* Alleges huge sums of money taken from firm
* Accuses family firm executives as being derelict
* Family says allegations baseless
* Links Madoffs to fraudulent investment arm (Recasts, adds details of involvement in firm’s business, statement by sons)
By Grant McCool
NEW YORK, Oct 2 (Reuters) - Four Madoffs most closely associated with swindler Bernard Madoff’s firm could have stopped the fraud but they milked the business to buy everything from luxury vacation homes to paying for restaurant meals, a court-appointed trustee said on Friday.
The trustee sued the brother, sons and a niece of the imprisoned fraudster for what he said was $198.7 million of misappropriated customer money while they were executives of Bernard L. Madoff Investment Securities LLC in New York.
Each dismissed Picard’s allegations as baseless; they said they had “no prior knowledge” of Bernard Madoff’s crimes.
“Simply put, if the Family Members had been doing their jobs honestly and faithfully the Madoff Ponzi scheme might never have succeeded, or continued for so long,” trustee Irving Picard said in the lawsuit, part of efforts to recover money for thousands bilked in Wall Street’s biggest investment fraud of as much as $65 billion.
The lawsuit against Madoff’s brother Peter, sons Mark and Andrew and niece Shana, is a civil action and none of the family members has been criminally charged.
It said although they all had important roles in the ostensibly legitimate trading side of the business, they also played roles at times in the fraudulent investment advisory unit and the London branch, Madoff Securities International Ltd.
Commission income derived from purported trades “was a term used to disguise the laundering of money from the Investment Advisory business” and “often through MSIL in transactions which had no legitimate business purpose” the suit said.
Madoff, 71, was arrested last December and told the FBI he had confessed to his sons that he orchestrated a worldwide, decades-long, multibillion dollar scheme that collapsed in the declining economy. A Ponzi scheme is one in which early investors are paid with money from new clients.
The sons say they turned their father in to the authorities.
“By immediately turning him in, the brothers saved the victims of the fraud more than $170 million that their father was about to distribute,” their lawyer Martin Flumenbaum said in a statement on Friday.
In the lawsuit in U.S. Bankruptcy Court in New York, Picard said he was seeking a total of $198,743,299 from the four Madoffs. In July, he sued Ruth Madoff, Bernard’s wife of 45 years, for $44.8 million [see NUMBERS FACTBOX ID:nN02335510].
“The Family Defendants’ misappropriations of BLMIS customer funds ranged from the extraordinary (the use of BLMIS customer funds to pay for multi-million dollar vacation homes) to the routine (the use of BLMIS customer funds to pay their monthly credit card charges for restaurants, vacations, and clothing),” part of Friday’s 68-page complaint said.
It accused the four executives of the family-run firm of being “completely derelict in duties and responsibilities”.
The complaint details more than 380 separate transactions, which he says were fraudulent transfers of money.
Peter Madoff was chief compliance officer. Picard said he invested only $14 into BLMIS accounts after 1995 and withdrew about $16.2 million, Picard said in the complaint. Sons Mark and Andrew each worked at their father’s firm for about 20 years and held the titles of co-heads of trading.
Shana Madoff was a lawyer at the firm with responsibilities to ensure that it met its legal and regulatory obligations.
She married a former U.S. Securities and Exchange Commission Assistant Director Eric Swanson. An internal SEC investigation of how the regulator missed the Madoff fraud found that this romantic relationship did not influence the conduct of SEC examinations of Madoff and his firm.
Nine months after the fraud unraveled, the trustee has recovered $1.5 billion under the Securities Investor Protection Act, but his lawyers expect to collect more over time.
The case is Irving Picard, Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC v Peter Madoff et al 09-01503 in U.S. Bankruptcy Court for the Southern District of New York (Manhattan) (Reporting by Grant McCool, editing by Gerald E. McCormick and Carol Bishopric)