Prosecution Motion To Jail Madoff Denied

Bernard Madoff remains out on bail following the denial by the court of the government’s motion to have him detained pending trial. In denying the motion of the government, the Court imposed additional conditions on Mr. Madoff’s pretrial release suggested by the defense. U.S. v. Madoff, No. 08 Mag. 2735 (S.D.N.Y. Ruling: Jan. 19, 2009).

Last week, the government requested that the court revoke Mr. Madoff’s bail and order him detained pending trial. The motion argued: (1) that there was a clear risk of flight and obstruction of justice; and (2) the current conditions of release are not sufficient to protect the safety of the community. The motion was based on claims by the government that on or about December 24, 2008, Mr. Madoff and his wife mailed packages to family and friends as “gifts” which contained jewelry and other personal property that may have a value of up to $1 million. Most of these items have been returned.

At the time the gifts were sent, Mr. Madoff had been released on a $10 million personal recognizance secured bond. The bond was secured by his apartment and properties owned by his wife and brother. The conditions of release also required Mr. Madoff to file confessions of judgment with respect to these properties, be subject to home detention 24 hours per day with electronic monitoring and have a security firm monitor the apartment on a continuous basis. Although not a condition of his bail, at the time of the actions in question Mr. Madoff was subject to a consent decree in the SEC’s civil action against him which essentially precluded the dissipation of assets.

In ruling on the government’s motion, the court began by noting that the accused is to be released on personal recognizance or an unsecured appearance bond unless that will not reasonably assure the appearance of the person or will endanger the safety of others or the community. The government can seek detention if there is a serious risk that the defendant will either flee or obstruct or attempt to obstruct justice. To support detention based on danger, the government’s proof must be clear and convincing.

Here, the government admitted during the hearing that the prior bail orders substantially diminished the risk of flight. The Court rejected the government’s claim that because those restrictions did not diminish the risk to zero that they were insufficient.

The Court also rejected the government’s claim that there was a risk of obstruction. The question in this regard is not whether Mr. Madoff’s actions can be considered obstruction “but whether there is a serious risk of obstruction in the future.” The Court found it unnecessary to address this issue because the government failed to demonstrate “that no conditions can be set to reasonably protect the community from this form of obstruction.”

In this regard, Mr. Madoff offered to add specific restrictions into the terms of his bail to satisfy the concerns raised by the government. These include an offer to incorporate the terms of the SEC injunction into the bail requirements. In addition, he offered to compile an inventory of all valuable portable items in the apartment where he is confined and to have an inventory taken every two weeks. These requirements, coupled with the earlier bail restrictions, were sufficient, the Court concluded. This is particularly true since the government failed to even address their adequacy. Accordingly, Mr. Madoff, whose counsel postponed the preliminary hearing that had been scheduled, will remain out of jail on bond pending trial.

Criminal Fraud Charges Dropped Against Stockman And Others

The U.S. Attorney’s Office for the Southern District of New York took the extraordinary step of dismissing all criminal charges brought against former OMB Director David Stockman and three other defendants. The indictment was based on an alleged accounting fraud orchestrated and directed by Mr. Stockman while he was the Chief Executive Officer and President of failed auto parts manufacturer Collins & Aikman Corporation. U.S. v. Stockman (S.D.N.Y. Filed March 26, 2007). At the same time that indictment was brought, the SEC filed civil fraud charges against Mr. Aikman, the company and others. SEC v. Collins & Aikman Corporation, Case No 07-CV-2419 (S.D.N.Y. Filed March 26, 2007). It remains to be seen if the SEC will continue to pursue its case, which is based on the same core facts.

The eight count indictment charged Mr. Stockman and three former Collins & Aikman employees, CFO Michael Stepp, controller David Cosgrove and director of purchasing Paul Barnaba with conspiracy to commit securities fraud, making false filings with the SEC, falsifying the books and records of Collins & Aikman, wire fraud, conspiracy to commit bank fraud and obstruction of justice. The charges were based on a multi-year fraudulent scheme alleged to have been directed by Mr. Stockman and participated in by Messrs. Stepp, Cosgrove and Barnaba. According to the indictment, beginning in 2001 and continuing through 2004, the defendants misrepresented the true financial condition of the company by falsifying key financial metrics. As part of the scheme, the defendants systematically prematurely recognized cost reductions based on supplier rebates. These actions caused the financial statements filed with the SEC to be false.

When the financial condition of the company substantially deteriorated toward the end of 2004 and in early 2005, Mr. Stockman and others, according to the indictment, began misrepresenting the nature of C&A’s portfolio of accounts which had been pledged to General Electric Capital to secure a line of credit. At the same time, C&A’s rebate practices came under scrutiny by its auditors. Mr. Stockman then orchestrated a scheme in which numerous false statements were made to the public and the creditors of the firm about its liquidity and financial metrics. When the board of directors discovered that the company was out of cash in May 2005 and that its creditors and investors had been misled at the direction of Mr. Stockman, Collins & Aikman filed for bankruptcy. Subsequently, the company entered into a non-prosecution agreement with the U.S. Attorney’s office and settled civil charges with the SEC as discussed here. Mr. Stockman and other former company officials have been litigating with the government and the SEC since the charges were filed.

The U.S. Attorney’s Office should be commended for re-evaluating its case after filing charges and for taking the extraordinary step of dismissing the charges in view of the totality of the evidence now available. It is clearly difficult to dismiss charges once they are filed. This is particularly true in a high profile case such as this. At the same time, it is in the best tradition of American justice and the U.S. Attorney’s Office to take such action when, as here, the facts warrant it.

Now the question is what will the SEC do? The agency has civil fraud charges pending against Mr. Stockman and others. The allegations in the SEC’s complaint are based on essentially the same factual claims as those in the criminal case. To be sure the decision regarding whether to prosecute a criminal case is not the same as in civil action. At the same time the action by the U.S. Attorney’s office at least suggests that a careful reassessment of the SEC’s case is in order. While that reassessment will be conducted by the enforcement staff in the first instance, since the case was authorized by the Commission, ultimately Chairman Cox and the four other Commissioners should review the propriety of their decision.