March 20, 2023

DealBook: Peter Madoff Says He Didn’t Know About the Fraud

Peter B. Madoff, right, pleaded guilty to criminal actions that enabled his brother, Bernard L. Madoff, to carry out a Ponzi scheme.John Marshall Mantel for The New York TimesPeter B. Madoff, right, pleaded guilty to criminal actions that enabled his brother, Bernard L. Madoff, to carry out a Ponzi scheme.

Peter B. Madoff, the former No. 2 executive at Bernard L. Madoff Securities, stood before a judge on Friday and admitted to committing numerous crimes.

He avoided paying taxes on tens of millions of dollars in income, he said. He put his wife on the firm payroll even though she never worked there. He submitted false filings to securities regulators.

But he also emphasized that at no time was he aware that his brother, Bernard, was orchestrating the largest Ponzi scheme in history, wiping out $65 billion in paper wealth and shattering lives around the globe.

“I was in shock, and my world was destroyed,” said Peter Madoff, describing his reaction when his brother told him about the fraud in December 2008. “I always looked up to and admired him.”

Later in the hearing he said, “I truly believed my brother was a brilliant trader.”

In a deal cut with prosecutors before his court appearance, Peter Madoff, 66, agreed to serve 10 years in prison, a sentence that still requires a judge’s approval. He has also agreed to forfeit all of his assets, including the proceeds from the sale of a co-op on the Upper East Side of Manhattan; two homes on Long Island and one in Palm Beach, Fla.; and a 1995 Ferrari 355 Spyder.

Judge Laura Taylor Swain of United States District Court in Manhattan accepted the plea, and set him free on bail until his Oct. 4 sentencing. He and his wife, Marion, must turn over their passports and remain in the New York metropolitan area, the judge ordered.

The 10-year sentence was a point of contention between federal prosecutors and the Federal Bureau of Investigation. After Peter Madoff struck the deal with prosecutors, some officials at the F.B.I. questioned whether he got off too easy, according to people close to the case.

Preet Bharara, the top federal prosecutor in New York, addressed the severity of the sentence in a statement on Friday, casting the penalty as steep. Peter Madoff “will now be jailed well into old age, and he will forfeit virtually every penny he has,” Mr. Bharara said. A dispute also emerged about the early-morning arrest. The F.B.I. dispatched agents to arrest Peter Madoff at his lawyer’s office in Manhattan, and later drove him past a crowd of television cameras. Some officials wondered if the show was necessary since he had already agreed to plead guilty.

The conflict reflected the broader tension over high profile convictions. The tensions have grown as Mr. Bharara, has raised his profile after a series of successful prosecutions. The F.B.I., which builds the cases that Mr. Bharara’s office ultimately prosecutes, has played a more anonymous role in the crackdown on financial crime.

“There may be disagreements along the way, but at the end of the day both offices are happy with this result,” said Timothy Flannelly, a spokesman for the F.B.I.’s New York branch.

On Friday, the F.B.I. also highlighted Peter Madoff’s role as a “chief architect” of the Madoff empire.

“Peter Madoff played an essential enabling role in the largest investment fraud in U.S. history,” Janice K. Fedarcyk, an assistant director of the F.B.I., said in a statement.

Peter Madoff acknowledged that, despite his role as the firm’s top legal and compliance officer, he failed to perform any meaningful oversight of his brother’s investment activities, enabling a fraud that played out for decades, during which he was considered among Wall Street’s most highly regarded money managers.

“I am deeply ashamed of my actions,” Peter Madoff, reading from notes in a gravelly voice reminiscent of his brother’s, said at the hearing before Judge Swain.

“I want to apologize to anyone who was harmed and to my family, and I’m here today to take responsibility for my conduct,” he said, choking back tears.

Although Bernard Madoff has maintained that he acted alone, prosecutors have charged 13 others in connection with the case, including the office secretary and an outside accountant. Peter Madoff is the eighth person to plead guilty; five others await trial before Judge Swain.

While it did not match the pandemonium surrounding Bernard Madoff’s court appearances, there was a circuslike atmosphere at the courthouse on Friday. Photographers and cameramen crowded the entrance, hoping to get a shot of the defendant. Spectators packed the courtroom, including a group of summer interns from the United States attorney’s office.

Peter Madoff’s guilty plea comes three years to the day after Bernard Madoff, 74, received a 150-year prison sentence, which he is serving at a federal prison in North Carolina. Peter, who worked for his brother for nearly 40 years, is the first relative to plead guilty to crimes connected to the Ponzi scheme.

“Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals,” said Robert Khuzami, the director of enforcement at the Securities and Exchange Commission, which filed a parallel civil case.

Prosecutors said that Peter Madoff deceived regulators by submitting sham paperwork that vastly underreported the firm’s assets and number of investors. The firm’s filings, signed off on by Peter, said it had 23 client accounts, when in fact it had more than 4,000. These misrepresentations helped Bernard Madoff avoid scrutiny, the government said.

The charges against Peter Madoff included falsifying documents and filing fraudulent tax returns. Prosecutors said that from 1998 to 2009, Peter Madoff and his family received more than $40 million from the firm, on which he did not pay any taxes. He avoided the detection of tax authorities by disguising those payments as loans or backdated stock trades, the government said.

Peter Madoff also acknowledged on Friday that, for years, his wife was paid more than $100,000 annually for a no-show job at the firm.

There had been speculation that Peter Madoff’s deal with the government included a promise by authorities to not bring any charges against his and Marion’s daughter, Shana Madoff Swanson, a lawyer at the firm. But his plea agreement does not protect anyone else from potential criminal charges, according to the plea agreement.

Mark W. Smith, a lawyer for Ms. Madoff Swanson, did not return a request for comment.

In his guilty plea, Peter Madoff described how on the day after learning about the Ponzi scheme, he assisted Bernard Madoff in sending out $300 million to employees, family and friends before Bernard turned himself in. He told the judge why he had committed this crime.

“I did as my brother said,” Peter explained, “as I’d consistently done for decades.

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DealBook: A Stunning Fall From Grace for a Star Executive

Rajat K. Gupta, left, and his lawyer, Gary Naftalis, leave federal court on Wednesday after Mr. Gupta was charged with insider trading.John Marshall Mantel for The New York TimesRajat K. Gupta, left, and his lawyer, Gary Naftalis, leave federal court in Manhattan on Wednesday after Mr. Gupta was charged with insider trading.

Last year, Rajat K. Gupta delivered a commencement speech at the Indian School of Business, a graduate school in Hyderabad that he helped start.

“Try to make other people successful,” said Mr. Gupta, one of the world’s most prominent Indian-born business executives. “If you work on making other people successful, they will in turn make you successful beyond your dreams.”

On Wednesday, federal prosecutors said that Mr. Gupta had tried to make other people successful — illegally.

Mr. Gupta, 62, a former director of Goldman Sachs, is accused of leaking corporate secrets about the bank to his friend Raj Rajaratnam, the head of the Galleon Group hedge fund. Mr. Rajaratnam was sentenced to 11 years in prison this month for orchestrating a huge insider trading conspiracy.

Gary P. Naftalis, a lawyer for Mr. Gupta, has denied the government’s accusations.

“Mr. Gupta is innocent of any of these charges,” he said. “He has always acted with honesty and integrity.”

Regardless of the case’s outcome, the charges punctuate a stunning fall from grace for Mr. Gupta, whose personal story reads like a caricature of a Horatio Alger tale.

Orphaned at 18, Mr. Gupta, a native of Kolkata, received an engineering degree from the elite Indian Institute of Technology. He earned a scholarship to Harvard Business School, graduating at the top of his class and securing a prized posting at McKinsey Company, the dispenser of corporate wisdom to many of the Fortune 500.

He rose rapidly at the consulting firm, making his mark running its Scandinavian office, once considered a backwater at the firm. He expanded McKinsey’s presence in that region and became known for his low-key, dignified manner.

Most young consultants use McKinsey as a breeding ground for careers in corporate America. The firm counts among its alumni James P. Gorman, the chief executive of Morgan Stanley, and Sheryl Sandberg, the chief operating officer of Facebook.

But Mr. Gupta became a McKinsey lifer, taking on more and more responsibility until 1994, when, at the age of 45, his partners elected him to run the firm. His election — he was the first non-American-born executive to run McKinsey — was seen as a sea change for the hidebound organization.

“I know consensus says McKinsey is white and traditional, but I am testimony to the fact that image isn’t true,” said Mr. Gupta in a 1994 profile in The Chicago Tribune. “If anything, it’s a meritocracy.”

Under his tenure, McKinsey expanded its global reach, aggressively moving into emerging markets like India and China. While he oversaw an era of growth at the consulting firm, his reign was not without controversy.

Mr. Gupta and some of his partners got caught up in the euphoria of the dot-com boom. One former executive, who requested anonymity because he was not authorized to discuss his former firm, said that during that time, McKinsey strayed from its core big-company consulting work and began helping dot-coms cut deals and develop their businesses.

“It was pigging out,” said this executive. “The work was there, and the young people wanted to do it.”

The firm was also an architect of Enron’s push from a sleepy energy pipeline company into the high-risk trading operation that led to the company’s 2001 collapse amid an accounting scandal. Jeffrey Skilling, Enron’s former chief executive, was a McKinsey alumnus.

The firm suffered, and in the wake of the technology and telecom bust during the early part of the last decade, McKinsey found itself with too many employees and not enough business.

When he stepped down from McKinsey in 2003, Mr. Gupta used the reputation — and peerless Rolodex — that he had built at the firm.

Kofi A. Annan, the former secretary general of the United Nations, appointed him to advise the international organization on management reform. The Rockefeller Foundation named him a trustee. Some of America’s top companies recruited him for their boards, including Procter Gamble, the consumer products giant; AMR, the parent of American Airlines; and Goldman Sachs.

“Over his 32-year career, Rajat Gupta has been a valued source of counsel to institutions, governments and business leaders around the world,” said Lloyd C. Blankfein, the chief executive of Goldman, in a November 2006 statement announcing Mr. Gupta’s election to the board. “Our shareholders will be fortunate to have his strategic and operational expertise and judgment.”

Mr. Gupta’s directorship at Goldman was part of his aggressive push away from management consulting and into the more lucrative arena of Wall Street. In 2007, he started a private equity firm, New Silk Route, that focused on Indian investments. One of his original partners on the New Silk Route deal was Mr. Rajaratnam. A Sri Lankan native, Mr. Rajaratnam met Mr. Gupta through their philanthropic work. The two men, both pillars of New York’s South Asian immigrant business community, became fast friends.

Mr. Gupta had a number of hedge fund and private equity investments, including several with Mr. Rajaratnam’s Galleon firm. Around that time, Mr. Gupta was weighing a position at the private equity firm Kohlberg Kravis Roberts. On a taped call played during Mr. Rajaratnam’s trial, Mr. Rajaratnam and a friend gossiped about what they saw as the materialistic ambitions of Mr. Gupta, who lives with his wife in a waterfront mansion in Westport, Conn, where they raised four daughters.

“Here he sees an opportunity to make a hundred million dollars over the next five years, or 10 years, without doing a lot of work,” Mr. Rajaratnam said.

His foray into Wall Street could not have been more ill-timed. The first cracks in the global economy surfaced just as he started New Silk Route, and his Galleon investments struggled as the stock market swooned. He ultimately lost his entire $10 million investment in a special Galleon-related vehicle set up for Mr. Gupta and a third partner.

On July 29, 2008, with the financial crisis entering its most serious phase, Mr. Gupta called Mr. Rajaratnam. The conversation, secretly recorded by Federal Bureau of Investigation agents, was played during Mr. Rajaratnam’s trial. On the call, Mr. Rajaratnam asked Mr. Gupta about a rumor that Goldman might look to buy a commercial bank.

“This was a big discussion at a board meeting,” said Mr. Gupta, who then told Mr. Rajaratnam that Goldman was weighing a purchase of Wachovia and the American International Group.

The charges do not include the contents of that telephone call because there appears to be no evidence that Mr. Rajaratnam traded on the tip. Instead, the government’s case is based on more circumstantial evidence — phone bills and trading records that the government says show that Mr. Gupta leaked other secret Goldman board discussions to Mr. Rajaratnam, and that Mr. Rajaratnam traded on those, gaining several million dollars.

During its closing argument in the Rajaratnam trial, the government effectively previewed its case against Mr. Gupta.

“You don’t get on the board of Goldman Sachs without having accomplished a lot in your life and having a great reputation,” said Reed Brodsky, a prosecutor. “But having a great reputation doesn’t give you a free pass to violate the law. Nobody is above the law, no matter how good their reputation is.”

Mr. Gupta spoke to the issue of reputation in his speech last year to the Indian business school graduates. Mr. Gupta urged the students to “have a set of values that guide you.”

“Don’t take the shortcut,” he said. “Have your sense of values, your compass, and follow that.”

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DealBook: Hedge Fund Founder Gets 11-Year Term in Insider Case

Raj Rajaratnam left federal court in Manhattan on Thursday.John Marshall Mantel for The New York TimesRaj Rajaratnam left federal court in Manhattan on Thursday.

1:09 p.m. | Updated

The fallen hedge fund billionaire Raj Rajaratnam received the longest prison sentence ever for insider trading on Thursday, a watershed moment in the government’s aggressive two-year campaign to root out the illegal exchange of confidential information on Wall Street.

Judge Richard J. Holwell sentenced Mr. Rajaratnam, the former head of the Galleon Group hedge fund, to 11 years in prison and fined him $10 million and ordered him to forfeit $53.8 million. A jury convicted Mr. Rajaratnam of securities fraud and conspiracy in May after a two-month trial.

Calling him “the modern face of illegal insider trading,” prosecutors accused Mr. Rajaratnam of using a corrupt network of well-placed tipsters — including former executives of Intel, I.B.M. and the consulting firm McKinsey Company — to illicitly gain about $70 million.

“Insider trading is an assault on the free markets,” Judge Holwell said. “His crimes reflect a virus in our business culture that needs to be eradicated.”

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Mr. Rajaratnam showed no emotion as Judge Holwell read his sentence in a packed courtroom. The 54-year-old Sri Lankan native, who has not spoken publicly since his arrest in October 2009 and declined to testify at his trial, did not speak at the sentencing. His wife, absent from the trial, sat stoically in the spectators’ gallery during the hour-long proceeding.

At 11 years, the sentence lacks the symbolic heft of the range of 19 to 24 years that the government had sought under federal sentencing guidelines. At Thursday’s hearing, Reed Brodsky, a federal prosecutor, said Mr. Rajaratnam deserved an outsize penalty because his crimes were “brazen, pervasive and egregious” and “there is no one who is Mr. Rajaratnam’s equal in terms of the breadth and scope of his insider-trading crimes.”

In imposing his sentence, Judge Holwell cited a number of mitigating factors that he said caused him to hand down a term that was substantially lower than the nonbinding federal guidelines. He said Mr. Rajaratnam’s “good works figure into the equation,” citing his financial help for victims of the tsunami in Sri Lanka, the earthquakes in Pakistan and the Sept. 11 attacks.

Judge Holwell also disclosed that Mr. Rajaratnam had advanced diabetes that was leading to kidney failure, and said that prison “is a more intense experience for people with serious health conditions.”

“Some form of forbearance, however constrained by circumstance, is fundamental to our system of justice and appropriate here,” the judge said.

Nevertheless, Mr. Rajaratnam’s prison sentence continues a trend of ever-stiffer penalties against white-collar criminals. Legal experts say the increased prison terms are in part a result of federal sentencing guidelines passed in 1987 that link the length of a sentence to the dollar amount involved in the fraud.

Historically, judges showed leniency when penalizing corporate criminals because they were not seen as a threat to society and perhaps because they empathized with people who often came from similar backgrounds as themselves. But gone, for the most part, are the days of slap-on-the-wrist sentences and “country club” prisons where white-collar defendants would serve short stints in relatively comfortable quarters.

Corporate wrongdoers have received record-length sentences in recent years. Bernard L. Madoff is serving 150 years for cheating investors in an epic Ponzi scheme. Lee B. Farkas, a former mortgage company executive, received 30 years for his role in a $2.9 billion bank-fraud scheme. Last month, Adley H. Abdulwahab, who was convicted of participating in a $100 million fraud scheme that preyed on retirees, was sentenced to 60 years in prison.

On the insider-trading front, judges’ penalties have also been severe.

Zvi Goffer, a former trader at Galleon, received a 10-year prison term, matching the longest sentence to date for insider trading. The average sentence of the 13 other defendants connected to Mr. Rajaratnam’s case has been about three years.

Legal experts say that because prison terms across all federal crimes have substantially increased over the last two decades, it stands to reason that the length of sentences for executives on Wall Street and in corporate American would also grow.

“Often the question is raised, ‘Why shouldn’t crime in the suites be punished as severely as crimes on the streets?’ ” said Douglas A. Berman, a law professor at Ohio State University who teaches sentencing law and policy. “While that sounds like a sound bite, it’s an important question.”

It is a question that played a crucial role in the debate over the appropriate prison term for Mr. Rajaratnam.

John C. Dowd, Mr. Rajaratnam’s lawyer, had asked the judge to impose a sentence closer to six to eight years, calling the government’s request “grotesquely severe.” In arguing for a lesser term, Mr. Dowd noted that a stiff penalty for Mr. Rajaratnam would be on par with the average sentences for violent crimes like kidnapping and sexual abuse.

Advocates of more lenient insider-trading sentences also say that the crime does not have any real identifiable victims, whereas other white-collar crimes like Ponzi schemes or corporate accounting frauds destroy lives and livelihoods.

Preet S. Bharara, the United States attorney in Manhattan who spearheaded the government’s crackdown on insider trading, disagrees with that view. His office, working in many cases with the Securities and Exchange Commission, has charged 54 people with insider trading crimes during the last two years. Fifty of those individuals have pleaded guilty or been convicted by a jury.

In a series of public speeches, Mr. Bharara has described the illegal exchange of secret information on Wall Street trading floors as “rampant.” He echoed that view in a talk last week at the Wharton School of the University of Pennsylvania, the business school from which Mr. Rajaratnam graduated in 1983.

“We’re talking about people, in some instances, who are basically creating a business model for a stable of insider sources,” he said. “That has been distressing.”

Mr. Bharara also noted the deterrent effect of harsh insider-trading sentences, which are designed to “convince rational business people that the risk is not worth it.”

Another potential deterrent is the unprecedented investigatory tactics and vast resources deployed by federal authorities in their pursuit of Mr. Rajaratnam and his co-conspirators.

For the first time in an insider-trading inquiry, the government used wiretaps to secretly record the phone conversations of hedge fund traders. Mr. Rajaratnam’s cellphone was tapped for nine months during 2008, yielding damning evidence used against him at trial.

“One legacy of this case is that Wall Street will be more careful about what they say on telephones than they used to be,” said David Siegal, a white-collar defense lawyer and former federal prosecutor at Haynes Boone.

Mr. Rajaratnam’s lawyers are expected to focus their appeal on attacking the judge’s decision to admit the wiretapped calls as evidence. They will argue, among other things, that Congress has not authorized the use of wiretap surveillance for insider-trading cases.

But most lawyers say the odds of a reversal are low.

“An appeals court will show great deference to the trial court judge on this issue,” Mr. Siegal said.

When federal agents arrested Mr. Rajaratnam almost exactly two years ago, his case brought to mind the insider trading scandal of the 1980s. Rudolph W. Giuliani, then the top federal prosecutor in Manhattan, brought charges against Ivan Boesky and Michael R. Milken, two of the leading financiers of that era.

Mr. Rajaratnam represented a new breed of Wall Street power player: the hedge fund tycoon. Over the last decade, these money managers — boasting superior performance and princely fees — became among the most powerful players in global finance, controlling more than $2 trillion in assets. And as their influence and wealth grew — in 2009, Mr. Rajaratnam had a net worth of $1.5 billion, according to Forbes magazine — they attracted attention from regulators.

The government placed Mr. Rajaratnam and his hedge fund, Galleon, which at its peak managed $7 billion, at the center of what it billed as the largest hedge fund insider trading case ever charged. During the trial, federal prosecutors played scores of dozens of phone conversations during which Mr. Rajaratnam exchanged illegal stock tips about companies including Goldman Sachs and Google with corporate insiders and fellow traders.

Mr. Rajaratnam must report within 45 days to the Bureau of Prisons, which will assign him to a correctional facility. Until then, he will be confined to his home, a duplex apartment on Sutton Place. Judge Holwell said he would recommend that Mr. Rajaratnam serve his time at the federal medical center in Butner, N.C., part of the same complex where Mr. Madoff is incarcerated.

Despite the Justice Department’s focus on insider trading, Mr. Rajaratnam’s case and the government’s broader crackdown have been something of a sideshow to the larger problems related to the global financial crisis and America’s continued economic woes.

For instance, insider trading at hedge funds — and the notion that the stock market is a rigged game — does not rate on the list of grievances from the anti-Wall Street protestors spreading across the country.

“Unless people can identify lost money as a result of insider trading, or have had their savings stolen by Madoff, they don’t view their own economic difficulties as being caused by a few bad apples,” said Mr. Berman, the Ohio State law professor. “They see the problems with our economy and financial markets as far more systemic than that.”

William Alden contributed reporting.

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