Oct. 16 (Bloomberg) -- Five former employees of Bernard L. Madoff helped conceal his $17 billion Ponzi scheme by making fake documents to trick customers and regulators for decades, a federal prosecutor told a jury.
The defendants created millions of false account statements and elaborate trading records to mislead anyone who came in contact with the company, and became rich in the process, Assistant U.S. Attorney Matthew Schwartz said today in his opening statement at the trial in federal court in New York.
“They enabled the fraud in different but essential ways,” Schwartz told the 12-person jury. “They did it for the most simple reason of all -- greed.”
The three men and two women on trial knew Madoff’s securities firm didn’t conduct real trades and used money from earlier investors to pay off new ones, the U.S. alleges. When the fraud collapsed on Dec. 11, 2008, thousands of customers lost at least $17 billion in principal and $48 billion in fake profit they believed was being held in their accounts.
Schwartz spoke to the jurors for more than an hour and a half in a late-afternoon hearing not far from Wall Street, where Madoff’s company was once based in the 1970s. Defense lawyers will give their opening statements tomorrow.
“It’s often said that jurors decide a case following opening statements -- at a minimum, perspectives on the evidence are formed that are difficult to overcome,” said Richard Scheff, a former federal prosecutor who’s chairman of Philadelphia-based law firm Montgomery, McCracken, Walker & Rhoads LLP.
The former employees, all of whom have pleaded not guilty, are Annette Bongiorno, a Madoff employee for 40 years who went from being his personal secretary to helping run the company’s investment advisory business; Joann Crupi, a manager of large accounts who worked closely with Bongiorno; Daniel Bonventre, the operations chief who signed checks for Madoff’s securities firm and worked with its general ledger; and computer programmers Jerome O’Hara and George Perez, whose expertise was used to generate millions of corporate documents.
“For more than 30 years, Bernard Madoff ran a multibillion-dollar fraud that turned out to be the biggest Ponzi scheme in history,” Schwartz said. “These are the people who helped him do it.”
U.S. District Judge Laura Taylor Swain has said the trial she’s overseeing may last five months, including a weeklong jury selection process that ended yesterday. The 12 jurors and six alternates will hear what will become the fullest account of how Madoff carried out the Ponzi scheme.
The ex-employees “obsessed” over the details of fake documents they created to make them look real, including long discussions over what fonts and paper to use and where to place asterisks, Schwartz said.
When auditors from KPMG appeared in Madoff’s offices requesting a report the company hadn’t faked in advance, the defendants kept them waiting while they created one, printed it, placed it in the refrigerator to cool it down and tossed it “like a hot potato” to make it look roughed up, Schwartz said.
Schwartz told the jury they would see extensive evidence against the defendants, including Bongiorno’s “meticulous records of her involvement in the fraud” and details of Crupi’s management of the “slush fund” into which all customers’ money was deposited instead of being invested into securities.
The evidence will show Crupi used her corporate card for $50,000 in personal expenses each year that she didn’t claim on her taxes, and used $2.7 million in stolen money to buy a beach house, Schwartz said. A photograph of the house was displayed on flat-screen monitors in the jury box.
The two women worked together daily, scouring newspapers for stock prices to put together the right mix of fake trades and prices to use on customers’ fake account statements, according to the U.S.
Prosecutors will also show Bonventre used money stolen from Madoff’s customers to pay for his vacations and country club dues, finance his child’s private-school education, help buy a “fancy Upper East Side apartment” for himself and “fancy cigars,” Schwartz told the jury.
Evidence during the trial will show O’Hara and Perez in 2006 realized their programming codes -- which allowed the firm’s computers to “spit out fake paperwork” -- were essential to keeping the fraud going, and demanded more money from Madoff to keep quiet, Schwartz said. He gave the men $100,000 each and let them name their own annual bonuses and salary increases, according to the prosecutor.
The jurors were shown an image of a note allegedly hand-written by O’Hara during that period that said, “I won’t lie any longer.”
Defense lawyers will need to “plant the seeds of doubt” about the government’s case and suggest to jurors that the defendants were “as much duped by Bernie Madoff as others,” said Scheff, who isn’t involved in the case.
Their challenge will be showing that the former employees had isolated knowledge about what went on at the company and lacked Madoff’s big-picture view, said Tamar Frankel, a professor at the Boston University School of Law.
“Even if they were able to know, what was their access to the materials that would have suggested that something else was going on?” Frankel said in an e-mail. “Did they have enough information to put two and two together and come up with some suspicion about his investments?”
The fraud started in the early 1970s and evolved into an “elaborate fiction” that was “surprisingly simple” and made each of the defendants rich, Schwartz told the jury today.
Testimony from Madoff’s accomplices who pleaded guilty will be central to the government’s case against the five people. The U.S. in 2009 won a guilty plea from Frank DiPascali, Madoff’s finance chief, who agreed to assist with the criminal case and is set to testify. David Friehling, an accountant for Madoff, pleaded guilty to helping prepare phony tax returns and is cooperating with prosecutors.
Schwartz said DiPascali and other testifying witnesses, including others who pleaded guilty and their secretaries and assistants, would “give the ultimate insider’s perspective to Madoff’s fraud.”
Madoff, 75, admitted to federal agents in December 2008 that his company was a sham. He pleaded guilty to 11 counts and was sentenced to 150 years in prison, though he claimed all along that he worked alone and refused to implicate anyone else.
Federal authorities also obtained guilty pleas from Peter Madoff, who helped his brother run the firm for four decades, and employees Craig Kugel, David Kugel, Enrica Cotellessa-Pitz, Irwin Lipkin and Eric Lipkin.
Peter Madoff was sentenced to 10 years in prison. The other defendants haven’t been sentenced.
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