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Madoff’s Accountant Is Charged With Securities Fraud
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(March 18, 2009 - Wednesday) - http://www.nytimes.com/2009/03/19/business/19madoff.html?ref=business
The accountant who provided auditing services to Bernard L. Madoff’s investment advisory business for more than a decade, operating out of a tiny storefront office in Rockland County, was charged on Wednesday with securities fraud and aiding investment adviser fraud in connection with Mr. Madoff’s vast Ponzi scheme.
The accountant, David G. Friehling, who became Mr. Madoff’s primary auditor in the early 1990s when his father-in-law retired and he took over the two-man firm of Friehling & Horowitz, surrendered to federal authorities and prosecutors on Wednesday morning.
The charges are the first filed publicly since the 70-year-old Mr. Madoff pleaded guilty to fraud on Thursday and was ordered to a federal jail to await what is expected to be the equivalent of a life sentence. People briefed on the matter say they expect more cases to follow as prosecutors and F.B.I. agents focus on Mr. Madoff’s family members and employees despite his assertion that he carried out the fraud alone.
Mr. Friehling’s 80-year-old father-in-law and former partner, Jeremy Horowitz, who had been suffering from cancer, died in Florida on the same morning Mr. Madoff pleaded guilty in United States District Court in Lower Manhattan. Mr. Friehling will appear in the same courthouse to be arraigned later Wednesday.
Mr. Horowitz had been interviewed in recent days by federal investigators who have been piecing together information about Mr. Madoff’s Ponzi scheme, the person briefed on the matter said.
Mr. Friehling, 49, was charged in a six-count criminal complaint that accused him of one count each of securities fraud and aiding and abetting investment adviser fraud and four counts of making false filings to the Securities and Exchange Commission. If convicted, he faces a maximum of 105 years in prison.
Mr. Friehling’s lawyer, Andrew M. Lankler, declined to comment.
The acting United States attorney, Lev L. Dassin, who announced the charges in a statement with Joseph M. Demarest Jr., the head of the New York F.B.I. office, said that while Mr. Friehling was not accused of knowing about Mr. Madoff’s scheme, he was charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff’s business.
“Mr. Friehling’s deception helped foster the illusion that Mr. Madoff legitimately invested his clients’ money,” Mr. Dassin said in the statement.
Indeed, Mr. Demarest said that the accountant, abrogating his fiduciary responsibility to investors and his legal obligation to regulators as an independent auditor, did little or no testing and verification of the material he was hired to certify.
“His job was not merely to rubber-stamp statements he didn’t verify,” Mr. Demarest said. “Simply put, Friehling failed to do his job and lied to investors and regulators in saying he did.”
Moments after the criminal case was disclosed, the New York regional office of the S.E.C. filed a related civil action against Mr. Friehling and his accounting firm.
The civil complaint, besides citing the deceptive audits, also accused Mr. Friehling of collecting “ill-gotten gains” in the form of substantial fees — $186,000 a year — paid by the Madoff enterprise and by taking millions from accounts he and his family maintained with Mr. Madoff.
According to the S.E.C., Mr. Friehling and his family had accumulated more than $14 million in their Madoff accounts by last November and had taken more than $5.5 million from them since 2000.
Mr. Friehling “essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” said James Clarkson, acting director of the S.E.C.’s office in New York. “For all those years, Friehling deceived investors and regulators by and declaring that Madoff’s enterprise had a clean audit record.”
Some of Mr. Madoff’s critics have contended that the tiny accounting firm was a red flag, given the size of Mr. Madoff’s legitimate operations. The fact that Mr. Friehling also appeared to be the agent for dozens of accounts with Mr. Madoff’s investment advisory firm, according to a list of customers assembled by the trustee overseeing the firm’s bankruptcy, should have raised more red flags, they said.
The list shows more than 100 accounts attributed to Mr. Friehling, and the accounting firm is shown with an additional 17 accounts. Neither Mr. Friehling, who has been a focus of federal investigators since soon after Mr. Madoff’s arrest on Dec. 11, nor Mr. Horowitz or any of his family members have spoken publicly about what roles either of the men may have played in Mr. Madoff’s business or his crimes since the financier admitted a $50 billion Ponzi scheme to the F.B.I.
But someone who identified himself as Mr. Horowitz’s son, Irwin, posted a poem about his father on the day of his death on a Web site called Newwest.net. The poem called Mr. Horowitz “a decent, honorable man,” provided some insight into his final weeks and months and described how Mr. Madoff’s fraud affected his family.
“The irony that Bernard Madoff pled guilty to 11 counts of fraud, perjury and money laundering on this day is beyond measure,” Irwin Horowitz wrote. “My father’s passing has become part of this great American tragedy. He served as Mr. Madoff’s auditor for over three decades, before handing it off to my brother-in-law. He never suspected the crime that was happening.”
He added: “These last three months, since the Madoff scheme became public, have been a living nightmare for my entire family. This has been especially true for my father, who had spent his entire life building up both a reputation for honesty and integrity as well as an investment nest egg that would provide for my parents’ retirement. This reputation has suffered mightily simply from the association with Mr. Madoff.”
Both Mr. Friehling and his late father-in-law, according to people who know the two men, had invested with Mr. Madoff and lost substantial sums.
Mr. Friehling, whose records were subpoenaed by federal authorities in the weeks after Mr. Madoff’s arrest, is expected to be arraigned on Wednesday before Magistrate Theodore H. Katz of Federal District Court in Manhattan.
The complaint in the case charges that Mr. Friehling “deceived investors by creating false and fraudulent certified financial statements for Bernard L. Madoff Investment Securities L.L.C. and its predecessor Bernard L. Madoff Investment Securities and causing the statements to be filed with the United States Securities and Exchange Commission (S.E.C.) and sent to clients.”
The complaint, sworn out by an F.B.I. special agent, Keith D. Kelly, says that Mr. Friehling “caused false and misleading” certified audit reports to be filed with the S.E.C. in December 2004, December 2005, December 2006 and December 2007.
It also charges that Mr. Friehling failed to conduct meaningful audits in accordance with generally accepted accounting principals and generally accepted auditing standards.
Under the accounting standards, an auditor must obtain “sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.” The complaint contends Mr. Friehling, who it says was paid $12,000 to $14,500 a month between 2004 and 2007, did not do so.
The accounting firm’s audit work papers “reflected insufficient independent verification of the information provided to Friehling” by employees of Mr. Madoff’s investment firm, according to the complaint, which also details Agent Kelly’s accounting experience, including holding an active license in Georgia from approximately 1983 until 2004.
Mr. Friehling is a board member and past president of the Rockland County chapter of the New York Society of Certified Public Accountants, according to the group’s Web site. He also serves on the board of the JCC Rockland, a Jewish community center, according to that group’s tax filing.
State records show he was licensed as a certified public accountant in 1987.
He graduated with a bachelor of science degree from Cornell University in 1981, according to a spokesman, Simeon Moss.
Mr. Friehling began work at his firm in 1987, offering accounting, tax and bookkeeping services to individuals and businesses, working 60 hours a week, according to information he provided to the New Jersey Bureau of Securities.
While working at the accounting firm, he also worked for the CJM Planning Corporation, a broker-dealer in Pompton Lakes, N.J., from 1998 to 2004, with an 18-month break in 2000 and 2001, the records show. During much of that break, he worked at PFS Investments in Nanuet, N.Y., the records show.
His small storefront office, in a small office park in the town of New City, N.Y., is now closed and has a “for rent” sign in the window.
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