The Securities and Exchange Commission (SEC) has charged a pair of longtime employees at Bernard L. Madoff Investment Securities LLC (BMIS) with playing key roles in the Madoff Ponzi scheme. One employee produced phony account statements for investors and feathered her own accounts for personal gain, while the other conspired to cash out Madoff's friends and family as the fraud collapsed in addition to creating phony account statements and tracking the Ponzi scheme bank account.
The SEC alleges that Annette Bongiorno, who began working for BMIS in an administrative capacity in 1968, regularly created false books and records and helped mislead investors in telephone conversations and through account statements and trade confirmations that reported securities transactions that never happened and positions that never existed. Bongiorno also created false trades in her own BMIS accounts that enabled her to cash out millions of dollars more than she deposited.
The SEC further alleges that JoAnn Crupi, who was responsible for supervising the primary bank account used in BMIS's investment advisory operations, helped facilitate the fraud and mislead investors, auditors, and regulators into believing that BMIS was a legitimate enterprise. When the fraud was on the verge of collapse, Crupi helped decide which accounts should be cashed out and prepared checks for those selected investors, many of them who were friends or family of Madoff.
"Bongiorno and Crupi helped create an elaborate edifice of fake accounts, fake trades, and fake profits", said George S. Canellos, director of the SEC's New York regional office. "Without their active and ongoing assistance, Madoff's world of lies would have been unsustainable."
According to the SEC's complaint against Bongiorno filed in U.S. District Court for the Southern District of New York, Bongiorno created trades that were chosen with the benefit of hindsight to generate large "gains" in BMIS accounts. The trades and positions reported in investor accounts, however, were fictional. Bongiorno also fabricated trades in her own BMIS accounts, depositing approximately $920,000 into these accounts but withdrawing approximately $14.5 million. The high balances and withdrawals were made possible only through the sham, backdated, highly profitable "trades" that Bongiorno fabricated.
According to the SEC's complaint against Crupi, also filed in U.S. District Court for the Southern District of New York, she was hired in 1983 as a keypunch operator in BMIS's investment advisory operations and reported to Bongiorno. She eventually supervised some lower-level BMIS employees and worked closely with Frank DiPascali, another high-level BMIS lieutenant charged by the SEC last year. Crupi had exclusive control over two important aspects of the BMIS fraud: she handled the primary bank account used in the Ponzi scheme, and she created false trading portfolios and account statements related to a purported hedging strategy using baskets of stock for a group of limited partnership funds managed by a longtime BMIS investor.
The SEC alleges that Crupi knew the true financial condition of Madoff's Ponzi scheme and its dwindling assets. On Dec. 3, 2008, DiPascali told Crupi that the scheme was on the verge of collapse, and they met shortly thereafter to discuss the implications of the collapse in more detail. Crupi continued to process client deposits during this time period, depositing approximately $59 million of client checks into the Ponzi scheme bank account from December 4 to December 12. In the final days of the fraud, when the money available to meet investor redemptions had dwindled to a few hundred million dollars, DiPascali convinced Madoff to use the remaining funds to liquidate the accounts of family and friends of the firm, including employees, and not to honor redemption requests by the larger institutional investors. Crupi helped DiPascali review BMIS investor lists and identify which accounts should be cashed out. Madoff approved these actions and Crupi prepared checks for the selected investors totaling more than $350 million. Madoff was arrested and the checks were seized before they could be distributed.
The SEC's complaints against Bongiorno and Crupi specifically allege that by their actions, they violated Section 17(a) of the Securities Act; violated and aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and aided and abetted violations of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2 thereunder and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder. Among other things, the SEC's complaints seek permanent injunctions, financial penalties and court orders requiring Bongiorno and Crupi to disgorge their ill-gotten gains.