Nov. 6 (Bloomberg) -- Five ex-employees of Bernard Madoff on trial accused of aiding his $17 billion fraud seek to “embarrass” U.S. Securities and Exchange Commission witnesses by asking about bungled Madoff audits, prosecutors say.
The questions, to be asked on cross-examination, should be barred because the SEC employees who will testify began probing only after Madoff’s arrest on Dec. 11, 2008, and weren’t involved in earlier reviews that failed to uncover the Ponzi scheme, prosecutor Randall Jackson said Nov. 4 at a hearing.
The proposed questioning is “pure harassment designed to attempt to embarrass either the SEC or particular witnesses,” another prosecutor, Matthew Schwartz, said in a court filing. “The defendants should not be permitted to turn the trial into a referendum on the investigatory practices of the SEC.”
The five former employees are accused of helping Madoff hide his fraud from customers and regulators for years, and getting rich in the process. It’s the first criminal trial stemming from the Ponzi scheme that prosecutors say started in the early 1970s and imploded at the peak of the financial crisis.
U.S District Judge Laura Taylor Swain will decide later whether to narrow the defense’s cross-examination of SEC staff or allow the lawyers to explore the agency’s actions to make a point about their clients, who have all pleaded not guilty. The U.S. hasn’t said when the SEC witnesses will testify.
“The defendants must be free to explore the full circumstances of the SEC audits in order to establish that these audits failed for reasons separate and apart from the charged conduct,” defense lawyers said Oct. 30 in a letter to Swain placed in court files.
The defendants are Annette Bongiorno, who ran the investment advisory business at the center of the fraud; Joann Crupi, who managed large accounts; Daniel Bonventre, who oversaw the broker-dealer unit; and computer programmers George Perez and Jerome O’Hara, who allegedly automated the creation of millions of fake documents to trick customers and regulators.
The SEC since 1992 missed at least six opportunities to uncover the world’s biggest Ponzi scheme after assigning inexperienced lawyers to inquiries, conducting inspections that were too narrow and failing to press Madoff when catching him in lies, the agency said in a 2009 internal report about the failures.
The report, by then-SEC Inspector General H. David Kotz, found the agency failed to make a “thorough and competent” probe of Madoff’s firm, even after receiving detailed complaints suggesting its investment returns were impossible.
John Nester, a spokesman for the SEC, declined to comment on the dispute over questioning of the agency’s witnesses.
The five defendants argue they couldn’t have detected a fraud so sophisticated that it was missed by trained regulators. The U.S. claims the SEC overlooked the scheme partly because the defendants conspired to trick the agency, thus making the failure irrelevant to their guilt or innocence.
Arguments over the scope of such questioning take place only in court filings or when the jury isn’t present. Swain said the trial, in its third week of testimony, may last five months.
Madoff, 75, pleaded guilty in 2009 and is serving a 150-year prison sentence in North Carolina. About half a dozen others have pleaded guilty since then and are to testify.
The defense argues that the cooperating witnesses, who haven’t been sentenced, will lie about others to get less time behind bars.
Defense lawyers are also seeking permission to tell the jury about the guilty pleas of Madoff co-conspirators who aren’t testifying in the trial, including Madoff’s brother Peter Madoff, who worked for the company for decades and is serving a 10-year sentence.
“The evidence of Peter Madoff’s plea and 10-year sentence is directly relevant to the state of mind and motivation of the government’s cooperating witnesses,” the defense attorneys said in their filing. “Obviously, the cooperating witnesses are seeking desperately to avoid a similar fate.”
The trial continued today with the defense’s cross-examination of David Kugel, one of the former Madoff employees who pleaded guilty and is cooperating with the U.S. He testified last week that he gave fake trading data for years to Bongiorno and Crupi, who are accused of using the information to make fake customer account statements look real.
Bonventre’s lawyer, Andrew Frisch, asked Kugel if the phrase “fake trades” was ever used during the time he provided the trading information. Kugel said no, and agreed the words were used in relation to his jury testimony.
Kugel also testified under cross-examination that at the time of Madoff’s arrest, Kugel owed the company about $1 million that he never paid back. In the months after Madoff’s arrest, and before the firm shut down in early 2009, there was often little work to do and Kugel said he spent hours playing cards with Bonventre and talking with him.
They discussed retiring early and moving to Florida, and the possibility of never getting a job in the industry again, Kugel said. He said he never discussed the idea of being prosecuted and going to jail.
Bongiorno’s lawyer, Roland Riopelle, yesterday asked Kugel, a former trader for Madoff for 38 years who rose to supervise the trading floor of the broker-dealer unit, whether the financial markets were doing badly in 2008. Kugel said he was’t sure.
Kugel said he couldn’t remember when Lehman Brothers Holdings Inc. filed for bankruptcy and had to be reminded of the disappearance of Bear Stearns Cos. before recalling the state of the economy around the time Madoff’s firm collapsed.
Asked by Riopelle if the economic crisis unfolding had anything to do with his decision to withdraw $3 million from his inflated Madoff investment account in July 2008, and another $1.7 million a few months later, and put the money in insured certificates of deposit at several banks, he said no.
“Better safe than sorry,” Kugel said.
The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).
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