Madoff trustee alleges Madoff sons knew of father's fraud

Andrew Madoff
Peter Kramer | NBC | Getty Images

Bernard Madoff's sons, Mark and Andrew, always claimed they knew nothing about their father's epic Ponzi scheme—after all, they turned their father in after he confessed in December 2008. But a new lawsuit by the court-appointed trustee rounding up funds for investors alleges the sons knew far more than they have ever admitted.

Only Andrew, 48, survives. His older brother Mark committed suicide in 2010.

Read MoreScam of the century—The Bernard Madoff scandal

The complaint by trustee Irving Picard is the latest version of a $150 million lawsuit alleging the brothers knew full well what their father was up to.

Among the new allegations:

  • Andrew Madoff created fake accounts for himself to show "assets" allowing him to purchase real estate.
  • Andrew and Mark's actual account statements from their deferred compensation plans showed returns that were clearly too good to be true—including returns of up to 24 percent in accounts where no actual trades took place.
  • Both sons received millions of dollars in payments disguised as loans from their parents—Bernie and Ruth Madoff.
Andrew Madoff responds to new allegations
Andrew Madoff responds to new allegations

Perhaps most explosive, the complaint alleges the sons obstructed an SEC audit of the Madoff investment advisory business—the segment of the business they have claimed to know nothing about and the heart of the fraud.

Andrew Madoff's lead attorney, Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison, disputed the complaint's claims.

"The new allegations are unfounded. As we have stated from the outset, neither Andrew or Mark knew of or knowingly participated in their father's criminal conduct. The Trustee fails to mention in his new complaint that it was Andrew and Mark who turned their father in to the authorities and put an end to the fraud," Flumenbaum told CNBC.

He declined to comment on reports that a federal criminal investigation of Andrew Madoff is picking up steam.

The audit took place in 2005, at a time when Bernie Madoff was trying to avoid registering his investment advisory business with the SEC because of the scrutiny that would result.

With SEC auditors on site, the complaint alleges, "Madoff family members and other employees were behind the scenes deleting emails that could have exposed the fraud."

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The complaint says Andrew and Mark Madoff helped print out emails to identify ones that might be problematic. The emails in question were then deleted from the computer server and withheld from the SEC.

In one email allegedly recovered by Picard's investigators, Andrew writes to his brother in January 2005, about a discussion with then-director of operations, Daniel Bonventre, who is awaiting sentencing on charges he helped cover up the fraud.

Bernard Madoff in 2009
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"I spoke with Dad who conferred with Danny. Everything's in balance, so we don't need to worry. I love my job. I love my job. I love my job. Oops—Dad's calling me again."

Appearing on NBC's "Today Show" in 2011, Andrew blamed his father for everything.

"My father, what he did, was awful, he affected the lives of so many people, stole their dreams, their futures, us among them, and I'll never forgive him for that," he said.

Speculation about Andrew's possible role in the massive fraud flared up last month when former Madoff accountant Paul Konigsberg pleaded guilty to fraud charges and spoke in court about aiding two unidentified co-conspirators in the scam. Konigsberg is cooperating with prosecutors.

A source told CNBC that Andrew suffers from mantle cell lymphoma and underwent stem cell transplant therapy last year. His health is said to be "precarious."

Correction: This version corrected Andrew Madoff's age to 48 and corrected the year of Mark Madoff's suicide to 2010.

—By CNBC's Scott Cohn