You Gotta Be Kidding Me!

Imagine being complicit in the largest financial fraud in history and at the time of sentencing you’re faced with the prospect of serving 114 years in prison. Suddenly, the judge sentences you to time served, two years’ probation, a year under house arrest and 250 hours of community service.

If it were me, I would immediately head to the nearest convenience store or gas station and buy $100 worth of Powerball tickets.

But that’s exactly the “sentence” for one David Friehling, the accountant who signed off on phony audits for Bernie Madoff, whose unprecedented Ponzi scheme caused more than $17 billion in investor losses when the scam collapsed in 2008.

Friehling, whose testimony was critical to Madoff’s prosecution, claimed he never conducted a real audit of Madoff Securities because he always believed the owner at his word. Sort of like my brother in law promising me in 1999 that he would not only repay my loan to him, but with interest as well.

Care to venture a guess on whether I ever saw that money again?

Friehling pleaded guilty to nine counts including securities fraud, investment advisor fraud, and obstructing tax law administration. His aiding and abetting in the fraud caused the loss of life savings for his father, his mother in law, and a number of nieces and nephews.

One of the things I often wondered about this case is why it never raised a red flag with anyone that a 3-person storefront accounting firm located in a strip mall in suburban Rockland County, NY, was the auditor for a multi-billion dollar investment firm.

You would have thought that would have been Big Four territory or, at a minimum, a Top 10 firm in a revenue tier just below that.

I also found it ironic that Friehling used to author an auditing column for The Trusted Professional, one of the house organs for the New York State Society of CPAs.

I would also place a significant amount of blame on the Securities and Exchange Commission, who received repeated warnings about those impossible 18-20 percent annual returns that Madoff Securities managed to post but failed to follow up other than a cursory examination.

In another great irony, one of Madoff’s high-profile victims, Fred Wilpon, the co-owner of the New York Mets baseball club, was recently appointed a member of Major League Baseball’s financial committee. Not exactly someone I would entrust to manage my retirement portfolio – meager as it is.

When the accounting scandals of the late 1990s and early 2000s began to unfold, I covered a story where someone who perpetuated a fraud similar to the actions of Friehling, received 24 years in prison. Just think, had he pleaded to second degree manslaughter instead, he would have served just 12 years.

I’m sure there are scores of burned investors scrambling to recover their life savings who would have a very different idea of an ideal punishment for Mr. Friehling.

And much of it could probably not be printed here.