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January 27, 2023

#FBF: The Time Bernie Madoff’s CFO Fooled a KPMG Auditor With a Refrigerated Trade Ledger

The Madoff scandal crept back into the news recently, as Frank DiPascali, a key figure in the both the Ponzi scheme and the trial his of former associates, died of lung cancer last week. Since speaking ill of the dead is typically frowned upon, it makes sense to pick on an auditor instead. 

Lucky for us, there's a brief profile of DiPascali in the New York Times Magazine with the perfect anecdote:

One morning years ago, an auditor from the firm KPMG paid a visit to Bernard L. Madoff Investment Securities’ offices at 885 Third Avenue, the sleek, tubular Midtown office tower known as the Lipstick Building. The auditor informed Frank DiPascali Jr., Madoff’s de facto chief financial officer, that he was conducting due diligence for a major European bank and asked to see a trade ledger — a roster of Madoff’s transaction records — for the investment fund.
The trade ledger should have backed up what Madoff told his investors he was doing with their money: periodically buying and selling large volumes of blue-chip stocks and, in the intervals between those trades, parking the cash safely in government securities. What Madoff was actually doing, of course, was using some investors’ money to pay “profits” to other investors, which is the classic Ponzi-scheme model, executed at a scale no one had dreamed of before. As no trading was being done, no trade ledger existed. And if DiPascali couldn’t produce one for the auditor, the whole scheme would be exposed.
At this point, most people would think they were finished, dead in the water, that the jig was up. But not FDP:  

DiPascali made a phone call, and his staff quickly put together a fake ledger on a computer to reflect the billions of shares the accounts in question supposedly held. But the document, literally hot off the office printer, needed its recent origin disguised. As DiPascali later told the story, he “did a little soft shoe” and chatted to distract the auditor in a conference room while his staff quickly cooled the newly minted ledger in an office refrigerator, then tossed it around “like a medicine ball” to give it the patina of age and hard use. DiPascali handed it over, and the auditor left, satisfied.

The obvious lesson here is that a credulous auditor and a CFO/crook who can improvise is a dangerous combination. Stay vigilant, opiners.    


Image: Wikipedia

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