Jerome O’Hara and George Perez charged in Madoff scandal. Hush money for technical support!

January 8, 2010

Two computer programmers were charged for their role in helping convicted Ponzi schemer Bernard L. Madoff cover up the fraud at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 15 years.  According to the SEC investigation, Jerome O’Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J.,  are alleged to have provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Madoff and his lieutenant Frank DiPascali, Jr., routinely asked O’Hara and Perez for their help in creating records that, among other things, combined actual positions and activity from BMIS’ market-making and proprietary trading businesses with the fictional balances maintained in investor accounts. O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. They assigned file names to many of these programs that began with “SPCL,” which is short for “special.”

A separate computer internally known as “House 17” was used to process BMIS investment advisory account data at the direction of Madoff, DiPascali and others. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

So here’s the scoop according to the SEC – “O’Hara and Perez had a crisis of conscience in 2006 and tried to cover their tracks by attempting to delete approximately 218 of the 225 special programs from the House 17 computer. But they did not delete the monthly backup tapes. O’Hara and Perez then cashed out hundreds of thousands of dollars each from their personal BMIS accounts before confronting Madoff and refusing to generate any more fabricated books and records.”

AND WHAT DID THEY GET FOR THEIR EFFORTS?  A salary increase of 25% and a $60,000 bonus.  That’s right.  Now when I read that I was amazed.  A multi billion dollar scheme and the result is a pay raise and a bonus.

Further, the SEC alleges that they stated to DiPascali, a Madoff lieutenant, at the time that they did not ask for more because a greater amount might appear too suspicious. DiPascali then managed to convince O’Hara and Perez to modify computer programs so that he and other 17th floor employees could create the necessary reports themselves.

This goes beyond an ethics violation.  It is so far removed from ethical behavior that it isn’t funny.  What is now coming to light is what has been suspected for some time – Madoff wasn’t in this alone.  As an ethics and fraud prevention speaker, there is no way that one person could create and effect this fraud.  Bernie Madoff may be the point person, but the collapse in the house of cards has just begun.  More will fall as the investigation continues.

Here’s what I don’t get.  The three components of fraud are: NEED – OPPORTUNITY and RATIONALIZATION.  Now, it didn’t seem at the outset that NEED was obvious.  Unless there is something that hasn’t been reported, these fellows weren’t gaining initially from the efforts of their work.  So how did they RATIONALIZE that their behavior was legitimate, ethical or normal?  Most frauds tie their three components together, but in the case of O’Hara and Perez it seemed that they were just part of the group and became, at least initially, brainwashed into believing that what they were doing was right.

If you have a connection to either O’Hara or Perez and have some insight feel free to comment.