U.S. prosecutors filed criminal charges against accountant David Friehling, 49, and the Securities and Exchange Commission leveled civil charges against him, the first person to be prosecuted other than Madoff, who pleaded guilty to cheating investors out of billions of dollars in the past two decades.
The charges come as federal authorities turn their attention to those who they believe helped Madoff fool thousands of investors into thinking that their longtime investments were growing comfortably each year. Friehling is the first person to be arrested since the Madoff scandal broke three months ago.
The SEC said in its complaint that Friehling and his firm "did not perform anything remotely resembling an audit" of Madoff's money management firm or try to confirm that stocks that Madoff had purportedly bought for customers even existed, according to Reuters.
He faces a maximum of 105 years in prison on the charges, including securities fraud, aiding and abetting investment adviser fraud and false audit reports. He surrendered to the FBI and was expected to appear in court later Wednesday.
The SEC alleged that Friehling "merely pretended" to conduct minimal audit procedures to make it seem as if he was auditing Madoff's firm. Even then, he failed to adequately document his purported findings.
Friehling and his firm were paid from Madoff's ill-gotten gains, and he and his family improperly held accounts at the Madoff firm in violation of accounting rules, the SEC said. Authorities said there were millions of dollars of withdrawals from the accounts over the years.
From 1991 through 2008, Friehling served as Madoff's auditor while he worked at the sole practitioner at Friehling & Horowitz. Friehling is the only certified public accountant at that firm, and the firm's sole shareholder, according to media reports. He formed the firm around 1988, when he partnered with his late father-in-law, Jeremy Horowitz.
Prosecutors said Madoff paid him between $12,000 and $14,500 a month from 2004 to 2007, or $144,000 to $174,000 a year.
The criminal complaint in Manhattan federal court said Friehling falsely stated that audits of Bernard L. Madoff Investment Securities LLC were conducted according to standards generally accepted in the United States.
"Friehling also falsely stated that the audit 'included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements' when in fact, no such examination ever took place," the complaint said.
According to the SEC, he "essentially sold his license to Madoff for more than 17 years while Madoff's Ponzi scheme went undetected." In a Ponzi scheme, early investors are paid with money from new clients.
Friehling's attorney, Andrew Lankler, could not be reached immediately by news agencies for comment.
Acting U.S. Attorney Lev L. Dassin said in a release that Friehling is not charged with knowing about Madoff's Ponzi scheme. However, Dassin said: "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."
Madoff, 70, pleaded guilty on March 12 in a dramatic courtroom admission to running a worldwide fraud that prosecutors said went back at least 20 years, drawing in as much as $65 billion from big and small investors and charities. Investigators say they have recovered only about $1 billion.
During his plea, Madoff said he began a Ponzi scheme in the 1990s in response to the pain of a recession, thinking it would be a short-lived solution. He said he never recovered, though, and knew prison awaited him.
Prosecutors have said they believe Madoff's fraud started in the 1980s.