It was anything but boring cooking the books to make Bernard Madoff's returns seem smooth and steady, the arch-fraudster's former CFO testified yesterday.
Frank DiPascali, in his first day on the stand in the trial of five former Madoff employees, said that each of them were intimately involved in deceiving Madoff's investors and regulators—a deception that kept the wraps on a $65 billion Ponzi scheme for decades. DiPascali, who worked for Madoff for more than 30 years, told the jury that the fraud went on "as far back as I can remember" and that "it was virtually impossible not to know what was happening."
The five former employees—Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O'Hara and George Perez—have said that they had no idea Madoff was a fraud, in part because DiPascali hid it from them. But DiPascali regaled the jury with anecdotes about close calls averted with the help of each of the defendants, with whom he said he worked closely on the fraud.
In one case, an auditor for KPMG asked to see daily trading logs. DiPascali said that the defendants had prepared trading records for one day, but that the auditor asked for another.
So, DiPascali said, he called O'Hara and told him to fetch the non-existent records from "the archives." He and the others than spent several hours dummying up the records, which they then put into a refrigerator—to cool down the hot-off-the-printer documents—and then tossed them around "like a medicine ball" to create creases and give a patina of age to the new records.
"We all got a big chuckle out of that," DiPascali said. He added that he and his staff "literally" created trades out of thin air.
In another instance, a feeder fund run by an accounting firm founded by Madoff's father-in-law found itself in hot water with the Securities and Exchange Commission. The only problem was, the trading records they had were full of red flags. "They were in essence the wrong faked trades," DiPascali said, so he and the others whipped up a new set of monthly records, covering three years, hiding suspicious transfers and inventing $86 million in Treasury investments to demonstrate that the feeder fund was, as it said it was, invested conservatively.
Madoff "could not afford to have the SEC did any deeper," DiPascali said. He said that Bongiorno led that effort—prosecutors showed a set of documents that appear to show Bongiorno changing a money transfer into a dividend from General Motors Corp.—while Madoff was "throwing himself around the office like a lunatic."
He was afraid that the SEC would "peel away the onion" and was "ranting and raving to himself about the idiocy" of the feeder fund managers.
DiPascali said that the defendants also helped cover up losses from the 1987 stock-market crash, inventing hedges that didn't exist. Such work was done by Bongiorno and Crupi, while O'Hara and Perez created software to hide the fraud. DiPascali said that he and Bongiorno often personally lied to clients over the phone, and that she used historical stock prices from newspapers to come up with the phony trades.
"Did you see Ms. Bongiorno looking at real-time prices for stocks?" prosecutor John Zach asked.
"No," DiPascali said.
"Can you buy stock looking at yesterday's prices in The Wall Street Journal?" Zach continued.
"No," DiPascali said, again.
DiPascali told the jury that, when the Madoff fraud collapsed, he knew he "was going to jail." But he acknowledged that he hoped his testimony would limit the amount of time he'll spend behind bars; he faces up to 125 years in prison under the charges he pleaded guilty to four years ago.