More Madoff Accomplices Arrested

Today's WSJ reports:

Two former computer programmers for convicted Ponzi scheme operator Bernard Madoff were arrested and charged Friday with creating computer programs that helped Mr. Madoff hide a massive fraud from regulators for more than 15 years.

Jerome O'Hara and George Perez, who began working as computer programmers at Bernard L. Madoff Investment Securities LLC in the early 1990s, were charged with conspiracy, falsifying books and records of a broker-dealer and falsifying the books and records of an investment advisory.

The article reported that there is evidence that the two computer programmers knew what they were doing was fraudulent and received compensation to keep quiet.

Fraud Research in the News

Forbes discusses the recent publication of Using Nonfinancial Measures to Assess Fraud Risk, by Joseph Brazel, Keith Jones, and Mark Zimbelman, in Journal of Accounting Research.

What is this guy thinking?!

The more I read about the former auditor for Bernie Madoff's Ponzi scheme, the more questions I have about this guy. The WSJ reported that Mr. Friehling said that he is a victim of Madoff's scheme too. According to the article, Mr. Friehling revealed that "he entrusted his own retirement and his family's investments to Mr. Madoff, saying he had about $500,000 with the firm." I'm starting to think Mr. Friehling knows about as much about auditing as the typical High School student! Doesn't he know that an auditor is forbidden to invest in a company that he audits?! This is basic auditor independence! Something is missing here...but it may just be that Mr. Friehling is missing something...

Another guilty plea

Madoff's auditor, David Friehling, operated out of a small office in suburban New York and ran a three-person auditing firm that would be hard pressed to effectively audit anything but the smallest businesses let alone a huge hedge fund! As such, the auditor should have been a huge red flag to anyone investing with Madoff, not to mention regulators.

Today, the 50 year old auditor decided to plead guilty to "securities fraud, investment adviser fraud, making false filings with the Securities and Exchange Commission, and obstructing or impeding the administration of the Internal Revenue laws."

While prosecutors argue that Friehling must have known that Madoff was pulling off the largest Ponzi scheme ever, Friehling is claiming: "At no time was I ever aware Bernard Madoff was engaged in a Ponzi scheme."

Personally, I believe Friehling had no idea that Bernie was committing fraud. However, that does not excuse him from what might be considered constructive fraud and was surely gross negligence on his part. I believe Friehling was so over his head in trying to perform that audit that he should have never taken the engagement. .

No doubt Bernie paid a handsome fee to his auditor just as he did to his investors. Too bad Bernie was giving away other people's money!

Madoff victims get some money

It was reported today that victims of Bernard Madoff's Ponzi scheme received $530 million which was guaranteed by the Securities Investors Protection Corp (aka SIPC). The SIPC guarantees brokerage accounts up to $500,000 and is similar to the FDIC which guarantees bank accounts. Apparently, this payout of over one-half billion dollars is a record which exceeded the combined payout of the SIPC from 321 previous payouts since 1970! Sad as it is, Bernie Madoff will definitely be remembered as a fraudster for the record books!

Madoff friend found dead in his pool

The Madoff case seems to get crazier each time a news report comes out on it! Last week's allegations were deemed too speculative for us to do a post. We want to see some confirmation about these allegations before wasting too much energy on them. They are definitely extreme but this is an extreme case so who knows?!

However, the most recent news is not speculative but involves a fact that Madoff's friend, Jeffry Picower was found dead at the bottom of his pool at his Palm Beach mansion. Here are a few claims from an article posted yesterday on CNNMoney.com:

• Picard is listed as one of the wealthiest Americans by Forbes magazine.
• Madoff trustee, Irving Picard, claims Picower was complicit in the fraud.
• Picard claims that "Picower was the biggest beneficiary of Madoff's scheme, having withdrawn either directly or through the entities he controlled more than $7.2 billion of other investors' money."
• Picower was being sued by the Madoff trustee for $7.2 billion.

Today's WSJ and other reports say that Mr. Picower's lawyer said an autopsy shows Picower suffered a massive heart attack that caused his drowning while he was swimming.

Insider Trading Loss

More on Raj Rajaratnam's alleged insider trading scheme: the alleged scheme produced a net loss for defendants (from NYT):

Raj Rajaratnam, the authorities say, masterminded one of the biggest insider-trading schemes in a generation.

But if Mr. Rajaratnam was trading on insider information, apparently he was not very good at it.

A close examination of the trades that led to his arrest last week reveals a startling fact: In all, Mr. Rajaratnam lost millions from what prosecutors characterize as illegal trading.