Securities Law Blog

Bernie Madoff's accountant was arrested on fraud charges Wednesday as authorities blamed him for failing to make the most basic auditing checks that would have exposed an epic fraud that cost investors billions of dollars.

David Friehling is the first person to be arrested in the scandal since Madoff turned himself in, and his prosecution signals that the government is intent on bringing Madoff's associates to justice as they try to figure out who helped him carry out the fraud.

According to prosecutors, the 49-year-old Friehling essentially rubber-stamped Madoff's books for 17 years, serving as Madoff's auditor from 1991 through 2008 while operating from a discreet building in suburban New York.

Authorities said that if Friehling had done his job, Madoff's financial statements would have shown his company owed tens of billions of dollars to his customers and was insolvent.
"Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money," said acting U.S. Attorney Lev L. Dassin.

The relationship between the accountant and Madoff was so cozy that Friehling and his family pulled $5.5 million from accounts with Madoff since 2000 and had a balance of more than $14 million as recently as November. Prosecutors said it's a conflict for accountants to have such large sums invested with clients.

Friehling did not comment as he left the courthouse after being released on bail
Prosecutors now believe that Madoff received help--even if only in the category of malfeasance as opposed to misfeasance--from Friehling as he carried out his fraud, although Friehling is not charged with knowing about his Ponzi scheme.

The government says Friehling did not meaningfully audit Madoff's business or confirm that securities purportedly held by Madoff's company on behalf of its customers even existed.
The Securities and Exchange Commission said Friehling instead pretended to conduct minimal audit procedures of certain accounts to make it seem he was conducting an audit and then failed to document his purported findings and conclusions as he was required to do.

Prosecutors said he even failed to examine a bank account through which billions of dollars flowed.

"He did little or no testing, no verification of the `facts' he certified," said Joseph M. Demarest, head of New York's FBI office. "His job was not merely to rubber-stamp statements he didn't verify."

The SEC said Friehling took steps to hide his personal investment with Madoff, including replacing his own name on his Madoff account with his wife's name and later naming the account the "Friehling Investment Fund" to conceal the conflict of interest.

The SEC also accused Friehling of lying to the American Institute of Certified Public Accountants for years, denying he conducted any audit work, because he was afraid that his work for Madoff would be subject to peer review.

The accounting industry organization said Wednesday it had completed its ethics investigation of Friehling's conduct as an auditor of a brokerage firm and had expelled him for "failure to cooperate."

If convicted, Friehling faces up to 105 years in prison. He is charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports with the SEC.
The fraud charges against Friehling come just days after the founder of his auditing firm, Jerome Horowitz, died of cancer last week at the age of 80, a family friend said.

Horowitz handled Madoff's books for many years before turning the business over to Friehling, who is his son-in-law.