Securities and Exchange Commission v. Frank DiPascali, Jr.

[Editor’s Note: This brief summarizes only the complaint filed by the Securities and Exchange Commission against Frank DiPascali, Jr.] Bernard Madoff was the owner of Bernard L. Madoff Investment Securities LLC (BMIS), a broker-dealer and investment adviser registered with the Securities and Exchange Commission (SEC) (plaintiff). Madoff was charged civilly and criminally with conducting a massive securities fraud at BMIS by falsely claiming to be pursuing a certain investment strategy on behalf of clients and preparing customer confirmations and account statements reflecting trades that never occurred. Frank DiPascali, Jr. (defendant) worked at BMIS for 35 years. The SEC filed a complaint alleging that DiPascali violated the books-and-records requirements of § 17(a) of the Securities and Exchange Act of 1934 and Rule 17a-3 thereunder by designing, preparing, and overseeing fictitious books and records to conceal Madoff’s fraud from investors, auditors, and regulators. The SEC alleged that DiPascali (1) helped to fabricate backdated and fictitious trades and record them in investor account records for the purpose of generating fictitious returns; (2) when the volume of investor accounts increased, helped Madoff identify basket trades that achieved a fictitious target rate of return and oversaw the computer system that allocated the fictitious trades to individual accounts and generated the trade confirmations and account statements that were mailed to investors; (3) knew that the trading was fictitious, no securities were ever purchased, transaction prices were picked after the fact to generate fictitious returns, no trade confirmations or account statements came from anywhere outside of BMIS, and investor funds were deposited in a bank account that was not reflected on the books and records of BMIS’s broker-dealer operation; and (4) oversaw the computer system for generating books and records reflecting fictitious trading in BMIS’s advisory accounts. The SEC also alleged that to help avoid detection of the fraudulent scheme during audits and examinations, DiPascali (1) created fake books and records for a small subset of special accounts that concealed the magnitude of the advisory accounts; (2) prepared alternate account statements and records for the special accounts to substantiate Madoff’s claim that securities that were never actually purchased were custodied someplace other than at BMIS; (3) created fake Depository Trust Company reports for those advisory accounts for which BMIS purported to hold custody of the assets; (4) created a list of option counterparties that were unlikely to be approached for verification and false trade blotters that included the counterparty information; and (5) used a random-number-generator program to respond to regulators’ request for order-execution information. The SEC sought injunctive relief, disgorgement, and civil money penalties.