Is Friehling’s Guilty Plea a Warning Shot to Madoff’s Family?

[WSJ_law_blog]

What are the takeaways from the news that David Friehling, Bernie Madoff’s former accountant, will be spending some time behind bars? (Friehling pleaded guilty to fraud and other charges Tuesday in connection with his auditing work for Madoff’s firm, but denied knowing about the underlying Ponzi scheme. Click here for the Dow Jones Newswires story, from Chad Bray; here for the NYT story.)

For starters, there’s a lesson to auditors and accountants, who maybe haven’t brushed up on the GAAP rules in a bit. Just accepting what a client tells you about his financial statements, without doing more, can get you into hot waster.

Friehling, 49 years old, admitted that he failed to conduct independent audits of Madoff’s firm’s financial statements, saying he took the information given to him at “face value.” Friehling denied knowledge of Madoff’s Ponzi scheme, and admitted losing about $500,000 with the firm himself. But that disclaimer was beside the point. The fraud charges stuck — and now Friehling faces years behind bars.

In what was “the biggest mistake of my life, I placed my trust in Bernard Madoff,” Friehling said. He was previously charged in the matter in March. Mr. Friehling will be allowed to remain free on $2.5 million bail pending sentencing, which is tentatively set for February.

In the NYT piece, reporter Diana Henriques focuses on a separate possible takeaway: that the criminal investigation of the Madoff fraud may be heading in a new direction — away from securities fraud and toward criminal tax cases.

Interestingly, in addition to the longstanding charges, Friehling pleaded guilty to three counts of obstructing the administration of the federal tax laws. These charges were only added by the government in the last few days.

According to Henriques, those additions may suggest that the government had recently learned that Friehling’s cooperation could help it build criminal tax cases against others in the Madoff drama, perhaps Madoff family members. At the plea hearing on Tuesday, assistant U.S. attorney Lisa Baroni said Friehling prepared false tax returns for Madoff and others, but declined to say who those others are. “Just ‘others’ at this time,” Baroni said.

Peter Chavkin, a lawyer for Ruth Madoff declined to comment to the NYT, as did a spokesman for Madoff’s sons, Andrew and Mark. John R. Wing, a lawyer for Peter Madoff, Madoff’s brother, declined to comment as well.

Finally, in other Madoff news, Patrick Littaye, co-founder of Access International Advisors LLC, became the first person charged in the French criminal investigation into investor losses from Madoff’s Ponzi scheme.

Littaye, 70, was charged with participating in a breach of trust, a crime punishable by as much as three years in prison. A judge was reviewing a Paris woman’s claims that she was tricked into putting money in Access International’s LuxAlpha Sicav-American Selection fund, which entrusted about 95 percent of its money to Madoff. Click here for the Bloomberg story.