Madoff’s Ex-Finance Chief Changes Fraud Story in N.Y. Trial

Jan 14, 2014 12:25 pm ET

(Updates with bulk purchases in sixth paragraph.)

Jan. 14 (Bloomberg) -- Bernard Madoff’s former finance chief contradicted himself in testimony about when he learned of his boss’s use of fake trades, casting possible doubt on the government’s key witness in the trial of five ex-Madoff workers.

Frank DiPascali, 57, who said he was Madoff’s “right-hand man” in the defunct investment-advisory business, told a jury yesterday in Manhattan federal court that he learned of the scheme by 1992 -- a change from his testimony last month when he said the practice was “obvious” in the late 1970s. Yesterday was DiPascali’s 16th day under questioning on the stand.

“Whenever a key government witness changes his story on a fact so central to the case, it undermines his credibility and fosters reasonable doubt,” said Richard Scheff, a former federal prosecutor who isn’t involved in the case. “Bottom line is that this is a devastating change that helps the defense.”

DiPascali, who has pleaded guilty and agreed to be a government witness, is the highest-ranking former Madoff aide to testify in the first criminal trial over the world’s biggest Ponzi scheme, which collapsed after Madoff’s arrest on Dec. 11, 2008. Five of Madoff’s former employees are accused of aiding his fraud for decades and getting rich in the process.

‘Obvious’ Fraud

DiPascali, who joined Madoff’s firm in 1975, when he was 19, testified under questioning by prosecutors on Dec. 2 that he knew about the fake trading “for as long as I could remember.” Yesterday DiPascali said he didn’t know until as late as 1992, the year Madoff and his inner circle devised a wide-ranging scheme to trick the U.S. Securities and Exchange Commission about the nature of the firm’s trading strategy.

Asked by defense lawyer Larry Krantz yesterday to clarify his comments, DiPascali said that in the late 1970s he was under the impression that Madoff was buying securities in bulk and that customer trades were being taken out of that inventory.

“Sometimes stories change because a mistake is made but here, it simply is not believable that DiPascali made a mistake amounting to 15 or more years,” said Scheff, who’s chairman of Philadelphia-based Montgomery McCracken Walker & Rhoads LLP.

Sick Juror

The trial, which started in October, is expected to last until at least February, U.S. District Judge Laura Taylor Swain told jurors earlier this month. Today’s session was called off due to a sick juror for the second time in two weeks.

Krantz, who represents former Madoff computer programmer George Perez, asked DiPascali yesterday whether he knew in his “own mind” by the late 1970s that the trades weren’t real.

“No,” DiPascali said. “It was never my intention to testify to anything other than what I just said. If it was interpreted that way, I can’t help you.”

On Dec. 11, DiPascali agreed that his testimony about the fake trading being obvious by the late 1970s differed from what he told a judge at his plea hearing in August 2009, when he said the fraud became apparent in the late 1980s or early 1990s.

DiPascali has said even after he discovered the trades were fake, he believed Madoff was investing client funds in other ways, including in real estate deals and French banks. He has said he didn’t realize Madoff was running a Ponzi scheme -- paying investors with money from other investors -- until Madoff confessed to him in the days before he arrest.

False Statements

The U.S. alleges the five defendants used millions of fake trading confirmations and false account statements to trick customers into believing their money was being used to buy securities. No trading took place in the investment business, which collapsed when Madoff ran out of money to pay customer withdrawals.

DiPascali, who faces as long as 125 years in prison when he’s sentenced, is seeking leniency by testifying against the people, all of whom claim they were duped by Madoff into believing his business was legitimate. Their lawyers claim DiPascali is lying to win less time behind bars.

The other defendants are Joann Crupi, who managed large accounts; Annette Bongiorno, who ran the investment advisory unit; Daniel Bonventre, Madoff’s ex-operations chief; and computer programmer Jerome O’Hara, who allegedly wrote code to print millions of fake account statements and trade confirmations.

Fooling People

DiPascali yesterday agreed with Krantz that he had lied to several of the defendants at various times to prevent them from discovering the fraud, including when the group created fake trading records to trick regulators and auditors.

“Did you consider yourself to be pretty good at fooling people?” Krantz asked.

“Yes,” DiPascali said.

“Do you agree you had a lot of practice at it?” the lawyer asked.

“There were many opportunities for it,” DiPascali said.

Under questioning yesterday by Assistant U.S. Attorney John Zach, DiPascali repeated details of his earlier testimony about the defendants, including claims they worked together to create fake documents during audits, devised schemes to funnel customer funds to Madoff’s money-losing broker dealer unit and scheduled multi-million dollar payouts to insiders in the days before the firm collapsed.

DiPascali previously gave details of each defendant’s involvement in the fraud, saying they all knew the trading was fake and conspired to hide it from customers and regulators.

Madoff, 75, pleaded guilty to fraud in 2009 and is serving a 150-year sentence at a federal prison in North Carolina. At least seven others pleaded guilty, including his brother Peter Madoff, who is serving a 10-year term.

Zach asked DiPascali if he understood that the fraud hadn’t only hurt rich investors and that “normal, run-of-the-mill folks” had been devastated by his scheme.

“Yes,” DiPascali said.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

--Editors: Andrew Dunn, Fred Strasser