Five former employees of Bernard Madoff, all key players in helping him defraud investors for decades, were convicted of numerous fraud-related crimes. Madoff was prominent in the securities industry and a sought-after investment advisor and money manager. He pled guilty in 2009 to operating the largest Ponzi scheme in history, defrauding thousands of investors of $60 billion dollars. A Ponzi scheme is a swindle in which investors are, unknowingly, paid with sums obtained from later investors, creating an illusion of profitability. Madoff is serving a sentence of 150 years in a federal prison.
The five convicted henchmen include two computer programmers, the director of operations, and two portfolio managers They assisted their boss in hiding from authorities Madoff’s scam, which cost many investors their life savings while enriching Madoff and the guilty five. They embellished financial data to yield non-existent earnings, made up fake securities trades, and manipulated the firm’s general ledger to deceive regulators, auditors and bankers.
The programmers wrote computer code that printed out fake trading documents and false account statements. The programs were complex and were intended to deceive regulators and customers by backdating internal records and printing out millions of false documents that gave the impression that Madoff’s investment-advisory unit had a vast investment inventory. In fact, no trading occurred. Per the testimony, the programmer’s sought higher pay because of the risks associated with the work, and requested payment in diamonds to facilitate hiding the money and avoiding detection.
On one occasion, a visiting auditor asked to see a trading ledger that would have supported the firm’s representations about the securities it owned for the auditor’s client. Panic – there was no securities in the client’s account. The solution - the auditor was diverted throughout much of the afternoon while several of the defendants created a fake ledger. It came off the printer warm, so they cooled it in the office refrigerator. To make it appear worn, they played toss with it. In the end, the auditor was satisfied.
One night the group went out to dinner together on the evening before a planned audit by the accounting firm KPMG. One of the programmers offered a toast to “tricking the auditors.”
The five were found guilty on all 59 charges. Among the crimes are conspiracy (agreeing with at least one other person to commit a crime together) to commit securities fraud (a brockerage firm giving false information to investors who use the data to make investment decisions), falsifying records of a broker-dealer, conspiracy to defraud clients, and filing false tax returns (intentionally submitting a tax return with material false information). The maximum potential sentences range from 70 to 200 years, plus $5 millions of dollars in fines on each charge.
The key witness against the five was Madoff’s chief finance officer, Frank DiPascali. He previously pled guilty to fraud, perjury and tax evasion, and faces 125 years in jail. He agreed to testify for the prosecutor in exchange for the possibility of a reduced sentence. He hopes the prosecutors will submit a letter to DiPascali’s sentencing judge explaining his cooperation and recommending a reduced sentence. Defense lawyers, attempting to discredit DiPascali, argued to the jury that he was desperate to avoid a lifelong prison term and wanted to please the prosecutors, so could not be believed. Apparently the jury credited DiPascali's description of events.
Two elements are necessary to prove all crimes: wrongful conduct and a criminal mental state.(typically this means acting intentionally), The evidence establishing the wrongdoing was strong. The primary issue at the trial was the criminal mental state. The defendants claimed they were misled by Madoff and were unaware they were perpetuating a fraud. The prosecutor argued, “The notion that these defendants didn’t know the trading was fake is an absurdity.” A juror commented that the claim of ignorance was “embarrassing”. Said another, “The evidence was just overwhelming.”
Sentencing will occur in July. Over objection of the prosecutor, the five have been released pending sentencing. It is likely the judge will impose significant prison time.
If you are ever requestied or directed by a boss to do something you know is illegal or unethical, decline to participate and then share your concerns with senior management or the government agency with oversight authority of the business.. The Sarbanes-Oxley Act adopted in 2002 provides significant protections to fired whistleblowers entitling them to reinstatement to their job, back pay, restoration of benefits and more. The whistleblower may also be entitled to 10-30% of the monetary sanctions the wrongdoer is ordered to pay.
For further information, read here: http://dealbook.nytimes.com/2014/03/24/5-former-madoff-employees-found-guilty-of-fraud/?_php=true&_type=blogs&_r=0
1) What should the five defendants have done long before now?
2) If one of the five had reported the wrongdoing, how much money would s/he be entitled to collect from Madoff?