NEW YORK (Reuters) - Accused swindler Bernard Madoff should be jailed for violating a court order by mailing $1 million worth of diamonds, watches and other jewelry to friends and family, U.S. prosecutors told a court on Wednesday.
Prosecutors said Madoff had become a flight risk and should be jailed immediately.
As the government pressed its case, the Securities Investor Protection Corp (SIPC) said some investors who may have been bilked by Madoff could start recovering money in a few months.
The agency, created by Congress in 1970 to help investors who had accounts at failed brokerages, said it had mailed 8,000 claim forms to Madoff investors, but that it was too soon to know how many investors had been defrauded.
Authorities have said that Madoff confessed last month to running a Ponzi scheme for many years in which early investors were paid with the money of new clients, piling up losses of $50 billion.
In a brief filed in U.S. District Court in Manhattan in response to the government, Madoff's lawyers said he "simply did not realize" that mailing valuable personal items to family and friends violated a December 18 court order.
"Although Mr. Madoff had consented to the order, which prohibited Mr. Madoff from transferring assets, he simply did not realize that it pertained to these personal items," lawyers Ira Sorkin and Daniel Horwitz wrote.
Prosecutors said the million dollar package mailed by Madoff contained 13 watches, a diamond necklace and other valuables. Other packages contained diamond Cartier and Tiffany watches, a diamond bracelet, gold watch, four diamond brooches and a jade necklace, according to government documents.
Madoff's lawyers said that every effort was being made to return the jewelry.
Madoff, under house arrest and surveillance, was arrested and charged in December with security fraud.
His lawyers argued in court papers on Wednesday that the 70-year-old's restrictive bail conditions "are more than adequate." They said he posed no danger to anyone and that he was not a flight risk. He and his wife have surrendered their passports to authorities.
Typically, in cases of white collar crime, defendants are allowed to remain free on bail, but often with restrictions.
Wealthy investors, Jewish charities, universities and others have said they lost money through the scheme.
The situation looked bleak for Austria's Bank Medici, which said it is one of the biggest victims of Madoff's purported $50 billion "giant Ponzi scheme", with a $3 billion exposure.
The bank, one of several in the world to disclose exposure to Madoff, is the only one to have been placed under government supervision since the Madoff scandal erupted.
In a statement on Wednesday, Bank Medici denied a New York Times report that chairwoman and majority owner Sonja Kohn had gone into hiding for fear of recrimination from wealthy Russians who lost money with the funds they bought from her.
Madoff has become a vilified figure since his December 11 arrest on a charge of securities fraud. He is under house arrest in his luxury Manhattan apartment on $10 million bail.
Recovery of investor losses through whatever assets and money Madoff and his firm have left is a major goal of investigators probing what could be Wall Street's biggest scam.
"Dissipation of the defendant's assets through transfers to third parties obstruct justice, within the meaning of the bail statute, because they make it more difficult, if not impossible, to recover all forfeitable assets to recompense victims," prosecutors said in court documents.
SIPC President Stephen Harbeck said in an interview with Reuters that some of the simpler claims might be resolved within the next few months. The SIPC does not have to wait until a criminal case is resolved to start distributing money on investors' claims.
Harbeck said the impact to SIPC's reserve would not be as great as the purported fraud, given the maximum the agency can pay an investor is $500,000.
"The $50 billion figure includes non-existent profits. Since there is a cap on what we can pay any one individual, the drawdown on our funds is not as severe as the entire loss," he said.
The Wall Street Journal reported on Wednesday that 10 days before his arrest, Madoff received $250 million from entrepreneur Carl Shapiro, one of his oldest friends and biggest financial backers. It was not clear if the money was a loan or investment, the report said.
SIPC has yet to receive Madoff's list of assets, which was turned over to the U.S. Securities and Exchange Commission and not made public. A trustee has identified more than $830 million in liquid assets related to Madoff's investment firm that may be subject to recovery and is searching for more.
Reporting by Martha Graybow in New York, Rachelle Younglai in Washington and Boris Groendahl in Vienna; Editing by Toni Reinhold