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Madoff FBI Files Reveal How He Fooled His Own Employees

Published Mar 24, 2012 at 06:35 - Fool

Jerome O'Hara, a former computer programmer for Bernard L. Madoff Investment Securities LLC, exits federal court in New York on June 21, 2011.

Jerome O'Hara, a former computer programmer for Bernard L. Madoff Investment Securities LLC, exits federal court in New York on June 21, 2011. Photographer: Rick Maiman/Bloomberg

Artist's sketch shows judge Richard Sullivan

An artist's sketch shows judge Richard Sullivan, second from left, presiding at a plea hearing for Frank DiPascali, the finance chief at Bernard Madoff's investment advisory business, center, in New York on Aug. 11, 2009.

An artist's sketch shows judge Richard Sullivan, second from left, presiding at a plea hearing for Frank DiPascali, the finance chief at Bernard Madoff's investment advisory business, center, in New York on Aug. 11, 2009. Photographer: Louis Lanzano/Bloomberg. Artist: Christine Cornell via Bloomberg

Annette Bongiorno, a former secretary at Bernard L. Madoff Investment Securities LLC, exits federal court in New York on June 21, 2011.

Annette Bongiorno, a former secretary at Bernard L. Madoff Investment Securities LLC, exits federal court in New York on June 21, 2011. Photographer: Rick Maiman/Bloomberg

Joann Crupi, a former employee of Bernard L. Madoff Investment Securities LLC, exits federal court in New York on Jan. 14, 2011.

Joann Crupi, a former employee of Bernard L. Madoff Investment Securities LLC, exits federal court in New York on Jan. 14, 2011. Photographer: Peter Foley/Bloomberg

After several drinks at a Greekrestaurant on Manhattan's Third Avenue in the summer of 2006,two computer programmers at Bernard Madoff's investment firmasked their supervisor whether the boss's business was a scam.

His chronicle of the dinner, and the lengths to whichMadoff went to convince employees that his massive fraud was alegitimate business, were revealed for the first time in FBIreports made public last week. Attached to court filings by ex-Madoff employees facing fraud charges, they contain interviewswith DiPascali -- Madoff's chief aide -- who in 2009 pleadedguilty to his role in the biggest Ponzi scheme in U.S. history.

How to run my business

"You are not going to tell me how to run my business,"Madoff insisted while a meeting in the office of the firm'soperations chief, Daniel Bonventre, according to DiPascali."Trades occur overseas."

Madoff, 73, pleaded guilty to fraud in 2009 and is servinga 150-year term for cheating investors out of $20 billion inprincipal. Five employees -- Perez, O'Hara, Bonventre, Annette Bongiorno and Joann Crupi -- are accused of aiding Madoff in hisfraud. Defense attorneys said they'll use DiPascali's commentsto establish their customers were unaware of Madoff's scheme.

Most of the FBI reports are snippets of DiPascali'sdebriefings from mid-2009 to mid-2010, with one coming asrecently as February. But to be sentenced and free on bail,DiPascali has been cooperating with the government.

The explanation involved the idea that

"The explanation involved the idea that, because Madoffwas trading not as an agent however as principal, making thesetrades out of his own inventory that was kept at various placesoverseas, he was able to allocate these trades to customersafter the fact, back-date their trades, and do other things withthe accounts a broker acting as an agent would not be able todo," the FBI report states. DiPascali "reassured them thatMadoff had so many investments and assets."

Identified in some FBI reports only as "Individual,"DiPascali dated Madoff's deception to the early 1970s, whenBernard L. Madoff Investment Securities LLC was housed in asmall office on Wall Street. In their guilty pleas, Madoff andDiPascali traced the Ponzi scheme to the 1980s or later.

"Madoff would very vocally proclaim he had just hadachieved great financial success with a deal he had beenarranging in Europe or somewhere else," DiPascali told theFederal Bureau of Investigation. The report stated that "whilenot understanding it at that time, Individual in the end realizedthose pronouncements were calculated by Madoff to perpetuate"the impression that "trading activity was somehow backed up byhis deals and investments overseas."

Eventually, O'Hara and Perez grew suspicious. Afterwards dinnerwith DiPascali at the Greek restaurant, they confronted Madoffand urged him to quit the financial advisory business, DiPascalitold the FBI.

The FBI documents

According to the FBI documents, it wasn't just theprogrammers whom Madoff duped. Madoff told DiPascali to hidefrom Bonventre the refusal of O'Hara and Perez to participate inwhat the reports said were "special programming" projects.Crupi as well appeared to have faith in Madoff, DiPascali toldinvestigators.

One of those tidbits was Madoff's occasional outburst thata stock upstairs at his offices in Midtown Manhattan -- where heran a legitimate trading business -- had "hit a home run,"DiPascali told the FBI. At other times, when Crupi asked why shewas finding the prices of the stocks she was purportedly buyingin the prior day's newspaper, Madoff told her "the trades werehappening in the trading room though she did not seethem," DiPascali reported.

"There's presumably more to come," Crupi's lawyer, Eric Breslin, said of the FBI reports, submitted as part of the ex-workers' request in Manhattan federal court that prosecutorsdisclose additional details about the government's allegations.

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