A lot of people have faced charges in the Bernie Madoff scandal over the past few years. Madoff’s accountant, David Friehling, pleaded guilty to falsifying documents. Madoff’s son Peter pleaded guilty to several criminal charges and was sentenced to ten years in prison. Frank DiPasquali, the CFO for Madoff’s company, pleaded guilty to ten counts—including conspiracy, securities fraud, investment advisor fraud, mail fraud, perjury, income tax evasion and international money laundering (to name just a few).
The latest target of DOJ and the SEC is Paul Konigsberg. Mr. Konigsberg, who is 77 years old, was an accountant for many of the investors in Bernard L. Madoff Investment Securities LLC (“BMIS”). Mr. Madoff would refer his investors to Mr. Konigsberg for accounting services. Some of Mr. Madoff’s largest clients worked with him.
Mr. Konigsberg is a CPA and a lawyer. After his arrest, he was released on a $2 million bond.
So, what was his supposed role in the fraud?
The Supposed Scheme
Basically, the government claims that Mr. Konigsberg actively worked with BMIS to hide this Ponzi scheme from Mr. Konigsberg’s clients.
First, Mr. Konigsberg allegedly conspired with an unnamed BMIS employee to falsify the investment statements of clients of Mr. Konigsberg and BMIS as well as trading records. These statements would reflect backdated trades and fictitious account activity. According to the SEC, the “long-standing understanding that Konigsberg and BMIS had to generate profitable backdated trades in Konigsberg’s clients’ accounts resulted in trading records being altered long after the supposed trades.”
Second, Mr. Konigsberg would allegedly work with BMIS to ensure that his clients would receive certain favorable tax treatment. Specifically, he and BMIS would “[d]ecide upon desired investment or tax gains and losses to be manufactured and reflected on BMIS account statements.” For example, the indictment alleges that Mr. Konigsberg “directed Employee X to arrive at certain profit or loss numbers . . and Employee X complied.”
Third, the government alleges that Mr. Konigsberg would assist BMIS in making sure that these falsified statements did not conflict with any existing account statements, by sending back the correct statements and replacing them with falsified statements. As the indictment explained,
For this scheme to be successful, it was essential that evidence of earlier account activity be destroyed or under BMIS’s control.
Mr. Konigsberg was charged last week by the Manhattan USAO with (1) conspiracy to falsify the records of a broker-dealer and investment advisor; (2) conspiracy to commit ERISA fraud; (3) falsifying records of a broker-dealer; and (4) falsifying records of an investment advisor.
The SEC also sued Mr. Konigsberg in the Southern District of New York for (1) aiding and abetting broker-dealer books and records violations; and (2) aiding and abetting investment advisor books and records violations.
Mr. Konigsberg is represented by Reed Brodsky of Gibson Dunn & Crutcher. He has pleaded not guilty.
While the exact contours of his defense are not yet known, it seems that his basic defense is that he was deceived by Mr. Madoff just like everyone else. His lawyer was quoted as saying,
In their witch hunt arising out of the largest Ponzi scheme in history, the government conveniently ignores that Bernie Madoff deceived everyone around him — from the most sophisticated investors to the S.E.C. itself.
(Nothing like getting in a little dig at the SEC’s failure to uncover the Madoff fraud earlier.)
It will be interesting to see how the case unfolds. In particular, I was struck by how many of the allegations in the indictment are . . . well . . . old. Some of them are from the mid-1990s, making it considerably more difficult to find witnesses who have credible memories of specific transactions. But, presumably, the government has a robust paper trail to support their claims and numerous cooperators to make their case.