More Madoff Details Emerge From SEC’s Complaint Against DiPascali

 

Without admitting or denying the allegations of the SEC's complaint, DiPascali consented to a proposed partial judgment, which, if entered by the court, would impose a permanent injunction against DiPascali and leave the issues of disgorgement and a financial penalty to be decided at a later time.

 

According to the SEC, DiPascali helped generate bogus annual returns of 10 to 17 percent by fabricating backdated and fictitious trades that never occurred. The SEC further alleged that DiPascali helped Madoff cover up the fraud by preparing fake trade blotters, stock records, customer confirmations, Depository Trust Corporation (“DTC”) reports and other phantom books and records to substantiate the non-existent trading.

 

"DiPascali and Madoff ran an extraordinary and massive counterfeiting operation that concealed their fraud from investors and regulators alike," said Robert Khuzami, Director of the SEC's Division of Enforcement.

 

The SEC alleged that DiPascali sustained Madoff's unprecedented fraud from at least the 1980s until the scheme's collapse, causing billions of dollars in investor losses. A specific computer was used to simulate phantom trading in advisory accounts, and to generate phony books and records reflecting that trading. This fake set of books and records was kept separate and distinct from the books and records for the market-making and proprietary trading operation at Bernard L. Madoff Investment Securities LLC (BMIS). When investors sent in funds to BMIS for investment, the funds were deposited or wired into a bank account at JPMorgan Chase that was not in any way reflected on the books and records (including the ledger) of the BMIS broker-dealer operation.

 

The SEC's complaint alleged that great effort was made to hide the fact that there were several thousand advisory accounts at BMIS, which would have required SEC registration. DiPascali helped Madoff devise a shifting subset of 10 to 25 accounts — known as the "special" accounts — which they deceptively presented as the universe of BMIS advisory accounts.

 

According to the complaint, DiPascali "and others" prepared fake books and records to provide regulators with information about only these special accounts in order to conceal the true size of the advisory business.

 

According to the SEC's complaint, DiPascali helped Madoff cover his tracks in numerous ways. For instance, when Madoff grew concerned that showing positive returns every month would be suspicious, he occasionally instructed DiPascali to enter phony trades designed to lose money in order to make their investment strategy and returns more credible. In order to avoid scrutiny by sophisticated financial institutions, they made a practice of closing down accounts of investors who worked at such institutions. Madoff and DiPascali even went so far as to develop a phantom computer trading platform that would appear to reflect real trading. In the event of a surprise visit from outsiders requesting to observe real-time trading activity, one BMIS employee was to enter trades on a computer screen and another employee was to go into an office nearby and play the role of a counterparty trader in Europe.