For years the London operation for Bernard Madoff's firm was a little-known outpost of his New York trading group. Now, authorities said it played a role in how Mr. Madoff carried out his alleged fraud.
The development, disclosed in the government's criminal charges against Mr. Madoff on Tuesday, draws a more-direct connection between the alleged fraud and the trading operation in London, where directors and shareholders included family members and associates of Mr. Madoff.
Mr. Madoff, the government alleges, used the London operation to launder client money. He carried out the alleged fraud by transferring client money from the investment-advisory business in New York to London and then back to the U.S. to support the U.S. trading operation of Bernard L. Madoff Investment Securities LLC, and also for his personal benefit and for family members and associates, authorities said.
Mr. Madoff is expected to plead guilty Thursday to 11 felony counts on allegations that he took in money and claimed to have invested it for clients when in fact he was perpetrating a multibillion-dollar Ponzi scheme.
Authorities in the U.K. have said they are looking for evidence of money laundering involving the London operation, Madoff Securities International Ltd., as they seek to build a case against Mr. Madoff.
In the U.S., prosecutors have said their investigation continues though they haven't been more specific.
No one in his family or associated with Mr. Madoff's business has been charged with wrongdoing. And there is no allegation that people involved in the London operation were aware of any illicit dealings.
But the government's allegations entangle the trading operations of Mr. Madoff's firm in the investigation. Family members have said through representatives that any fraud was contained in the investment-advisory business, which Mr. Madoff ran. His sons, who worked in the trading arm, have said through their lawyer they had no knowledge of the fraud and had no responsibility for, or role in, the investment-advisory business.
Martin Flumenbaum, an attorney representing Mark and Andrew Madoff, said:
"Mark and Andrew Madoff were not involved in the financial operations of Madoff Securities International, which was a legitimate proprietary trading business. They were outside directors with de minimis ownership interests. They had no knowledge that their father committed any fraud, including allegedly laundering fraudulently obtained funds through the London entity."
In 1998, Mark and Andrew Madoff became directors of the London operation and took stakes in the business. Both sons were given loans by Mr. Madoff's U.S. operation to buy their shares, according a representative for the sons. Interest on the loans was paid by dividends made by the London operation, according to a representative and documents filed in a 2000 divorce for Mark Madoff. His stake at the time was valued at $5 million. Other family members with shares in the business were Bernard's wife, Ruth, and brother, Peter.
A lawyer for Bernard and Ruth Madoff didn't comment. Peter Madoff's lawyer didn't respond to a request for comment.
Starting as early as 2002, authorities said, Mr. Madoff "caused more than $250 million" of advisory client money to be directed through wire transfers to accounts held by the London operation.
These transactions, the government said, also gave the appearance that he was trading in Europe for his clients, a claim he often made when questioned about his stock trading, according to investors.
The London operation opened its doors in 1983 as a separate legal entity from Mr. Madoff's U.S. operation. The business was located in a townhouse in the tony Mayfair district, which is home to offices of many private banks and asset managers.
Until the end of the 1990s, little trading appeared to be taking place in the London operation, according to publicly filed documents. Then Mr. Madoff began to add staff and expand the operation. He hired traders, and documents said that he loaned the business $62.5 million in November 2000. Prior to the collapse of Mr. Madoff's alleged scheme in the fall, a dozen traders or so were stationed on the first floor of the townhouse, according to a former employee.
Around 2002, Bernard Madoff added a camera in the firm's London office so he could watch from his office computer whether the employees in the London office were taking long lunches, said Nader Ibrahim, a former technology worker at Madoff who said he visited the London office for about two weeks in 2001. Mr. Ibrahim recalls that his stay was "kind of like a vacation" in which Madoff's firm paid his hotel tab and for expensive dinners with colleagues.
There also were nonfamily members with shares in the current London firm. One was Maurice J. Cohn, known as "Sonny." Messrs. Madoff and Cohn were shareholders in Cohmad Securities, which played a role in directing investors to Mr. Madoff's advisory business. Filings show that, in 1987, Mr. Cohn had shares of Madoff Holdings Ltd., a predecessor to the current London firm. In 1998, Mr. Cohn held 35,624 nonvoting shares, some of which he transferred to "BL Madoff" in 1998 and the rest that he "disposed of" in 2004. A lawyer for Mr. Cohn has said his client had no knowledge of fraud.
Another shareholder was Paul Konigsberg, a New York City accountant and a longtime friend of the Madoffs who audited the Madoff Family Foundation tax returns. Charles Stillman, an attorney for Mr. Konigsberg, said his client received the nonvoting shares when he did work for the London operation roughly 25 years ago when it was first opening, didn't have any "meaningful business role" in the London operation, and didn't receive dividends or compensation.
In addition to Mark and Andrew Madoff, there were seven other directors, including their father and Peter Madoff. Records suggest the directors were well compensated. In 1998, the directors received "emoluments" -- or payments -- totaling £688,570 ($946,577) while the operation reported profits of £1.03 million. In 2007, directors received emoluments of £1.09 million. The highest-paid director, not named, got £301,437 in 2007.
The primary business was trading stocks using the firm's own capital. The amounts managed by each trader were relatively modest, typically in the tens of millions of dollars, according to a former employee there. There was only minimal contact with the U.S. trading operation, traders said.
Source: http://online.wsj.com, By TOM LAURICELLA, CASSELL BRYAN-LOW, JEAN WHALEN
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