SEC Charges Longtime Madoff Employee With Creating Fake Trades

November 21, 2011

The SEC charged longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that David Kugel, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly 40 years, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be formulated into fictitious trading on investors’ account statements.  Kugel’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years.

The SEC previously charged two other longtime Madoff employees Annette Bongiorno and JoAnn Crupi for their roles in producing phony account statements that were sent to Madoff investors.  According to the SEC’s complaint, Bongiorno and Crupi and other staff in Madoff’s investment advisory (IA) operations used the information from Kugel to formulate fictitious trades to appear on investor account statements.  The SEC alleges that sometime in the early 1970s, Madoff informed Kugel that BMIS managed money for outside clients, and asked Kugel to provide the firm’s IA operations with backdated convertible arbitrage trades for inclusion on investor account statements.  Some of these trades replicated successful trades that Kugel had actually made for BMIS proprietary trading operations; other trades were based on historical information Kugel obtained from old newspapers.

According to the SEC’s complaint, Bongiorno and Crupi regularly asked Kugel for backdated information about trades amounting to millions of dollars.  After Kugel provided the information, Crupi and Bongiorno would then design trades that totaled that amount.  These fictitious trades were highly profitable on an annualized basis, and appeared on account statements and trade confirmations sent to investors.  Kugel, who opened his own BMIS account, received these account statements and trade confirmations as well.  The SEC alleges that Kugel provided backdated trade information for IA accounts, including his own.  One 2007 trade in S&P index options earned Kugel more than $375,000.  Kugel withdrew almost $10 million from his BMIS IA accounts from 2001 to 2008.

Kugel agreed to settle the SEC’s civil charges.

Click here to access this order.


Enforcement Actions, Investment Advisers, Investment Companies