Bernard Madoff Steered Dozens of Customers to Use the Defendant’s Services, and Madoff Personally Sought Tax and Business Advice from the Defendant
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that PAUL J. KONIGSBERG – a lawyer and accountant who provided services to numerous clients of Bernard L. Madoff Investment Securities (“Madoff Securities”), and who was a personal tax and business adviser to Madoff – pleaded guilty in Manhattan federal court before United States District Judge Laura Taylor Swain. KONIGBSERG pleaded guilty to a three-count superseding information charging him with one count of conspiracy to falsify the books and records of Madoff Securities and to obstruct the administration of the tax laws, as well as two substantive books and records counts. In addition to pleading guilty, KONIGSBERG has agreed to cooperate with the Government in its ongoing investigation of the fraud at Madoff Securities.
According to the superseding information, the plea agreement, and other documents filed in connection with the case:
KONIGSBERG, a lawyer and Certified Public Accountant, was the senior tax partner of Konigsberg Wolf & Co., P.C. (“Konigsberg Wolf”) and a minority shareholder of Madoff Securities International Limited, Madoff’s London-based affiliate, making KONIGSBERG the only person outside of the Madoff family to hold an ownership interest in either Madoff Securities or Madoff International.
Beginning in at least the early 1990s, Madoff began to steer several of his investors towards KONIGSBERG’s accounting practice, particularly certain long-time investors in whose accounts Madoff executed the most glaringly fraudulent transactions. By December 2008, when the scheme collapsed, Konigsberg Wolf was providing accounting services for Madoff Securities clients who aggregately held over 300 investment advisory accounts.
For example, after the death of one long-time Madoff client – who had recruited investors and so had been promised by Madoff corresponding annual commission payments in the form of guaranteed returns and fictitious, back-dated trades – Madoff encouraged the client’s widow to use KONIGSBERG as her accountant. Madoff and Frank DiPascali, Jr. – who has previously pleaded guilty for his role in the fraud and is cooperating with the Government – devised an investment “strategy” for the widow’s account: her money would be “invested” in United States Treasury bonds and cash equivalents for the first 11 months of each year, and in December, DiPascali would fabricate back-dated options trades in order to generate the promised returns. So, for instance, one of the widow’s accounts was invested in Treasuries and money market funds in January through November of 2003, resulting in net equity at the end of November 2003 of approximately $860,000. In January 2004, however, DiPascali back-dated fake options trades purportedly executed in December 2003 to generate an additional approximately $825,000, nearly doubling the value of the account. Each December, over the course of several years, KONIGSBERG called DiPascali to ensure that the widow’s accounts reflected the promised returns.
From time to time, moreover, Madoff and certain of his employees “amended” the holdings of some of his oldest clients, replacing statements reflecting one set of securities with revised statements, for the exact same time period, reflecting entirely different holdings and values. Because the existence of multiple, vastly different account statements for the same time risked exposing the fraud, Madoff could only ask certain trusted clients to return their statements in favor of the “amended” ones. Because KONIGSBERG serviced certain of Madoff’s most important accounts, however, he frequently returned statements in favor of the “amended” ones.
For example, in early 2003, Annette Bongiorno – one of the five defendants recently convicted of participating in Madoff’s massive fraud after a nearly six-month trial – created a year’s worth of profitable, back-dated trades in the account of another Madoff Securities client, who was also a client of KONIGSBERG’s. That client had suffered losses in a number of different investments in 2002, causing the client’s net worth to decline dramatically. In order to restore the client’s wealth, KONIGSBERG and the client went to Bongiorno’s office at Madoff Securities, and sat with her as she created and back-dated an entire year’s worth of profitable securities transactions and corresponding account statements for the client’s investment advisory account at Madoff Securities. Bongiorno then instructed KONIGSBERG and his client to return the original statements before receiving the new, “amended” statements. KONIGSBERG later used these back-dated, “amended” statements to prepare his client’s tax returns. Likewise, in 2008, KONIGSBERG sent back several months’ worth of statements for a different client, in favor of new ones reflecting millions of dollars in new transactions.
In addition to being paid for his accounting services by the dozens of clients referred to him by Madoff, KONIGSBERG also received payments directly from Madoff Securities of approximately $15,000 to $25,000 per month for over a decade. In addition, beginning in approximately 1992, KONIGSBERG arranged for a relative to be put on Madoff Securities’ payroll, receiving salary and employee benefits, despite not working at the firm. KONIGSBERG arranged for the relative to be paid by Madoff in lieu of accepting payments himself, despite the fact that the payments were on account of customers that KONIGSBERG recruited to invest with Madoff.
KONIGSBERG also provided tax and business advice to Madoff personally. For example, Madoff consulted KONIGSBERG about establishing Madoff Securities, which had for years been a sole proprietorship, as a Limited Liability Company. Madoff also consulted KONIGSBERG concerning accounting and bookkeeping issues in connection with Madoff International, the firm’s London affiliate.
In or about the early 1990s, Madoff consulted KONIGSBERG about the tax consequences of transferring funds to two other employees of Madoff Securities (“CC-1”and “CC-2”). KONIGSBERG advised Madoff that if the transfers were structured as loans and if CC-1 and CC-2 paid interest on those loans and paid back the principal of the loans, no taxes would be due and owing by either Madoff or by CC-1 or CC-2. Thereafter, KONIGSBERG arranged for a lawyer he worked with to draft promissory notes documenting the loans, and KONIGSBERG provided some of the financial terms of the loans, such as the applicable interest rate. The promissory notes therefore appeared to conform to the tax law, as Madoff, CC-1, and CC-2 desired. On December 10, 2008 – the day before Madoff was arrested – Madoff called KONIGSBERG to ask whether the loans had been converted into gifts, which would have created a substantial tax liability for Madoff. In fact, Madoff and KONIGSBERG had never discussed the possibility of reclassifying the loans into gifts, and KONIGSBERG told Madoff so.
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KONIGSBERG, 78, faces a total statutory maximum sentence of 30 years in prison. A chart identifying the maximum penalties for each of the charged offenses is attached to this release. The maximum penalties are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.
KONIGSBERG is also subject to mandatory restitution and criminal forfeiture and faces criminal fines up to twice the gross gain or loss derived from the offense. Pursuant to the agreement entered into with the Government, KONIGSBERG has agreed to forfeit $4.4 million. To the extent not already paid to the ongoing Securities Investor Protection Act liquidation proceedings of Madoff Securities, the forfeited funds will be used to compensate victims of the fraud through the Madoff Victim Fund, which is the victim remission fund established by the Manhattan U.S. Attorney to compensate victims of the fraud at Madoff Securities, and which has collected approximately $4 billion to date.
Judge Swain set a sentencing date for KONIGSBERG of September 19, 2014, at 2:00 p.m.
Mr. Bharara praised the investigative work of the Federal Bureau of Investigation, the Internal Revenue Service-Criminal Investigations, and the United States Department of Labor. He also thanked the U.S. Securities and Exchange Commission.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Since the inception of FFETF in November 2009, the Justice Department has filed more than 12,841 financial fraud cases against nearly 18,737 defendants including nearly 3,500 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Matthew L. Schwartz, John T. Zach, Randall W. Jackson, and Christopher D. Frey are in charge of the prosecution.