Tuesday, January 28, 2014

Madoff IT Guys Wrote Code to Trick Auditors, Jury Told

At last, information about how the trades were documented...


Bernard Madoff’s former computer programmers created a web of simple equations to make thousands of fake transaction numbers, dates and time stamps appear realistic on documents used to trick auditors, a jury was told in the trial of five of the con man’s former top aides.
The men, Jerome O’Hara and George Perez, wrote dozens of “special” programs during audits by the U.S. Securities and Exchange Commission and HSBC Holdings Plc (HSBA), Richard Dietrich, a senior technician at International Business Machines Corp., testified yesterday in federal court in Manhattan. Prosecutors have said the programming wouldn’t have been necessary if real trading had taken place, and that the former employees knew it was fraudulent because they helped create it.
The trial is the first stemming from Madoff’s $17 billion Ponzi scheme, which collapsed after his confession and arrest in December 2008. O’Hara, Perez and three other former Madoff employees went on trial in October over accusations they aided the fraud for decades and got rich in the process.
Dietrich analyzed computers seized from Madoff’s Midtown Manhattan office and is a prosecution expert witness.
The programmers used “a variety of techniques” for generating “pseudo-randomized” data for documents, said Dietrich, a 32-year IBM veteran who helped develop the AS400 computer system used at Madoff’s now-defunct company. The programming was used to perform tasks such as assigning random international banks as counterparties to fake trades and making false Depository Trust Co. statements, he said.

Software Programs

Dietrich explained to the jury hundreds of lines of code contained in dozens of linked programs written by Madoff’s information technology staff using what he said was IBM hardware from 1988 and a computer environment developed in 1983. The programs were displayed in a web-based format on monitors in the jury box while Dietrich navigated lines of code one at a time for hours under questioning by a prosecutor.
One program, called “SPCL1I,” which was created in 1994 and last modified in 2005 by Perez, created a fake time stamp for trades by assigning random times in 15-minute intervals from 4 a.m. and 8:59 a.m. to correspond with trading hours in London, Dietrich said. The program would then assign random minutes and seconds using the same technique, he said.
The system worked because it used a basket of pre-selected options like “a pile of cards” and then set each one aside so it wouldn’t be used again until the deck was empty, Dietrich said.

Fudged Numbers

The codes contained numerous internal comments that were left as notes by the programmers, Dietrich said. One such comment referred to a program being used for a “randomness check.” Another referred to a line of code that “fudges” the CUSIP numbers assigned to all stocks.
O’Hara and Perez, accused of automating the creation of millions of false customer statements and other documents as Madoff’s fraud expanded rapidly in the 1990s, have said they were following orders and didn’t realize the code was being used for a fraud. They both pleaded not guilty.
The U.S. alleges the fraud started in the late 1970s, more than two decades before Perez and O’Hara were hired. When the programmers discovered how essential their skills were to the fraud, they allegedly extorted higher salaries and bonuses out of Madoff after confronting him in his office in 2006.
During hours of testimony yesterday, some jurors closed their eyes for several minutes at a time while others shook their heads or yawned. Others appeared to pay close attention.

Visiting Judges

During a break, U.S. District Judge Laura Taylor Swain, who is overseeing the trial, spoke with a group of judges visiting from Kosovo who were observing the case for the day. She apologized to the group for the technical nature of the testimony and said it was important. An interpreter translated for them into Albanian.
During his cross-examination today by O’Hara’s lawyer Gordon Mehler, Dietrich said he didn’t have firsthand knowledge of who instructed the programmers to carry out their tasks.
“You don’t know what role Bernie Madoff had in programs he wanted created?” Mehler asked.
“No, I don’t,” Dietrich said.
Dietrich also said it wasn’t clear who created Madoff’s programs before Perez and O’Hara started working at the firm. The AS400 was installed at the company in 1993.
“So from your analysis you can’t tell who wrote what in the 1970s and 1980s, correct?” Mehler said.
“That is true,” Dietrich said.

Information Officer

Mehler drew the jury’s attention to evidence in the programs showing references to Liz Weintraub, a 25-year Madoff employee who was the con man’s chief information officer when the two programmers were hired. Weintraub died in February 2008, 10 months before the firm’s collapse.
The other defendants are Annette Bongiorno, an employee for 40 years who ran the investment advisory unit where the fraud occurred; Joann Crupi, who managed large accounts; and Daniel Bonventre, who oversaw the broker-dealer and proprietary trading operations where real trading took place.
Prosecutors, who may finish presenting evidence as soon as next week, asked Swain for permission to show the jury dozens of new charts depicting Bonventre’s “card swipes” for entering the secured investment-advisory unit within Madoff’s offices from 2005 to 2008. The former executive has argued that he wasn’t involved with the business where the fraud occurred, and that he worked on a different floor of the building.

Card Log

Bonventre’s defense lawyer Andrew Frisch asked Swain in a letter yesterday to block the move, arguing it’s too late in the case for his team to analyze the 35,000-page log of card-swipe activity for the lipstick-shaped skyscraper on 3rd Avenue in Midtown Manhattan, where Madoff’s offices were located.
Crupi’s lawyer Eric Breslin also asked Swain to block the U.S. from using a new set of “misleading and confusing” charts showing call logs between his client and Madoff’s former finance chief, Frank DiPascali, in the days before Madoff’s arrest.
DiPascali, who pleaded guilty in the case and testified as the government’s key witness, said he met with Crupi at a Panera Bread in New Jersey the weekend after Madoff confessed to him that the Ponzi scheme was about to collapse. DiPascali said he and Crupi had met to plan for operations the next week, including scheduling wires for millions of dollars to the company’s top clients and insiders.
“The only purpose of this exhibit is to suggest something nefarious must have happened at Panera Bread because the parties called each other multiple times,” Breslin said in a letter to Swain. “This is no more than argument.”
Madoff, 75, pleaded guilty to fraud in 2009 and is serving a 150-year sentence at a federal prison in North Carolina. Seven of his employees also pleaded guilty to crimes associated with the con man’s operations.
The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Erik Larson in federal court in Manhattan at
To contact the editor responsible for this story: Michael Hytha at

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