By Joseph Ax
NEW YORK (Reuters) - When a pair of U.S. Securities and Exchange Commission examiners visited Bernard Madoff's offices in 2005, the now-imprisoned financier was not too worried - until he sneaked a look into one of their briefcases.
What Madoff found - a news article questioning how he produced positive returns every year - sent him into a rage, according to courtroom testimony on Monday by his decades-long right hand man Frank DiPascali.
"These SOBs are toying with me," DiPascali quoted Madoff as saying.
DiPascali is the star witness for the government in the trial of five former Madoff firm employees in U.S. District Court in Manhattan, having pleaded guilty in 2009 in the hopes of receiving a lighter sentence than the 125 years he potentially faces.
The trial opened on October 16 for the five, who are charged with aiding Madoff's worldwide investment fraud, which imploded in December 2008 and cost investors an estimated $17 billion. The five have denied wrongdoing and said they fell under the spell of Madoff, who pleaded guilty in March 2009 and is serving a 150 year prison sentence.
In his testimony on Monday, DiPascali said that after Madoff went through the SEC examiner's briefcase, he and his employees got to work, erasing internal emails from the firm's servers and concocting fake documents that showed trades with foreign counterparties that never took place.
At one point, DiPascali said, he and two computer programmers, Jerome O'Hara and George Perez, discussed whether it would be feasible to bug the SEC examiners' office to hear their conversations, an idea that was never put in practice.
O'Hara and Perez are on trial with portfolio managers Annette Bongiorno and Joann Crupi and back office director of operations Daniel Bonventre. Their lawyers have not yet had an opportunity to question DiPascali in front of the jury.
DiPascali said the SEC examination was the agency's second in several months, after a team from Washington had also visited the firm's Manhattan office to look at records.
A few months later, KPMG would send auditors, and at the end of 2005, the SEC would send a letter requesting records as part of yet another investigation.
Madoff grew angry when he learned the New York SEC examiners wanted to see internal emails, DiPascali said.
"'That's how all these guys get caught for insider trading,'" Madoff said, according to DiPascali.
None of the probes would uncover the fraud, at least in part because of the effort Madoff and his employees made to hide the fraud, DiPascali testified.
The firm would list foreign brokerages as counterparties for its fake trades when providing records to U.S.-based examiners from the SEC, with Madoff reasoning that government agents would be less likely to contact overseas companies, DiPascali said.
But Madoff had them redo the records to list U.S. counterparties when the auditors from KPMG arrived from the London office.
When Madoff grew worried that the SEC would go after him for failing to register as an adviser, Crupi and DiPascali helped him alter customer authorization forms to make it seem as though he had no discretion in making investment decisions, DiPascali testified.
The night before the KPMG auditors arrived in New York, DiPascali said he went out to a fancy dinner with Crupi, O'Hara and Perez to celebrate their work in preparation. DiPascali testified that O'Hara made a toast: "'Here's to tricking the auditors, here's to fooling KPMG', or something like that."
The dinner cost more than $1,000, after which the five employees stayed for a few nights at the luxury hotel Plaza Athenee, since they were working long hours. Prosecutors showed jurors a copy of the hotel bill, which exceeded $3,800.
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 Grant McCool)