The decision by Bernard Madoff and his wife to ship jewelry and others valuables to family and friends may land him behind bars sooner rather than later.
Assistant U.S. Attorney Marc Litt of the Southern District of New York told a magistrate judge Monday that Madoff and his wife Ruth mailed in excess of $1 million in valuables late last month despite a court order in a related civil case requiring the accused mastermind of a multi-billion dollar Ponzi scheme not to dissipate assets.
Most of the material has since been returned and handed over to federal authorities, but Litt said the transfer amounted to changed conditions that warrant Madoff detention as he awaits trial or a guilty plea on one of the largest frauds in history.
Defense attorney Ira Sorkin of Dickstein Shapiro said the mailing of the valuables, which included watches, a pair of cuff links and even a $200 pair of mittens, had nothing to do with allowing Madoff to remain free on bail.
At issue was the Bail Reform Act, 18 U.S.C. §§3141-3150. Sorkin said the act contemplates only the risk of flight and potential danger to the community as factors in deciding whether a defendant should be allowed to stay at liberty pending trial. The public, he said, is in no danger if his client stays out of jail until the case is resolved.
"The government is not here about mittens and cuff links," answered Litt, who said the transfers involved "hundreds of thousands of dollars and perhaps millions of dollars in watches and jewelry."
Litt's argument, one that Magistrate Judge Ronald Ellis instructed both sides to brief over the next few days, is that the definition of harm to the community is an expansive one.
Given that Madoff, who the government says has already admitted his guilt to his family and acknowledged to an FBI agent he had no excuse for the fraud, will be required to make restitution to his victims and forfeit property, Litt said the dissipation of assets constitutes an ongoing harm.
On Dec. 18, Madoff was ordered by Southern District of New York Judge Louis Stanton not to dissipate assets in an action brought against him and his firm by the Securities and Exchange Commission. Litt said the shipment amounts to obstruction of justice.
But Sorkin said Litt's position on the Bail Reform Act would gut the statute.
"If you buy into his argument, then every defendant brought before this court should be incarcerated," he said, adding that the Bail Reform Act "does not cover dissipation" of assets.
Litt countered by citing legislative history -- that the Senate Judiciary Committee intended to adopt a "broader definition" of community safety in shaping the reform act.
Noting that "the case is strong and continues to go stronger," Litt told the court that, "This is an unusual case in many respects. It involves a long-standing, very large scheme that involved a great deal of deception and a great deal of losses."
He also said Madoff remains a flight risk and that is it "simply impractical for the government to go around and collect anything of value." "The most significant thing is, in the face of a direct and clear order of which the defendant was aware, he violated that order," Litt said.
Sorkin insisted that circumstances had not changed to a degree to warrant pretrial detention.
Wearing a gray suit, white shirt and dark tie, Madoff sat expressionless with his hands folded during the one hour hearing,
Arrested on Dec. 11 on a single count of securities fraud, Madoff was released, with the government's consent, on a $10 million bond secured by his apartment in New York City and property in his wife's name on Long Island and in Florida.
Those conditions were later modified to include more restrictive home detention, electronic monitoring and a 24-hour security guard on the couple's apartment, with the service to be paid for by Mrs. Madoff.
On Dec. 24, Sorkin said, the defendant and his wife mailed jewelry to his brother, Peter Madoff, his son and daughter-in-law, his other son, and a New York couple.
On Dec. 26, the government and Mrs. Madoff agreed to a voluntary freeze on her assets, Sorkin said, "which included jewelry, her jewelry. She assented to it. She signed it."
It was on Dec. 30, while the Madoffs were preparing a statement of their net worth, that it was learned the valuables had been mailed.
"They were told, 'You can't do that. You have to get it back,'" Sorkin said, adding that everything but the material sent to the New York couple had yet to be returned because the couple was vacationing in Florida.
It was only Monday morning, Sorkin said, that the defense learned the prosecution intended to seek detention. He said the Madoffs had already arranged to have most of the valuables returned, and turned them over to the authorities, when they learned of the government's motion.
Some of the assets mailed from the couple's apartment, he said, "belong to Mrs. Madoff, who is not a party to this action," or the SEC case.
Magistrate Judge Ellis also wanted the two sides to brief whether he can conduct a de novo review of bail conditions.
Litt responded that the judge is "free to evaluate what the appropriate conditions are," and Ellis can always examine "the totality of the circumstances" in deciding whether to detain Madoff, and those circumstances have changed.
CONGRESSIONAL HEARINGS
Meanwhile, at the first congressional hearing on the scandal hearings in Washington, D.C., Monday, Republican and Democratic House members said the alleged $50 billion fraud involving Madoff reflects deep, systemic problems at the SEC.
Inspector General H. David Kotz testified to the House Financial Services Committee that he is so concerned about the SEC's failure to uncover Madoff's alleged scheme that he is expanding the inquiry called for last month by SEC Chairman Christopher Cox. Cox had pushed the blame squarely onto the SEC's career staff for the failure to detect what Madoff was doing.
Representative Spencer Bachus, R-Ala., called for Congress to create a regulatory structure "for the 21st century." The committee is trying to determine how, despite warnings back to at least 1999 to SEC staff members, Madoff continued to operate his alleged scheme.
Kotz said that he will examine the SEC's enforcement and inspection divisions and will make recommendations, steps beyond what Cox had called for.
Among those testifying Monday was Allan Goldstein, 76, a retired New York textile distributor. "I am a human face on this tragedy," he said.
Goldstein said he lost his entire life savings with Madoff and had to cash in his life insurance policies to cover his mortgage.
"Everything I worked for over a 50-year career is gone," Goldstein said. He said he had no reason to question the steady returns of 8 percent to 12 percent a year he was told him he was earning.
The Securities Investor Protection Corp. and the trustee handling the liquidation of Madoff's firm told the committee they mailed more than 8,000 claim forms to customers on Friday.
SIPC's president, Stephen Harbeck, faced pointed questioning at the hearing as lawmakers spelled out the math: an estimated $50 billion in losses from Madoff, $1.6 billion available to SIPC. The industry-funded organization, created by Congress to protect investors when a brokerage firm fails, can provide funds up to a maximum of $500,000 for each customer.
Harbeck testified that the estimated $50 billion in losses includes an unknown measure of "false profits" not legitimately earned by Madoff investors, but on which the investors have been paying income taxes.
Harbeck said that Irving H. Picard, trustee over the Madoff bankruptcy and an attorney with Baker Hostetler, has so far identified $830 million in liquid assets in Madoff's firm, funds that likely will be used to help compensate victims of the scheme.
Harbeck said that the SIPC had $1.6 billion in cash and an additional $1 billion line of credit from the federal government from which to compensate victims of the scheme. He added that the agency might ask for more money .
Lawmakers, many of whom had received calls from constituents and charities in their districts that lost money, jumped on the opportunity to show concern. The hearing was held on the final day of the current Congress.
Representative Brad Sherman, D-Calif., insisted that all five SEC commissioners should tender their resignations to President-elect Barack Obama.
Republicans warned against rushing to new regulation as a response to the SEC breakdown.
"While the failures of regulatory and private-sector due diligence exposed by the Madoff matter are obvious, they do not lead me to conclude at this stage of the inquiry that what is needed are broad new legislative or regulatory mandates on the rest of the securities industry," said Bachus of Alabama.
The Associated Press contributed to this report.
