Madoff Subpoenas To Shed More Light on Ethics Oversight Void

Madoff Trustee Seeks Wide Power to Subpoena
The New York Times by DIANA B. HENRIQUES - January 3, 2009

The trustee overseeing the bankruptcy of Bernard L. Madoff’s trading firm has made an urgent request to the court for unusually broad authority to subpoena witnesses and documents, citing the vast scale of what is alleged to be a $50-billion Ponzi scheme. While not unprecedented, the request from the trustee, Irving H. Picard, is far from routine, and it illustrates how much Mr. Picard’s burdens have expanded beyond a trustee’s traditional tasks of identifying assets and selling them to satisfy claims. Noting that “the debtor’s operations were allegedly a massive fraudulent enterprise,” Mr. Picard said he needed the authority to issue expedited subpoenas to investigate those allegations — and that his need was “most urgent.”

The request was filed Wednesday amid new allegations that Mr. Madoff had been pulling in fresh investors — and at least $10 million in cash — within a week of his arrest on Dec. 11 on federal fraud charges. The trustee is just one of several investigators trying to determine what Mr. Madoff did with investors’ money. Federal prosecutors are conducting a criminal investigation, while the Securities and Exchange Commission continues its regulatory inquiry. The S.E.C. is also conducting an internal examination of why it failed to respond aggressively to previous warnings about Mr. Madoff, going back several years. And the House Financial Services Committee will hold a hearing on Monday to explore the regulatory implications of the Madoff case, with a witness list that includes the S.E.C.’s inspector general. According to his lawyers, Mr. Madoff — free on a $10 million bond but confined to his Manhattan apartment — is cooperating with federal authorities.

Few details have emerged about the case beyond those included in the earliest complaints: That Mr. Madoff’s sons questioned him on Dec. 10 about his plan to distribute several hundred million dollars in bonuses two months ahead of schedule; when confronted, he confessed that his business was a fraud whose losses could run as high as $50 billion. His sons promptly reported the confession to federal authorities, and their father was arrested the next day. In a case where so much remains unknown, the new complaint filed this week by one of Mr. Madoff’s final investors offers a small glimpse into his dealings with his customers in the days just before he was arrested. The accusation was made by a family corporation set up by Martin Rosenman, a resident of Great Neck, N.Y., and the president of Stuyvesant Fuel Service, a heating oil distributor in the New York area. According to his lawyer, Howard Kleinhendler of Wachtel & Masyr, Mr. Rosenman had been referred to Mr. Madoff by a friend who invested successfully with him over many years — “the usual story, unfortunately,” he added.

Around Dec. 3 — about the time Mr. Madoff was expressing some concern to colleagues about getting $7 billion in redemption demands, according to other court filings — Mr. Rosenman called Mr. Madoff at his office, Bernard L. Madoff Investment Securities. Mr. Rosenman wanted to invest $10 million with Mr. Madoff, according to the complaint, filed in federal bankruptcy court on Wednesday. “Mr. Madoff stated that the fund was closed until Jan. 1, 2009, but that Mr. Rosenman could wire money to a BMIS account where it would be held until the fund opened after the New Year,” the complaint continued. The money was wired to a Madoff bank account at JPMorgan Chase on Dec. 5.

On Dec. 9 — the day Mr. Madoff proposed the early bonus payments and two days before he was arrested — Mr. Rosenman was notified by the Madoff firm that his money had been received and invested. No record of that transaction has been found, Mr. Kleinhendler said. “We don’t think it happened — we don’t think any securities were bought or sold,” he added. “To the contrary, we think he was deliberately collecting money,” he continued. “He was trying to get more money in the door for this final distribution he wanted to make.” Although Mr. Madoff reportedly told his sons he had $100 million and $200 million to distribute, it is up to Mr. Picard, the bankruptcy trustee, to determine what assets can be recovered for the benefit of customers of the firm. Besides his investigative efforts, Mr. Picard is seeking a buyer for the separate proprietary and wholesale stock-trading operations that, before this scandal, were the foundation of Mr. Madoff’s reputation. Those operations have been suspended since the scandal broke, and Lazard Frères & Company has been hired by the trustee to help find a buyer for them.

In an exclusive interview on Friday, Mr. Picard said he was hopeful that those stock-trading businesses would be sold quickly, “perhaps by the end of next week.” It is not clear what the businesses will fetch. Greg LaRoche of LaRoche Research in Providence, R.I., said that one rule of thumb would value them at about three times their net income, which would yield a price of about $200 million based on an audit from late 2007 — a substantial discount from the firm’s reported net worth of roughly $670 million at that time. Other investment bankers were reluctant to put a price on the Madoff operations, citing the uncertain market environment and the cloud the firm is now under, although one said the range could be $200 million to $400 million.

Mr. Picard was named bankruptcy trustee at the request of the Securities Investor Protection Corporation, the federal agency that oversees the liquidation of failed brokerage firms. On Friday, he sent SIPC claims applications to every customer who had an open account at Madoff within 12 months of the bankruptcy filing, regardless of when the customer last made a deposit or withdrawal. Even an investor who closed a Madoff account during the last year should be on the mailing list, he said. People who believe they had a Madoff account but who do not get a claims package can print out the documents from the trustee’s Web site, madofftrustee.com, or from the SIPC site, sipc.org.