it takes a village…

Posted on Thursday 19 March 2009


friehlingNow that we’ve all had a chance to reflect on the fraud charges brought Wednesday against Bernard Madoff’s outside auditor, David Friehling, let’s delve a little deeper. Friehling was accused of enabling Madoff’s fraud by conducting sham audits.

Friehling was charged with securities fraud and investment adviser fraud, as well as four counts of filing false audits with the SEC. Federal prosecutors from the Southern District of New York went out of their way to say they weren’t charging Friehling with having “knowledge of the Madoff Ponzi scheme.”

We’ve heard from some lawyers who say this prosecution is aggressive because the criminal complaint against him doesn’t have any direct evidence that Friehling had “fraudulent intent” in the form of witness testimony or tape recordings, for example, showing his “criminal state of mind.”

One such lawyer is David Siegal, a former SDNY prosecutor who is now at Haynes and Boone. “There’s nothing improper about this charge; it’s a viable legal theory,” he says. But “bringing a criminal case based on expert testimony that an audit was not conducted properly, absent any allegation of actual knowledge of fraud, is an aggressive, and in my experience, unusual prosecution.”

He says that in a typical fraud prosecution, the government shows evidence that the defendant had actual knowledge that something fraudulent was afoot. Here, by contrast, the allegations are that government’s accounting expert says that there are certain audit steps that would typically be taken in an audit; that the defendant certified he had taken appropriate audit steps; and that, in fact, the defendant failed to take those steps the government expert says he should have taken.”

Presumably, Siegal says, Friehling could argue in his defense that he was a “lousy auditor” and even “grossly negligent” but didn’t have knowledge of fraud and didn’t intend to mislead anyone. In other words, being a lousy accountant might not make him a criminal…
There’s also a long and interesting article on Madoff in Bloomberg [Madoff Enablers Winked at Suspected Front-Running]. I find myself more interested in the unfolding Madoff story than in the AIG-FP Bonus scandal, I think because it is more instructive about the kind of greed in the financial industry that has become a cancer on the land. The AIG guys are just greedy. David Friehling , Madoff’s accountant, rubber-stamped a Gagillion dollar Investment business without looking at anything behind the books he was handed. But, as the Bloomberg story points out, all of the people feeding Madoff knew there was something wrong. They just were wrong about what was wrong. They thought he either had some "insider" track or that he was "front running," an illegal practice – in other words, he was a clever crook. That was fine with them as long as they reaped the benefit. And the rest of us enjoyed the profits from selling our property on the right side of the housing bubble, or the escalation of our 401K accounts.

I had never heard of a Ponzi scheme before this winter, or a Credit Default Swap, or of a mortgage backed security. It never occurred to me that the disappearance of Banks as they increasingly morphed into BankAmerica or Citigroup was something new, and something bad. I knew house values were rising at an astronomical rate and that it had to stop, but I didn’t think about the forces behind the boom. When gas prices shot up, I thought that the Shieks were getting greedy. It never occurred to me to look in the background or that it all had something to do with Deregulation , an out-of-control financial industry, and a number of disasterous bills passed through Congress. I even thought Alan Greenspan must be a master mechanic [instead of a misguided idealogue].

So it took a look-the-other-way accountant, and an on-the-payroll Congressman [or many], and some really-really-sleazy financial types; but it also took a gullible public like me and you who basked in our illusory good fortune. My The-Great-Depression-damaged father used to say, "Money doesn’t grow on trees!" I got tired of hearing it. More or less, in my adult life, he was wrong. And I don’t know if we’ve suffered enough yet to learn that lesson again.
  1.  
    Joy
    March 20, 2009 | 8:48 AM
     

    If you want to see another thing about AIG, check out alternet.org with author Melina Ripcoco “Was Eliot Spitzer Taken Out Because He Was Going To Bust AIG? What Spitzer did was awful but I don’t put anything past other bad people either.

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