Nov 19th 2013
By Teresa Ambord
The name Bernie Madoff probably rings a bell. It has also been known to set off a few whistles and sirens. Madoff is the mastermind behind the well-publicized and biggest Ponzi scheme ever recorded. After his empire fell, he was convicted of defrauding investors of about $20 billion of investment funds and $47 billion in fake profit, which his clients believed were in their accounts. He's now serving 150 years in the Butner Federal Correctional Complex at Butner, North Carolina. He owes restitution of $17 billion.
His list of about 4,800 victims is long and includes many names you'll recognize (see sidebar). Madoff was clever, but a crime this size that spanned many years was not one he could pull off alone. On November 13, the first criminal trial stemming from Madoff's arrest began in New York, and the featured "guests" are several of his former employees.
The Tax Decision
Madoff's personal accountant, David Friehling, age fifty-three, pled guilty to his role in the scheme back in 2009. He told the court he lost $4.3 million of his own money when Madoff's scheme collapsed. That included an investment his son made, beginning when the boy was just five years old. For his part in the massive fraud, Friehling could be looking at 114 years in prison, but his testimony might bring him some leniency.
Friehling told the court that for Madoff, the tax liability he paid each year was not an amount that was unknown before the taxes were done. It was a decision. Madoff and wife Ruth would decide how much tax they would pay, and then it was up to Friehling and others to back into that number and make it happen by faking documentation where necessary. He called it "fudging" the numbers, a sweet name for a federal crime that led to enormous deception.
Though they admit involvement, some former employees, including Friehling, maintain they didn't know the extent of the fraud. Others claim total innocence. Director of operations Daniel Bonventre pled not guilty, stating he was duped. Yet Bonventre prepared false general ledgers and corporate profit and loss statements in order to produce the desired tax results, Friehling told the court. Friehling said when he instructed Bonventre to destroy faked documents, Bonventre complied without objection.
Friehling also prepared taxes for Madoff's brother, Peter. Peter Madoff worked for the company for forty years and is now serving ten years in prison for his role in the scheme.
David Kugel, a former securities trader, was actually the first of Madoff's former employees to cooperate with the investigation. He told the court he trusted Madoff, viewing him as a mentor. He admitted that he did understand there was an element of fiction to the investments, but had no idea his boss was involved in a Ponzi scheme. "I always thought he invested in shopping centers, foreign currencies, and other ventures. Ponzi scheme? I didn't think he was doing that."
Kugel, age sixty-eight, told the court he himself lost $10 million, and his children, mother, and siblings lost millions when Madoff's house of cards went tumbling down.
Kugel testified about the involvement of other employees who are now on trial. Joann Crupi, an account manager, and Madoff's secretary, Annette Bongiorno, would use old stock tables to create fake statements to show to clients. Those statements were intended to prove good returns on investments. Kugel himself would fabricate trades and give them to the two women to use in the deception. He also testified that two computer programmers on trial – George Perez and Jerome O'Hara – developed the software that automated the scheme.
What did all this do for the employees? According to Kugel, they were able to treat themselves to tens of millions of dollars in slush fund money, money that had been stolen from clients. Prosecutors are hoping to use Kugel's testimony to show that he and others purposely maintained a blind loyalty to their boss while growing wealthy from the fraud.
The trial continues.