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."
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