Peter Madoff's Guilty Plea Points to Perils of Being a Chief Compliance Officer

Peter Madoff’s decision to plead guilty and accept a 10-year prison term for his role as chief compliance officer in his brother Bernard Madoff’s brokerage business is a stunning and sad turn of events for someone who claimed to have no knowledge of the fraud. It is also a stark reminder that the role of chief compliance officer on Wall Street is taken very seriously by federal prosecutors when investors are swindled out of billions of dollars.

On Friday, Peter Madoff, who helped run the family business, Bernard L. Madoff Investment Securities LLC, alongside his older brother Bernard Madoff for decades, is expected to appear in Federal Court in Manhattan to enter a guilty plea, reports The New York Times in “Madoff’s Brother Sets Plea Deal in Ponzi Scheme”.

In addition to serving prison time, Madoff will agree to forfeit $143 billion - an amount that is more than double the $65 billion that was originally estimated to be have disappeared in the elaborate investment scam.

Obviously, $143 billion — and not million — is a staggering sum of money that Peter Madoff, 66 years old, could never hope to repay. And that is the point! “The calculation is based on the amount of money that passed through the firm and a clear indication that prosecutors will seize all of his assets,” wrote today’s New York Times. [See also “Why is the Peter Madoff Forfeiture So Large,” in today’s Wall Street Journal.]

Over the three years since Bernard Madoff’s confession of stealing billions of dollars from investors, Peter Madoff maintained that he knew nothing about the Ponzi scheme that Bernard Madoff conducted from a separate floor in the New York office tower. As today’s New York Times reports, much of Peter’s work as chief compliance officer “involved oversight of the firm’s legitimate trading operations, which operated separately from the money management firm that Bernard ran.”

The guilty plea is not an admission that Peter Madoff knew about his brother’s ongoing Ponzi scheme which took place in the money management business. But prosecutors maintained that Peter Madoff’s negligence in his role as COO enabled his brother’s Ponzi scheme to continue for so long and that if he had been more vigilant the scam may have been discovered sooner.

Even if Peter Madoff had no knowledge of his brother’s Ponzi scheme, he had worked at the firm since 1970, right after he graduated from Fordham Law School. He served as his brother’s confidante as he built the business; he was said to help pioneer the computerized trading methods that the firm used to compete with large rivals who were members of the New York Stock Exchange, and this led to the creation of the Nasdaq stock market. Peter was also the person whom Bernie Madoff said was more technologically savvy when it came to explaining the firm’s options trading system to this reporter.

From the New York Times:

Peter Madoff played a leading role in embracing the technological shifts in the trading business, making him influential in regulatory circles on Wall Street.

Though Peter Madoff held many roles at the firm --- he was a senior managing director and chief general counsel — he remained a salaried employee and never was made a partner or owner in the firm, an interesting revelation in the New York Times. While he didn’t own the firm, he did own three homes- in Westbury, Long Island, Palm Beach, Florida and an apartment on Park Avenue. All of those assets will be turned over to prosecutors.

Described as having a luxurious lifestyle, Peter became a target of Irving Picard, the bankruptcy trustee whose mission is to try to recover losses for Madoff victims which he estimates total $18 billion. In 2009, Picard sued Peter and other Madoff family members including his daughter and Bernard Madoff’s two sons, Mark and Andrew, for treating the business “as family piggy bank,” spending $255 million of victim’s money. Picard’s lawsuit is seeking about $90 million in illicit proceeds that he alleges the Madoffs paid themselves.

Facing such a lawsuit and the weight of accusations that he was “derelict in his professional duties,” must have taken a terrible toll on Peter Madoff, who decided to settle the matter rather than continue the legal battle and risk going to trial.