NEW YORK, N.Y. – In the many years he spent as a trader at Bernard L. Madoff Investment Securities LLC, David Kugel learned that investments that Madoff claimed to be making for clients were fiction.
Kugel, 68, knew that because he was instrumental in concocting the phoney trades. But he always kept his mouth shut.
Madoff “was my boss,” he testified at the trial of five former Madoff employees in federal court in Manhattan. “If he asked me to do something, I gave it to him. I didn’t question him. … I believed him.”
Prosecutors are seeking to use Kugel’s testimony — the first by a co-operator in the Madoff investigation — to show how he and other insiders purposely stayed blindly loyal to Madoff while becoming wealthy off his fraud.
But the testimony also suggested some complexities in the don’t-ask-don’t-tell environment: By Kugel’s account, there was a belief that Madoff was working his investment magic in ways he wasn’t revealing.
“I always thought he invested in shopping centres, foreign currencies and other ventures,” Kugel testified. “A Ponzi scheme? … I didn’t think he was doing that.”
When asked where all the money was going, Kugel told jurors: “I thought it was being invested. I didn’t know in exactly what.”
The world now knows that what Madoff was paying out as profits was actually the cash flow from new investors — the largest Ponzi scheme in history. By the time fraud was revealed in 2008, he admitted the nearly $68 billion he claimed existed in accounts was actually only a few hundred million dollars.
The collapse of Madoff’s private investment business ended up costing clients nearly $20 billion. A court-appointed trustee has recovered much of the money by forcing those customers who received big payouts from Madoff to return the funds.
The victims included some big names and influential people who were Madoff visitors: During Kugel’s weeklong testimony, prosecutors displayed a thank-you note the firm had received from retired baseball player Sandy Koufaxe. During testimony by another former Madoff employee, Eleanor Squillari, it was revealed that author Tom Clancy visited the offices when he was writing a book about automated trading. She said she saw U.S. Sen. Chuck Schumer, D-N.Y., visit, and the late U.S. Sen. Frank Lautenberg, D-N.J., was a customer.
Prosecutors have described the defendants as “necessary players” in Madoff’s fraud.
They allege that Annette Bongiorno and account manager JoAnn Crupi used old stock tables to fabricate account statements and other fake records intended to dupe clients by showing steady returns even during economic downturns; that computer programmers Jerome O’Hara and George Perez developed a software program that automated the scheme; and that Daniel Bonventre, director of operations for investments, kept three separate of books on the business designed to fool the Securities and Exchange Commission, banks or anyone else who examined them.
The defendants also rewarded themselves with tens of millions of dollars in salary and bonuses from a “slush fund” of stolen money, including $2.5 million for a beach house for Crupi as the Ponzi scheme was falling apart, prosecutors say.
While the defendants have denied the charges, Kugel and four other former employees, including his son, have pleaded guilty and agreed to co-operate in the case. The trial was scheduled to resume Tuesday.
Kugel, who worked with Madoff for 36 years, testified at a trial expected to last months that he spent more than an hour a week from the mid-1970s to the mid-1990s fabricating trades that he gave to Bongiorno and later Crupi.
Madoff “asked me to do the math to calculate the returns,” he said. Asked by a prosecutor whether his boss was good at math, the witness responded: “In some aspects, yes; in some aspects, no. He had trouble with long division.”
Kugel described the firm as “a friendly place to work” and prosecutors showed photographs of other employees at Kugel family social functions. But at times he looked upset as he recalled assuring his family that investing with Madoff was safe. And he had trouble blaming Madoff.
“I looked up to him. I admired him. He was my mentor and I believed in him. … I loved working there,” he said. “I’m mad at myself for not realizing certain things and doing certain things.”
When the scheme was exposed, he testified, the phoney account statements showed that his daughter lost her $500,000 account; his son an account worth $600,000 to $700,000; his mother more than $500,000; his brother and sister more than $2 million in a combined account and he lost more than $20 million.
Kugel testified that at various points Madoff had indicated, in truth, the returns were coming from secret investments overseas.
“Did you ever just ask him, ‘Why don’t you just say that?'” a prosecutor asked him.
“I didn’t,” he responded.