| NEW YORK
NEW YORK Dec 9 When a pair of U.S. Securities
and Exchange Commission examiners visited Bernard Madoff's
offices in 2005, the now-imprisoned financier was not too
worried - until he sneaked a look into one of their briefcases.
What Madoff found - a news article questioning how he
produced positive returns every year - sent him into a rage,
according to courtroom testimony on Monday by his decades-long
right hand man Frank DiPascali.
"These SOBs are toying with me," DiPascali quoted Madoff as
DiPascali is the star witness for the government in the
trial of five former Madoff firm employees in U.S. District
Court in Manhattan, having pleaded guilty in 2009 in the hopes
of receiving a lighter sentence than the 125 years he
The trial opened on Oct. 16 for the five, who are charged
with aiding Madoff's worldwide investment fraud, which imploded
in December 2008 and cost investors an estimated $17 billion.
The five have denied wrongdoing and said they fell under the
spell of Madoff, who pleaded guilty in March 2009 and is serving
a 150 year prison sentence.
In his testimony on Monday, DiPascali said that after Madoff
went through the SEC examiner's briefcase, he and his employees
got to work, erasing internal emails from the firm's servers and
concocting fake documents that showed trades with foreign
counterparties that never took place.
At one point, DiPascali said, he and two computer
programmers, Jerome O'Hara and George Perez, discussed whether
it would be feasible to bug the SEC examiners' office to hear
their conversations, an idea that was never put in practice.
O'Hara and Perez are on trial with portfolio managers
Annette Bongiorno and Joann Crupi and back office director of
operations Daniel Bonventre. Their lawyers have not yet had an
opportunity to question DiPascali in front of the jury.
DiPascali said the SEC examination was the agency's second
in several months, after a team from Washington had also visited
the firm's Manhattan office to look at records.
A few months later, KPMG would send auditors, and at the end
of 2005, the SEC would send a letter requesting records as part
of yet another investigation.
Madoff grew angry when he learned the New York SEC examiners
wanted to see internal emails, DiPascali said.
"'That's how all these guys get caught for insider
trading,'" Madoff said, according to DiPascali.
None of the probes would uncover the fraud, at least in part
because of the effort Madoff and his employees made to hide the
fraud, DiPascali testified.
The firm would list foreign brokerages as counterparties for
its fake trades when providing records to U.S.-based examiners
from the SEC, with Madoff reasoning that government agents would
be less likely to contact overseas companies, DiPascali said.
But Madoff had them redo the records to list U.S.
counterparties when the auditors from KPMG arrived from the
When Madoff grew worried that the SEC would go after him for
failing to register as an adviser, Crupi and DiPascali helped
him alter customer authorization forms to make it seem as though
he had no discretion in making investment decisions, DiPascali
The night before the KPMG auditors arrived in New York,
DiPascali said he went out to a fancy dinner with Crupi, O'Hara
and Perez to celebrate their work in preparation. DiPascali
testified that O'Hara made a toast: "'Here's to tricking the
auditors, here's to fooling KPMG', or something like that."
The dinner cost more than $1,000, after which the five
employees stayed for a few nights at the luxury hotel Plaza
Athenee, since they were working long hours. Prosecutors showed
jurors a copy of the hotel bill, which exceeded $3,800.
The case is USA v. O'Hara et al, U.S. District Court,
Southern District of New York, No. 10-cr-0228.