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Philanthropist got $1b in fake profit, Madoff trustee says

The trustee in the Madoff case has identified 2,568 investors who could be forced to return money, with Boston philanthropist Carl Shapiro (above) one of the biggest among them. The trustee in the Madoff case has identified 2,568 investors who could be forced to return money, with Boston philanthropist Carl Shapiro (above) one of the biggest among them.
By Beth Healy
Globe Staff / December 2, 2009

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The trustee in the Bernard Madoff case is accusing Boston philanthropist Carl Shapiro and his family foundation of reaping $1 billion in fictitious profits from investments over 40 years, calling the Shapiros among the “largest beneficiaries’’ of Madoff’s Ponzi scheme.

The trustee, Irving Picard, made the allegations in a court filing last week, after months of private negotiations between his office and lawyers for the 96-year-old Shapiro broke down.

In a letter filed with Judge Burton R. Lifland in US Bankruptcy Court in New York, Picard’s office said Shapiro, during his long relationship with Madoff, enjoyed “unrealistically and consistently purported high rates of return and remarkable purported trading success.’’

Those high rates of return were allegedly false profits invented by Madoff, who at least since 1980 did not invest his clients’ money. Instead, he used money from new investors to pay off others. The Shapiros said in the court filing that Picard is likely to demand the family return several hundred million dollars to Madoff’s estate, for the trustee to redistribute to other victims who lost money.

The letter from Picard was in response to documents that Shapiro’s lawyer, Stephen Fishbein, filed in mid-November, which said his client is frail and in poor health. Fishbein asked Lifland to set Dec. 14 as the day when Shapiro would give Picard a deposition about the matter, noting that in his declining condition, “this could well be Mr. Shapiro’s last chance to tell his story.’’

The public airing of the matter comes after months of silence from a highly private family.

Shapiro was one of Madoff’s first investors, and the two families were close. Shapiro’s son-in-law Robert Jaffe worked for Madoff to bring new investors into the business.

Picard and the Securities and Exchange Commission have sued Jaffe, alleging fraud, and are seeking to recoup $100 million in commissions Madoff paid to the firm Jaffe worked at, Cohmad Securities.

Jaffe has denied the charges.

In 1971, Shapiro sold his Kay Windsor Inc. dress business for $21 million, and, with Madoff’s help, managed to parlay that into a fortune exceeding $1 billion. Shapiro has given away large chunks of that fortune, with numerous buildings and wings at hospitals, schools, and other institutions in the Boston area bearing his name.

The Shapiros have acknowledged losing at least $545 million to Madoff. About $145 million of that came from the family foundation, and another $250 million was money Carl Shapiro had invested at Madoff’s request, just weeks before the scandal was exposed in December 2008.

Shapiro, through spokesmen, has maintained that he had no idea Madoff was stealing from some investors to pay off others.

But in documents he filed Nov. 23, Picard makes clear he does not see Shapiro as a victim like thousands of others fleeced by Madoff. His investigation, Picard’s office said in its letter, “has demonstrated inconsistencies between Mr. Shapiro’s counsel’s account of the family’s history with Madoff and the records available.’’ Picard’s office said it is developing a more detailed brief about Shapiro’s relationship with Madoff.

Picard has already gone after other Madoff clients who he claims withdrew more money from their accounts than they really had. The largest target so far has been Jeffry Picower, the philanthropist who Picard alleged withdrew $7.2 billion from Madoff accounts. Picower died of a heart attack in his swimming pool in October.

The trustee has identified 2,568 investors who could be subject to a “clawback,’’ or forced to return funds, with Shapiro now one of the biggest among them.

Picard’s accounting of the “real’’ losses from Madoff’s theft is $21.2 billion, far less than the $60 billion that investors collectively claimed at the outset of the case. Many of the “losses’’ were the fake profits Madoff had invented to dupe investors.

Fishbein, Shapiro’s attorney, had previously argued in court documents that Shapiro should be able to claim losses based on the amounts reflected in his account statements - that is, counting the false profits - and not just on what he had originally invested with Madoff.

Fishbein argued that the vast majority of Shapiro’s holdings had been in stocks and bonds he had owned for a long time, not in a separate options-trading scheme Madoff marketed to other victims.

Picard has said many times that this argument, advanced by other alleged victims, as well, will not succeed. His Nov. 23 letter, some details of which first appeared in Newsday, said his office wants to examine “the relationship between Mr. Shapiro and his family’’ and his relationship with Madoff, who is in prison. The trustee also wants a more complete picture of the family’s net worth, to evaluate the potential for a settlement.

In August, according to documents filed in court, the two sides started discussing when Carl Shapiro would be deposed. Weeks later, Shapiro’s health worsened, according to his lawyer. An Oct. 26 letter from Shapiro’s cardiologist at Brigham and Women’s Hospital said Shapiro is suffering from heart trouble and numerous other medical issues and describes a man weakened by the Madoff affair.

“The events of the last several months, combined with his multitude of medical problems, have caused a clear cut decline in his state of wellbeing and robustness. He is now fragile and, for the first time since I have known him, less confident of the future,’’ wrote the cardiologist, Kenneth L. Baughman.

He warned the lawyers that he can’t be certain how long Shapiro will live and urged them to complete their discussions about Madoff “in an expedited fashion.’’

(Baughman, 63, was killed by a car while jogging in Orlando, Fla., on Nov. 16.)

Shapiro’s lawyer has requested a six-hour deposition on Dec.14, to be conducted at the Breakers Hotel in Palm Beach, Fla., where Shapiro lives for most of the year. Shapiro would get breaks as needed, “given his level of fatigue and concentration.’’

Picard has not agreed to the date. His staff alleges that Shapiro has not produced all requested documents - including some the US Department of Justice and the SEC have but that he does not. Picard also alleges Shapiro is trying to rush the meeting and place improper limits on their time with him.

But Shapiro’s lawyer said his client’s health is the main issue in a high-stakes matter.

“Mr. Shapiro’s upcoming testimony may well be the first and last time he is able to offer meaningful testimony in this proceeding,’’ Fishbein said in his filing.

Beth Healy can be reached at bhealy@globe.com.