Madoff 'mailed heirlooms to relatives' after his arrest

Watchdog under pressure from Congress to explain its failure to uncover fraud

Bernard Madoff, accused of Wall Street's biggest ever fraud, mailed around $1m (£680,000) of jewellery, watches and other family heirlooms to friends and relatives in the days after his arrest, prosecutors say, in an attempt to prevent the authorities from getting their hands on them.

Mr Madoff was brought before a New York court yesterday as the government sought to revoke his $10m bail, claiming he had violated its terms and was likely to try to flee the country.

Last night, however, he remained free and under house arrest at his $7m penthouse apartment on Manhattan's exclusive Upper East Side, with legal wrangling set to continue before a final ruling on whether he must go straight to prison.

His attorney, Ira Sorkin, said that the items posted by Mr Madoff and his wife, Ruth, included small Chanukah gifts for family members and were sent "innocently" before a formal court order freezing the couple's assets last month.

US marshals helped spirit Mr Madoff into a car and then through a service entrance at his apartment block to avoid a repeat of the scenes two weeks ago when he first attended court and was involved in a fracas with photographers on the streets outside his Manhattan home.

The Wall Street grandee admitted to his two sons last month that his decades-old investment business was "all just one big lie", and told the FBI that he was running a "giant Ponzi scheme" that investigators now believe stretched back to the Seventies.

Instead of investing his clients' money and generating the solid returns he claimed, Mr Madoff had been paying existing clients with money taken in from new investors. He told the FBI that losses could amount to $50bn, making it the biggest Wall Street fraud in history.

The fallout from the affair has only grown since Mr Madoff's arrest, with celebrities and charities among those admitting they have lost money. Many big European banks have admitted billions of dollars in losses, and an international network of hedge fund managers who invested their clients' money with his firm, Madoff Investment Securities, face embarrassment, negligence claims and personal ruin.

And last night, a congressional committee was conducting a hearing into the fraud, and into the regulatory failures that allowed it to go undetected despite eight formal investigations of Madoff Investment Securities over the past 16 years.

Assistant US attorney, Marc Litt, told the court yesterday that there was no practical way to prevent Mr Madoff from attempting once again to transfer valuables – assets that could eventually be needed to compensate some of his victims. "It is impractical for the government to go around and collect such items as jewellery or small items scattered around the United States and indeed the world," Mr Litt said.

Mr Sorkin, told the judge that the items were some heirlooms, including watches and pens, and some things of nominal value including cufflinks worth $25 and a pair of mittens valued at $200. Judge Ronald Ellis said he wanted legal arguments in writing before making a ruling on the government's request to revoke bail.

Dressed in a dark grey suit, white shirt and black tie, Mr Madoff sat silently during the hearing and ignored TV crews and photographers when he left the courthouse, flanked by marshals.

The scenes, including Mr Madoff's car journey home, were broadcast live on some news channels. Meanwhile, in Washington, politicians were holding hearings into the affair, and berating the Securities and Exchange Commission, Wall Street's watchdog.

Regulators including the SEC investigated Madoff Investment Securities at least eight times in the past 16 years, uncovering only minor irregularities. This despite repeated letters from Harry Markopolos, a Boston accountant, who first suggested Mr Madoff was running a Ponzi scheme as early as 1999. The firm was being run as a private investment business, similar to a hedge fund, until three years ago, and was not inspected even after formally registering with the SEC in 2005.

The commission's internal investigation into how it failed repeatedly to detect Mr Madoff's $50bn Ponzi scheme is being widened to examine whether the organisation has enough powers to protect investors from rogue fund managers, and could presage a new regulatory clampdown on the investment industry and on hedge funds.

David Kotz, the SEC's inspector-general, said he was examining numerous reasons why the regulator may have failed to uncover Mr Madoff's fraud, including whether officials were dazzled by the veteran trader's reputation as a former chairman of Nasdaq, and whether social and sexual relationships between officials and members of the Madoff family caused conflicts of interest. And he added that he would also now examine whether the SEC needs more powers. It will consider "whether there are gaps in policies and procedures relating to operations involving voluntary private investment pools, such as hedge funds, because they are subject to limited oversight by the SEC, and whether any such gaps may lead to fraudulent activities not being detected".

Congress has begun considering ways to tighten regulation of the finance industry and of hedge funds, in light of the credit crisis, the meltdown on Wall Street last year and the Madoff affair. Democrat representative Paul Kanjorski, heading the sub-committee hearing into the Madoff scandal, said revelations to date "simply shock the conscience", and that they "raised even more troubling questions about the effectiveness of our regulatory system".

Yesterday, the Securities Investor Protection Corporation and the trustee handling the liquidation of Madoff Investment Securities said they had mailed more than 8,000 claim forms to customers who lost money during the alleged investment fraud. The SIPC was created by Congress in 1970 to protect investors when a brokerage firm fails, and is able to pay up to $500,000 in compensation.

Aside from recovering money through the liquidation of Madoff's investment firm and the SIPC, investors could get some money back if some of Mr Madoff's personal assets are sold, including homes in Manhattan, Long Island and Palm Beach and numerous yachts.

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