Bernard Madoff's longtime accountant was arrested on fraud charges Wednesday, accused of aiding the man who has admitted cheating 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 those who they believe helped Madoff fool 4,800 investors into thinking that their longtime 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. Experts in accounting said it would be preposterous for such a tiny firm to audit properly an operation the size of Madoff's.
He had served 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 works out to $144,000 to $174,000 a year.
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, did not immediately return a phone call Wednesday. 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.
Illusion of legitimacy
However, Dassin said: "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."
In a Ponzi scheme, early investors are paid with money raised from later investors.
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 agency said 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.
The SEC 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.
Prosecutors said that as far back as 1995, Friehling failed to maintain professional independence from Madoff. They said he or his wife had an account with Madoff that exceeded $500,000, the maximum amount under SEC rules that an auditor can invest with a client and still maintain independence.
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.
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 had previously described him as one of Madoff's victims and said he was in financial ruin because of the fraud.
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.
As recently as November, Madoff notified investors that they had about $65 billion in their accounts. Investigators say they have recovered only about $1 billion.
Prosecutors have said they believe Madoff's fraud started in the 1980s.