- The Washington Times - Thursday, March 19, 2009

NEW YORK (AP) | Bernard Madoff’s longtime 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 three months ago. He was released on $2.5 million bail. He faces up to 105 years in prison if convicted. He is charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports with the Securities and Exchange Commission.

Prosecutors say the 49-year-old Mr. 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 Mr. 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 Mr. 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.

Mr. Friehling did not comment as he left the courthouse after being released on bail, and his lawyer, Andrew Lankler, also declined comment.

Madoff, 70, confessed to his sons in early December that his investment empire was actually a giant Ponzi scheme in which he paid off old investors with money from new ones. Though he reported to 4,800 investors that they had $65 billion in November, investigators have found only about $1 billion.

He pleaded guilty last week and could spend the rest of his life in prison after he is sentenced in June.

Prosecutors now believe that Madoff received help from Mr. Friehling as he carried out his fraud, although Mr. Friehling is not charged with knowing about his Ponzi scheme.

The government says Mr. 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 Mr. 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 also accused Mr. 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 his conduct as an auditor of a brokerage firm and had expelled him for “failure to cooperate.”

He was paid a tidy sum by Madoff: Prosecutors said he made between $12,000 and $14,500 a month from 2004 to 2007, amounting to $144,000 to $174,000 annually.

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