Madoff’s Fake Trading Was Obvious, Ex-Finance Chief Says
Bernard Madoff’s finance chief, who pleaded guilty to aiding his $17 billion fraud, said he could tell right away that fake trades were being used in customer accounts in 1975 when he joined the firm after high school.
The fraudulent trading went on “for as long as I could remember,” Frank DiPascali, 57, told a jury in Manhattan federal court today at the trial of five former colleagues. “It was virtually impossible not to know what was happening.”
DiPascali, who started working for Madoff as a researcher when he was 19, is the highest-ranking former Madoff executive to testify in the first criminal trial stemming from the Ponzi scheme, which the U.S. has said began in the early 1970s and collapsed at the peak of the financial crisis.
DiPascali, who faces as long as 125 years in prison when he’s sentenced, is seeking leniency by testifying against the people, all of whom claim they were duped by Madoff into believing his investment advisory business was legitimate.
The defendants, who have pleaded not guilty, are Annette Bongiorno, who ran the investment advisory unit where the fraud occurred and is a childhood friend of DiPascali; Joann Crupi, who managed large accounts; Daniel Bonventre, who ran Madoff’s broker-dealer unit, where real trading took place; and computer programmers George Perez and Jerome O’Hara, who allegedly automated the production of fake account statements.
DiPascali is among about half a dozen former Madoff employees who have pleaded guilty and are testifying in the case. Enrica Cotellessa-Pitz, Madoff’s ex-controller, and David Kugel, a former trader, testified earlier.
DiPascali told jurors today there was no way employees at Madoff’s investment advisory unit could have confused fake trades for real ones, because the real trading taking place at Madoff’s broker-dealer involved counterparties, current trading prices and the coordination of several people making simultaneous phone calls “in a very noisy environment.”
By comparison, the fake trading in the investment advisory unit was based on historical prices taken out of newspapers and given to Bongiorno on index cards in a small, metal box about once a month, he said.
“Did you see Ms. Bongiorno looking at real-time prices for stocks?” Assistant U.S. Attorney John Zach asked DiPascali. “No,” DiPascali said. “Can you buy stock looking at yesterday’s prices in the Wall Street Journal?” Zach asked. “No,” DiPascali said.
Bongiorno regularly received trading data from Kugel, who had an expertise in arbitrage trades and convertible stocks, so she could make customer statements look realistic, DiPascali said today in court. DiPascali said he eventually provided similar information to Bongiorno after he developed knowledge of how to hedge index accounts with options. The fake hedges allowed Madoff to trick customers into believing the stock market collapse in 1987 hadn’t affected their accounts, he said.
Asked by Zach if he knew at the time that his actions were wrong, DiPascali said, “Sure.” Asked if he knew it was fraud, the former executive answered, “Yes.”
DiPascali said his deception was “pretty extensive” and that he personally lied to customers when he spoke with them on the phone. Bongiorno had similar conversations in which she lied to other investors, he said. DiPascali said Crupi, O’Hara and Perez were all deeply involved in the deception.
The customers he spoke with “ranged from complete dolts to PhDs in mathematics,” DiPascali said, and he would lie to them accordingly based on their level of understanding.
Defense lawyers have said cooperating witnesses such as DiPascali will lie on the stand and implicate others in a bid to spend less time behind bars. DiPascali said today he’s hoping for a “substantial” reduction to his sentence.
Former clerical employees who haven’t been charged also testified. Semone Anderson, a researcher at the firm, testified she unwittingly helped backdate fake trades by researching historical trading information, and Winnie Jackson, a former assistant to Bongiorno, told the jury her boss would use “cut and paste” trade data on statements.
DiPascali, who grew up in the Howard Beach neighborhood of Queens, New York, said he has known Bongiorno since he was eight years old, when her family moved next door. Bongiorno’s younger sister sometimes babysat him, and her father owned a laundry service that DiPascali worked at for a few years in high school, he said.
Madoff called DiPascali on the morning of Dec. 11, 2008, the day he was arrested, to tell him his brother Peter Madoff was in the office with the Federal Bureau of Investigation, the former finance chief testified today. DiPascali said he yelled at Madoff, “Why are you calling me?” and he threw his phone across the room when he was told the news.
In the week before Madoff’s arrest, DiPascali learned “the firm was entirely bust,” he told the jury.
Asked by prosecutors today what that meant for him personally, DiPascali replied, “I was going to jail.”
DiPascali pleaded guilty in August 2009 to 10 counts, including conspiracy, fraud and money laundering. He told U.S. agents that company employees asked him if the business was a “scam” before the world learned the truth, according to interview documents filed in the case.
In February 2010, a judge granted DiPascali’s bid to be released from jail on $10 million bail after federal agents said the former executive was providing invaluable assistance to the case against his former colleagues.
DiPascali has spent his time under house arrest in an 1,800-square-foot apartment in Bridgewater, New Jersey, according to court filings in the case. The U.S. previously seized DiPascali’s five-bedroom, five-bathroom house in Bridgewater.
DiPascali also forfeited his 17-foot boat and personal watercraft to the government. He and his wife, who have four children, were also told to forfeit all but $300,000 of their assets.
Madoff, 75, is serving a 150-year sentence in a federal prison in North Carolina.
The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Erik Larson in New York at firstname.lastname@example.org