Bernard Madoff's longtime accountant was arrested on fraud charges today and accused of helping the disgraced money manager cheat thousands of investors out of billions of dollars in the past two decades.
The charges against David Friehling, 49, come as federal authorities turn their attention to people they believe helped Madoff fool 4,800 investors into thinking that their investments were growing comfortably each year. Friehling is the first person to be arrested since the Madoff scandal broke three months ago.
Friehling ran an accounting office in a nondescript suburban building north of New York City, and quickly drew scrutiny over how he could have not detected the fraud. Experts in accounting also said it would be preposterous for such a tiny firm to properly audit an operation the size of Madoff's.
Prosecutors said Friehling essentially rubber-stamped Madoff's books for 17 years, serving as Madoff's auditor from 1991 through 2008 while he worked as the sole practitioner at Friehling & Horowitz. He was paid a tidy sum by Madoff: Prosecutors said he made between $12,000 and $14,500 a month from 2004 to 2007. That amounts to $144,000 to $174,000 a year.
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.
"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."
Friehling faces up to 105 years in prison if he is convicted. He is charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports with the U.S. Securities and Exchange Commission.
Friehling's lawyer, Andrew Lankler, said in an email that he and his client had "no comment at this time." The accountant had a court appearance Wednesday afternoon in federal court.
Acting U.S. Attorney Lev L. Dassin said in a release that Friehling is not charged with knowing about Madoff's Ponzi scheme. However, Dassin said: "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."
Investigators also said that Friehling and his family had sizable investments with Madoff, accumulating a balance of more than $14 million by late last year and withdrawing more than $5.5 million since 2000. Prosecutors said it's a conflict of interest for an auditor to have such a large investment.
The SEC said Friehling also took steps to hide his 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 said 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 SEC 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.
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 fraud charges against Friehling come just days after the founder of his auditing firm died of cancer. Jerome Horowitz died 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.
Horowitz's lawyer, Latour "L.T." Lafferty, declined to immediately comment on his death or Friehling's arrest Wednesday, but had previously described the two accountants as victims of the scam who were unaware that fraud was taking place.
The strain of the Madoff scandal on Friehling began to show in recent months as he put his luxury home in Rockland County on the market.
A listing posted on the Web site of Prudential Rand Real Estate said the family is seeking $995,000 for the five-bedroom Colonial. The home was built in 1990 and has a swimming pool and 4,437 square feet of space.
Madoff, 70, pleaded guilty to securities fraud, perjury and other charges on Thursday and was immediately sent to prison to await a June sentencing, when he faces up to 150 years in prison.
During his plea, Madoff said he began a Ponzi scheme in the 1990s in response to the pain of a recession, thinking it would be a short-lived solution. He said he never recovered, though, and knew prison awaited him.
Investigators have said they believe investors may have originally put $17 billion or less into accounts with Madoff but that Madoff falsely told them in their financial statements that it had grown to as much as $65 billion.