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Feds Arrest Madoff Accountant

Mar 18, 2009 | Parker Waichman LLP

Bernard Madoff's accountant has been charged in connection with the jailed swindler's Ponzi scheme.  According to ABC News, David Friehling  has turned himself in and has been charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports to the Securities and Exchange Commission.

U.S. Prosecutors have not accused Friehling of knowing about Madoff's scheme.   In fact, he and his wife had an account of about $500,000 with Madoff, ABC said.  However, prosecutors allege that Friehling deceived investors by falsely certifying that he audited the financial statements of Madoff's business. That allowed Madoff to maintain the illusion that he was legitimately investing his clients' money, prosecutors said.  

According to prosecutors, Madoff's firm paid Friehling about $12,000 to $14,500 per month between 2004 and 2007.  He is the first person other than Madoff to face charges related to the Ponzi scheme.

Madoff himself pleaded guilty to 11 counts of securities fraud.  He now faces up to 150 years in prison. In addition to a long jail term, U.S. prosecutors are also seeking as much as $170 billion in forfeited assets from Madoff. According to the Los Angeles Times, that amount includes all of the money that moved through the Madoff accounts since the early 1980s, when the government says the investor fraud began.

Judge Denny Chin revoked Madoff's bail after accepting his guilty plea, saying that Madoff had means to flee and an incentive to do so because of his age.  Since March 12, Madoff has been held at the Metropolitan Correctional Center in lower Manhattan.

According to CNN, Madoff's lawyers are trying to have his $10 million bail reinstated, so that he can stay out of jail until his June 16 sentencing.  He is scheduled to appear tomorrow at the  U.S. Court of Appeal for the 2nd Circuit to appeal the bail revocation.

Meanwhile, investors defrauded by Madoff got a rare bit of good news yesterday.  According to a report on Bloomberg.com, the IRS will allow them to claim some of their Madoff losses as deductions on their tax returns. Under the new guidance issued yesterday, the losses are classified  as theft losses rather than capital losses, giving most victims a bigger deduction, Bloomberg.com said.   In addition, a special limitation that sometimes reduces deductions by 10 percent won’t apply.

The IRS guidance says defrauded investors can claim theft losses not only for amounts originally invested, but also for fictitious income.  The new rules apply immediately, Bloomberg said, and will be applicable to victims of all Ponzi schemes.

Investors who sue Madoff and may receive some settlement are limited to a 75 percent theft-loss deduction. Those who don’t sue can deduct 95 percent of their losses immediately and claim the rest at a later date if they receive none of their funds back, Bloomberg said.  


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