Madoff's family could face bankruptcy

The legal net is tightening around the Madoff family, and the closest relatives of Wall Street swindler Bernard Madoff could be bankrupted by a lawsuit expected to be announced this week.

Madoff's sons, Andrew and Mark, his brother Peter and niece Shana are all braced for the arrival of legal papers demanding that they compensate thousands of victims for their negligence and breaches of responsibility when they worked at the family firm.

When Madoff was running history's largest pyramid scheme, the rest of the family were living high on the hog and treating the Madoff business as a piggy bank to fund shopping trips, holidays and country club memberships, according to court papers.

Many of the victims of the fraud have long believed the Madoffs must have known their patriarch was a crook; this week, the trustee trying to recover the money says he no longer cares whether they did or didn't, and that their failure to ask where the money was coming from makes them just as culpable.

"Whether or not they have criminal problems, we will be pursuing them as far as we can pursue them," said Irving Picard, the court-appointed trustee.

"If it leads to bankrupting them, then that's what will happen."

Peter Madoff was his brother's de facto deputy at Bernard L. Madoff Investment Securities, and also served as its chief compliance officer.

Andrew and Mark had worked in their father's firm for most of their adult lives. Shana, Peter's daughter, also worked as a compliance lawyer, responsible for checking that the firm met its legal and regulatory obligations.

They have all vigorously defended their innocence, saying they worked exclusively on the share-trading side of the business, while Madoff orchestrated his sham investment business from a different floor.

They are victims, not accomplices, they say. Indeed, Mark and Andrew say they are owed money by the business.

In the days after he confessed that his investment business was "one big lie" and the US$65 billion ($90 billion) he had said was in his clients' accounts was just a mirage, Madoff wrapped up and sent some of his most treasured possessions, such as expensive designer watches, to family members.

He must have known then that his downfall would bring an end to their own lavish lifestyles, and perhaps he wanted to compensate them a little; nine months on, his downfall could be their absolute ruin.

Picard says Madoff's brother and sons alone were paid US$80 million in compensation over the seven years before the pyramid scheme came crashing down, and got millions more in expenses.

The lawsuits due this week are going to demand the return of US$198 million that was paid out, loaned or spent by the four Madoffs.

Ruth Madoff, the fraudster's wife, is already being sued and has to report every item of expenditure valued at more than US$100.

The reason? Picard suspects that extra money has been squirrelled away in overseas accounts and he wants to make sure that family members are not able to get access to such assets without him noticing.

Ruth Madoff moved out of the couple's Manhattan penthouse in July, an hour before it was seized by US marshals. Another family home, in Palm Beach, Florida, is also going under the hammer; a Montauk beach house was sold last week for more than the asking price of US$8.75 million.

Picard is trying to raise as much money as possible for the victims' compensation fund, and although it is doomed to fall short of what is necessary, every little helps. When all the account statements that Madoff sent to his victims are added up, they total US$64.8 billion. But none of the investment returns that those statements showed, sometimes over more than two decades, was real, because Madoff had never invested a penny. He had simply used money coming in to the fund to pay clients cashing out.

Still, even the real loss - the amount of money that victims paid in, minus the amount they cashed out over the years - is US$18 billion.

The largest amount of money, the trustee believes, can be clawed back from big institutional and mega-rich investors who took billions out in the final years of the scheme, and who, according to earlier suits, had all sorts of irregular dealings with Madoff, such as discussing in advance what investment returns should be and back-dating some statements of trading activity.

The lawsuits against relatives are expected to lean heavily on the disclosures of how the Madoff family took millions out of the business in expenses.

Bob Mintz, a former federal prosecutor who is now partner at the McCarter & English law firm in New Jersey, said Picard will have to prove that the four family members in his sights breached their duty to investors in the Madoff scheme.

"What he may use is a broad-based allegation that, if they did not know about Bernard Madoff's fraudulent activities, they certainly should have, based on their knowledge of the way the operations were being run. Were there enough indications of some irregular activity that they should have made further inquiries?"

- INDEPENDENT