Prosecutors seek to jail Madoff

NEW YORK/WASHINGTON (Reuters) - U.S. prosecutors asked a judge to jail accused swindler Bernard Madoff on Monday, saying he sent jewelry and other items worth more than $1 million to family and friends in violation of his bail.

A lawyer for investment adviser Madoff, who made his first court appearance since his December 11 arrest on a charge of securities fraud in what could be Wall Street's biggest scam, said his client had already returned some of the items and argued that the 70-year-old was not a flight risk.

The U.S. magistrate judge reserved decision and asked both sides for more information concerning the purported $50 billion scheme by Thursday.

As Madoff appeared in the Manhattan federal court, regulators appeared before a congressional panel which was not as restrained as the magistrate.

"Many of us have lost confidence in the SEC," U.S. Rep. Carolyn Maloney, a New York Democrat, told Securities and Exchange Commission Inspector General David Kotz as he testified before the House Financial Services Committee.

At the hearing on Madoff's alleged fraud, Kotz promised to have his report to Congress "in a matter of months, not years."

Meanwhile Madoff remains under house arrest in his Manhattan apartment and 24-hour surveillance as part of his $10 million bail, which has also required his assets to be frozen.

Many of Madoff's clients who say he stole their life savings are outraged that he has not been jailed, but allowed to remain in his $7 million apartment.

Prosecutor Marc Litt told the court that one item mailed by Madoff and his wife, Ruth, was valued at more than $1 million in violation of a judge's order.

Litt argued that the items mailed nearly two weeks ago represented a "dissipation of assets" that threatened to compromise the value of the inevitable restitution and forfeiture that Madoff would have to make.

"There is still some flight risk," Litt said. "It is impractical for the government to go around and collect such items as jewelry or small items scattered around the United States and indeed the world. It is not practical for the government to maintain them."

The gray-haired Madoff has not formally responded in court to the securities fraud charge.

Dressed in a charcoal gray suit, white shirt and black tie Madoff sat silently during the hearing and ignored reporters, TV crews and photographers when he left the courthouse.

HEIRLOOMS

Madoff's attorney Ira 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.

"We attempted to get the items back before we ever learned the government had this concern," Sorkin told U.S. Magistrate Judge Ronald Ellis. "There is no claim that they ever sought to flee and no claim they sought to dissipate the assets."

Madoff, a former chairman of the Nasdaq stock market, was charged with securities fraud in a sweeping "Ponzi" scheme that the government says cost investors, banks and charities worldwide billions of dollars.

According to court documents, Madoff confessed to investigators that he ran the scheme over many years with losses of $50 billion. A Ponzi scheme is one in which early investors are paid off with the money of newer clients.

No one else has been charged.

In Washington, the Madoff scandal has emerged as a rallying point for Democrats intent on overhauling financial regulation this year, with the help of the incoming Obama administration as it moves to stabilize the troubled U.S. financial system.

"Clearly our regulatory system has failed miserably and we must rebuild it now," said Rep. Paul Kanjorski, a Pennsylvania Democrat who chaired a hearing with witnesses that included the internal watchdog of the U.S. Securities and Exchange Commission (SEC).

Inspector General David Kotz has set a January 16 deadline for SEC staff to turn over Madoff records and said "social and professional relationships" may have influenced investigators.

(Additional reporting by Martha Graybow in New York and Kevin Drawbaugh in Washington, editing by Leslie Gevirtz)