Madoff headed to hellish jail, SEC still in doghouse

Disgraced financier Bernard Madoff enters a federal court in New York City on March 12, 2009. (Photo by Mario Tama/Getty Images)

by Frank James

Physicians get to bury their mistakes, it's said. And federal regulators get to see theirs go to jail.

That's one way to look at Bernard Madoff's federal court appearance today where he pleaded guilty and a judge sent him directly to jail to await his sentencing in June.

If Securities and Exchange Commission officials had caught Madoff years earlier, which was possible since it was informed more than once of suspicions that Madoff was running a Ponzi scheme, he arguably would have been stopped years ago perhaps billions of dollars of investor money likely wouldn't have been lost.

But the SEC clearly failed in its duty to safeguard investors from a fraud it was literally led to by private investigator Harry Markopolos who repeatedly tugged the SEC's jacket to get them to fully probe Madoff's activities.

It will likely take years for the SEC to live down the mistakes it made in the Madoff case. As Mary Schapiro, the SEC's new head said at a House hearing yesterday: "As you can imagine, it is unfortunately that the SEC is currently being defined more by what it's missed than by what it's done, and certainly Madoff is an enormous component of that."

Schapiro said the SEC is working on fixing the commission problems Madoff exposed:

An excerpt of her testimony:

I will say that two weeks ago we filed three TROs in one day for Ponzi schemes. And there's no doubt but that the Enforcement Division's a bit on fire with respect to Ponzi schemes. And we can talk more about that.

As you also know, we have an inspector general investigation ongoing about what went wrong with Madoff. And we look forward very much to his report and his findings. And I do talk with him on a fairly regular basis. His report won't be done for months, and I feel -- I have to run the agency in the meantime, and we don't have the luxury of waiting months to start to make some of the structural changes that I think are really critical to addressing what went wrong with Madoff.

As you point out, we received tips, information that was quite credible and fairly complete, outlining why the returns that were promised by Madoff were highly unlikely to be legitimate. We get, as I said, 700,000 to a million and a half complaints a year and tips a year. We have to figure out a way to deal with that volume of information.

So I contracted in the last week with the Center for Enterprise Modernization, who's worked with other federal agencies to do just this sort of process review for the handling of data coming into the agency and then to make some short-term and longer-term recommendations to us on how we might better mine that data, understand what's important in it and then jump on those matters as a priority to try to head off Ponzi schemes and problems like that much earlier.

And we've -- also working on a package of proposed regulatory reforms that would deal with issues like the custody of customer assets, potentially an independent audit by an accounting firm of investment advisers. Such a requirement doesn't exist.

And so there's also a regulatory reform package that we're working on, and our examination program is refocused on a number of these kinds of issues.

Back to Madoff. He was told the court he was very sorry about his crimes:

An excerpt from the Associated Press:

"I am actually grateful for this opportunity to publicly comment about my crimes, for which I am deeply sorry and ashamed," he told U.S. District Judge Denny Chin.

He said that he started the fraud but that he believed it would be short and he could extricate himself.

"As the years went by, I realized my risk, and this day would inevitably come," he said in a steady voice. "I cannot adequately express how sorry I am for my crimes."

The fraud turned a revered money man into an overnight global disgrace whose name became synonymous with the current economic meltdown.

Madoff also said he never invested the money. Instead he just stashed the money in a Chase Manhattan bank.

As for Madoff, he may have made many investors' lives hellish by separating them from their life savings. As punishment It sounds like his life is about to become hellish in return.

An excerpt from a Bloomberg News report on what he faces:

March 12 (Bloomberg) - Bernard Madoff, who pleaded guilty today to masterminding the largest Ponzi scheme in history, may have to fight off prison inmates who want to squeeze him for money or blame him for the Wall Street crash.

"Madoff isn't going to be real popular," said Larry Levine, who served 10 years in federal prisons for securities fraud and narcotics trafficking and now advises convicts on surviving time behind bars. "All the guys there will have wives or parents who are losing their homes or their jobs or who can't send money to them anymore. Everybody's going to be blaming Bernie."

The 70-year-old investment adviser was ordered to jail by U.S. District Judge Denny Chin until sentencing scheduled for June 16. He faces as much as 150 years in prison...

... "He's looking at well over 20 years, probably at least 30," said Ellis, former president of the National Association of Criminal Defense Lawyers in Washington, D.C. "That's a life sentence for him."

Madoff didn't agree to a plea deal with prosecutors because they demanded he admit to a conspiracy, according to people familiar with the matter. That would have required him to say he worked with others in the alleged scheme, they said.

Ira Sorkin, Madoff's lawyer, had no comment on his client's possible sentence before the investment adviser arrived at court today.

The Queens, New York-born financier is a former Nasdaq Stock Market chairman and owns a penthouse on Manhattan's Upper East Side, vacation homes in Palm Beach and the French Riviera and a 55-foot Rybovich sport-fishing yacht called "Bull." He started his investment business in 1960, at the age of 22, with $5,000 saved from summer jobs.

Aging Convicts

Madoff will likely join a corps of aging white-collar convicts including former WorldCom Inc. Chief Executive Officer Bernard Ebbers, 67, now housed at the Federal Correctional Institution in Oakdale, Louisiana, and John Rigas, 84, the ex-CEO of Adelphia Communications Corp. who is imprisoned at the Federal Correctional Institution in Butner, North Carolina.

Ebbers, who was convicted in an $11 billion accounting fraud, is due for release on July 4, 2028, while Rigas's sentence for securities and bank fraud and conspiracy runs until Jan. 23, 2018, according to the Federal Bureau of Prisons Web site.

Federal prisons carry different designations, ranging from minimum to maximum, based on levels of security.

The two former CEOs are doing time in low-security prisons featuring double-fenced perimeters, mostly dormitory housing and work programs, according to the bureau Web site.

Madoff probably would be assigned to a low- or medium- security facility, said Levine, whose firm, Wall Street Prison Consultants, is in Los Angeles. Medium-level lockups usually house inmates in cells and are ringed with electronic escape- detection systems, the bureau site says.

'Least Violent'

Because crimes such as rape and murder are usually prosecuted under state laws, "in general, the federal system is less violent," said Peter Henning, a law professor at Wayne State University in Detroit. "Madoff will be put in with the least violent."

Madoff, who is Jewish, may be assigned to one of several U.S. facilities in the New York area, including the Federal Correctional Institution in Otisville, New York, 70 miles from Manhattan, where ultra-Orthodox Jews run religious services inside the prison, he said.

The financier may be sent instead to a low-security facility at Fort Dix, New Jersey. It's next to a minimum-security camp housing former fund manager Martin Armstrong, founder of now- defunct Princeton Economics International Ltd., who's serving a five-year sentence for securities fraud.

11 Counts

Madoff pleaded guilty to 11 counts, including securities, investment-adviser, mail and wire fraud as well as money laundering and theft from an employee-benefit plan.

The addition of money-laundering charges "may make this a life sentence" and push Madoff into a medium-security prison, at least at first, Ellis said. "Where you end up has as much to do with where the BOP has a bed open as your sentence."

Before Madoff's plea, two judges dismissed a government motion to revoke his $10 million bail and jail the financier after he sent a diamond bracelet and watches to friends and relatives in violation of an asset freeze. He awaited his hearing under house arrest at his $7 million duplex at 64th Street and Lexington Avenue.

Madoff may be sent first to the 12-story Metropolitan Correctional Center in lower Manhattan or the Metropolitan Detention Center in Brooklyn. Both house criminals from "swindlers to murderers," Wayne State's Henning said.

'Bleak' House

The "bleak" MCC is "horrendous," according to defense attorney Sam Schmidt, who visits the jail several times a week and represented Wadih el-Hage, convicted of federal terrorism charges related to the 1998 bombings of the U.S. embassies in Africa. He visited el-Hage at the facility between 1998 and 2001.

Conditions are worse at the Brooklyn jail, according to a court filing by Flora Edwards, a lawyer for fund manager Raffaello Follieri. He was convicted in 2008 in a real-estate investment fraud that led investors to believe he had a special relationship with the Vatican. Edwards' filing described the MDC as having an "intolerable" stench and free-roaming rats.