Five Years On, "Madoff 5" Face Justice

When you are alleged to be deeply involved in the largest known Ponzi scheme in history, professed ignorance is not an acceptable defense.

April 2014

By Scott Patterson, CFE

When you are alleged to be deeply involved in the largest known Ponzi scheme in history, professed ignorance is not an acceptable defense.

That was the message sent by a federal jury in Manhattan last month when they convicted five associates of Bernard Madoff for their role in his $20 billon investment fraud that was exposed in 2008.

CFE’s Report, Testimony Were Key

It is still somewhat little-known that the testifying expert witness in the case is also the Chairman of the ACFE Board of Regents, Bruce Dubinsky, CFE, CPA. Dubinsky, who spent years investigating this fraud with teams of experienced fraud investigators and financial analysts from Duff & Phelps, was retained by the law firm of Baker & Hostetler LLP, counsel for Irving H. Picard, Trustee.

Dubinsky's expert report used in this case was hundreds of pages long and laid out in great detail the fraud and Ponzi scheme, and the mechanics of how it was perpetrated.

Different media outlets reported on Dubinsky’s testimony as the trial progressed. Bloomberg’s Erik Larsen detailed many of Dubinsky’s findings in the case and some of his statements from the witness stand in “Madoff Ex-Employees’ Jury Told of ‘Smoke And Mirrors,’” published October 13, 2013:

The majority of securities trades on the customer statements exceeded actual market volume for the indicated day or had prices outside the reported range of highs and lows, Bruce Dubinsky, a government witness who analyzed the fraud in 2011, testified today in federal court in Manhattan.

In other cases, trades would “magically” move from original statements to other versions of the same document, Dubinsky said. “Things would appear and disappear -- it was smoke and mirrors with account statements.”

Dubinsky’s commissioned report on the fraud is being used in civil lawsuits by Irving Picard, the trustee liquidating the defunct company to help repay victims. The report will help the 12-member jury understand exactly how Madoff’s company operated the “world’s biggest Ponzi scheme,” Dubinsky said.

The Illusion of Separation

There is a subtle point worth observing in the last sentence of the excerpt above. Previously, most reports on the historic scandal referred to it in terms of Madoff, the man – how “Bernard Madoff operated the world’s biggest Ponzi scheme,” to paraphrase countless news articles, blogs and other documentation. Yet it takes more than one man to conduct the largest Ponzi scheme in history, a premise that served as the crux of the trial and, as explained by Dubinsky himself, years of investigation prior to it. History would now reflect how Madoff’s company operated the fraud.

Writing for the Wall Street Journal on December 10, 2013, James Sterngold noted the same theme in “Unraveling the Lies Madoff Told,” reflecting the state’s assertion that Madoff did not operate in a bubble:

The trial has highlighted how investigators have reversed their view that, as Mr. Madoff had insisted, the market-making and trading operation was walled off from the fraud. They now believe that busy trading desk became Mr. Madoff's front, actually losing tens of millions of dollars a year and kept alive with hidden subsidies from the Ponzi scheme, according to Bruce Dubinsky, a forensic accountant with Duff& Phelps LLC, who was hired by the bankruptcy trustee …

In 2007, for instance, the year before Mr. Madoff was arrested, funds transferred from the investment-advisory fraud accounted for 72% of the reported revenue of the market-making operation, according to Mr. Dubinsky's analysis.

In the end, the jury agreed. Madoff employees Daniel Bonventre, Annette Bongiorno, JoAnn Crupi, Jerome O'Hara and George Perez were found guilty on a 31-count indictment, with the list of various charges including securities fraud, conspiracy, falsifying records, tax evasion and similar crimes. They are currently free on bail, with sentencing set for July. They face a maximum collective sentence of up to nearly 200 years in prison (though it is expected that each will receive considerably less than their maximum potential punishment).

Just Following Orders?

At least one of the defendants, Bongiorno, reportedly claimed that she only did what she was told, without realizing she was helping perpetuate a fraud. As she was quoted in CNNMoney: "[Madoff] told me what to do. I typed.”  

It is that kind of lack of accountability that bothers John Gill, J.D., CFE, the ACFE’s Vice President – Education. In a guest blog for ACFE Insights, Gill wrote that people who find themselves in similar situations as Madoff’s employees should take special note of the fate of the "Madoff 5":

I hope that the verdict will be noticed by employees who at this very minute are being asked to do things that they believe may be wrong, or at least questionable. Individuals, regardless of where they are on the organizational chart, must be held accountable for their actions. If an employee suspects that her boss is falsifying financial statements, stealing company funds, or lying to the government and does nothing, then she should be held accountable.

Gill cites a famous quote by philosopher Edmund Burke: “the only thing necessary for the triumph of evil is for good men to do nothing.” In today’s business climate, it is not enough to simply tune out possible frauds, to ignore red flags and things that don’t add up. After Enron and WorldCom, for example, a new era of accountability has entered the public consciousness. As Gill notes:

However, it’s not just about saying no to fraud; in many cases, it is about standing up to fraud. Both the Sarbanes-Oxley Act and the Dodd-Frank Act provide for substantial rewards for those who blow the whistle on fraud. Last October, the Securities and Exchange Commission (SEC) announced that it had awarded more than $14 million to a whistleblower who provided information that led to a successful enforcement action.

Five years after Madoff pled guilty to fraud, several of his employees now join him in his fall. While lawyers for the convicted have opined that the verdict means there are now five more victims of Bernie Madoff, the fact is that Madoff’s true victims, the ones who lost their life savings or retirement funds, would undoubtedly disagree. Some of them have been forced to return to work in their twilight years, trying to make ends meet in their 70s and beyond. For them, and for investigators and the prosecution, this measure of justice has been a long time coming.

Even a mastermind needs help. For Madoff, he found his help within his loyal inner circle.