White Collar Crime News

Yet another Madoff employee charged February 26, 2010

As I’ve said before, anyone connected to Bernard “Bernie” Madoff needs to get an attorney.  Hopefully, that has already happened since I think the arrests are going to keep coming.   The latest Madoff related arrest is:

DANIEL BONVENTRE, the former Director of Operations for Bernard L. Madoff Investment Securities, LLC (“BLMIS”).  He was arrested on a criminal Complaint charging him with conspiracy; securities fraud; falsifying books and records of a broker-dealer; false filings with the U.S. Securities and Exchange Commission (“SEC”); and filing false federal tax returns.

As alleged in the Complaint unsealed today in Manhattan federal court:

For decades, BERNARD L. MADOFF purported to provide investment advisory (“IA”) services through BLMIS. In fact, MADOFF defrauded thousands of IA clients out of billions of dollars through an elaborate Ponzi scheme. 

In 1968, BONVENTRE was employed at BLMIS and served as its Director of Operations beginning at least as early as 1978. In that capacity, BONVENTRE was responsible for, among other things: (a) maintaining and supervising the production of the principal internal accounting documents for BLMIS, including its general ledger (the “G/L”) and financial statements; (b) maintaining the stock record for BLMIS and resolving any discrepancies between internal and external records; (c) supervising the use and reconciliation of BLMIS bank accounts through which the Market Making, Proprietary Trading, and IA business operations were funded; and (d) supervising BLMIS employees who were responsible for accounting and other “back office” functions, including settlement and clearing of trades executed by the Market Making and Proprietary Trading operations.

As Director of Operations, BONVENTRE directed that false entries be made in the G/L that concealed the scope of the IA operations and understated BLMIS’s liabilities by billions of dollars. From 1997 to 2008, more than $750 million of IA investor funds were used to support BLMIS’s Market Making and Proprietary Trading operations, but were accounted for on BLMIS’s books and records, including the G/L, so as to conceal the true source of the funds. Moreover, as BONVENTRE knew, the G/L did not accurately reflect the assets contained in the bank and brokerage accounts into which IA investor funds were deposited, and likewise did not reflect the liability of BLMIS to its IA clients that arose from the custody of IA client funds in those accounts. At various points in time, the assets and associated liabilities of BLMIS’s IA operations, which were omitted from the G/L, ranged from millions to billions of dollars.

Between November 2005 and June 2006, BLMIS experienced a liquidity crisis caused by IA clients’ demands for withdrawals that exceeded cash on hand. Rather than sell securities to meet those demands—which could not be done because BLMIS had not actually purchased any such securities on behalf of those Clients—BONVENTRE requested $145 million of loans from a bank, using $154 million of an IA client’s bonds as collateral, to meet obligations to other IA clients. During the same period, BONVENTRE monitored lines of credit, which BLMIS drew down by more than $340 million and used to meet IA clients’ withdrawal requests. BONVENTRE also created false and fraudulent books and records that had the effect of disguising $262 million worth of payments to IA clients from the principal bank account that funded BLMIS’s operations as purchases of bonds and other debt instruments when, in fact, no such purchases had been made.

During the liquidity crisis, BLMIS was required to file Financial and Operational Combined Uniform Single Reports (“FOCUS Reports”) with the SEC. Those FOCUS Reports require the production of basic information that amounts to a condensed version of a broker-dealer’s general ledger. Because the G/L was inaccurate, as BONVENTRE well knew, the FOCUS Reports were likewise false because they failed accurately to reflect BLMIS’s assets and liabilities. For example, one such report, for the month of April 2006, in the midst of the above-described liquidity crisis, failed to reflect at least $299 million in BLMIS liabilities related to $154 million of an IA client’s bonds and the $145 million that BLMIS had borrowed using those bonds as collateral.

At this point, it looks bad but there is a difference between a loyal employee and a co-conspirator.  The difference doesn’t really impact on whether any of this was legal (assuming its all true) but it does impact the prosecution.  But it does get worse because…

as early as 1983, BONVENTRE also had his own IA account at BLMIS. Between 2002 and 2006, BONVENTRE obtained more than $1.8 million in at least three fictitious backdated trades that appeared in his account. For example, one purported trade, which appeared in BONVENTRE’s IA account in 2002, included a purchase that was backdated 12 years, to 1990, and generated purported long-term capital gains of nearly $1 million. BONVENTRE is also charged with four counts of filing false federal tax returns related to his accounting for the three fictitious trades, and his failure to report a total of approximately $273,620.24 in income that he obtained from BLMIS bank accounts in 2003, 2004, 2006, and 2007.

Yeah, that hurts.  As an attorney, you want to look to see if someone is just following orders and maybe looking the other way or if they are lining their pockets too.  As I said before, the Government may be willing to work with someone that was just stupid, naive, loyal, etc.  But when you line your pockets too, then a number of problems arise. 

First, you normally have other charges such as the false tax returns.  These charges make it much more difficult for the attorney to defend the client since the greed/profit motive will make the Government’s case stronger.  The jury will really hate the defendant as he will be seen as Madoff’s right hand man.   As a result of all of this, the Government wants to make an example out of you because they didn’t get enough mileage out of the aging Madoff.  But much like Madoff, the goal here for his attorney may be to protect his family against any fallout from all of this.