Madoff: the $18bn hunt for justice continues

The legal net is tightening around the Madoff family, and the closest relatives of Wall Street swindler Bernard Madoff could be bankrupted by a lawsuit expected to be announced this week.

Madoff's sons, Andrew and Mark, his brother, Peter, and niece Shana are all braced for the arrival of legal papers demanding that they compensate thousands of victims of their negligence and breaches of responsibility when they worked at the family firm.

When Bernard Madoff was running history's largest pyramid scheme, the rest of the family were living high on the hog and treating the Madoff business as a piggy bank to fund shopping trips, holidays and country club memberships, according to court papers.

Many of the victims of the fraud have long believed the Madoffs must have known that their patriarch was a crook; this week, the trustee trying to recover the money says he no longer cares whether they did or didn't, and that their failure to ask where the family fortune was coming from makes them just as culpable.

"Whether or not they have criminal problems, we will be pursuing them as far as we can pursue them," Irving Picard, the court-appointed trustee, said. "If it leads to bankrupting them, then that's what will happen."

Peter Madoff was his brother's de facto deputy at Bernard L Madoff Investment Securities, and also served as its chief compliance officer. Andrew and Mark had worked in their father's firm for most of their adult lives. Shana, Peter's daughter, also worked as a compliance lawyer, responsible for checking that the firm met its legal and regulatory obligations.

They have all vigorously defended their innocence, saying they worked exclusively on the share-trading side of the business, while Bernard Madoff orchestrated his sham investment business from a different floor. They are victims, not accomplices, they say. Indeed, Mark and Andrew say they are owed money by the business.

In the days after he confessed that his investment business was "one big lie" and that the $65bn he had said was in his clients' accounts was just a mirage, Bernard Madoff wrapped up and sent some of his most treasured possessions, such as expensive designer watches, to family members. He must have known then that his downfall would bring an end to their own lavish lifestyles, and perhaps he wanted to compensate them a little; nine months on, his downfall could be their absolute ruin.

Mr Picard says that Madoff's brother and sons alone were paid $80m in compensation over the seven years before the pyramid scheme came crashing down, and got millions more in expenses. The lawsuits due this week are going to demand the return of $198m that was paid out, loaned or spent by the four Madoffs.

Ruth Madoff, the fraudster's wife, is already being sued and has to report every item of expenditure valued at more than $100.

The reason? Mr Picard suspects that additional money has been squirreled away in offshore accounts and he wants to make sure that family members are not able to get access to such assets without him noticing.

Mrs Madoff moved out of the couple's Manhattan penthouse in July, an hour before it was seized by US marshals. Another family home, in Palm Beach, Florida, is also going under the hammer; a Montauk beach house was sold last week for more than the asking price of $8.75m.

Mr Picard is trying to raise as much money as possible for the victims' compensation fund, and although it is doomed to fall short of what is necessary, every little helps. When all the account statements that Madoff sent to his victims are added up, they total $64.8bn. But none of the investment returns that those statements showed, sometimes over more than two decades, was real, because Madoff had never invested a penny. He had simply used money coming in to the fund to pay clients cashing out.

Still, even the real loss – the amount of money that victims paid in, minus the amount they cashed out over the years – is $18bn. Even counting the sons' multiple homes, and Andrew's stakes in some New York businesses, the latest lawsuits will be small beer against that giant total.

The largest amount of money, the trustee believes, can be clawed back from big institutional and mega-rich investors who took billions out in the final years of the scheme, and which, according to earlier suits, had all sorts of irregular dealings with Madoff, such as discussing in advance what investment returns should be and back-dating some statements of trading activity.

Parked for a later date is the question of whether to pursue smaller investors who were lucky enough to cash out more than they put in to the Madoff black hole. Even those who had no suspicions at all that Madoff was a crook could be on the hook to give back their profits from the last six years, just to be fair to those who didn't cash in their fictional profits and have been left with less than they put in.

The lawsuits against family members are expected to lean heavily on the disclosures of how the Madoff family took millions out of the business in expenses. Peter Madoff once spent $441 on food from a gourmet deli called Tal Bagels on Manhattan's Upper East Side. Mark Madoff spent $8,400 on a single night's hotel bill early in 2008, as well as $2,166 in New York's Apple Store. His brother spent $2,395 on family clothing at Polo Ralph Lauren.

Bob Mintz, a former federal prosecutor who is now partner at the McCarter & English law firm in New Jersey, said that Mr Picard will have to prove that the four family members in his sights breached their duty to investors in the Madoff scheme. "What he may use is a broad-based allegation that, if they did not know about Bernard Madoff's fraudulent activities, they certainly should have, based on their knowledge of the way the operations were being run. Were there enough indications of some irregular activity that they should have made further inquiries?"

John Wing, a lawyer representing Peter Madoff, said that his client and Shana Madoff "are among the many victims of Bernard Madoff's alleged Ponzi scheme" and added that any suggestion Peter Madoff knew his brother was engaged in such a scheme scheme was "absurd".

Martin Flumenbaum, who represents Mark and Andrew Madoff, said they "strong disagree with the trustee's baseless claims". In a statement, the attorney said: "By immediately turning him in, the brothers saved the victims of the fraud more than $170m that their father was about to distribute.... They suffered substantial economic losses as a result of their father's crimes, and they continue to cooperate fully with the authorities in their ongoing investigations."

News of the impending lawsuit was reported on CBS Television's 60 Minutes, which interviewed Mr Picard and his chief counsel, David Sheehan, who was keen to get the case on to the offensive.

"If you were those sons, and you knew what you know today about where all that money came from, wouldn't you be embarrassed to keep that money?" Mr Sheehan asked. "They should give it all back, and if they don't give it all back, I think we have got an obligation to go get it and take it all back."