Madoff pals knew of trouble

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Jin Lee / Bloomberg News Archives The question now is will any other of Bernard Madoff�s associates go to prison? (BLOOMBERG BLOOMBERG)

NEW YORK -- In December 2008, two of Bernard Madoff's most loyal employees met on a Manhattan street corner and fretted over a closely held secret that the rest of the world would learn about eight days later: their boss was a con man for the ages.

Frank DiPascali told JoAnn Crupi Madoff had just confided his investment firm was out of money and client accounts -- worth billions on paper -- actually had no more value than Monopoly money, authorities say.

The pair then is alleged to have cooked up a cover story that quickly collapsed under the weight of the largest Ponzi scheme in history -- one authorities say cost investors an estimated $17.3 billion.

The exchange was recounted for the first time in a newly rewritten indictment this week expanding the case and charges against five defendants headed for a trial next year.

The indictment brings into sharper focus the final few years of a fraud the government says dated to at least the early 1970s, two decades before Madoff claimed it began and well before 1992, when the government said in its original case against the defendants the conspiracy began.

It portrays a private investment business in Manhattan where as many as a dozen officers grew a fraud so sophisticated that repeated probes by the Securities and Exchange Commission and queries from banks and investors could draw no blood. All the while, it says, they rewarded themselves with millions of dollars, sometimes tax-free or with taxes greatly reduced by fake losses generated by made-up securities trades.

Those facing a criminal trial next year are Annette Bongiorno, 64, Madoff's longtime secretary and a supervisor in his private investment business; Daniel Bonventre, 65, his director of operations for investments; Crupi, 51, who managed accounts; and two computer programmers, Jerome O'Hara, 49, and George Perez, 46. All have pleaded not guilty.

Besides the 74-year-old Madoff, who is serving a 150-year prison sentence, six others have pleaded guilty in the case, including a brother who served as his chief compliance officer; former finance chief DiPascali; a payroll manager; an accountant; a comptroller; and a securities trader.

The new account fills in information prosecutors learned as they built their case with help from several co-operators, including DiPascali.

U.S. Attorney Preet Bharara said when the new indictment was released earlier this week that with the new charges, "the architecture of Madoff's house of cards and each defendant's alleged role in it becomes clearer."

Mary Galligan, the head of the FBI's New York office, said the government has known for years the Ponzi scheme was not the work only of Madoff, who pleaded guilty to fraud and insisted he acted alone.

"Each of the defendants in his or her way allegedly played a key role in designing, building or maintaining the house of cards. The habitual doctoring of books and records, the fictitious trades, the phantom accounts, were the core of the charade," she said.

Eric Breslin, a lawyer for Crupi, said his client's conversation with DiPascali was important evidence because it shows DiPascali didn't tell her about the fraud until days before Madoff revealed it his sons and he was arrested.

Attorney Gordon Mehler, who represents O'Hara, said: "Nearly four years have passed since Madoff confessed, and the indictment against the five Madoff employees has now expanded to more than 150 pages. But neither the passage of time nor the extreme length of the indictment has weakened Jerry O'Hara's resolve to fight the charges against him."

Larry H. Krantz, attorney for Perez, said: "We will be vigorously defending against the charges."

Other lawyers did not respond to messages seeking comment.

As the government tells it, the fraud appears to have started in a measured way in the 1970s as phoney documents were regularly manufactured to make it appear investor funds were being invested. Lists of bogus trades of securities were based on data gleaned from published sources of market information.

By the 1990s, according to the indictment, Madoff leaned on his back-office workers to produce and mail thousands of pages of statements to customers of his "split-strike conversion strategy," an investing technique based on a model basket of S&P 100 stocks that he claimed was unique. Prosecutors say no trades occurred.

All the while, Madoff was telling investors they were making up to 45 per cent in annual gains.

-- The Associated Press

Republished from the Winnipeg Free Press print edition October 6, 2012 B17