By Larry Neumeister
Associated Press
Wednesday, March 18, 2009

NEW YORK, March 17 -- Prosecutors stepped up their scrutiny of Bernard L. Madoff's family and assets Tuesday, telling a judge they want to seize jewelry, business interests and more than $30 million that the disgraced financier and his wife lent to their two sons.

The move was one of two motions that prosecutors filed Tuesday, less than a week after Madoff pleaded guilty to what could be the largest fraud in history. The other motion argued that Madoff must remain behind bars before his sentencing because his guilty plea creates a tremendous motive to flee.

Assistant U.S. Attorney Lisa A. Baroni said strict bail conditions that have kept Madoff under guard in his apartment with an electronic ankle bracelet and video monitoring were not foolproof. She said Madoff "managed to perpetrate an enormous fraud, over the course of decades; his ingenuity should not be underestimated."

Prosecutors also are pursuing the fruits of the fraud. The government earlier this week indicated that it would seek the forfeiture of nearly everything the Madoffs own, from the $22 million estimated value of four homes to $62 million in cash and securities, nearly all of it in the name of Madoff's wife, Ruth.

The latest list extends the demands to loans the Madoffs made to their sons, Mark and Andrew, including an Oct. 6 promissory note for $4.3 million to Andrew and a Sept. 21 note for $250,000 to Andrew. The loans came less than three months before Madoff admitted to them that his investment business was a fraud.

In all, the government cites $22 million in loans to Mark and $9.55 million in loans to Andrew. The document lists 2005 as a particularly busy year, when Mark received $16 million in loans and Andrew received $5 million in loans.

The Internal Revenue Service, meanwhile, issued guidelines that will allow tax relief and refunds for some Madoff victims who were levied for investment earnings that turned out to be nonexistent.

Madoff investors should have reported earnings from their investments with him through the years and thus paid taxes on those earnings. Given that some of those were "phantom" profits, investors have said they should be entitled to refunds of the taxes they paid.

Investors in some of these cases are entitled to a "theft-loss" deduction, not subject to the limits on normal capital losses from investments, according to the guidelines, IRS Commissioner Douglas Shulman testified at a Senate Finance Committee hearing.