Tuesday, August 11, 2009

What Will Frank DiPascali Say About the Bernie Madoff Scandal?

Frank DiPascali, depicted by the government as Bernie Madoff's right hand man, pled guilty today in the federal court in Manhattan. The charges against him include ten felony counts, enough for a maximum 125-year sentence. If imposed, that would be close to Bernie's 150 year sentence. But DiPascali will probably get something much less than 125 years.

Unlike Bernie, DiPascali entered into a cooperation agreement with the government. Although the plea agreement isn't public, it likely requires DiPascali to reveal everything he knows about the Madoff scandal. At age 52, DiPascali has a chance, by singing loudly and at length about every crime he's aware of, to avoid a lifetime sentence. It's clear that's his goal.

Bernie, on the other hand, has refused to cooperate. As we discussed previously (see http://blogger.uncleleosden.com/2009/06/will-bernie-madoff-now-talk.html), there are pressures on Bernie to talk. Things have only gotten worse for him today, with DiPascali getting friendly with the government.

In the "information" (the government's document setting forth the criminal charges) and in the "complaint" (a document containing civil charges) filed simultaneously by the SEC against DiPascali, one gets the picture that contrary to Bernie's claims, he had a number of people helping him out. DiPascali and other "co-conspirators" allegedly fabricated documents and misled investors, the government, and auditors. They evidently enjoyed lying to the SEC, because they supposedly did it early (beginning in 1992) and often (again in 2004, 2005 and 2006).

Rather intriguing are the allegations that the fraud went back to at least the 1980s, and that in 1992, things almost fell apart when Bernie had to prove that he actually held some $300 million in assets for clients he got through a firm called Avelleno & Bienes. The SEC sued Avelleno & Bienes, and a receiver appointed by the court in that case asked for redemption of all accounts of A&B customers and records of those accounts. Bernie had to scramble to come up with $300 million actual dollars while DiPascali helped to fabricate phony documentation. They were successful in deceiving the receiver and the SEC, and many A&B clients returned to Madoff to be defrauded further. (This shows you the allure of Ponzi schemes--when the culprits successfully meet withdrawal requests, many victims think everything is legit and come back to be fleeced again.)

This may have been a critical moment in Bernie's Ponzi scheme. If it had been exposed in 1992, the total loss might have been in the hundreds of millions or low billions--a very large fraud, but nothing on the scale of the ultimate scam. But Bernie thwarted any possibility of that by coming up with the $300 million needed for the redemptions.

Bernie's ability to come up with this much cash in 1992 raises interesting questions. Since the scam was probably much smaller in those days, with fewer feeder funds and what not, how did Bernie come up with such a big pile of dinero so quickly? There are allegations in the court papers that in recent years the Madoff firm kept well-funded bank accounts at J.P. Morgan Chase as a reserve against customer redemption requests (in other words, the crooks were prudent about taking steps to keep the fraud going). But did they have a reserve fund in 1992? If so, was it funded with $300 million (probably not, since the SEC complaint says that Bernie "scrambled" to raise the money).

Since Bernie didn't hold real assets, but ran a fraud, he couldn't have simply gone to his neighborhood bank, pledged some collateral, and got a $300 million loan. He was running a criminal enterprise, not a legitimate business. In the world of crime, there are ways to get loans. But they tend to be expensive, and repayment is very important unless you want to be fitted with really heavy shoes. Is this why Bernie has been mum? Are there investors in, lenders to, or owners of his scheme whose identities he can't afford to reveal no matter where he is?

Today's court papers also reveal that DiPascali made off with more than $5 million of investor funds by siphoning them into accounts he personally controlled. That, it appears, was boat money and other such pocket change. It's unclear whether Bernie knew about DiPascali's sticky fingers--when you're stealing tens of billions, the disappearance of a few million might go unnoticed. But perhaps DiPascali wasn't alone in pinching off a few pennies here and there. Perhaps Bernie quietly stashed a few nickels in places he doesn't want to reveal.

You can expect that DiPascali will name everyone in the Madoff organization or elsewhere who was involved in the nastiness. It would improve his prospects at the sentencing hearing (conveniently set for ten months from now to give him plenty of time to sing) if he can truthfully finger high profile people (like members of Bernie's family). His "co-conspirators" are now under the gun to come in out of the cold and cut deals with the government to sing themselves. Otherwise, they might be sitting ducks once the prosecutors have DiPascali's evidence. The tabloid quality of this story could improve.

As for Bernie, the enigma of his silence only increases. He could have fingered DiPascali and other "co-conspirators" to get a chance at a lesser sentence. That he didn't suggests he wants to be in prison (a possibility we discussed in http://blogger.uncleleosden.com/2009/03/what-bernie-madoff-told-us-today.html). Now, with DiPascali doing his best Pavarotti imitation, Bernie's lost some leverage. We may never learn why Bernie's taken a vow of silence. But, then again, with the number of indicted songbirds likely to increase, perhaps we will. Stay tuned.


Ed said...

WHy is it so hard to find a photo of DiPascali on the internet? I have searched and found only one of the court artist's renderings, and in that, we only get the back of his head????

Leo Wang said...

Ed, if you search Google Images for Frank DiPascali, you'll find a very small number of photos of him in news reports. One seems to be about 25 years old, but the others appear to be more recent.