Madoff Assets Frozen, First Lawsuits Are Readied

Dec 15 2008 | 1:58am ET

A federal judge has frozen the assets of Bernard Madoff, the Wall Street legend and hedge fund manager accused of orchestrating a $50 billion Ponzi scheme, as more details of the scandal emerge and the first lawsuits are filed.

On Friday, U.S. District Judge Louis Stanton froze the assets of Madoff and his firm, Bernard L. Madoff Investment Securities, granting a motion for emergency relief sought by the Securities and Exchange Commission, the agency said. Judge Stanton also appoint a receiver, Lee Richards of New York law firm Richards Kibbe & Orbe.

Madoff was arrested and charged last week with running what might be the biggest Ponzi scheme in history, defrauding investors of as much as $50 billion. His list of alleged victims includes prominent hedge funds and investors, as well as several philanthropic organizations, at least two of which have been forced to close due to the losses.

The 70-year-old was released on $10 million bond after being charged with one count of securities fraud. He has also been sued by SEC, and is due back in court on Friday for a hearing in that case.

According to the criminal complaint against Madoff, the former chairman of the Nasdaq Stock Market, confessed to two senior employees on Wednesday. Those senior employees are reportedly his sons, Mark, who ran the Madoff firm’s proprietary trading business, and Andrew, who also worked on the prop desk.

After Madoff told his sons that the firm’s investment advisory business was “just one big lie,” they contacted a lawyer, who told them to tell the authorities. They did so on Wednesday night; their father was arrested by the Federal Bureau of Investigation on Thursday morning.

That lawyer, Martin Flumbenbaum of Paul Weiss Rifkind Wharton & Garrison, made sure to emphasize that Mark and Andrew were not involved in the fraud at the firm, which in addition to the disgraced investment advisory business includes a leading market-making unit and the prop desk.

“Mark and Andrew Madoff are not involved in the firm’s asset management business, and neither had any knowledge of the fraud before their father informed them of it on Wednesday,” Flumbenbaum said in a statement.

The first of what is expected to be an avalanche of lawsuits against Madoff and his firm have also made it to the courthouse. One suit, which is seeking class-action status, was filed on Long Island on Friday. Other aggrieved investors have retained law firms, which are preparing lawsuits.

Meanwhile, one of the most-cited red flags in the Madoff case—the firm’s auditor—is getting some unwanted attention of its own. The Rockland County district attorney said the New City, N.Y., accounting firm Friehling & Horowitz was under investigation. That firm signed off on the investment advisory business’ annual financial statement through Oct. 31.

“We’re trying to determine if there have been any state crimes here,” Thomas Zugibe told Bloomberg News. “When you have a key player like that operating in your county, you have to look.”

Some have point to Madoff’s use of Friehling & Horowitz as something that should have raised eyebrows. The accounting firm is run out of a 13-foot-by-18-foot storefront in an office plaza 30 miles north of Manhattan. The firm is said to employ just three people, a secretary, an active accountant and a partner in his late 70s who has long since retired to Florida. That said, firm namesake David Friehling—who has not been charged—is a former president and current board member of the Rockland County chapter of the New York State Society of Certified Public Accountants.

According to Bloomberg, an employee of a nearby office said that a man comes to the Friehling & Horowitz office for 10- to 15-minute periods and then leaves.

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