Madoff should be in jail, says prosecutor

NEW YORK — A prosecutor on Monday asked that Bernard Madoff be jailed pending trial, saying the disgraced financier violated an agreement with the court by mailing watches, jewelry, cufflinks and mittens worth more than $1 million to relatives and friends.

"The defendant's recent actions amount to obstruction of justice," Assistant U.S. Attorney Marc Litt told U.S. Magistrate Judge Ronald Ellis at an hourlong bail hearing.

The prosecutor said one package of items that was accompanied by a handwritten note from Madoff may alone be worth more than $1 million.

The judge ordered both sides to submit written arguments this week and said he would rule later.

Madoff's lawyer, Ira Sorkin, said his client did not violate a court-imposed asset freeze by mailing heirlooms including $25 cufflinks, pens and a $200 pair of mittens through the post office to his brother, a son and daughter-in-law and a New York couple vacationing in Florida.

Sorkin called it an innocent mistake and said Madoff and his wife sought the return of the items they had sent on Dec. 24 as soon as they were told they could not send them out. He also suggested that some of the items mailed belonged to Madoff's wife, and therefore were not subject to a court order at that time.

Madoff's sons alerted prosecutors last week that their father mailed them jewelry, watches and other items in violation of an asset freeze, Sorkin said in an interview after court.

Also on Monday, Republican and Democratic House members in the nation's capital said that the Madoff case reflects deep, systemic problems at the Securities and Exchange Commission (SEC).

Inspector General H. David Kotz said he is so concerned about the SEC's failure to uncover Madoff's alleged Ponzi scheme that the IG is expanding the inquiry called for last month by SEC Chairman Christopher Cox.

Cox had pushed the blame squarely onto the SEC's career staff for the failure to detect what Madoff was doing.

At the first congressional hearing on the scandal Monday, Rep. Spencer Bachus, R-Ala., called for Congress to create a regulatory structure "for the 21st century."

The House Financial Services Committee is trying to determine how, despite warnings back to at least 1999 to SEC staff members, Madoff continued to operate his alleged scheme.

"Clearly, our regulatory system ... failed miserably and we must rebuild it now," said Rep. Paul Kanjorski, D-Pa.

Rep. Paul Hodes, D-N.H., said the Madoff scandal is like "the cherry on a bad sundae."

Kotz said that he will examine the operations of the SEC's enforcement and inspection divisions and will make recommendations, steps beyond what Cox had called for.

The 70-year-old Madoff, a former Nasdaq stock-market chairman, was arrested Dec. 11 on securities-fraud charges alleging he duped investors out of as much as $50 billion in a giant Ponzi scheme.

At some point during his home confinement, Madoff and his wife decided to start sending the personal items to relatives and friends, including cufflinks that had been given to him by his granddaughter.

Sorkin said lawyers learned for the first time that the watch and jewelry had been sent to relatives and the couple in Florida when they were preparing a statement of Madoff's assets on Dec. 30 that had to be turned over to the SEC a day later.

Litt said the government has taken possession of most of the items, including the most expensive ones.

The issue of Madoff's assets is an important part of the investigation because authorities are trying to determine what is left and use it as restitution for burned investors.

The defense lawyer offered to let the government take custody of any jewelry or other small assets belonging to Madoff, an offer that Litt said would be impossible to carry out because there might be valuable small assets such as paintings and sculptures "scattered around the country and the world."

The effort by the Madoffs to send property to family and friends was not the first time that Madoff sought to help out members of his inner circle since his alleged scheme unraveled.

The FBI said in a complaint at the time of Madoff's arrest that he had sought to distribute $200 million to $300 million he had left to selected employees, family and friends.

The prosecutor urged the magistrate judge to consider the "totality of actions" as Madoff carried out a sweeping fraud.

Madoff has not yet entered a plea in the case because an indictment had not been returned, though it was due within a week.

In court, the prosecutor had argued that Madoff obstructed justice by trying to dissipate assets and said that he was a danger to the community because he was liquidating assets needed by his investors.

Associated Press writers Marcy Gordon and Tom Hays and Bloomberg News contributed to this report.