Bernie Madoff sweated scam's intricate details

Kevin McCoy | USA TODAY

NEW YORK — Bernard Madoff sweated the intricate details of his massive Ponzi scheme.

Obsessively.

Keeping one of history's largest frauds running for decades arguably required at least as much time and effort as operating a legitimate investment firm, according to evidence in the ongoing conspiracy trial of former Madoff employees. Frank DiPascali, the now-disgraced financier's ex-finance chief, told jurors Madoff paced around his firm's Manhattan offices, discussing how to handle investment fabrications and respond to investigations and other threats.

No detail was too small to overlook — whether typeface on a backdated trade blotter or the shape of an asterisk on a fabricated version of a business form.

"A lot of these discussions he had with himself out loud," said DiPascali, who testified he at times tried to stifle the then-Wall Street heavyweight by warning "you cannot continue to talk like this."

The star prosecution witness began testifying days before Dec. 11's five-year anniversary of the scam's collapse. The implosion of the world's largest Ponzi scheme racked up more than $17.3 billion in losses for thousands of charities, celebrities, ordinary investors and financial funds. Roughly $11.8 billion has been recovered by investigators.

Madoff pleaded guilty without standing trial and is now serving a 150-year prison term. He insisted he ran the scheme alone.

However, five of his ex-employees are being tried on charges they knowingly aided and profited from the scheme. They are: Annette Bongiorno, Madoff's former executive assistant; Daniel Bonventre, the firm's ex-operations chief; JoAnn Crupi, who worked with Bongiorno and DiPascali; and former computer programmers Jerome O'Hara and George Perez.

They have maintained they had no knowledge of the fraud and were hoodwinked by Madoff.

DiPascali's testimony has provided the first insider view of the scheme. Speaking in a rapid-fire New York accent, he depicted Madoff as a meticulous if sometimes profane boss who dictated the percentage gains he wanted each investment customer to receive. DiPascali said he and other employees then added fake trades to adjust the purported values up or down.

When a client died, Madoff typically had the employees add losing trades to reduce the final payout. But that wouldn't work when longtime French customer Jacques Amsellem died. Attorneys for his estate didn't notify Madoff's firm or seek an accounting until two months later, DiPascali said.

By then, Amsellem's account "was too far over where Bernie wanted it to be," he testified.

Responding to Madoff instructions, Bongiorno and Crupi created a fictionalized Amsellem account "that didn't exist when he was alive," said DiPascali, who participated in the effort. They then filled the account with losing trades to produce a $1,772,000 loss, which reduced the last payout to match Madoff's expectations, said DiPascali.

The boss acted "like a lunatic" as he worked to limit a 1992 Securities and Exchange Commission investigation of Avellino and Bienes, an accounting firm that invested its client funds with Madoff, DiPascali testified. Had the probe expanded, it might have focused on Madoff's firm, too.

DiPascali said he and other Madoff employees created a phony new Avellino & Bienes account and filled it with fictitious, backdated trades of quality stocks. The idea was to have the SEC examine an account with "safe and secure" investments like IBM that gave the appearance of higher value, DiPascali testified.

The effort involved manipulating computer entries to make sure there were no signs of the current date.

"Were there actually any assets in these accounts?" asked Assistant U.S. Attorney John Zach.

"No," said DiPascali. "These were real companies, but fictitious trades."

Millions of other Madoff firm records were similarly fabricated. But DiPascali said that didn't stop the boss from warning employees never to include "Story Stocks" — securities of firms recently in news accounts with announcements that sent those shares soaring or plunging.

Why? According to DiPascali, Madoff theorized a regulatory agency could someday see the records and suspect a customer of acting on non-public information to reap illegal, insider-trading profits.

Concerned that an extended business interruption could lead to discovery of the scam, Madoff had an emergency operations center constructed in Queens, a few miles across the East River from his Midtown Manhattan headquarters. DiPascali said the office, equipped with millions of dollars in computers, printers and other equipment, was used after the 9/11 terrorist attacks.

Employees kept close track of changes in the name and of Madoff's firm and its business forms over the years. Madoff made sure they used the correct version when fabricating backdated transactions for a specific time period, DiPascali testified.

Similarly, he said, Madoff made sure employees obtained just the right paper, computer printing fonts and layout format needed to fabricate bogus reports that would convince anyone the fakes were genuine documents from the Depository Trust Co. securities clearinghouse. The fakes showed billions of dollars in fictional Treasury securities purportedly held by Madoff's firm.

Zach suggested the work included repeated efforts to get asterisks on the fakes to look exactly like the real ones.

Eventually, the bogus reports were "close to perfect," said DiPascali, who testified Madoff once held one up near an office window and remarked "how great it was."

But a 2004 SEC probe of Madoff's business posed a tougher challenge. DiPascali said Madoff read an SEC letter requesting information over and over, trying to decide how to respond. For years, the financier had told clients he held their investment funds and securities. But he didn't want the SEC to know that, said DiPascali.

So he had employees craft a whole new set of office records that would purportedly show he held no customer funds and delivered client securities to custody banks. DiPascali testified he showed the boss old reports that might work. But Madoff pronounced them "no damn good" because they didn't include the name of an appropriate custody bank for each client's securities.

"Where the hell are we going to get these banks from?" DiPascali said he responded to Madoff. "His response was, you can just make them up."

Ultimately, DiPascali said Madoff had employees search the Internet for names of foreign banks, and then add them to the new batch of bogus records. The financier stressed the choices "had to make sense" — a Japanese bank with a Japanese investment client — said DiPascali.

Madoff gambled that SEC's lead investigator would not make vigorous efforts to contact the banks and double-check the data, saying, "It's just not in his pay grade."