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Madoff Accountant Pleads Guilty in Federal Court

November 3, 2009 at 12:00 AM EST
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The consequences of Bernard Madoff's Ponzi scheme continue to trickle down as his accountant pleaded guilty to criminal charges. Judy Woodruff reports.
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JIM LEHRER: Next tonight: the latest on the fallout from the Madoff affair.

Judy Woodruff has that story.

JUDY WOODRUFF: Bernard Madoff is now behind bars, but the consequences of his giant Ponzi scheme are far from over. Today, his longtime accountant, David Friehling, pleaded guilty in federal court to nine criminal charges stemming from his role in producing audits that helped conceal the scheme.

Tens of billions of dollars were lost by thousands of victims who were defrauded. Efforts to recover any of the money are going slowly.

Diana Henriques is a senior financial writer at The New York Times who has been covering the story, and she was back in the courtroom this morning.

Diana, good to have you with us again.

First of all, tell us who this man David Friehling is. Is that the right pronunciation? And tell us what his….

DIANA HENRIQUES, The New York Times: That is…

JUDY WOODRUFF: … and his role.

DIANA HENRIQUES: That is correct.

His role was to essentially create or rubber-stamp the — the financial statements that Madoff filed for decades with the Securities and Exchange Commission and occasionally provided to institutional investors.

He was supposed to be the independent certified accountant. That was what the world thought he was. In fact, he wasn’t independent, and he wasn’t thoroughly or even barely checking any of the figures that Madoff gave him.

JUDY WOODRUFF: So, what was he pleading guilty to today?

DIANA HENRIQUES: Well, he was pleading guilty to a complicated set of charges that involved both being engaged in a fraud, namely, the fraud of creating what looked like a genuine audit, but wasn’t, but also aiding and abetting the fraud of creating those.

He insisted in court, Judy, that he never knew Bernie Madoff was running a Ponzi scheme. He admitted that he was deliberately not producing legitimate audits. He admitted that he did that for years. But he insisted he did not know that, by doing that, he was enabling this Ponzi scheme to continue and to — and to escape regulatory attention.

Friehling enters into agreement

Diana Henriques
New York Times
Clearly, something has happened recently that has made Mr. Friehling a very valuable witness with respect to tax issues.

JUDY WOODRUFF: So, the prosecutors must have questioned him closely about the difference between the two?

DIANA HENRIQUES: Well, actually, no.

The prosecutors have entered into a cooperation agreement with Mr. Friehling. That was quite intriguing to me. They had charged him with six criminal counts last spring, and he had been negotiating with them throughout the summer.

Last Friday, the prosecutors announced that they were adding a single obstruction of the tax laws count to those charges. And when he showed up in court today, there were actually three of those tax-based obstruction charges.

So, clearly, something has happened recently that has made Mr. Friehling a very valuable witness with respect to tax issues. We don't know yet what it is, but it is certainly going to be interesting to follow.

JUDY WOODRUFF: And the judge, I gather -- the judge decided today he is not a flight risk. He did let him go home?

DIANA HENRIQUES: There wasn't a lot of discussion about it. He did let him go home. I must admit that those of us who had covered the double attempts by the previous guilty defendant in this case, Frank DiPascali, to get out on bail were a little surprised. But the judge accepted the terms that the government suggested.

And Mr. Friehling went home to his family tonight.

JUDY WOODRUFF: Diana, give us a sense of what it was like in the class -- in the...

JUDY WOODRUFF: ... in the courtroom. What -- what did you see there?

DIANA HENRIQUES: Well, it was really a little bizarre, Judy. It started out with a typical criminal court arraignment for a totally unrelated crime, seven or eight very large, very unpleasant looking people being trooped in with armed guards to be arraigned, while all the rest of the white-collar criminal crowd was sitting in the courtroom waiting, including the defendant.

When that was finally taken care of, they -- they moved on to Mr. Friehling's case. The judge was very meticulous. He walked people very carefully through what these various charges were, several times prompting the U.S. attorney herself to expand on the explanations.

He pressed a couple of times for information that the prosecutors refused to give him, for example, information about who else's personal tax filings Mr. Friehling had prepared besides Bernie Madoff's, who he admitted having done.

JUDY WOODRUFF: Diana, I also want to ask you about this news that came out over the weekend. The inspector general for the Securities and Exchange Commission, the SEC, did an investigation into what happened at the SEC, why they missed the Bernard Madoff scheme.

Tell us about what came out, some pretty interesting material there.

'Scathing' report on SEC activity

Diana Henriques
New York Times
It said that they had had numerous credible tips about Bernie Madoff over the years, had actually begun numerous investigations, and had botched every single one of them.

DIANA HENRIQUES: It -- it was.

You could almost say that, you know, we -- we -- we got the Cliff's Notes last month, when the inspector general's full report came out. And now we got the full library on which the Cliff's Notes were based.

The prior -- the report that came out last month essentially was scathing towards the SEC. It said that they had had numerous credible tips about Bernie Madoff over the years, had actually begun numerous investigations, and had botched every single one of them.

That report came out last month with tantalizing little references to exhibit 42 and exhibit 233 scattered all the way through the report. Well, on Friday night -- actually, Friday late afternoon, to be fair, 6,157 pages of those tantalizing exhibits became public.

That was my personal marathon over the weekend here in New York.

JUDY WOODRUFF: And Bernard Madoff himself is quoted in there as saying that he was surprised he wasn't caught?

DIANA HENRIQUES: Yes. It's exhibit number 104, for readers who want to follow along.

It was an amazing conversation. He not only said he was amazed he didn't get caught. He almost lectured the inspector general about the right way to investigate a Ponzi scheme: Here's how you should go about it, if you really wanted to catch me.

But he did say, actually, in more serious moments that it had been a nightmare every time examiners showed up at his firm, because he felt like he was on a knife edge. And, on two occasions which are detailed there, he thought for sure he was going to be caught, that the obvious next step that investigators would take, as far as he was concerned, would clearly show that he was a fraud.

And, so, he waited for them to take that step and was astonished when they didn't.

JUDY WOODRUFF: So, does that give us a clearer picture of what the SEC did wrong?

DIANA HENRIQUES: It does, not just his account, because, after all, he is a confessed criminal.

But, if you read through the dozens and dozens of transcripts in which mid-level, low-level and senior SEC executives describe what they did, why they did it, what the basis for their ultimately very misguided decisions with respect to these investigations were, you get a picture of very poorly managed investigations being done by unseasoned people who were often at sea and just unwilling to ask for help.

So, it's a -- I'm sure it's a litany of information that's going to make a lot of proud former SEC lawyers feel a little heartbroken.

JUDY WOODRUFF: Diana Henriques, some fascinating, disturbing findings there.

Thank you very much. It's good to see you again.

DIANA HENRIQUES: Thank you, Judy. Thanks.