Dec. 11 (Bloomberg) -- Bernard Madoff planned every detail of his firm’s demise in the days before he was arrested five years ago today to avoid being marched past his 200 employees in handcuffs, the con man’s former finance chief told a jury.
Madoff, in papers spread across his desk, wrote a series of names and dates in a schedule of events leading up to the exact day his $17 billion Ponzi scheme would finally come to light, Frank DiPascali, the former executive, testified yesterday in Manhattan federal court in the trial of five ex-colleagues.
DiPascali, who joined Madoff’s company as a researcher in 1975, when he was 19 years old, said he learned of the plan during a private meeting in his office on Dec. 3, 2008, about a week before his arrest, after Madoff had been “staring out the window all day.”
“He turned to me and said, crying, ‘I’m at the end of my rope,’” DiPascali told a jury. When DiPascali expressed confusion, Madoff shouted, “I don’t have any more goddamned money -- don’t you get it? The whole goddamn thing is a fraud!”
DiPascali is the highest-ranking former Madoff executive to testify in the first criminal trial stemming from the scheme, which was exposed after Madoff’s arrest by federal authorities at his Manhattan apartment on Dec. 11, 2008. Five of his former employees are on trial in federal court in Manhattan, accused of aiding his fraud for decades and getting rich in the process.
At the meeting, Madoff told DiPascali to close his office door before revealing the fraud they’d worked on together for decades was actually a Ponzi scheme that would soon collapse, DiPascali said. The former finance chief said that while he knew he’d been lying to customers and regulators for years about fake trades, he didn’t know the firm was out of money.
“Do you have any money?” Madoff asked DiPascali, according to his testimony. The con man then asked DiPascali if his wife had money, which was his way of asking if she’d be all right when he was in jail, DiPascali said.
Madoff told him his own wife, Ruth, would be taken care of because she had $30 million of her own money saved, as well as houses that were in her name, DiPascali said.
Asked how he responded to the news, DiPascali said, “My knees were buckling.” He said he realized, “I was going to jail.”
U.S. District Judge Laura Taylor Swain, who is overseeing the trial of the former employees, asked DiPascali to lower his voice and slow down his speaking as he explained the situation.
Madoff’s fraud collapsed faster than he expected, according to DiPascali’s testimony today. The con man planned for his money to run out just before the holidays, giving him until at least Dec. 26 to “explain to his family that he was busted,” DiPascali said.
“He also said, ‘I don’t want to ruin anyone’s Christmas,’” DiPascali testified.
Madoff told DiPascali he would soon meet with a lawyer, Ira Sorkin, to make arrangements for turning himself in and avoid being taken from his office in custody, DiPascali said.
“I can’t let that happen -- I have to do this on my terms,” Madoff said, according to DiPascali. The con man was “delirious” and incoherent as he discussed the plan, he said.
Madoff already had set the plan in motion by instructing the company’s biggest investors to put off large redemptions they’d been seeking, telling them to wait until they “get out of the market” to “buy us more time,” DiPascali said.
Madoff realized a redemption request for $250 million sought by customer Optimal Investment Services would “cause the house of cards to collapse,” DiPascali said. Madoff told him the company “simply won’t make that wire,” he said. By the time Optimal realized what was happening, it would be over, he testified.
“He had obviously thought this out very carefully,” DiPascali said.
DiPascali said he urged Madoff to pay some of his employees the money in their personal accounts before he repaid any foreign hedge funds, because they’d soon be unemployed and broke. DiPascali said it was the “moral” thing to do.
“I was crazed when I left” the meeting, DiPascali said.
DiPascali said that sometime after he learned of the fraud and before Madoff’s arrest, he recruited Annette Bongiorno, who ran the investment advisory business at the center of the fraud and is also on trial, to help cut checks for Madoff employees and their family members with the last of the firm’s money, which amounted to less than $300 million.
He said he lied to Bongiorno about why the task needed to be carried out, telling her that insider accounts needed to be closed to abide by new accounting rules before an upcoming audit.
He said he didn’t want to tell her Madoff was out of money because he didn’t want her “to jump out the window.” Even though Bongiorno knew about the fraud for decades, she was unaware it was a Ponzi scheme on the verge of a collapse, he said.
“The people who work at the firm were going to get that last bit of money?” Assistant U.S. Attorney John Zach asked.
“Correct,” DiPascali replied.
DiPascali testified he later described the meeting to Crupi, the employee who managed large accounts.
DiPascali testified that in anticipation of being arrested, he took an unregistered gun from his home in New Jersey and threw it in a pond, and crushed a small USB drive containing fake reports and other files. FBI divers retrieved the weapon, he said.
Joann Crupi, who managed large accounts and is one of the employees on trial, met with DiPascali at a restaurant in New Jersey the weekend after Madoff’s confession to discuss a plan for operations going forward, he said.
Starting the next Monday, Crupi began scheduling wires to some of the firm’s top clients, according to internal Madoff documents that were displayed for the jury.
DiPascali said he knew Madoff had gone off his schedule on the morning of Dec. 10, when Ruth Madoff came into the office on the morning of the company’s annual holiday party to leave presents on the desks of some employees, as she did every year.
“He told her, which was not in the game plan,” because it was too early, DiPascali said. “She looked catatonic” with red eyes “and couldn’t even look at me.”
He said he followed her into an elevator and “told her it was going to be OK.”
DiPascali didn’t explain why Madoff’s time frame didn’t work out. He said he and Madoff gathered incriminating evidence into 22 boxes that they agreed to shred and burn. Madoff called him at one point to double check how many boxes they’d packed, fearing he’d overlooked one. DiPascali said he assured him he got them all.
In the week before his arrest, Madoff confessed to his two sons, Mark and Andrew, who worked for the firm, telling them he used money from new investors to pay off earlier ones.
Madoff told the same story to two FBI agents who showed up at his apartment the morning of Dec. 11, 2008. Special Agent Theodore Cacioppi testified at the trial in October that he assembled a team of agents at 4:30 a.m. after receiving a late-night call from his supervisor alerting him that a massive fraud had been uncovered.
“We’re here to find out if there’s an innocent explanation,” Cacioppi told Madoff. Madoff, with Ruth present, responded that there wasn’t such an explanation and that he expected to go to jail. Cacioppi told the jury he interviewed Madoff for about an hour before taking him away.
In the office on the day of Madoff’s arrest, faxes from customers requesting to close their accounts were “flying off the machine,” DiPascali said. One such fax was displayed for the jury on flat-screen monitors. The next day, after consulting his lawyer, DiPascali testified that he left the office and didn’t return again until much later, after he decided to cooperate with prosecutors to “help unwind what had occurred.”
Crupi, the employee who managed large accounts, also met with DiPascali’s legal team around Christmas, while he waited in the law firm’s reception area, he said. When she emerged from a conference room, they hugged each and she told him she was going to “stick to her story,” which was that she believed the trading was real, DiPascali said.
After he agreed to cooperate, DiPascali said he told the authorities about all of his illegal actions, including using cocaine twice and buying stolen jackets in his youth.
Before Madoff’s tearful confession, DiPascali said he always thought Madoff had customer cash invested somewhere else, such as in real estate or French banks, he said.
Madoff tricked DiPascali and his co-conspirators by leaving hints about his wealth, such as stacks of documents on his office sofa relating to “private placements on very big real estate deals around the world,” DiPascali said.
“Put two and two together -- they were a prop,” DiPascali said. “I know now he had no goddamn money.”
The other defendants along with Crupi and Bongiorno are Daniel Bonventre, Madoff’s former operations chief; and computer programmers Jerome O’Hara and George Perez, who allegedly wrote code to print out millions of fake account statements and trade confirmations.
DiPascali said earlier yesterday that O’Hara and Perez asked in 2006 to be paid in diamonds after they became uncomfortable with their role in Madoff’s firm. DiPascali testified that he rejected the “crazy” request, telling the programmers, “Where in the hell am I gonna get a bag of diamonds.”
DiPascali, who faces as long as 125 years in prison, has said he’s hoping for a “substantial” reduction to his sentence by cooperating. The former executive, who spent 11 months in jail before being released on bail, said he wears an ankle bracelet with a GPS device and can’t go anywhere outside his home without an FBI agent.
Madoff, 75, is serving a 150-year prison sentence in North Carolina. Mark Madoff, the con man’s elder son, committed suicide by hanging himself with a dog leash from a pipe in the living room of his Manhattan apartment on Dec. 11, 2010 -- exactly two years after his father’s arrest. Neither he nor his brother Andrew was ever charged with a crime.
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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