David Friehling, Bernard Madoff's "Pretend" Accountant, Arrested for Securities Fraud: Another Breakdown in the System?

Some have suggested that Bernard "Bernie" Madoff's Ponzi scheme was far too large and widespread for him to have pulled it off alone. Various reports have suggested that his wife, Ruth, would be pursued for her assets, and also possibly charged. Then their sons' assets were targeted by the government. However, according to the AP, it turns out that CPA "David Friehling, 49, who ran a small storefront firm in a New York suburb, is the first person besides Madoff to be arrested on criminal charges in the long-running fraud."

The AP summarized the allegations indicating that Friehling:

"'pretended' to conduct audits of the confessed swindler's investment firm, authorities said Wednesday in charging him with fraud going back 17 years in the biggest investment scheme on Wall Street."

Further, the AP noted how the SEC's complaint alleged Friehling and his CPA firm:

"did not perform anything remotely resembling an audit" of Madoff's money management firm or try to confirm that stocks that Madoff had purportedly bought for customers even existed.

Undoubtedly many will wonder what, if any, oversight failures were involved in this case. However, the SEC's complaint indicates that Friehling "falsely represented" to the American Institute of Certified Public Accountants (AICPA) that he was not engaged in accounting work. In this manner, he "avoided the AICPA's peer review requirements" which could well have discovered the misconduct far earlier. Nevertheless, the allegations in the civil and criminal complaints are far-reaching and may leave the door open to the possibility that the web of fraud is just starting to unravel.

As noted by the AP, "Friehling's fraud ran from 1991 to 2008, and according to the SEC, he 'essentially sold his license to Madoff for more than 17 years while Madoff's Ponzi scheme went undetected.'" Below are links to key legal documents and news coverage in the case.

• AP: Madoff Accountant Arrested On Fraud Charges (CNBC)
• Criminal Complaint (U.S. v. Friehling) (FindLaw)
• Civil Complaint (S.E.C. v. Friehling, et al.) (FindLaw)
• Notice of Intent to Seek Forfeiture (From Ruth Madoff) (FindLaw)
• Notice of Intent to Seek Forfeiture (From Madoff's Sons) (FindLaw)
• White Collar Crime FAQ (provided by Blumberg & Associates)
• AICPA Code of Professional Conduct (American Institute of Certified Public Accountants)
• Generally Accepted Auditing Standards (GAAS) [PDF] (AICPA)
• Boston Herald: Prosecutors will seek Bernard Madoff’s wife’s money too