Bernard Madoff's broker-dealer and proprietary trading units were backed by “hundreds of millions of dollars” in stolen money from his fraudulent investment advisory business, a jury was told in the trial of five former employees accused of aiding the $17 billion Ponzi scheme.
Mr. Madoff funneled money intended for customer investments through his London-based operation and through external U.S. brokerage accounts so it could be used for rent, payroll and credit card payments at his businesses where real trading took place, Bruce Dubinsky, a government witness who analyzed the fraud in 2011, testified Tuesday in federal court in Manhattan.
“That's customer money -- the most sacred account in an investment advisory business,” Mr. Dubinsky told the panel of 12 jurors and six alternates. “You can't stick your hand in the piggy bank and use it for other means.”
One of the defendants, Daniel Bonventre, who oversaw the broker-dealer and proprietary trading operations, argues he wasn't aware of the fraud because Mr. Madoff lied to him, and because he didn't work in the investment advisory unit. The U.S. alleges Bonventre knew his business benefited from fraud.
In his guilty plea in 2009, Mr. Madoff said the market-making and proprietary trading side of his firm was “legitimate” while admitting he ran the scheme from the advisory unit. The judge overseeing the liquidation of Madoff's operations to help repay victims approved the sale of the market-making business for as much $25.5 million in April 2009.
Prosecutors Tuesday showed the jury copies of internal documents including a Dec. 28, 1999, check for $31 million from the investment advisory unit paid to the primary bank account of the broker-dealer unit. Mr. Dubinsky, a managing director at Duff & Phelps LLC, said in his testimony that that transaction and others like it weren't properly accounted for.
“It wasn't booked as anything other than a fake security,” he said.
The other defendants, accused of conspiring to trick customers and regulators for years, are Annette Bongiorno and Joann Crupi, who ran the investment adviser and managed large accounts, and computer programmers George Perez and Jerome O'Hara, who allegedly automated the creation of millions of fake documents. All five have pleaded not guilty.
The 2009 charges against Mr. Madoff alleged he directed the transfer of $250 million from investment advisory clients' funds to his market making and proprietary trading businesses. Those transfers, through his London business, gave the false appearance that he was conducting transactions in Europe on behalf of investors, the U.S. said.
Mr. Madoff is serving a 150-year sentence at a federal prison in North Carolina for running the world's biggest Ponzi scheme, which deprived investors of $17 billion in principal and billions more in fake profit customers believed was being held in their accounts.
U.S. District Judge Laura Taylor Swain said the trial may last as long as five months.