Federal prosecutors in Manhattan today asked a court to place alleged $50 billion Ponzi scheme operator Bernard Madoff in jail while they continue developing their case against him. Meanwhile, in Washington a Congressional panel was asking what the SEC could have done to prevent the scandal.
A federal judge, perhaps predictably, questioned the validity of the government's request to put Madoff in custody considering that Madoff's current bail terms -- home confinement in his posh Manhattan penthouse -- had earlier been agreed upon by the government.
A federal prosecutor argued that cufflinks, watches, and other personal property purportedly worth $1 million had been shipped by Madoff and his wife to relatives and friends during the holiday season, and that this constituted a violation of the terms of bail because the "dissipation of assets" could potentially harm investors seeking to recoup any of their losses from investing with Madoff.
Madoff's attorney, Ira Sorkin made light of the government's claim, saying the cufflinks were worth twenty five dollars and the valuable property included a pair of $200 mittens Mrs. Ruth Madoff sent a friend. Madoff's bail is secured by his assets including a posh Manhattan apartment appraised by some at $7 million, an ocean retreat in Montauk, New York, and a Florida mansion in Palm Beach.
When Madoff was originally arrested in mid December, his bail terms included an electronic bracelet but allowed him to roam his exclusive upper East Side neighborhood during the daytime and only be confined in his home overnight. Within a week, and amid public outcry, those terms were amended to eliminate the provision that allowed Madoff freedom from confinement.
A federal judge asked the prosecution and defense for written briefs to consider prior to making a decision on the government's request that Madoff be incarcerated. That decision is not expected to be handed down before Thursday afternoon.
Meanwhile, Congress has barely gotten back to work but members are already debating the Madoff scandal -- and what new regulatory changes are needed to prevent a similar one in the future.
As Rep. Paul Kanjorski, (D-PA), who chaired the hearing by the House Financial Services Committee Monday, put it, the allegations of fraud by Madoff "simply shock the conscience."
But, as the debate between the members made clear, the central question Congress will looking over in the coming months: whether it is a lack of regulations or a lack of enforcing existing regulations that led to the failure to detect Madoff's alleged Ponzi scheme.
Most, particularly Democrats agreed with Kanjorski, who noted that the failure of the SEC to detect the alleged scam despite complaints "raised even more troubling questions about the effectiveness of our regulatory process." He added: "Clearly our regulatory system has failed miserably and we must rebuild it now."
And while Republicans like Rep. Spencer Bachus (AL) agreed for the need for a "regulatory system for the 21st century," he said that Madoff's alleged scam may not be the result of a failure of regulation but "a failure to use them."
Whatever the ultimate shape of any new congressional legislation, it is clear that the SEC's inspector general, H. David Kotz, will take a broad look at whether the SEC failed to uphold its own standards.
"There is nothing ordinary or normal about it," Kotz told Congress.
He said that his office's probe -- which began only a few weeks ago -- will look into allegations made to the SEC about Madoff going back to at least 1999 and whether SEC failed to follow its own policies in regulating Madoff's funds. His examination will also look at whether any staff contacts or relationships between SEC employees and the Madoff family impacting any decisions regarding Madoff's investigation. And it will probe whether Madoff's stature or reputation had any impact on SEC decision-making.
He noted that there are many questions that have been raised already -- of the tiny accounting firm overseeing Madoff's fund, of the warning signs by key analysts nearly a decade ago, of how his returns were unusually consistent, among others -- will be examined closely.
The investigation, said Kotz, will not only look at what went wrong with Madoff, but will likely take a broader view and provide "overarching and comprehensive recommendations" to the SEC. Among the areas he said his office may look into: the complaint handling procedures of the enforcement divisions, the intra-agency communication as well as the Office of Compliance Inspections and Examinations.
"There needs to be more than just the potential identification of individuals who may have engaged in appropriate behavior or potentially failed to follow-up appropriately on complaints," he said. "But rather an attempt to provide the commission with concrete and specific recommendations as appropriate to ensure that the SEC has sufficient systems and resources to enable it to respond appropriately and effectively to complaints."
And that is exactly what many members are hoping for. "Our focus is not so much to blame for what happened," said Rep. Barney Frank (D-Mass.). "Our main job is to do what we can to see that this doesn't happen again."
Madoff made headlines last month when an unsealed criminal complaint in federal court in New York charged that he has been running a decades long Ponzi scheme that defrauded investors of $50 billion dollars.
A former chairman of NASDAQ, Madoff was an investment advisor who catered to a handful of high net worth clients, one of whom told ABC News that Madoff was so sought after that, as recently as two months ago, he was turning down potential new business. His handful of clients routinely expected -- and received -- double digit returns, up market or down.
According to a SEC document filed in Jan. 2008, and cited in the complaint, the firm had between 11 and 25 clients for the fiscal year ending Oct. 2007 and managed about $17 billion in assets in 23 different accounts.
Bernard Madoff Investment Securities, in addition to that private client practice, is also a market maker that trades with other dealers in bonds, the S&P 500 and NASDAQ, according to Bloomberg News.
The firm was the 23rd largest market maker on NASDAQ in October, handling a daily average of about 50 million shares a day. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc., Bloomberg News reported.
But on Dec. 10, Madoff allegedly told senior employees at his firm that his entire business was a fraud. According to the federal complaint, Madoff told those employees that he was "finished" and that "it's all one big lie." Madoff estimated "the losses from the fraud to be at least approximately $50 billion," the complaint states.
At that time Madoff also told those employees that he intended to surrender to authorities, but before he did he planned to use $200-300 million he had left to make payments to "selected employees, family and friends," the complaint states.
Madoff started his business in 1960 with $5000 in savings. He resides in New York City and, according to clients, also maintains a posh waterfront home. Known to his clients as Bernie, he has a long and significant history on Wall Street and has been a chairman of the board of the NASDAQ and was a founding member of the board of the International Securities Clearing Corp. in London.
The Web site for Madoff's firm, in its company profile, says, "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
Madoff was arrested last month by FBI agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The complaint states that he used "manipulative and deceptive practices." The complaint cites two senior employees in describing how Madoff kept his client records "under lock and key" and how he left them in the dark about how he managed the private client funds. One of those employees, in interviews with the FBI, said that Madoff was "cryptic" in his statements. This, according to clients, is in keeping with the aura that Madoff cultivated among his clients, some of whom have kept funds under management with him for generations.
But by the first week of December, when clients began clamoring for redemptions -- to the tune of $7 billion -- the complaint states that Madoff began a struggle to obtain the necessary liquidity. The stress began to show, the employees said.
In a meeting at their boss's Manhattan apartment -- held there following a confrontation in the office because Madoff wasn't sure "he would be able to "hold it together" if the conversation took place in the office -- the employees came away believing that Madoff was "saying, in substance that he had for years been paying returns to certain investors out of the principal received from other, different investors."
The next day, Dec. 11, Madoff spoke with FBI agent Theodore Cacioppi and invited the agent and another agent to his apartment. Cacioppo stated in the complaint that he told Madoff he came by to see if "there's an innocent explanation."
"There is no innocent explanation," Madoff replied, according to the sworn complaint.
Madoff's lawyer, Dan Horwitz, a partner at Dickstein Shapiro in New York, has said his client is cooperating fully with the federal investigation.
"Bernie Madoff is a long-standing leader in the financial services industry and he is cooperating fully with the government investigation into this unfortunate set of events," Horwitz said.