A small-town accountant Wednesday became the first person to join Bernard L. Madoff in facing criminal charges in connection with Madoff's vast Ponzi scheme.
In a complaint unsealed Wednesday, federal prosecutors accused David G. Friehling, 49, of New City, N.Y., of securities fraud and other offenses for failing to conduct audits and deceiving investors as he provided audit services to Madoff's investment services business. A state-licensed certified public accountant, Friehling and his firm were retained by Madoff from 1991 to 2008.
Friehling surrendered Wednesday morning. He was released on bail in the afternoon after making his initial appearance in United States v. Friehling, 09-mg-729, before Southern District of New York Magistrate Judge Theodore Katz.
Assistant U.S. Attorney Lisa A. Baroni said in court that the government had agreed to a bail package under which Friehling would be released on a $2.5 million personal recognizance bond secured by four pieces of property and cosigned by four financially responsible persons. His travel is restricted to the Southern and Eastern districts of New York and the District of New Jersey. A pretrial conference has been scheduled for April 17.
"Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff's business," Acting U.S. Attorney Lev Dassin said in a statement. "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his client's money."
Friehling's "job was not merely to rubber stamp statements, he didn't verify," according to a statement by Joseph M. Demarest, FBI assistant director-in-charge. "Simply put, Friehling failed to do his job, and lied to investors and regulators in saying he did."
The Securities and Exchange Commission filed a companion civil suit against the accountant, Securities and Exchange Commission v. Friehling, 09 civ. 2467 (See the complaint).
Friehling is the sole practicing accountant at Friehling & Horowitz, which occupies a 13-by-18-foot storefront office sandwiched between two medical offices in a Rockland County shopping mall.
He was charged with securities fraud, aiding and abetting investment advisor fraud and four counts of filing false audit reports with the SEC, one each in 2004, 2005, 2006 and 2007. Taken together, the charges technically provide for up to 105 years in prison, although Friehling would receive far less than that if convicted.
Friehling was responsible for creating the Madoff investment service's certified and audited financial statements, which prosecutors say included balance sheets, statements of income and cash flows, and reports on internal control.
Friehling certified that his reports complied with generally accepted auditing standards and accounting principles, but the criminal complaint states he failed to verify assets or the purchase of securities, failed to examine sources of the company's revenue and did not examine a bank account through which billions of dollars of money flowed.
He was paid from $12,000 to $14,000 a month between 2004 and 2007. But the SEC said in its suit that Friehling and his family made a lot more money than that through Bernard L. Madoff Investment Securities LLC (BLMIS).
In November 2008, according to the SEC complaint, Friehling and his family had an accumulated balance of more than $14 million with Madoff; they had withdrawn more than $5 million from these accounts since 2000.
"Friehling and F&H obtained ill-gotten gains through compensation paid to them by Madoff and BLMIS and also by withdrawing millions of dollars from accounts held at BLMIS in the name of Friehling and his family members," the SEC complaint said.
Dassin, in his statement, said Friehling also failed to keep a professional distance from his client because either he or his wife had an account with Bernard L. Madoff Investment Securities in excess of $500,000, "the maximum amount that, under SEC rules, he could have invested with a broker-dealer client and still maintain his independence."
The criminal complaint signed by veteran FBI Special Agent Keith D. Kelly said Friehling failed "to conduct meaningful audits," a conclusion reached after Kelly and other FBI agents spoke to "numerous employees of BLMIS who were responsible for the receipt and disbursement of BLMIS funds, including client funds."
The SEC's complaint said Friehling falsely represented to the American Institute of Certified Public Accountants that he was not engaged in audit work and was thus able to avoid that organization's peer review requirements, "which might have exposed that his so-called audit work for" Madoff "was a sham," exposing Madoff to greater scrutiny.
Friehling "furthered the fraud" by authorizing the company to send account confirmation documents to customers reassuring them that the accounting firm was on the job.
Some customers asked him to examine their accounts, the complaint states, and Friehling promised he would, but then did not.
He "nevertheless represented to these customers and their auditors that he had performed the procedures and found no problems," the complaint states. "All of these actions were designed to, and did, shield Bernard L. Madoff Investment Securities and Madoff from any real scrutiny by regulators, customers and qualified auditors."
Dassin said the investigation was continuing.
Andrew M. Lankler of Lankler & Carragher is representing Friehling. He has declined to comment.
Madoff, who pleaded guilty to an 11-count criminal information on March 12, was jailed pending sentencing by Southern District of New York Judge Denny Chin and is being held at the Metropolitan Correctional Center.
His attorneys were expected to appear before the 2nd U.S. Circuit Court of Appeals this morning to argue for the reinstatement of bail and the resumption of home detention pending his June 16 sentencing.
Friehling's former partner in the New City firm, his father-in-law, Jeremy Horowitz, ceded the firm to Friehling in the early 1990s. Horowitz died of cancer in Florida the same day Madoff pleaded guilty.
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