A former trader at Bernard Madoff's investment firm described on Thursday how he helped create false trades with two other former employees to prop up Madoff's $17 billion Ponzi scheme.
David Kugel, who joined the firm in 1970 and worked there for nearly four decades, said he provided historical data on stock prices to Annette Bongiorno and Joann Crupi, who then fabricated trades in client accounts.
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"If someone looked at it, it would look potentially like a real trade, like something that had taken place," he told a federal jury in New York.
Bongiorno and Crupi are among five former Madoff employees charged with aiding Madoff in a scheme that cost investors an estimated $17 billion. The other defendants are Daniel Bonventre, the firm's director of operations, and two computer programmers, Jerome O'Hara and George Perez.
Kugel, who pleaded guilty in 2011 as part of an agreement to cooperate with prosecutors, is the first insider to testify at the trial. He did not offer testimony implicating Bonventre, O'Hara or Perez on Thursday.
Madoff, 75, is serving a 150-year prison sentence after pleading guilty in 2009. He has said he perpetrated the fraud on his own.
Defense lawyers for the five employees on trial have argued that they were bewitched by Madoff's brilliance and did not question whether his success was legitimate. They have not had a chance to cross-examine Kugel, who will continue to testify on Monday when the trial resumes.
In approximately five hours on the witness stand on Thursday, Kugel explained how he would use copies of the Wall Street Journal to provide a range of stock prices to Bongiorno beginning in the late 1970s and to Crupi years later.
They used the data to construct fake trades that would appear to be based on real stock prices and dates, he said.
Madoff himself didn't handle the calculations, Kugel said, in part because he wasn't good at basic math.
"Bernie Madoff couldn't do long division, you said?" prosecutor Matthew Schwartz asked.
"That was my understanding, yes," Kugel replied.
Kugel said he believed all along that Madoff was investing customer money elsewhere - in shopping centers or foreign currency, for instance - and using returns from those investments to pay clients.
That explained why he held almost his entire personal fortune in accounts at Madoff's firm and helped his mother, sister, brother, daughter and son open their own accounts there, he said.
"Why, if you knew the trades were fake, did you allow your family to invest?" Schwartz asked.
"For the same reason I had an account - even though I knew everything was wrong, that he was fooling people and sending out fraudulent accounts, I thought he was investing it and the money was safe," Kugel said.
U.S. District Judge Laura Taylor Swain dismissed the jury a little early on Thursday so any parents could go trick-or-treating on Halloween night. The trial is expected to last several more months.
The case is USA v. O'Hara et al, U.S. District Court, Southern District of New York, No. 10-cr-0228.
(Reporting by Joseph Ax; Editing by Cynthia Osterman)