Risk Management

First, Madoff. Now? His Accountant.

Federal prosecutors arrest David Friehling on charges that could lead to 105 years in prison, while SEC files its own false-representation allegati...
Stephen TaubMarch 18, 2009

Federal prosecutors turned from Bernard Madoff — now in jail awaiting sentencing — and arrested his accountant on charges of aiding and abetting Madoff’s alleged $50 billion pyramid investment scheme.

David G. Friehling, who surrendered this morning, was charged with six counts of securities fraud, aiding and abetting investment-adviser fraud, and filing false audit reports with the Securities and Exchange Commission, according to Lev L. Dassin, acting U.S. attorney for the Southern District of New York.

In a separate civil complaint, the SEC charged the auditor with committing securities fraud by falsely representing that they had conducted legitimate audits, when in fact they had not.

According to the criminal complaint, Friehling was the sole practitioner at Friehling & Horowitz, which from 1991 through 2008 was retained by Bernard L. Madoff Investment Securities LLC to audit its financial statements. Friehling falsely certified that he had prepared audited financial statements, including balance sheets, statements of income, statements of cash flows, and reports on internal control, it is charged. The Madoff firm paid Friehling about $12,000 to $14,500 per month for his services between 2004 and 2007, according to prosecutors.

They allege that Friehling failed to conduct audits that complied with GAAS and GAAP by failing to conduct independent verification of the Madoff firm’s assets; review material sources of its revenue, including commissions; examine a bank account through which billions of dollars of its client funds flowed; verify liabilities related to its client accounts; and verify purchase and custody of securities.

Friehling, who faces up to 105 years in prison, was also accused of failing to test internal controls, including areas such as the Madoff firm’s redemption of client funds, the payment of invoices for corporate expenses, or the purchase of securities on behalf of its clients. The accountant also was accused of not being independent. The government said that he and his wife had an account with Madoff’s firm with a year-end net equity of more than $500,000 — the maximum amount that, under SEC rules, he could have invested with a broker-dealer client and still maintain his independence.

“Mr. Friehling is charged with crimes that represent a serious breach of the investing public’s trust,” said Dassin. “Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff’s business. Mr. Friehling’s deception helped foster the illusion that Mr. Madoff legitimately invested his clients’ money.”

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