BNY Mellon Raised Madoff’s Credit by $225 Million in 2006

Bank of New York Mellon Corp. considered boosting Bernard Madoff’s corporate credit line to half a billion dollars to finance a surge in trading in 2006 -- two years before the con man’s arrest, a jury was told.

Madoff’s limit was instead raised to $300 million from $75 million based on financial documentation that later turned out to be false, Monika Arora, a vice president at BNY Mellon, testified today in the Manhattan trial of five ex-Madoff employees accused of aiding his $17 billion fraud.

The initial request by Daniel Bonventre, one of the defendants who was the bank’s primary contact at Madoff’s firm, was deemed “quite large,” while $300 million was seen as more “realistic,” Arora said. “If we needed to revisit it, it would be easier to do it from that point on,” she said.

The five former colleagues 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 scheme, which prosecutors say started in the early 1970s and imploded at the peak of the financial crisis.

BNY Mellon, which isn’t accused in the criminal case, has faced civil lawsuits by funds that lost money in the fraud and accuse the New York-based bank of negligence. The lawsuits include claims the bank funneled billions of dollars into the Ponzi scheme while reaping millions of dollars in fees.

Bank Loans

Prosecutors claim Madoff and his co-conspirators tapped banks for loans and credit increases as the Ponzi scheme became unsustainable. Bonventre, who joined Madoff’s firm in the 1960s and ran his broker-dealer unit, was central to getting the cash through deception, the U.S. alleges.

Kevin Heine, a spokesman for BNY Mellon, declined to comment on today’s testimony. The bank has denied wrongdoing related to Madoff’s fraud.

Arora, who has worked at BNY Mellon since 2004, said she proposed the credit increase based on financial statements and other documentation provided by Bonventre and one of his employees, Enrica Cotellessa-Pitz.

The data showed Madoff’s firm had assets of $977 million at the time, according to documents displayed on flat-screen monitors for jurors. Financial statements given to the bank were affirmed by Madoff’s external accountant for more than 20 years, David Friehling, the papers showed, increasing their perceived validity, Arora said.

Madoff, who was arrested in December 2008, pleaded guilty to fraud and is serving a 150-year sentence. Cotellessa-Pitz and Friehling also pleaded guilty and are awaiting sentencing based on their cooperation in the case.

Never Audited

Friehling testified yesterday that he never conducted an audit of Madoff’s company as required by accounting rules.

When Madoff was arrested, staff at BNY Mellon were immediately concerned about the bank’s exposure, Arora testified. The lender cut off access to Madoff’s accounts, resulting in a call from Bonventre, who was panicked about the ability of his broker-dealer unit to operate, she said.

Bonventre said he was trying to “do business as usual” and that “there was no connection whatsoever with what was happening in the media” and his business at Madoff, she said. She said she told him there was nothing she could do, and he didn’t call back, she said.

Consultant Meeting

Arora said she met Madoff once at a meeting in the years before his arrest. She recalled a meeting at the offices of Bernard L. Madoff Investment Securities LLC, where Madoff and his sons Mark and Andrew were present, along with Bonventre. BNY Mellon had arranged the meeting with a consultant on a new trading strategy that Madoff was interested in pursuing, though he ended up never using it, Arora said.

The increased credit limit was needed to finance what Bonventre said was a boost in proprietary trading by Madoff’s firm, Arora said. Madoff had already started hiring additional staff for the trading and had begun tapping an earlier $75 million credit line at a faster rate than usual, she said.

“The team will be doing the same proprietary trading that is currently taking place, but in larger volumes,” Arora wrote in a March 31, 2006, proposal to BNY Mellon’s credit department. “The new team is expected to increase business significantly.”

Arora said she later heard from colleagues at BNY Mellon that Madoff’s firm wasn’t drawing on the credit line as expected, depriving the bank of anticipated fees. When she asked Bonventre about the development, he cited market conditions and said the plan had changed, she said.

Denied Involvement

Bonventre, who also ran the proprietary trading operations of Madoff’s company, pleaded not guilty and has denied involvement in the fraud, saying he was duped like thousands of others.

The other defendants in the case, all accused of helping make fake documents for decades, are Annette Bongiorno, who ran the investment advisory business at the center of the fraud; Joann Crupi, who managed large accounts, and computer programmers George Perez and Jerome O’Hara. All five have pleaded not guilty.

William Wallman, a 66-year-old victim of Madoff’s fraud, also testified today. He said Madoff called him and offered to open an account in his name after the Florida firm he had been investing in, Avellino & Bienes -- a so-called feeder fund that directed money to Madoff for years -- was shut by regulators.

Avellino & Biennes was once run by Madoff’s father-in-law, Saul Alpern.

In the phone call, Madoff told Wallman that investors usually needed a minimum of $2 million to open an account with him, and that he’d waive that requirement since Wallman only had $200,000, Wallman said.

“He said he was doing this almost like a favor,” Wallman said.

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.