The criminal charges filed Tuesday against Bernard Madoff make clear the central role that his secretive London operation played in enabling him to hide the theft of billions of dollars of investors' funds.
As Condé Nast Portfolio reported last week, the Serious Fraud Office in Britain has been investigating the London firm, Madoff Securities International, for suspected money laundering.
Now an 11-count "criminal information" document U.S. prosecutors filed in federal court in Manhattan reveals that in recent years the London firm was the main conduit for his diversion of funds.
Madoff sent money investors deposited in his fund to London, then had it transferred back to different U.S. accounts, for his personal use and to help pay the overhead of the legitimate stock trading business that was part of his main operation in New York.
On one April day in 2007, for instance, Madoff caused nearly $55 million "derived from fraud in the sale of securities, mail fraud, wire fraud, and theft from an employee benefit plan" to be transferred from New York to London.
As an integral part of the alleged Ponzi scheme, some of the money sent to London was sent back to the U.S. and used to pay off earlier customers who wanted to cash out their investment accounts. This helped to perpetuate the scheme by making it appear that returns were real and that investors could have access to their money.
The charges also spell out that Madoff used the London office as a key prop in his massive charade, to make it appear, falsely, that he actually was buying and trading securities for his investment fund customers as he had claimed. Transferring funds to London helped deceive regulators and investors into believing he was executing the trades in Europe, the court document says.
Madoff falsely assured Securities and Exchange Commission investigators in May 2006 that he was trading securities in Europe, the document says.
In fact, in a scheme that extended back at least to the 1980s, he never did any actual trading of the money that thousands of investors entrusted to his fund, according to the court documents and public statements by the trustee liquidating his main, New York-based firm, Bernard L. Madoff Investment Securities.
Madoff is expected to plead guilty on Thursday to the charges, which include money laundering, securities fraud, perjury, and filing false statements with the SEC.
The charges said that customer statements for November 2008, shortly before he was arrested, made it appear that his fund had a balance of $64.8 billion; in reality, it had "only a small fraction" of that amount.
The charges give no clue, however, to his investor's real losses, the amount of money they actually had invested in his fund. Securities experts have said they expect that amount to be much smaller, likely somewhere between $10 billion and $30 billion. The charges disclose that Madoff had promised some customers annual returns of up to 46 percent.
The London firm was owned mainly by Madoff, with smaller amounts owned by his brother, Peter, and several other family members. It was located in Mayfair, home to numerous hedge funds, in a small office building two blocks from St. James Park. It shut down the day after Madoff was arrested.
The office was run by Stephen Raven, 70, who in a long career with several well-known investment firms had been a distinguished figure in London's securities. He has stated publicly that he had no inkling of any fraud, and that he learned of Madoff's downfall by watching a TV news program. He has said that none of the other employees in the office knew of the fraud either.
The charges filed in New York contain no indication of whether any other individuals besides Madoff, on either side of the Atlantic, are suspected of complicity in the fraud and may be charged. A British solicitor representing Raven couldn't immediately be reached overnight in London.
The charges detail that Madoff took money deposited by his investors and transferred it to accounts controlled by his London firm. He then had the firm send the money back to different U.S. accounts under his control.
Some of the money went to "purchase and maintain property and services for the personal use and benefit of Madoff, his family members, and associates," according to authorities. Another portion of the money was sent back from London to an operating account that paid the overhead costs of his separate legitimate stock trading business in New York.
The amounts of money sent back and forth weren't disclosed in the charges.