Auditor pleads guilty, saying he failed to verify Madoff’s reports, never knew of Ponzi scheme

Madoff’s longtime auditor pleads guilty to fraud

NEW YORK — Bernard Madoff’s longtime auditor pleaded guilty to securities fraud charges Tuesday, saying he failed to do his job to verify the disgraced money manager’s financial records but did not know Madoff was running history’s biggest Ponzi scheme.

David Friehling, 49, entered the plea in U.S. District Court in Manhattan, apologizing to the thousands of victims who lost billions of dollars while he audited Madoff’s financial records between 1991 and 2008. The plea was part of a cooperation deal with prosecutors.

“In what was the biggest mistake of my life, I put my trust with Bernard Madoff,” Friehling told Judge Alvin K. Hellerstein.

Before he explained his crimes to the judge, he said he wanted to make clear: “At no time was I ever aware Bernard Madoff was engaged in a Ponzi scheme.”

He said if he had known that investor money was not properly invested, he would not have poured his family’s savings, including the college funds for three children ages 17, 20 and 24, into Madoff’s investment business.

But he admitted that he took the financial records handed him by Madoff “at face value,” failing to independently verify the assets of Madoff’s investment company or ensure that his bank account records or charts listing the purchase of securities were accurate.

He said he also prepared personal tax returns for Madoff that he knew were not accurate.

As part of his statement supporting his guilty plea, he apologized to Madoff’s investors for his role in the fraud. Hellerstein provided an opportunity for investors to speak at the proceeding but no one asked to do so in a courtroom crowded mostly with reporters.

Friehling’s statement was made to support his guilty plea to charges of 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.

The charges carry a potential prison term of up to 114 years in prison, though substantial cooperation with prosecutors can result in significant leniency.

Friehling has agreed to forfeit $3.1 million, which represents what he was paid by Madoff for his accounting and tax services, along with what his family withdrew from their Madoff accounts. He also agreed to give up any properties that were paid for with money from the fraud.

A tentative sentencing date was set for Feb. 26, but it was unlikely that Friehling will be sentenced until he completes his cooperation with prosecutors, which will include divulging any crimes by others he knows about and testifying before grand juries investigating the fraud. He also faces the possibility of unspecified restitution and fines.

Friehling remains free on $2.5 million bail. His lawyer, Andrew Lankler, declined to comment after the plea.

In a statement, U.S. Attorney Preet Bharara called Friehling “one of the key enablers of Bernard Madoff’s historic fraud.”

He said Friehling “will now assist us in holding others accountable for their involvement in Madoff’s epic fraud against so many victims.”

The SEC said in a release after the plea that Friehling has agreed not to contest SEC civil charges that he enabled Madoff’s fraud by falsely stating he had properly audited Madoff’s financial statements. He faces disgorgement, prejudgment interest and a civil penalty in the action.

Friehling was Madoff’s auditor from 1991 to 2008, a job he inherited from his father-in-law, who was originally hired by the father of Madoff’s wife Ruth in 1963, shortly after Madoff began his investment career.

The 71-year-old Madoff, who pleaded guilty to fraud charges in March, is serving a 150-year sentence at a prison in North Carolina.

Despite the more than $65 billion in private investments that Madoff claimed he oversaw for thousands of investors, Friehling said he operated alone out of a tiny office in suburban New City, N.Y.

Authorities say if Friehling had done his job, they would have known years earlier that Madoff was carrying out history’s greatest Ponzi scheme by paying money to some investors with the proceeds he received from other investors.

When Madoff revealed his fraud last December in a confession to his sons and later to the FBI, it was discovered that only a few hundred million dollars was left of the more than $170 billion that prosecutors say went through his accounts over the years. Prosecutors say investors originally entrusted Madoff with more than $13 billion and he greatly exaggerated bogus gains.

It’s the third plea in the case. Frank DiPascali, Madoff’s former finance chief, also is cooperating after pleading guilty in August to helping Madoff carry out his fraud.