Jan. 12, 2009 -- Bernard Madoff, the man who allegedly committed the largest financial crime in history, will not go to jail while he awaits trial. Instead he will remain under house arrest, in the comfort of his posh penthouse apartment in Manhattan, despite prosecutors' somewhat belated efforts to put him behind bars.
In a written decision handed down at noon Monday, Federal Magistrate Ronald Ellis rebuffed the argument prosecutors made last week that charged circumstances warranted that the alleged $50 billion fraudster's bail be revoked. Late Monday, the US attorney sent a letter to Ellis saying the government intends to appeal the decision.
Ellis said that the government's arguments that Madoff was a danger to the community - an economic danger in that he might further dissipate assets that could be used to pay back the allegedly defrauded investors and an increased flight risk now that the case against him is more substantial - did not warrant any changes.
The federal magistrate imposed some additional, minor conditions to the current terms of Madoff's bail. They included additional restrictions on the transfer of any assets and the requirement that Madoff provide the court a list of all valuable in his Manhattan home and that a security company search "all outgoing physical mail to ensure that no property has been transferred."
"The issue at this stage of the criminal proceedings is not whether Madoff has been charged in perhaps the largest Ponzi scheme ever, nor whether Madoff's alleged actions should result in his widespread disapprobation by the public, nor even what is appropriate punishment after conviction. The legal issue before the Court is whether the Government has carried its burden of demonstrating that no condition or combination of conditions can be set that will reasonably assure Madoff's appearance and protect the community from danger." The government had not, the judge decided.
The government's bail revocation argument was made orally last Monday and a written brief was submitted last Tuesday. In each case, prosecutors argued that a million dollars worth of heirloom jewelry and watches that Madoff and his wife, Ruth, shipped through the mail during the holidays was an effort to circumvent restrictions on dissipating assets that might need be returned to allegedly defrauded investors. Madoff had shipped the items to his sons and to a friend who allegedly was also a victim of his fraud.
The government said that the economic danger plus flight risk required detention - this after initially structuring remarkably lenient bail terms for Madoff and suffering public outcry and derision on cable television business news outlets.
Madoff's lawyers conceded that on Christmas Eve, Madoff and his wife sent a number of packages to friends and family.
"Mr. Madoff gathered a number of watches that he collected over the course of years, knowing that, due to the sudden change in his circumstances, he would never have an occasion to wear these watches again," according to a brief filed by Madoff's attorneys, who say packages were sent to the Madoffs' sons, a daughter in-law, Madoff's brother and sister in-law, Mrs. Madoff's sister and a married couple who are close friends.
Madoff, say his attorneys, "simply did not realize" that the SEC order he consented to "pertained to these personal items". The jewelry has all since been recovered, according to Madoff's lawyers.
Madoff was arrested on December 11th and his intitial bail conditions left him free to come and go as he wished during daytime hours, with restriction to his home only at night. Within a week those conditions were changed and on December 18th, Madoff was restricted to his home on a 24 hour basis.
In another development in the case, the prosecution and defense agreed this past weekend to extend the time within which the prosecution could continue developing its case without either seeking an indictment or submitting to a preliminary hearing. Madoff was charged in a federal complaint, and under the court guidelines, the government had 20 days in which to make a case. That time frame has expired, but as is often the case, the two parties agreed to give the government more time. The preliminary hearing rule would have required the government to present its case today. It now has until mid-February. And the judge has the right to grant additional extensions.
Prosecutors Wanted Madoff Behind Bars
Last week prosecutors argued that Madoff should be put in jail immediately saying that when Madoff's desk was searched following his arrest, investigators found approximately 100 signed checks totaling more than $173 million "ready to be sent out".
"The only thing that prevented the defendant from executing his plan to dissipate those assets was his arrest by the FBI," prosecutors said. "The defendant's recent distribution of jewelry and watches demonstrates a continuing intention to benefit those close to him to the detriment of his victims."
An earlier court order barred Madoff from "dissipating, concealing, or disposing of any money" or "personal property".
Was Madoff Running a Ponzi Scheme?
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.
Bernard Madoff Investment Securities and the SEC
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.
Madoff Struggled to Obtain Liquidity in December, Complaint Says
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.