Dec. 20 (Bloomberg) -- Neil Friedman, a retired life insurance salesman who followed the advice of an old friend, lost $4.5 million with Bernard Madoff after having decided 30 years ago to trust his money to the alleged swindler.

That old friend was Madoff’s accountant, Jerry Horowitz. He and Friedman were next-door neighbors in the 1950s when they lived in the same New York City apartment building. Twenty years later, he told Friedman about Madoff after being hired as the money manager’s outside accountant, Friedman said. Horowitz later founded a small New York auditing firm that has now come under scrutiny for signing off on Madoff’s financial statements.

“Jerry was taken, like we were taken,” said Friedman, who claimed the accountant lost money with Madoff as well. “Jerry was invested like we were, except he had a lot more money.”

Madoff, 70, was charged last week by federal prosecutors with securities fraud. He allegedly told employees that Bernard L. Madoff Investment Securities LLC had been insolvent for years. The business was a Ponzi scheme, using new investments to pay off earlier investors, and “one big lie,” Madoff said, according to the government.

“It seemed from what I was hearing, it offered me an opportunity to get good returns from my money,” Friedman, of Palm City, Florida, said of his initial decision to invest with Madoff in the 70s. “We were very moderate people at that time. I wasn’t making a terribly large income so return for the future was very important.”

Living Expenses

After investing with Madoff, Friedman, 74, said he withdrew money quarterly as a retiree from his Madoff accounts to cover living expenses and never touched the principal. He added that Horowitz told him he took out from his own account what he anticipated needing for the year each January.

“My wife didn’t want to do this,” Friedman said of his decision to trust Madoff. “She wanted to keep the money under the mattress because she didn’t understand it. Unfortunately, in retrospect, she was right. But at the time we were living so good.”

Friedman said that he and Horowitz recently discussed their financial conditions now, in light of the alleged fraud.

“I told him about how long we could survive and he said he has about two months,” Friedman said of Horowitz’s finances.

Horowitz didn’t return calls to his home in Palm Beach Gardens, Florida. His son-in-law, David Friehling, who took over the accounting firm, Friehling & Horowitz, when Horowitz retired in the 1990s, didn’t return a call seeking comment at his office in New City, a northern suburb of New York City. Andrew Lankler, an attorney for Friehling, and Latour Lafferty, an attorney for Horowitz, declined to comment.

10 Years

Neither Horowitz or Friehling has been charged with a crime. Madoff faces as much as 10 years in prison and a fine of $5 million if convicted.

U.S. regulators, trying to unravel the breadth of the alleged scheme, have found evidence of misconduct stretching back to at least the 1970s, two people familiar with the inquiry said. Madoff’s investment advisory business is now estimated to have had more than 4,000 customers, the people said, declining to be identified because the inquiry isn’t public.

Hedge fund investment adviser Aksia LLC warned clients last year not to put their money with Madoff after learning of “red flags” at his firm, including that its books were audited by Friehling & Horowitz.

“I don’t know how they could be doing their job,” said Scott Berman, an attorney at Friedman Kaplan Seiler & Adelman in New York, who has been involved in litigation against accounting firms. “It’s hard to believe an independent auditor doing an audit could have let this occur.”

Financial Statement

Friehling & Horowitz audited Madoff’s firm’s financial statement for the year ended Oct. 31, 2007.

The auditor said it performed its analysis of Madoff’s finances in accordance with standards meant to obtain “reasonable assurance” they were “free of material misstatement,” according to a copy of the report obtained by Bloomberg News.

The statement presented “fairly, in all material respects,” the firm’s financial position, according to the copy.

Friehling & Horowitz completed a similar audit for fiscal 2006, according to a copy of the document.

The auditing firm operated from a 13 x 18 foot storefront office in the Georgetown Office Plaza in New City, sandwiched between a pediatrician’s office and another medical office.

Thomas Zugibe, district attorney in New York’s Rockland County, which includes New City, said this week he has begun a probe of the auditor.

Ethics Investigation

The American Institute of Certified Public Accountants, the national organization for CPAs, also started a preliminary ethics investigation, said AICPA spokesman Bill Roberts.

Jerome Horowitz, CPA, PC, was a professional corporation in Bellmore, New York, that initially registered with state regulators in 1976 and is no longer active, according to state records. Friehling & Horowitz made its initial filing in 1988.

The auditing firm hasn’t had a peer review since 1993, Roberts said. AICPA members are exempted from such reviews only when they cease performing audits, he added.

David Friehling is a former president and a current board member of the Rockland chapter of the New York State Society of Certified Public Accountants.

Friehling served as Friedman’s personal accountant and did his tax return because he understood how to report the Madoff accounts, Friedman said. The accountant would come to Florida each February and set up shop for about a week, according to Friedman.

‘Financial Planner’

“I was a certified financial planner but I never felt qualified outside my area of expertise, which was life insurance,” Friedman said. “Every time I bought a stock myself I lost money.”

After he and Horowitz left their apartment building in Far Rockaway, in the Queens section of New York City, Friedman said they stayed close as their families grew. Through moves to Nassau County, Long Island, and finally to Florida where they retired, the two men remained friends, he said. Friedman said he attended the wedding of Horowitz’s daughter, Robin, where she married Friehling, his auditing firm partner.

Over the years, when he and Horowitz went to dinner, they would often celebrate their mutual affection for Madoff, as they watched their assets seemingly accumulate under his supervision, Friedman said.

‘We All Toasted’

“We all toasted Bernie,” he recalled.

Friedman said he couldn’t reach Friehling when he called him on Dec. 12 after news of the fraud broke. He was told the accountant was on his way to meet a lawyer, Friedman said.

Friedman and his wife then called Horowitz and asked what they should do, he recalled.

“He told us there was such a thing as casualty loss,” Friedman said.

Now, Friedman said, he has no choice but to come out of retirement to make ends meet.

“I have to get a job or turn my hobby into a money maker of some sort,” Friedman said. “I do a lot of photography. I’m a master gardener. And I can teach children how to start a vegetable garden.”

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporter on this story: Karen Freifeld in New York State Supreme Court at kfreifeld@bloomberg.net.

Last Updated: December 20, 2008 00:01 EST