Two former employees for Bernard Madoff programmed an old IBM computer to generate false records that concealed the crooked financier's massive Ponzi scheme and were given hush money when they threatened to stop lying, federal prosecutors said Friday.
Madoff gave orders to pay the pair "whatever they wanted to keep them happy," a criminal complaint said.
The complaint relies heavily on inside information provided by Madoff's chief financial officer, Frank DiPascali, who is cooperating after pleading guilty in August.
The computer programmers, Jerome O'Hara, of Malverne, N.Y., and George Perez, of East Brunswick, N.J., were arrested at dawn Friday at their homes on charges including conspiracy and falsifying records.
Both were released on $1 million bond after a brief hearing Friday in federal court in Manhattan. Their attorneys had no comment.
"Without the help of O'Hara and Perez, the Madoff fraud would not have been possible," George S. Canellos, director of the Securities and Exchange Commission's New York Regional Office, said in a statement.
The SEC brought similar charges against the men on Friday in a parallel civil complaint.
O'Hara and Perez were hired by Madoff's firm in the early 1990s to develop and maintain programs using a computer known as "House 17." The programs allowed Madoff to generate account statements for thousands of clients "that purported to confirm the purchases of securities that, in fact, had not been purchased," the complaint said.
DiPascali has told investigators that in 2001, Madoff become alarmed by news report that his phony returns were too good to be true. Madoff "attempted to prepare for increased scrutiny" by the SEC by having O'Hara and Perez fabricate a second set of books that would throw regulators off the trail, the complaint said.
In what the SEC called "a crisis of conscience" in 2006, O'Hara and Perez deleted 218 of the 225 special programs from the House 17 computer, and withdrew thousands of dollars from their own accounts with the firm, authorities said.
DiPascali said that at a meeting the pair told Madoff "that they would no longer lie for him." Handwritten notes found later by FBI agents in O'Hara's desk read, "I won't lie any longer. Next time, I say 'ask Frank.'"
DiPascali said Madoff responded by ordering him to buy their silence. They both received $60,000 bonuses and 25 percent pay raises, the complaint said.
"Their subterfuge was designed to conceal the fraud from regulators and others, and when they told Madoff they would no longer lie for him, their continued complicity was bought for a price," Joseph Demarest, head of the FBI's New York office, said in statement.
Madoff, 71, was sentenced in June to 150 years in prison for orchestrating a decades-long Ponzi scheme in which investors are paid with other investors' money rather than actual profits on their investment. The scheme destroyed thousands of people's life savings and wrecked charities.
O'Hara, 46, and Perez, 43, face up to 30 years in prison if convicted on all counts.