Some of Madoff's employees pursued by prosecutors

UPDATE: Now that Bernard Madoff pleaded guilty to 11 charges, prosecutors' efforts turn to identifying those who helped him perpetuate the fraud.

Investigators say Madoff told 4,800 investors in November that their accounts were worth $64.8 billion, even though he knew their holdings were a "small fraction" of that amount, according to the charges filed in Manhattan federal court Tuesday. What prosecutors still don't know is whether the employees of the firm knew these numbers were fraudulent, though investigators believe that at least some employees were involved in the fraud.

"The issue will be whether the government can establish that they knew what in the paper was in fact phony," Christopher Steskal, a former federal prosecutor, told Bloomberg. What has come out so far is that Madoff told his employees to create false account documents and trade confirmations that reflected phony returns so they could transfer funds and give the appearance of legitimate trades. They used this information to generate false financial statements for regulators, according to the U.S. prosecutor.

Madoff's guilty plea today included no plea deal. In cases like these, a plea deal would normally be structured with the defendant agreeing to cooperate in exchange for a reduced sentence and possibly being allowed to keep some assets. Steskal told Bloomberg that by not entering into a plea deal, Madoff may be trying to protect employees of the firm. Madoff likely is refusing to help prosecutors determine who may have helped him in the alleged fraud.

Steskal also went on to say that, "Certainly lower level employees are unlikely to be involved, but people with auditing functions or authority to access accounts or make trades are more likely to have knowledge of the fraud." Prosecutors alleged Tuesday that Madoff hired numerous employees with "little or no prior pertinent training or experience in the securities industry" and caused them to "communicate with clients and generate false and fraudulent documents."

So who are some prime targets for investigators to pursue? Here's what is known about some key employees, but I want to make it clear that none have been accused of any wrongdoing:

  • Frank DiPascali, director of options trading, is the one who Madoff says executed trades. But at this point the court-appointed trustee found no trading occurred for the past 13 years. Investigators have talked with at least three employees under DiPascali. Employees were given proffer agreements, which means the prosecutors agree not to use their statements against them as long as they tell the truth.
  • Annette Bongiorno, who worked for Madoff for 40 years, instructed assistants to generate trading tickets that appear to be bogus. According to investigators, she would ask assistants to research daily share prices for blue chip stocks from the previous month or several months earlier. Using these researched numbers, Bongiorno would instruct assistants to generate the "trading" tickets, so they could show gains that were in line with Madoff's steady annual returns. Investigators obtained this information from talking with Bongiorno's assistants.
  • Horowitz and Friehling, auditors for Madoff, so far have given no indication of knowledge of any fraud. Jerome Horowitz, who was Madoff's auditor from the early 1960s until he retired in 1995, told investigators in a recent interview that he saw no indication of fraud. His son-in-law, David Friehling, has handled audits since Horowitz retired. Investigators indicate he has said nothing to implicate his son-in-law. Horowitz has terminal cancer and lost his life savings in the fraud, according to his lawyer. He has cooperated with the FBI and explained his working relationship to investigators.
  • Ruth Madoff, Madoff's wife, reconciled the Madoff firm's bank accounts. She recently announced that she will hire her own attorney separately from her husband. Two lawsuits have been filed against Ruth Madoff in New York State court.
  • Peter Madoff, Madoff's younger brother, had the title of compliance officer, which made him responsible for assuring the firm followed securities laws and regulations. Peter Madoff and Bernard Madoff are listed as officers of the firm on SEC flings.

In a separate court filing, the government sought to force Madoff to forfeit more than $170 billion, a claim that represents "proceeds traceable" to the alleged scheme. Ira Sorkin, Madoff's attorney, told U.S. District Judge Denny Chin that the amount sought is "grossly overstated -- and misleading -- even for a case of this magnitude. The issues related to forfeiture, restitution and sentencing in this matter are highly complex and will require extensive time to resolve." Obviously, since Ruth Madoff wants to keep $70 million dollars of her assets, the amount to be paid in restitution becomes a key sticking point in negotiations.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.


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