Madoff Employees Questioned If Firm Was Scam, Ex-CFO Says

Frank DiPascali Jr., who admitted to helping his boss Bernard L. Madoff carry out the biggest Ponzi scheme ever, told FBI agents that employees asked him if the business was a “scam” before the world learned the truth.

DiPascali, the chief financial officer at Bernard L. Madoff Investment Securities LLC who pleaded guilty to 10 criminal charges and is cooperating with the U.S., gave extensive interviews to Federal Bureau of Investigation agents as part of its probe.

“There were times when DiPascali’s employees came to him with questions,” FBI agents wrote in a memo filed in federal court in Manhattan that refers to two former computer programmers at the firm, Jerome O’Hara and George Perez, “DiPascali, Perez and O’Hara used to socialize and at one of those dinners Perez and O’Hara asked DiPascali if the entire business was a scam and would blow up in their faces.”

“DiPascali lied and told them the stocks were being held in the books as a liability,” the agents wrote.

Perez, O’Hara, Daniel Bonventre, the firm’s operations chief, and two aides to Madoff, Annette Bongiorno and Joann Crupi, are accused of aiding the Ponzi fraud and face trial in October.

FBI Reports

The memos, some of which reiterate FBI reports made public by defense lawyers in March, were filed with the court today by attorneys for the five defendants. The notes include newly disclosed FBI interviews with Enrica Cotellessa-Pitz, the former BLMIS controller who has pleaded guilty and is cooperating with the U.S.

The day after Madoff’s December 2008 arrest, Cotellessa-Pitz said she was at the firm’s midtown Manhattan office sitting with Annette Bongiorno, who spent more than 40 years at BLMIS. Cotellessa-Pitz is referred to in the FBI memo as “ECP.”

“At the time, ECP and Bongiorno were both devastated at the news of Madoff’s arrest,” according to a May 31, 2011, FBI memo. “Bongiorno then stated if she and ECP had talked more about their work and had not been so concerned about confidentiality, they could have ‘blown the lid off the whole thing.’”

Defense attorneys are seeking additional evidence from the government that could help their clients, including proof that investors and other high-level BLMIS employees, such as Madoff’s brother Peter, the firm’s chief compliance officer, and Peter’s daughter, Shana, a lawyer, had knowledge of the Ponzi scheme.

May 2011

“Madoff, Bonventre, Peter Madoff and Shana Madoff reiterated to ECP that the firm did not have customers,” Cotellessa-Pitz told the FBI in the May 2011 report.

The defense lawyers said that of almost 14 million pages of documents the U.S. has turned over to them, prosecutors have produced only 64 pages of FBI interviews, and some of those pages are almost entirely blacked out with redactions.

Eric Breslin, a lawyer for Crupi, asked in a memo to the court on behalf of all five defendants for any additional evidence of what Bernard Madoff told others, including his family and investors and those who operated feeder funds.

Breslin argued that many high-level BLMIS employees have never been charged with any crimes and that Peter Madoff was allowed to plead guilty and be sentenced without admitting knowledge of the Ponzi scheme.

‘Sophisticated Investors’

“The government appears to have taken the position that Madoff was able to fool all these people and organizations -- sophisticated investors, close family members, lawyers, government regulators,” Breslin wrote.

“This now begs the question, ‘What did Madoff and others say to these sophisticated individuals that convinced them of BLMIS’s legitimacy?’”

Mark Warren Smith, a lawyer for Shana Madoff, didn’t immediately respond to a voice-mail message seeking comment about the witness’s account to the FBI. Charles Spada, a lawyer for Peter Madoff, didn’t immediately respond to a voice-mail message seeking comment about the FBI memo.

Larry Krantz, a lawyer for Perez, and Gordon Mehler, a lawyer for O’Hara, declined to comment. Roland Riopelle, a lawyer for Bongiorno, didn’t immediately respond to an e-mail seeking comment about the memo.

Madoff pleaded guilty to fraud in 2009 for cheating investors out of $20 billion in principal. He’s serving a 150-year term in 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).

Before it's here, it's on the Bloomberg Terminal.