How Bernie Madoff did it

Madoff is behind bars and isn't talking. But a Fortune Magazine investigation uncovers secrets of his massive swindle.

Since Bernard Madoff was arrested in December and confessed to masterminding a multi-billion Ponzi scheme, countless people have wondered: Who else was involved? Who knew about the fraud? After all, Madoff not only engineered an epic swindle, he insisted to the FBI that he did it all by himself. To date, Madoff has not implicated anybody but himself.

But the contours of the case are changing.

Fortune has learned that Frank DiPascali, the chief lieutenant in Madoff's secretive investment business, is trying to negotiate a plea deal with federal prosecutors. In exchange for a reduced sentence, he would divulge his encyclopedic knowledge of Madoff's scheme. And unlike his boss, DiPascali is willing to name names.

According to a person familiar with the matter, DiPascali has no evidence that other Madoff family members were participants in the fraud. However, he is prepared to testify that he manipulated phony returns on behalf of some key Madoff investors, including Frank Avellino, who used to run a so-called feeder fund, Jeffry Picower, whose foundation had to close as a result of Madoff-related losses, and others.

If, for example, one of these special customers had large gains on other investments, he would tell DiPascali, who would fabricate a loss to reduce the tax bill. If true, that would mean these investors knew their returns were fishy.

Explains the source familiar with the matter: "This is a group of inside investors -- all individuals with very, very high net worths who, hypothetically speaking, received a 20% markup or 25% markup or a 15% loss if they needed it." The investors would tell DiPascali, for example, that their other investments had soared and they needed to find some losses to cut their tax bills. DiPascali would adjust their Madoff results accordingly.

(Gary Woodfield, a lawyer for Avellino, and William Zabel, the attorney for Picower, both declined to comment. Marc Mukasey, DiPascali's laywer, says, "We expect and encourage a thorough investigation.")

Inside the Madoff swindle: Read the full story

These special deals for select Madoff investors have become a key focus for federal prosecutors, according to this source and a second one familiar with the investigation. The second source describes the arrangements as "kickbacks" and "bonuses." A spokesperson for the U.S. Attorney declined to comment.

But a little-noticed line in a public filing by the prosecutors in March supports at least part of these sources' account. The document that formally charged Madoff with his crimes asserted that he "promised certain clients annual returns in varying amounts up to at least approximately 46 percent per year." That was quite a boost when most investors were receiving 10% to 15%. It appears to reflect the benefits that accrued to those who helped bring large sums to Madoff.

The emergence of this potential star witness is the best news to surface publicly for the Madoff family since the case began. DiPascali has every incentive to implicate high-profile names to save his skin -- and nobody is more under scrutiny than the Madoffs, many of whom worked for the firm. (Representatives for all of the family members have asserted their innocence.) It should be noted that DiPascali is not in a position to say what the Madoffs knew -- this should not be construed as an exoneration. But the fact that a high-ranking participant in the investment operation is not implicating them is telling.

The DiPascali revelations are part of a special Fortune investigation into the inner workings of Madoff's firm. It chronicles Madoff's rise -- how he started his firm in 1960 with only $200, rose to become a pioneer of electronic trading, and became notorious for his investment operation -- a strange, secretive world supervised by DiPascali.

DiPascali was a 33-year veteran of Madoff's firm. A high school graduate with a Queens accent, he came to work in an incongruously starched version of a slacker's uniform: pressed jeans, a sweatshirt, and pristine white sneakers or boat shoes. He could often be found outside the building, smoking a cigarette.

Nobody was quite sure what he did or what his title was. "He was like a ninja," says a former trader in the legitimate operation upstairs. "Everyone knew he was a big deal, but he was like a shadow."

He may not have looked or acted like a financier, but when customers like the giant feeder fund Fairfield Greenwich came in to talk, DiPascali was usually the only Madoff employee in the room with Bernie. Madoff told the visitors that DiPascali was "primarily responsible" for the investment operation, according to a Fairfield memo.

And now DiPascali may be primarily responsible for taking the ever-surprising Madoff case in yet another unexpected direction

Madoff Files Appeal to Get Out of Jail

Bernard Madoff's lawyers are appealing a judge's decision to revoke his $10 million bail and send him to jail to await sentencing. Madoff pleaded guilty on Thursday to 11 felony counts including securities fraud and was immediately jailed. His lawyers filed papers with a federal appeals court Friday. The court papers were not immediately available.

Bail was revoked after the 70-year-old financier confessed to carrying out what may be the biggest fraud in Wall Street history. Madoff told U.S. District Judge Denny Chin that he was "deeply sorry and ashamed."

Sentencing is June 16. Madoff is facing up to 150 years, plus fines and mandatory restitution.

In other Bernard Madoff news, Newly filed court documents show Bernard Madoff and his wife had a net worth of more than $823 million at the end of last year. The document detailing the Madoffs' assets was contained in papers his lawyers filed Friday in an effort to get him freed on bail.

The document shows the Madoffs owned four real estate properties worth $22 million and had $17 million in cash and a $7 million yacht, among other assets.

Bernard Madoff will plead guilty

Bernard Madoff's lawyer says his client will plead guilty to 11 counts, meaning the former Nasdaq chairman could spend the rest of his life behind bars.

The counts include money laundering, perjury and securities, mail and wire fraud. Madoff, 70, is accused of carrying out one of the largest financial frauds in history.

On Tuesday, the judge presiding over the case asked Madoff's lawyer, Ira Sorkin, if his client would plead guilty.

"That's a reasonable expectation," Sorkin replied.

Prosecutor Marc Litt said the U.S. government has not offered Madoff a plea deal on the 11 counts, which carry a combined penalty of up to 150 years in prison.

The comments were made at a hearing to resolve any potential conflicts of interest between Madoff and Sorkin; the lawyer's family invested more than $900,000 with Madoff.

The judge decided Madoff understood his right to "conflict free counsel" and "is waiving that right," so ruled that Sorkin could continue to represent him.

Prosecutors allege Madoff essentially ran an unprecedented Ponzi scheme, which the U.S. Securities and Exchange Commission failed to uncover, that bilked investors out of between $20 billion and $50 billion.

So far, authorities have managed to recover $1 billion.

Frank Razzano, a former SEC lawyer, said that if Madoff pleads guilty, and has not made a plea deal with prosecutors, he would not be obligated to share information about whether anyone else is connected to the case.

"He does not have to provide information with respect to his wife, children and fellow employees," Razzano said. "Normally, if you enter into a plea deal with the United States government, you have to agree to provide truthful information to the government and you can't assert your Fifth Amendment rights -- the right to remain silent."

However, Razzano said authorities would continue to investigate the scheme, and look into who may be connected.

"Prosecutors are going to run every single lead into the ground," he said.

Among the alleged victims were numerous charities, including and the Elie Wiesel Foundation for Humanity, which lost about $15 million. The group's mandate is to educate the public about the Holocaust and combat intolerance. A Canadian charity, the Jewish Federation of Greater Toronto, was also reportedly affected.

The British bank HSBC was one of the largest victims, losing about $1 billion. Celebrities like director Steven Spielberg and actor Kevin Bacon also lost money, although the exact amount is unknown.

U.S. prosecutors indicate Madoff plea may be in works

Prosecutors filed court papers Friday indicating Bernard Madoff may be ready to plead guilty to charges arising from one of the biggest financial frauds in history.

Madoff, 70, is scheduled for court twice next week, including a Tuesday appearance to waive any potential conflicts of interest involving his lawyer, and a Thursday morning arraignment. A defendant must enter a plea - guilty or not guilty - at an arraignment.

The U.S. attorney's office suggested Friday in a brief court filing that the money manager is ready to waive an indictment and one of Madoff's lawyers said he had already done so. A waiver of indictment is a necessary procedural step before a defendant enters a guilty plea.
Prosecutors have a deadline of next Friday to bring an indictment against Madoff under the speedy-trials law.

Madoff has been confined to his Manhattan penthouse since his arrest in early December after authorities said he told his family that he had engaged in a US$50 billion fraud. Authorities have since said money lost by investors might be less than $17 billion and the higher amount may represent false profits.

Madoff has never contested the allegations and recently surrendered millions of dollars in major assets, actions that typically precede plea deals.
Investigators have spent the last three months trying to untangle Madoff's complicated financial operation while attempting to return what is left of his assets to investors who lost billions. Madoff's co-operation could be key to explaining the mysteries and intricacies of his business, and also explain if others were involved in the fraud.

Daniel J. Horwitz, a Madoff defence lawyer, would only say "we've waived the right to indictment and the case will proceed by information."

Typically, a defendant is brought before a judge, waives indictment and enters a guilty plea the same day to a charging document known as an "information." It resembles an indictment but is brought by prosecutors rather than a grand jury.
Prosecutor's spokeswoman Rebekah Carmichael declined to comment.

Matthew Fishbein, a former chief of the criminal division in the federal prosecutor's office in Manhattan who is now in private practice, said a waiver of indictment is often followed quickly by a guilty plea but it does not have to be imminent.
"This seems to be a more complicated information and more back and forth going on. It may simply be that this basically buys them some time," he said.

Madoff already has surrendered rights to his business and any of the assets held by the business. A trustee overseeing his assets said he has identified nearly $1 billion in assets that are available to reimburse investors who have lost money.
Shortly after his arrest, Madoff offered to relinquish many of his and his wife's assets, including properties in Palm Beach, Fla., and Antibes, France, as well as his boats and cars, according to a Jan. 13 court filing signed by Horwitz and fellow defence lawyer Ira Sorkin.

"Hellishly Hot" Sauce dedicated to Bernard Madoff

A New York artist has come up with a novel way to scorn the disgraced Wall Street financier Bernard Madoff: a bottle of hot habenero sauce called "Bernie in hell".



Alex Gardega said he wanted to make a statement about Mr Madoff, who is accused of taking $50 billion from investors in his fund.

Bottles of the sauce, available for sale for $10 each on the artist's website, bear a photograph of the financier with horns on his head and dollar signs for eyes.

Underneath is the slogan "You're Gonna" over some flames and the words "Bernie in Hell".

"This sauce is habenero based and very good and hellishly hot!" Mr Gardega wrote on his blog.

Despite his claims of culinary excellence, however, Mr Gardega said the bottles had been produced as a limited-edition artwork rather than as a condiment.

Further text on the bottle reads, "You can take the money but can you take... the heat?!!!"

A string of high-profile names have emerged as victims of the alleged fraudster, including pioneer hedge fund manager Michael Steinhardt, Hollywood actor Kevin Bacon and Liliane Bettencourt, heiress to the L'Oreal fortune.

Mr Madoff, who spent Christmas under nightly house arrest after failing to find the four people needed to guarantee his $10m bail, was charged last month by federal prosecutors with directing an alleged Ponzi scheme through his New York investment firm.

His lawyer, Ira Sorkin, has said Mr Madoff's company is co-operating with the government.

Judge allows Bernard Madoff to remain free

In a decision that is sure to anger more then a few investors, A judge allowed disgraced money manager Bernard Madoff to remain free on bail Monday, rejecting an attempt by prosecutors to send him to jail for mailing more than $1 million in jewelry to family and friends over the holidays.
Prosecutors had said the gifts were grounds to have his bail revoked because what's left of Madoff's assets will have to be returned to his burned investors.

But the judge could not swayed by their arguments that Madoff represents an economic danger to the community because of the size of the fraud and his actions in sending the gifts.

Judges in bail decisions normally consider two main factors:

- whether the defendant is a flight risk or
- a danger to the community.

"The government fails to provide sufficient evidence that any potential future dissemination of Madoff's assets would rise to the level of an economic harm," Magistrate Judge Ronald L. Ellis wrote.

The anxiously awaited decision does put more restrictions on Madoff, including a restriction stating that Madoff compile an inventory of all "valuable portable items" in his Manhattan home. The judge required that prosecutors employ a security company to check the inventory every two weeks and to inspect outgoing mail.

Defense lawyer Ira Sorkin says the "the opinion speaks for itself and we intend to comply with the judge's order." Sorkin has said the gifts were an innocent mistake and said he is neither a danger to the community nor a threat to flee.

Authorities say Madoff has described his activities as a $50 billion Ponzi scheme.

Madoff has been under house arrest since posting $10 million bail against his $7 million Manhattan apartment, where he lives with his wife, and his residence in France.

Prosecutors have been trying to put Bernard Madoff behind bars since last week. That's when the U.S. Department of Justice filed documents to Ellis accusing Madoff of shipping five packages containing more than $1 million worth of diamond-studded jewelry to family and friends, in violation of bail.

Prosecutors said last Wednesday that Madoff was trying to protect these assets - which included 15 watches, four brooches, necklaces and rings - from seizure, preventing alleged victims from recovering their losses.

But Madoff's defense attorney, Ira Lee Sorkin, said Madoff didn't know he violated bail when he mailed these "sentimental" items, and that some of the packages were actually sent by his wife.

Prosecutors on Thursday urged the judge once again to revoke bail, accusing Madoff of planning to transfer up to $300 million worth of assets - including 100 signed and ready-to-send checks found in his office, totaling $173 million.

He was arrested in December and charged with one count of securities fraud for allegedly stealing up to $50 billion from investors. If convicted, the 70-year-old could face up to 20 years in prison and a $5 million fine.

Madoff's alleged scheme disrupted what was an already fragile financial system, affecting hedge funds and well-heeled investors from Wall Street, Palm Beach, Fla., and Europe. Alleged victims included Banco Santander (STD) in Spain and HSBC (HBC) in Britain, as well as director Steven Spielberg and actor Kevin Bacon.

In a Ponzi scheme, money from new investors is used to pay off early investors to create the appearance of legitimate returns.

Prosecutors:Madoff was ready to send out cheques worth $173 million

Prosecutors say that Bernard Madoff had $173 million in signed cheques in his office desk that he was ready to send out at the time of his arrest last month.

The detail was provided in a court filing Thursday as prosecutors argued that Madoff should have his bail revoked and be sent directly to jail.

They said the 100 cheques were further evidence that he wants to keep his assets away from burned investors.

Investigators previously have said that Madoff had planned on distributing more than $200 million to his closest friends and family after he realized his scheme had unravelled.

In support of their effort to have Bernard Madoff's $10 million(US) bail revoked, in a court filing, prosecutors listed SIXTEEN watches, including diamond-encrusted timepieces from Tiffany and Cartier. Four diamond brooches. Two sets of cuff links. An emerald ring.

Madoff, who is said to have confessed last month to a huge Ponzi scheme, is under 24-hour house arrest in his $US7 million Manhattan apartment.

The filing was released on Wednesday morning, less than 48 hours after a hastily called court hearing in which prosecutors said that Madoff and his wife, Ruth, had sent packages of valuables to his sons and brother, violating the terms of his bail agreement.

Madoff has promised the Securities and Exchange Commission not to dispose of any of his assets, which may be sold and used to repay investors.

His sons, Andrew and Mark, blew the whistle on their father by informing their lawyers of the unexpected parcel.

At the hearing on Monday, a lawyer for Madoff, Ira Lee Sorkin, told the court that many of the items were relatively inexpensive, including $25(US) cuff links and $200(US) mittens.
He argued the valuables were sent innocently and that the mailings happened before an asset freeze came into effect.

But assistant US attorneys Marc Litt and Lisa Baroni said in their filing that Mr Sorkin's description of the packages was at best, incomplete.

The filing said the defendant had sent a package containing "13 watches, one diamond necklace, an emerald ring and two sets of cuff links". "The Government has been informed that the value of those items could exceed $US1 million. Two other packages - containing a diamond bracelet, a gold watch, a diamond Cartier watch, a diamond Tiffany watch, four diamond brooches, a jade necklace and other assorted jewellery - also were sent to relatives."

There was no mention of the mittens.

Victims of Madoff's fund scheme include director Steven Spielberg.

He was also accused of sending more than $1 million worth of jewelry to friends and family over the holidays.

Defence lawyers have said that he is not a risk to flee or any danger to the community, and therefore he should remain free on bail.

Investor who lost $1.4B to Madoff kills himself

He was a distinguished investor who traced his lineage to the French aristocracy, hobnobbed with members of European high society and sailed around the world on fancy yachts. But after losing more than $1 billion of his clients' money to Bernard Madoff, The founder of a hedge fund Access International Advisors, Rene-Thierry Magon de la Villehuchet, had had enough. He locked the door of his Madison Avenue office and apparently swallowed sleeping pills and slashed his wrists with a box cutter, police said.

Rene-Thierry Magon de la Villehuchet

A security guard found his body Tuesday morning, next to a garbage can placed to catch the blood.

The bloody scene marked a grisly turn in the Madoff scandal in which money managers and investors were ensnared in an alleged $50 billion Ponzi scheme. De la Villehuchet is believed to have lost about $1.4 billion to Madoff.

No suicide note was found, said NYPD spokesman Paul Browne.

De la Villehuchet, 65, was an esteemed financier who tapped his upper-crust European connections to attract clients. It was not immediately clear how he knew Madoff or who his clients were.

He grew increasingly subdued after the Madoff scandal broke, drawing suspicion among janitors at his office Monday night when he demanded that they be out of there by 7 p.m. Less than 13 hours later, his body was found.

His death came as swindled investors began looking for ways to recoup their losses. Funds that lost big to Madoff are also facing investor lawsuits and backlash for failing to properly vet Madoff and overlooking red flags that could have steered them away. It's not immediately known what kind of scrutiny de la Villehuchet was facing over his losses.

De la Villehuchet (pronounced veel-ou-SHAY) comes from rich French lineage, with the Magon part of his name referring to one of France's most powerful families. The Magon name is even listed on the Arc de Triomphe in Paris, a monument commissioned by Napoleon in 1806.

"He's irreproachable," said Bill Rapavy, who was Access International's chief operating officer before founding his own firm in 2007.

De la Villehuchet's firm enlisted intermediaries with links to wealthy Europeans to garner investors. Among them was Philippe Junot, a French businessman and friend who is the former husband of Princess Caroline of Monaco, and Prince Michel of Yugoslavia.

De la Villehuchet, the former chairman and chief executive of Credit Lyonnais Securities USA, was also known as a keen sailor who regularly participated in regattas and was a member of the New York Yacht Club.

He lived in an affluent suburb in Westchester County with his wife, Claudine. They have no children. There was no answer Tuesday at the family's two-story house. Phone calls to the home and de la Villehuchet's office went unanswered.

Guy Gurney, a British photographer living in Connecticut, was friends with de la Villehuchet. The two often sailed together and competed in a regatta in France in November.

"He was a very honorable man," Gurney said. "He was extraordinarily generous. He was an aristocrat but not a snob. He was a real person. When he was sailing, he was one of the boys."

The two were supposed to have dinner last Friday but Gurney called the day before to cancel because of the weather. But during the call, de la Villehuchet revealed he had been ensnared in Madoff scandal.

"He sounded very subdued," Gurney said.

Gurney said de la Villehuchet was happily married to his wife.

"I can't imagine what it's like for her now," he said.