UPDATE 3-Ex-Madoff auditor pleads guilty, denies knew of fraud

* Friehling tells court never had contact with investors

* Helped approve Madoff books for 17 years

* Cooperating with investigators in continuing probe

* Agrees to forfeit $3.1 mln of Madoff firm compensation (Adds U.S. prosecutor on holding others accountable, $3.1 million forfeiture)

By Grant McCool

NEW YORK, Nov 3 (Reuters) - The former outside accountant for Bernard Madoff's firm pleaded guilty to fraud charges on Tuesday, but he told a U.S. judge he did not know about the swindler's multibillion-dollar Ponzi scheme, which shook investor confidence and market regulators who missed it.

David Friehling, the former auditor who worked on Madoff's books for 17 years out of a small suburban New York firm from 1991, was allowed to remain free on bond of $2.5 million until he is sentenced next year.

"At no time was I aware that Mr Madoff was engaged in a Ponzi scheme," Friehling told U.S. District Judge Alvin Hellerstein in Manhattan federal court during an hour-long plea proceeding. "I never had contact with investors and never acted as a feeder to investors."

Madoff, 71, is serving a 150-year prison sentence after pleading guilty to orchestrating the worldwide decades-long scheme of as much as $65 billion, considered Wall Street's biggest investment fraud. (See FACTBOX: [ID:nN02335510])

A Ponzi scheme is one in which early investors are paid with the money of new clients. Madoff's fraud collapsed in the declining economy and the FBI arrested him last December.

Friehling, 49, is one of only three people who have been criminally charged so far in the case. The others are Madoff himself and his longtime deputy Frank DiPascali, 53, who is jailed pending sentencing next year.

Both Friehling and DiPascali are cooperating with investigators, who are expected to bring more criminal charges in the fraud that bilked thousands of investors, including charities.

"David Friehling was one of the key enablers of Bernard Madoff's historic fraud... and will now assist us in holding others accountable for their involvement in Madoff's epic fraud against so many victims," Preet Bharara, the United States Attorney for Manhattan, said in a statement.

Friehling pleaded guilty to securities fraud, investment adviser fraud, making false statements to the U.S. Securities and Exchange Commission and breaking tax laws. Some of the charges carry a maximum penalty of 20 years imprisonment and millions of dollars in fines.

He told the court that he did not conduct any independent auditing or verification of financial statements or tax returns provided by Madoff and "others" at Bernard L. Madoff Investment Securities LLC (BLMIS) in New York. He also said he had investments in the firm exceeding $500,000, which is against generally accepted accounting standards.

Friehling did not identify any of the others he dealt with at the Madoff firm. He told the court that in "what is surely the biggest mistake in my life, I placed my trust in Bernard Madoff." He apologized to defrauded investors and to his wife of 27 years, their three children and other family members.