I wondered what secret strategy was at play in the decision to waive indictment and plead to an 11 count information, with no apparent deal on the table.  Some suggested a backroom deal.  Others a guilty conscience.  Others still just a plea to mercy.  None struck me as much of a plan.

Following the plea allocution, however, the strategy has crystallized.  From the WSJ Law Blog, this is what Madoff had to say, with the important parts in boldface:

Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC, which was located here in Manhattan, New York at 885 Third Avenue. I am actually grateful for this first opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come. I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done. I am here today to accept responsibility for my crimes by pleading guilty and, with this plea allocution, explain the means by which I carried out and concealed my fraud.

The essence of my scheme was that I represented to clients and prospective clients who wished to open investment advisor and individual trading accounts with me that I would invest their money in shares of common stock, options and other securities of well-known corporations, and upon request, would return to them their profits and principle. Those representations were false because for many years and up until I was arrested on December 11, 2008, I never invested those funds in securities, as I had promised. Instead, those funds were deposited in a bank account at Chase Manhattan Bank. When clients wished to receive the profits they believed they had earned with me or to redeem their principal, I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds. The victims of my scheme included individuals, charitable organizations, trusts, pension funds and hedge funds. Among other means, I obtained their funds through interstate wire transfers they sent from financial institutions located outside New York State to the bank account of my investment advisory business, located here in Manhattan, New York and through mailings delivered by the United States Postal Service and private interstate carriers to my firm here in Manhattan.

I want to emphasize today that while my investment advisory business – the vehicle of my wrongdoing – was part of my firm Bernard L. Madoff Securities, the other business my firm engaged in, proprietary trading and market making, were legitimate, profitable and successful in all respects. Those businesses were managed by my brother and two sons.

To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a “split strike conversion strategy,” to falsely give the appearance to clients that I had achieved the results I believed they expected.

Through the split-strike conversion strategy, I promised to clients and prospective clients that client funds would be invested in a basket of common stocks within the Standard & Poor’s 100 Index, a collection of the 100 largest publicly traded companies in terms of their market capitalization. I promised that I would select a basket of stocks that would closely mimic the price movements of the Standard & Poor’s 100 Index. I promised that I would opportunistically time these purchases and would be out of the market intermittently, investing client funds during these periods in United States Government-issued securities such as United States Treasury bills. In addition, I promised that as part of the split strike conversion strategy, I would hedge the investments I made in the basket of common stocks by using client funds to buy and sell option contracts related to those stocks, thereby limiting potential client losses caused by unpredictable changes in stock prices. In fact, I never made the investments I promised clients, who believed they were invested with me in the split strike conversion strategy.

To conceal my fraud, I misrepresented to clients, employees and others, that I purchased securities for clients in overseas markets. Indeed, when the United States Securities and Exchange Commission asked me to testify as part of an investigation they were conducting about my investment advisory business, I knowingly gave false testimony under oath to the staff of the SEC on May 19, 2006 that I executed trades of common stock on behalf of my investment advisory clients and that I purchased and sold the equities that were part of my investment strategy in European markets. In that session with the SEC, which took place here in Manhattan, New York, I also knowingly gave false testimony under oath to the staff of the SEC on May 19, 2006 that I executed trades of common stock on behalf of my investment advisory clients and that I purchased and sold the equities that were part of my investment strategy in European markets. In that session with the SEC, which took place here in Manhattan, New York, I also knowingly gave false testimony under oath that I had executed options contracts on behalf of my investment advisory clients and that my firm had custody of the assets managed on behalf of my investment advisory clients.

To further cover-up the fact that I had not executed trades on behalf of my investment advisory clients, I knowingly caused false trading confirmations and client account statements that reflected the bogus transactions and positions to be created and sent to clients purportedly involved in the split strike conversion strategy, as well as other individual clients I defrauded who believed they had invested in securities through me. The clients receiving trade confirmations and account statements had no way of knowing by reviewing these documents that I had never engaged in the transactions represented on the statements and confirmations. I knew those false confirmations and account statements would be and were sent to clients through the U.S. mails from my office here in Manhattan.

Another way that I concealed my fraud was through the filing of false and misleading certified audit reports and financial statements with the SEC. I knew that these audit reports and financial statements were false and that they would also be sent to clients. These reports, which were prepared here in the Southern District of New York, among things, falsely reflected my firm’s liabilities as a result of my intentional failure to purchase securities on behalf of my advisory clients.

Similarly, when I recently caused my firm in 2006 to register as an investment advisor with the SEC, I subsequently filed with the SEC a document called a Form ADV Uniform Application for Investment Adviser Registration. On this form, I intentionally and falsely certified under penalty of perjury that Bernard L. Madoff Investment and Securities had custody of my advisory clients’ securities. The at was not true and I knew it when I completed and filed the form with the SEC, which I did from my office on the 17th floor of 855 Third Avenue, here in Manhattan.

In more recent years, I used yet another method to conceal my fraud. I wired money between the United States and the United Kingdom to make it appear as though there were actual securities transactions executed on behalf of my investment advisory clients. Specifically, I had money transferred form the U.S. bank account of my investment advisory business to the London bank account of Madoff Securities International Ltd., a United Kingdom corporation that was an affiliate of my business in New York. Madoff Securities International Ltd. was principally engaged in proprietary trading and was a legitimate, honestly run and operated business.

Nevertheless, to support my false claim that I purchased and sold securities for my investment advisory clients in European markets, I caused money from the bank account of my fraudulent advisory business, located here in Manhattan, to be wire transferred to the London bank account of Madoff Securities International Limited.

There were also times in recent years when I had money, which had originated in the New York Chase Manhattan bank account of my investment advisory business, transferred from the London bank account of Madoff Securities International Ltd. to the Bank of New York operating bank account of my firm’s legitimate proprietary and market making business. That Bank of New York account was located in New York. I did this as a way of ensuring that the expenses associated with the operation of the fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses.

In connection with the purported trades, I caused the fraudulent investment advisory side of my business to charge the investment clients $0.04 per share as a commission. At times in the last few years, these commissions were transferred from Chase Manhattan bank account of the fraudulent advisory side of my firm to the account at the Bank of New York, which was the operating account for the legitimate side of Bernard L. Madoff Investment Securities — the proprietary trading and market making side of my firm. I did this to ensure that the expenses associated with the operation of my fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses. It is my belief that the salaries and bonuses of the personnel involved in the operation of the legitimate side of Bernard L. Madoff Investment Securities were funded by the operations of the firm’s successful proprietary trading and market making businesses.

Your Honor, I hope I have conveyed with some particularity in my own words, the crimes I committed and the means by which I committed them. Thank you

Makes no mistake about it, this was a carefully crafted statement, designed to accomplish what apparently could not be done by negotiation after the government demanded that Madoff plead to conspiracy in return for a deal of any sort, something he refused to do. 

Bernie Madoff has crafted a two-tier structure for his business empire, one criminal and run exclusively by him, and the other wholly legitimate and run by his brother and sons.  By pleading guilty, and thus avoiding a trial where evidence of how the various parts of his empire interrelated, and how the various people involved in his empire functioned, Madoff is trying to make an end-run around the government and limit its ability to show the extent and involvement of the various parts in the criminal enterprise. 

By doing this, Madoff apparently seeks to accomplish two discrete things.  First, he is trying to insulate the rest of his family from the crimes, falling on the sword for the sake of his brother and sons.  What good father wouldn’t? 

Second, the allocution firmly establishes the fact that the balance of his investment empire was entirely legitimate, and hence the profits earned (and paid out to others by way of salary and bonus) are not part of, commingled with or subject to, the criminal enterprise.  In other words, he’s not only insulating the people who ran the other parts of the investment empire, but the monies made by them, and by him, in its course.

It seems clear that Madoff believed he had no hope of finding any way out of his own predicament, something that seemed abundantly clear from the outset.  But that doesn’t mean that Bernie was going down without a fight.  As to the question of why plead guilty now, long before the case was anywhere near ready for trial, and thereby risk the highly probable remand that would deny him the comfort of his penthouse for the joys of the Metropolitan Correctional Center (and likely the Metropolitan Detention Center in Brooklyn, and then even Otisville until his final designation is determined), the defense sought to pre-empt an indictment that would include a conspiracy count and would inhibit any ability to take an open plea without any other names of loved ones being mentioned.

So it appears that the government, in its statement that there was no deal, is actually playing it a little fast and loose.  There was a deal here, and the deal was that Madoff would waive indictment and plead to an information provided that the information did not include a conspiracy.  Granted, it isn’t much of a deal, but it is a deal nonetheless.  It seems that the government has been less than forthright about it, perhaps redefining “deal” to suit a desire to conceal the agreement not to include conspiracy in the 11 count information.

All of this begs the next question, which is whether this plan will work.  That depends entirely on the government’s willingness to play ball, or continue to play ball now that the plea has been taken.  There is nothing that prohibits the government from indicting Madoff co-conspirators, assuming that evidence exists that this scheme was perpetrated by someone along with Madoff.  Whether Madoff can be prosecuted for the conspiracy, in addition to the charges already levied and accepted, will depend upon the nature of the conspiracy and Department of Justice policies.  But indicting Madoff is unnecessary for the purpose of charging a conspiracy.

So did Madoff do this alone?  Was there no one else who agreed to participate in his scheme?  It seems impossible that one person could do this.  Indeed, it seems impossible that this scheme could have been carried out by less than broad array of people, ranging from traders, accountants, compliance officers, lawyers, clerical staff and family members.  It’s just not that easy to take in billions of dollars, stick it in a bank account and have no one notice that none of it was every invested.  To borrow a phrase, it takes a village.

It would not be surprising that the other arms of Madoff investments were run legitimately, and that Madoff was smart enough to maintain a separation between the scheme and his legitimate business enterprises.  Whether the separation was sufficient to isolate the legitimate business functions from the scheme is another matter, and lacking sufficient information to know how careful Bernie was, it would be impossible to offer any sort of guesstimate. 

For the victims of the scheme, for whom the spectacle of watching Madoff led out of the courtroom in handcuffs offered momentary solace, this may have some significant consequences.  While the victims want to see Bernie drawn and quartered for the moment, they will ultimately take little comfort from the downfall of the big guy.  After the glow wears off, they will remember what they went to Bernie for in the first place, money.  When they come to realize that no matter how much the government finds in Bernie’s worldwide stashes, it will fall short of the amount needed to reimburse their investment, the ability to go after the profits, salary and bonuses in the hands of relatives and others will increase in relative importance.  That’s when this conspiracy aspect will take on a lot more meaning.

And so the question remains whether the government will chose to end the Saga of Bernie Madoff here, or take it as far as it will go.