Madoff Legal Morass Just Keeps Growing

Bernard Madoff's multi-billion dollar Ponzi scheme was, at its very core, breathtakingly simple -- notwithstanding the huge sums of money involved and its sweeping global reach.

Its aftermath has been anything but, as evidenced most recently by the death of Madoff's son.

Madoff’s arrest just over two years ago has spawned a legal morass that has so far entangled hundreds of people who were connected in one way or another to what has been described as perhaps the largest investment fraud in history.

The vast majority of these cases are civil suits filed in an effort to recoup losses. A flurry of those arrived last week as a Dec. 11 deadline approached for suits seeking to "claw back" money from investors who may have profited inadvertently from Madoff’s fraud.

Meanwhile, just eight people have been charged criminally to date, including Madoff and seven of his closest business associates, several of them long-time employees at his midtown Manhattan office.

Specifically, some have questioned why no members of Madoff’s family have been charged as criminals. Tragically, that topic was thrown into stark relief on Saturday when Madoff’s 46-year-old son Mark apparently committed suicide in his Manhattan apartment.

Mark Madoff, his brother Andrew, and Bernard Madoff’s brother Peter all worked for Madoff for decades, ostensibly running Madoff’s legitimate business as a market maker for big investors. But all three benefited financially from Madoff’s scheme, and all three are facing numerous civil claims filed by, among others, Irving Picard, the court appointed trustee who is overseeing attempts to recoup losses.

Ronnie Sue Ambrosino, who with her husband lost their life savings to Madoff, has grown philosophical over time. “Putting the whole Madoff family behind bars would certainly bring a sense of closure and righteousness, but it’s not going to get the innocent victims their money back,” she said.

Another frequent target for criticism has been the Securities and Exchange Commission, which received numerous warnings from would-be whistle blowers skeptical of Madoff’s methods for a decade prior to his arrest. But the regulatory agency failed to follow up on those leads in a manner that might have shut Madoff down.

“Here’s an organization whose sole purpose is to maintain fair markets. But instead they perpetuated Madoff’s fraud and allowed many hundreds more to be ensnared. Their actions lured fresh investors into the Web,” said Ambrosino.

An SEC spokesman didn’t immediately respond to a request for comment.

In just the past few weeks, Picard has filed hundreds of suits against investors, banks and feeder funds seeking an estimated $50 billion in so-called clawbacks. Picard has determined the targets of these suits to be “net winners,” or investors who over the years withdrew more than they invested with Madoff.

So far Picard has recovered about $2.5 billion for reimbursement to investors who lost money to Madoff.

Picard has also stepped up his legal efforts -- and legal rhetoric -- toward some pillars of Wall Street that were connected to Madoff in various ways.

A suit filed against JPMorgan Chase (NYSE:JPM) earlier this month seeking more than $6 billion in fees and damages was accompanied by a statement that read in part: “JPMorgan was willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff. JPMC was at the very center of that fraud, and thoroughly complicit in it.”

JPMorgan has denied any wrongdoing in connection with Madoff.

Picard also recently filed civil suits against UBS AG (NYSE:UBS) and HSBC (NYSE:HBC), alleging that the banking giants enabled the fraud.

Earlier lawsuits filed by Picard against high-powered investment advisors such as J. Ezra Merkin, head of hedge fund family Gabriel Capital, and the principles behind the Fairfield Greenwich Group also described how sophisticated money managers steered billions of dollars to Madoff while collecting millions in fees, all while apparently turning a blind eye to Madoff’s more questionable methods.

Consequently, some have questioned why these people have escaped criminal charges.

Michael Shapiro, a lawyer at Carter Ledyard and Milburn in New York, a firm representing Madoff victims, offered some perspective.

Many of the Madoff intermediaries who have been slapped with civil suits for aiding Madoff in some fashion have claimed they lost money in the scam, Shapiro noted.

“Many of these folks can point to net losses. That undermines the notion of intent,” he said. “If they knew what was going on, if they were in cahoots with Madoff, the expectation is that he would have tipped them when the house of cards was about to come falling down. But the fact that he didn’t undermines the notion that he was involved with them or that they had the kind of inside knowledge needed to sustain criminal charges.”

In any case, there’s still plenty of time for additional criminal charges. It’s another three years before the statute of limitations runs out on Madoff’s fraud.

Ultimately what prosecutors are likely doing is looking to put pressure on people already charged to give up other people, Shapiro said.

Frank DiPascali, for example, is well-positioned to “say yay or nay” concerning whether family members were criminally involved with the scheme, he said. DiPascali was Madoff’s right-hand man for 30 years, managing the office in which the fraud was run. He is one of the six people other than Madoff to have been charged as a criminal in the fraud but he has yet to be tried or plead guilty to any crimes.

“There’s no reason for them not to be doing this very methodically,” Shapiro said. “It’s proceeding as I would have expected it to proceed. I would not be surprised to see additional criminal charges filed and I wouldn’t be surprised to see the remaining son charged criminally at some point.”