More details about the Madoff Ponzi scheme emerged from the guilty plea of and SEC complaint against Frank DiPascali, the finance chief of Mr. Madoff’s so-called investment advisory business. U.S. v. DiPascali, Case No. 1:09-cr-0764 (S.D.N.Y. Filed Aug. 11, 2009). See also DOJ Press Release, “Frank DiPascali, Jr., Former Employee at Bernard L. Madoff Investment Securities LLC, Pleads Guilty To Ten-Count Criminal Information,” (Aug. 11, 2009) (available at Mr. DiPascali, who began working for Bernard Madoff years ago when he was just out of high school, pleaded guilty to a ten count information on Tuesday. The charges include conspiracy, securities fraud, investment adviser fraud, falsifying books and records, mail and wire fraud, money laundering, perjury and tax evasion. The government has requested that sentencing be scheduled in May. Following the plea, the court remanded Mr. DiPascali to jail, rejecting a deal under which he would be released on a $2.5 million bond.

Mr. DiPascali, who is cooperating with the government, stated at the time of his plea that that it was “all fake” — that is, there never were any securities trades in the years long scheme. While Mr. Madoff made essentially the same admission, Mr. DiPascali went further , describing how he and others created fake trade blotters and distributed phony account statements to clients. Clearly others were involved who may be charged in the future.

The SEC settlement with Mr. DiPascali revealed more details. SEC v. DiPascali, Case No. 09 CV 7085 (S.D.N.Y. Filed Aug. 11, 2009). See also Lit. Rel. 21174 (Aug. 11, 2009). In its complaint, the Commission stated that:

• In 1992, when SEC claims were brought against Avellino & Bienes, a feeder fund, records were fabricated for the accounts while Mr. Madoff scrambled to raise cash to pay investors.

• Following the SEC’s 1992 action, many of the customers from A&B returned through the Madoff brokerage firm. This prompted the creation of the so-called split-strike conversion trading strategy. Mr. DiPascali supervised the creation of computer programs for the accounts and compiled historical securities prices and volume data to give the appearance of profits from trading. Mr. Madoff directed Mr. DiPascali to create credible trading profits of 10% to 17%.

• Year after year, millions of pages of fictitious account statements were created and sent to investors.

• Accounts were maintained at JPMorgan Chase where investors sent funds. According to the complaint, this account was a “slush fund” used to pay investor redemptions. Excess cash was transferred to other accounts and invested in U.S. Treasuries and other short term paper.

• False books and records were created to reflect the fictitious trades. Other records and steps were taken to avoid detection, apparently a constant concern.

The case has been partially resolved. Mr. DiPascali consented to the entry of a permanent injunction prohibiting violations of Securities Act Section 17(a), Exchange Act Section 10(b) and aiding and abetting violations of Sections 204, 106(1) and 206(2) of the Advisers Act in addition to Sections 15(c) and 17(a) of the Exchange Act and pertinent rules. Issues regarding disgorgement were reserved.

As the investigations continue others will likely be charged. At the same time, those cases will clearly reveal more about the operations of the Ponzi scheme king.

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