting. The SEC alleges this was done as a
surreptitious pay-off for his steering over $1 billion of
investments to him (Madoff also, according to the SEC, accommodatingly
back-dated the non-existent transactions for this associate
so that his fake profits taxes were taxable only at the
minimal capital gains rate.)
Others Madoff clients got even larger “profits”
put in their accounts through this device. The Trustee’s
investigation found instances in which Madoff credited accounts
with returns more than 40 times greater than his others
investors (even though Madoff was supposedly using the
same trading strategies for all his accounts.), For one
such favored account, Madoff “purported to earn over
950% in 1999" [emphasis Trustee’s]. The Trustee
alleges that such “implausibly high purported returns”
resulted in 84 accounts controlled by two of Madoff’s
long-time clients withdrawing the lion’s share of
the money that other investors lost, and he filed law suits
against both of them.
One of these favored clients is Jeffry Picower, a lawyer,
accountant, deal-maker, tax shelter promoter, and philanthropist,
who knew Madoff for about 30 years. According to the Trustee’s
suit , Picower redeemed no less than $6.7 billion from 24
accounts under his control.
Where did this huge sum come from? According to analysis
by the Trustee, “at a minimum, more than five billion
dollars [came from] other people’s money.” One
reason that some much money accrued to some Picower accounts
is that Madoff favored them with extraordinary
returns. According to the Trustee, a few of them “enjoyed
14 instances of supposed annual returns of more than 100%”
(while other clients got returns of only between 10% and
15%.)
The other favored client sued by the Trustee (and the SEC)
is Stanley Chais, a former resident
of the Bronx who established himself in Beverly Hills an
unregistered investment advisor to a
wealthy clientele. Like Picower, Chais had known Madoff
for three decades, and his access was
such that his name came up first on Madoff’s office
speed dial. According to the Trustee’s
complaint, Chais withdrew $1.15 billion from 60 accounts
for himself, family members,
corporations in which he held interests, funds into which
he consolidated his clients, and other
entities. He was also favored with inexplicably high phantom
profits, with rates of returns in
some accounts, according to the complaint, “in excess
of 100 %–or even 300%– a year.”
The Trustee alleges that Chais and Picower together withdrew
a total of $7.9 billion between
1995 and 2008– most of which came from the phantom
profits Madoff allocated to them.. If so,
they, or the accounts they represented, took away nearly
one-hundred times as much money as
Madoff himself siphoned off by writing checks for his personal
and family use.
For their part, Chais and Picower, via their respective
lawyers, deny any wrong doing and
both men say they are themselves victims of the massive
swindle and suffered ruinous losses.. Chais
even wrote the federal bankruptcy judge that he is so short
on cash that he has a “serious problem”
paying a lawyer to defend him, Meanwhile, Picower virtually
closed down his foundation because of
the losses it suffered. Perhaps these men did not ultimately
get the billions that the Trustee
alleges were withdrew from accounts under their control.
After all, Madoff was not above forging his internal records.
As one prosecutor pointed out, “Madoff’s “
demonstrated ability to lie, mislead, and deceive is staggering.”
But if the $7.9 billion moved to other hands, where did
it end up? This issue may be cleared up when Picower, Chais,
and others have their day in court this summer (if the proceedings
are not delayed ). But given Madoff’s international
money laundering skills the $7.9 billion may already have
been swallowed up by what the Trustee modestly describes
as “ a labyrinth of interrelated international funds,
institutions, and entities of almost unparalleled complexity
and breath.”
|