David Friehling, auditor through his CPA firm of Bernard L. Madoff Investment Securities LLC and its predecessor, pleaded guilty to a nine-count criminal information and agreed to certain forfeitures. Mr. Friehling also entered into a cooperation agreement with the government. Comments at the time of the plea suggest he will implicate others in the fraud, although he apparently denied knowing about the Ponzi scheme. The court agreed to his release on bond. U.S. v. Friehling, Case No. 1:09-mj-00729 (S.D.N.Y. Filed July 17, 2009).

The nine-count information, filed on Tuesday, charged Mr. Friehling with one count of securities fraud, one count of investment adviser fraud, four counts of making false statements to the SEC and three counts of obstructing the administration of the internal revenue laws. Essentially, the information alleges that Mr. Friehling, a CPA practicing as a sole practitioner through Friehling & Horowitz, CPAs, from at least the 1990s through 2008 represented that he conducted audits of the Madoff firm in accord with generally accepted auditing standards when in fact he did not. Among other things, Mr. Friehling, according to the information: failed to conduct independent verification of the assets; failed to review material sources of revenue including commissions; failed to examine a bank account through which billions of dollars of client funds flowed; failed to verify liabilities related to the Madoff client accounts; and failed to verify the purchase and custody of securities by the firm.

Mr. Friehling also falsely represented that the financial statements of the Madoff firm had been prepared in accordance with generally accepted accounting principles. In fact, they were not because, among other things, Mr. Friehling did not meet the required independence standards. He and/or his wife had an investment account at the Madoff firm. At the end of each year between 1995 and 2007, that account had an equity balance of at least $500,000. Mr. Friehling also filed false reports with the SEC.

At the Tuesday hearing, Mr. Friehling pleaded guilty to each of the counts in the information. Some reports indicate that during the hearing he denied knowing that Bernard Madoff conducted a Ponzi scheme, although that allegation is not specifically contained in the information. He reportedly was asked by the court at one point who else was involved. The question was not answered at the request of the government.

As part of the plea, the defendant agreed to forfeit approximately $3.1 million. That represents the total amount of compensation he received from Madoff along with the sums he and his family withdrew from his investment account. He also agreed to forfeit certain properties traceable to the scheme. As part of the plea arrangement, Mr. Friehling entered into a cooperation agreement with the government. Following the plea, the court directed his release on a $2.5 million bond.

In the parallel SEC action, Mr. Friehling consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions of the Securities Act, the Exchange Act and from aiding and abetting violations of certain provisions of the Investment Advisers Act. The resolution of all monetary issues has been deferred. SEC v. Friehling, Case No. 09 CV 2467 (S.D.N.Y. Filed March 18, 2009); See also Litig. Rel. 21274 (Nov. 3, 2009).