Jailed financier Bernard Madoff's multibillion-dollar Ponzi scheme stretched back at least to the early 1970s, when his employees used historical information about stocks to create false trades that could be placed on customer statements, a former trader revealed as he pleaded guilty Monday to criminal charges.
David Kugel pleaded guilty in U.S. District Court in Manhattan to conspiracy, securities fraud, bank fraud, falsifying business records and falsifying the books of an investment adviser, charges that carry a potential penalty of up to 85 years in prison. A cooperation deal with prosecutors that leaves Kugel free on $3 million bail would earn him leniency at a sentencing tentatively scheduled for May 4. As part of the plea, he agreed to forfeit $3.5 million to the government.
The 66-year-old Kugel told Judge Laura Taylor Swain that he was engaging in fraud in the private investment wing of Madoff's Manhattan-based business in the early 1970s.
He said he was "deeply sorry." Kugel admitted that he helped create fake, backdated trades for Madoff's private investment business along with two others already charged in the Madoff fraud and others.
"I want the court to know I will do all I can to cooperate with the government," Kugel, of Manhasset, said at the outset of a statement he gave describing his fraud.
He said his deceit stretched from the early 1970s to Dec. 11, 2008, when Madoff revealed that a business he started in the 1960s had turned into a giant Ponzi scheme, causing the loss of $19.5 billion invested by thousands of people and institutions, including charities.
Madoff, who is serving 150 years in prison for orchestrating the largest Ponzi scheme in history, told the court during his guilty plea to fraud charges in March 2009 that the fraud had been going on less than two decades.
But Kugel said he and other Madoff employees were faking trades in the 1970s to give "the appearance of profitable trades when, in fact, no trading had occurred."
According to court papers, Kugel and others "at Madoff's request" began creating fake trades in the early 1970s that were included on statements sent to investors.
The Securities and Exchange Commission said Kugel had agreed to settle civil fraud charges that included the allegation that he withdrew nearly $10 million from 2001 to 2008 in "profits" from fictitious trading in his own account.
"Kugel helped Madoff maintain the elaborate and enduring facade that his clients were engaged in actual trading when in fact no such trading occurred," said George S. Canellos, director of the SEC's New York regional office. "Kugel withdrew millions of dollars of phony profits that he knew weren't from actual trading activity."
Kugel told the judge that he scanned old newspaper stock tables to collect data such as the trading range for a stock for a given day and the volume of shares that were traded so that fake trades could be listed on statements based on historical stock prices. The volume of shares was necessary to know so that fake trades involving millions of dollars on behalf of Madoff investors would not add up to more than the volume of shares traded in any stock in a day, he said.
Kugel said he gave the information to other Madoff employees, including Annette Bongiorno and Joann Crupi, who then created the fake trades to list on customer statements. Madoff's longtime secretary, Bongiorno, of Boca Raton, Fla., and Crupi, another back office worker, have pleaded not guilty to criminal charges.
In addition, he said he caused false financial information to be submitted to financial institutions from 2002 to 2007 so he and others could obtain mortgages and loans.
He said he overstated the value of the assets held by he and others to obtain the loans on homes that the government said were worth millions.
"Did you know that what you were doing was wrong and unlawful?" Swain asked Kugel.
"Yes, your honor," Kugel answered.
Kugel had worked at Madoff's firm since 1970, said Assistant U.S. Attorney Julian J. Moore. He said Kugel initially worked as a trader at the firm but assumed a managerial position on the firm's trading floor before becoming a trading floor compliance analyst.