In the news – Madoff’s ex-employees on trial

TheFraudChronicles.com
Bernard Madoff (Bloomberg)
Photographer: Jin Lee/Bloomberg News

Bernard Madoff shocked the world in December, 2008, by confessing that his exclusive hedge fund was a Ponzi Scheme. Madoff, once a revered Wall Street icon, is now serving a 150 year sentence, while five of his ex-employees spend their days in a Manhattan courtroom, on trial for charges that they allegedly aided Madoff in perpetuating his multi-billion dollar fraud scheme.

Madoff’s Plea Allocution

On December, 2008, the legendary Bernard Madoff confessed that his prestigious hedge fund was a Ponzi scheme, and had been for “many years.” He confessed to running a Ponzi scheme through Bernard Madoff Securities LLC’s investment advisory business since the early 1990s. In his plea allocution he referred to “the fraudulent side of my business”, distinguishing it from the legitimate proprietary trading and market making side of his firm. He insisted that the legitimate operation – run by his brother and his sons – had no involvement with the fraud. In the allocution, Madoff apologized for harm done to his family, friends, business associates, and the “thousands of clients who gave me their money.”

His plea allocution included the following admissions (see Bernard Madoff Plea Allocution – WSJ):

  • He promised to invest client funds in a variety of well-known securities, options, and hedge funds, but from the early 1990s to 2008 he “never invested those funds in the securities, as I had promised.”
  • His clients included individuals, charitable organizations, trusts, pension funds and hedge funds. (See the Wall Street Journal’s Madoff’s Victims for a list of those defrauded.)
  • He attributed his higher-than-market returns by falsely claiming to use a “split-strike conversion strategy” he had invented.
  • He lied to clients, employees, and his family, and knowingly gave false testimony under oath to the SEC.
  • He knowingly “caused” client statements to be produced, which contained itemized listings of trades that never happened.
  • He filed false and misleading certified audit reports and financial statements with regulatory bodies.

Five years after Madoff’s confession added worldwide fuel to the economic recession, five of his ex-employees are now on trial, accused of helping perpetuate Madoff’s $17 billion Ponzi scheme. (The prosecution in this case states that when Madoff’s Ponzi collapsed thousands of clients lost over $17 billion in principal and $48 billion in fake profit)

Accused ex-employees, Victims, and the Lawyers’

Reporter Erik Lawson profiled the accused employees in his October 17th Bloomberg article Madoff Was Like A God, Wizard of Oz, Lawyers Tell Jury 

  • Defendant Joann Crupi worked for Madoff from 1983 until 2008, first as a secretary and later managed large accounts for the firm. Her defense lawyer stated that “Crupi, like everyone else, was duped into helping [Madoff].”
  • Annette Bongiorno worked 40 years for Madoff, first as personal secretary and later helping to manage the investment advisory business.
  • Operations chief Daniel Bonventre signed checks for Madoff’s securities firm and worked with the General Ledger.
  • The expertise of computer programmers Jerome O’Hara and George Perez “was used to generate millions of corporate documents for customers and regulators.”

Defense lawyers argue that the defendants trusted Madoff and believed in his integrity, and were also reassured by two external factors:

  • failure of regulatory audits to show problems in the firm, and
  • the sophisticated billionaires who trusted Madoff with their money.

In fairness, however, we should remember that Madoff was a persuasive man largely regarded as one of Wall Street’s most respected figures. Fraud investigator Harry Markopolis five times reported evidence against Madoff to the SEC, with no substantive result. Few were willing to believe in Madoff’s guilt – until the day he confessed. Like the emperor in the tale The Emperor’s New Clothes, until he confessed suspicion of Madoff’s integrity was tantamount to sacrilege. His persuasiveness, confidence, and status as a financial guru are easy to see in this YouTube video of Bernard Madoff speaking on the modern stock market before the Ponzi was exposed.

Witnesses for the Prosecution

Aligned against Madoff’s five accused ex-employees in the current trial are prosecution witnesses Frank DiPascali (Madoff’s finance chief) and several other ex-employees.

I When Frank DiPascali pled guilty in 2009, I was eager to learn his story. I knew that DiPascali had worked for Madoff for years, and had managed the restricted-entrance part of the firm where false reports to clients had been produced. Ever since I learned in 2009 that DiPascali, the insider, had agreed  to assist prosecutors, I’ve been waiting to hear his testimony.

Defense lawyers have cautioned that the ex-employees testifying against the five defendants are motivated by the desire to get reduced sentences for their own crimes.

Lawyer Jerry Reisman represents 35 of Madoff’s victims, who have lost a total of $125 million US dollars. Reisman is quoted as saying in an email that, “They were not only complicit, but their actions enabled Madoff to continue his deceitful operation. Their ongoing efforts to aid Bernie Madoff made them his partners, not just his workers.” (Bloomberg, 17 Oct 2013)

The Trial

The trial of these five accused individuals may last for some months. It will make fascinating reading for fraud investigators, educators, investors, and especially for those concerned with preventing frauds. As we read the accounts of witnesses, we may gain a deeper understanding of how this fraud took place. If we can gain an understanding of the interpersonal dynamics involved, we may gain a better nose for fraud and corruption, and learn how to fight, uncover, and hopefully ultimately prevent frauds like this from happening.

I’ll be following the trial with great interest over the next few weeks, and posting updates here and on my Facebook and Google+ pages.

Author: V. G. Oltmann

V. G. Oltmann, MBA, CPA, CGA, CFI - Professor, Vancouver Island University 2002 - 2013 - Board Member, Association of Certified Forensic Investigators of Canada (ACFI): 2010-2013 - LinkedIn Profile: http://ca.linkedin.com/in/vgoltmann/

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