1 Boring Old Man

An “Aggressive” Prosecution? Breaking Down Madoff Auditor Case
WSJ Law Blog
March 19, 2009
By Amir Efrati

Now 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…

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].