U.S. Attorney Makes First New Arrest in Madoff Case

Paul Radvany in Hedgefund.net, March 18, 2009

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by Paula Schaap
Although Bernard Madoff handed himself into the FBI on Dec. 11 with the astonishing confession that he had run a $65 billion Ponzi scheme for decades, no other arrests had been made in the case. That was even after Madoff pleaded guilty on March 12 to 11 counts of fraud and was sent to jail. Despite the longevity and breadth of the scam, no one else had faced justice.
That changed on Wednesday when Madoff's accountant, David Friehling, 49, was arrested and charged with crimes for accounting violations.
"Mr. Friehling is charged with crimes that represent a serious breach of the investing public's trust," Lev Dassin, who heads up the U.S. Attorney's office in New York, said in a statement.
An attorney for Friehling did not return a call from HedgeFund.net.
After Madoff was arrested, news reports came out that the auditor for his business was Friehling & Horowitz, a two-man accounting firm in New City, N.Y. Jeremy Horowitz was Friehling's father-in-law, who handed over the business to him in the early 1990's when he retired. Horowitz, who was in his 80's, recently died, according to The New York Times.
There has been speculation that Madoff could not have acted alone to keep his scheme going for so long and with so many investors.
"I don't understand why conspiracy wasn't part of the plea," Mr. Newberger, a Madoff investor said in a statement to the federal court judge who oversaw Madoff's guilty plea. "Just to produce the reams of documents must have required armies of people to produce."
Nonetheless, Dassin said in his statement that Friehling was not being charged with knowledge that Madoff was running a Ponzi scheme. But the government said Friehling did not verify whether the transactions Madoff said he made were actually done, yet he certified to investors and the Securities and Exchange Commission that he had properly completed his audits.
Irving Picard, the trustee in charge of liquidating Bernard L. Madoff Investment Securities Inc. (BLMIS), has told investors the statements they received showing securities transactions were entirely fictitious.
Paul Radvany, a professor at Fordham Law School and a former federal prosecutor said, "All prosecutors have become attuned to the fact that accountants play a vital role in our society in assuring that companies abide by certain rules."
"A lot of times these frauds could not have been done without accountants agreeing to certain financial statements," Radvany said.
Another factor that may have weighed in the government's decision to prosecute the accountant was the many years that Friehling worked as the auditor for BLMIS, Radvany said. The government claimed that the accountant certified BLMIS' audits from 1998 to 2008.
At the same time Friehling and his wife kept an account with BLMIS that had a balance of more than $500,000, which compromised his independence, prosecutors alleged.
Friehling was paid about $12,000 to $14,500 per month between 2004 and 2007 for his accounting and auditing services, according to the government.
If he is convicted, Friehling faces up to 105 years in prison.