Madoff staff 'used code to trick auditors'
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 has been 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 US Securities and Exchange Commission and HSBC to perform tasks such as assigning random international banks as counterparties to fake trades and making false Depository Trust Co. statements, Richard Dietrich, a senior technician at IBM, testified on Monday (local time) in federal court in New York.
The programmers used "a variety of techniques" for generating "pseudo-randomised" 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 trial is the first stemming from Madoff's US$17 billion (NZ$20.64bn) 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 explained to the jury hundreds of lines of code contained in dozens of linked programs that were 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 4am and 8.59am 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.
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.
Dietrich is acting as an expert witness for US prosecutors after analysing computers seized from Madoff's Midtown Manhattan offices.
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 realise the code was being used for a fraud. They both pleaded not guilty.
The US 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.
Prosecutors said during their opening statements that 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.
During hours of testimony on Monday, some jurors closed their eyes for several minutes at a time, while others shook their heads or yawned; others appeared to pay close attention.
During a break, US 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 apologised to the group for the technical nature of the testimony and said it was important. An interpreter translated for them into Albanian.
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.
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.
- WP Bloom