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Estimates of Madoff Fraud Questioned; Plea Deal Possibly in the Works

Mar 6, 2009 | Parker Waichman LLP

Bernard Madoff's fraud may have "only" cost investors around $20 billion, a new report from the Associated Press said.  The early $50 billion figure cited by many reportedly came from Madoff himself on the day he was arrested, but according to The Associated Press, that figure may be as fictitious as the trades Madoff supposedly made for his clients.

Meanwhile, there are fresh indications that Madoff''s lawyers and federal prosecutors are close to reaching a plea deal.

Madoff, founder and primary owner of Bernard L. Madoff Investment Securities LLC, was arrested on securities fraud charges in December.  He also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds, and other institutions. According to the FBI complaint against Madoff, that business was largely a Ponzi scheme. The FBI said Madoff “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately millions of dollars.”

Early report said that on the day of his arrest, Madoff himself confessed that as much as $50 billion could have been lost to his alleged fraud.  But Stephen Harbeck, President of the Securities Investor Protection Corp. (SIPC) said that the figure "does not appear to reflect reality."   The $50 billion number likely included the fictitious profits Madoff claimed, not the amount money investors had actually placed with him, Harbeck said.

No one will actually know the extent of the fraud until investors file their claims with the SIPC.  

Harvey Pitt, former head of the Securities Exchange Commission, told the Associated Press that the Madoff fraud would likely amount to more than $10 billion.  Other people involved in the case said the losses would probably total around $20 million.  But even the lower estimates would make Madoff's fraud one of the largest Ponzi schemes in history.

Meanwhile, CNBC is reporting this afternoon that prosecutors may be closer to reaching a plea deal with Madoff.  According to the report, federal prosecutors have filed a notice of intent to file an information. This is the first step prosecutors often take when they believe a defendant may waive his right to a grand jury indictment.  Such a waiver generally precedes the announcement of a plea, CNBC said.

A lot of people - especially Madoff's investors - will be watching closely if there is  a plea.  According to CNBC, a plea could take several forms.  The minimum would be a guilty plea to  one count of securities fraud, which carries of maximum of 20 years.  But such a light sentence would probably produce a public outcry.

Madoff could also be charged with violating the Racketeer Influenced Corrupt Organizations Act, or RICO.  If he were to plead guilty to such a charge, any ill-gotten gains from the fraud would become property of the U.S. government, CNBC said.

That would include assets Madoff's wife, Ruth, is trying to hold on to.  As we reported earlier this week, Madoff's lawyers claimed the couple's $7 million Manhattan penthouse, $45 million in municipal bonds and another $17 million held in separate account belonged to Ruth Madoff.  Advocates for Madoff's investors have decried this move, pointing out that  Ruth Madoff was her husband’s bookkeeper for a time, and thus may be both civilly and criminally culpable for his fraud.


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