Bernard Madoff’s sons, who ran the proprietary-trading unit of his securities firm, started a separate energy-exploration company two years ago, according to public records and their attorney.
Mark and Andrew Madoff teamed up with their cousin Shana Madoff Swanson in early 2007 to fund Madoff Energy LLC. After hiring geologists and other employees, they began financing oil and gas projects, including well drilling in Texas.
It was Madoff’s sons who went to authorities last month after he confessed to them that he was running a Ponzi scheme that may cost investors $50 billion. Mark, and Andrew, told federal regulators they were previously unaware of the alleged fraud. Bernard Madoff, isn’t involved in the energy investments, their attorney said.
“Madoff Energy is a private company established by Andrew, Mark and Shana Madoff in 2007 to invest in drilling oil and gas wells in the United States,” Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, said in an e-mailed statement. “Neither Bernard Madoff nor Bernard L. Madoff Investment Securities LLC had any investment in this venture.”
The cousins incorporated Madoff Energy, located at the family brokerage in New York, on Feb. 20, 2007, according to Delaware state records. They provided all of the company’s funding, said Eric Starkman, Shana’s spokesman. “Madoff Energy has no additional investors,” he said in an e-mail.
Neither Flumenbaum nor Starkman would provide details about the company, including the amount of the cousins’ investment or whether it has generated any profits. The Madoff brothers and Madoff Swanson declined to comment, as did Ira Sorkin, Bernard Madoff’s lawyer.
Investigators from the Federal Bureau of Investigation, US Securities and Exchange Commission and US Attorney’s Office in Manhattan are seeking to understand how Bernard Madoff’s scam worked and whether there are any remaining assets that can be used to compensate his investors.
Irving Picard, the trustee liquidating Madoff’s brokerage, has located $830 million in “liquid assets” at the firm to meet claims, according to Congressional testimony given on January 5 by Stephen Harbeck, president of Securities Investor Protection Corp, a Washington-based group that acts as a trustee or works with court-appointed trustees to recover funds in missing-asset cases. Prosecutors said last week they found 100 Madoff-signed checks totaling $173 million in the investment adviser’s desk, ready for mailing.
US Magistrate Judge Ronald Ellis will rule on Monday on whether Bernard Madoff’s $10 million bail will be revoked or modified. The brokerage itself may fetch $40 million in a sale “at best,” estimated Larry Tabb, founder of TABB Group, a financial-market research and advisory firm in Westborough, Massachusetts. Mark Madoff, who joined his father’s firm in 1986 after graduating from college, ran proprietary trading and also worked in the market-making business. Andrew, who started in 1988 after graduation, was a director and worked in both businesses. Shana, Bernard’s 38-year-old niece, had been with the company full time since 1996 and helped run the compliance department.
Traditionally, investors who wanted a direct stake in oil and gas projects would invest in partnerships set up by energy- industry veterans to drill wells or acquire acreage. Rising oil prices, which almost tripled from a low of $50 a barrel in January 2007 to a peak of $145 in July 2008, have spurred many people who lack experience to take a stab at becoming oil barons.
“Over the past two years, we have seen a tremendous increase in the number of private partnerships formed to explore for oil and gas,” said Dan Waller, a managing partner at Dallas- based law firm Secore & Waller LLP. “Unfortunately, a lot of the ones we have seen have not been profitable because they have been run by people who are not in the oil and gas business.” Waller’s firm helps set up at least a dozen energy partnerships each month, he said.
Such partnerships usually pay for the drilling necessary to determine whether a well can be profitable. If the well is viable, the partnerships pay the costs of equipping it to produce gas or oil. In return, they receive a cut of the revenue produced by the well and tax benefits tied to the costs of exploration.
In 2008, the Madoffs set up the partnerships Madoff Energy III LLC in May and Madoff Energy IV LLC in October. Madoff Energy IV entered into an October 30 agreement with Austin, Texas-based Pantera Petroleum Inc and Lakehills Production Inc to finance the drilling of natural gas wells in the West Gomez field in Pecos County, Texas, according to documents filed with the US Securities and Exchange Commission.
Pantera’s Web site describes the West Gomez field as “one of the most prolific gas plays in the world,” adding that companies operating on adjacent properties included Exxon Mobil Corp and ConocoPhillips. Chris Metcalf, Pantera’s chief executive officer, declined to comment.