November, 2011:

As part of the continued fallout relative to the Madoff fraud, the Securities and Exchange Commission (SEC) charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that David Kugel, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly four decades, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be formulated into fictitious trading on investors’ account statements. Kugel’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years.

“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.”

The SEC previously charged two other longtime Madoff employees Annette Bongiorno and JoAnn Crupi for their roles in producing phony account statements that were sent to Madoff investors. According to the SEC’s complaint against Kugel filed in U.S. District Court for the Southern District of New York, Bongiorno and Crupi and other staff in Madoff’s investment advisory (IA) operations used the information provided by Kugel to formulate fictitious trades to appear on investor account statements.

The SEC alleges that sometime in the early 1970s after Kugel began his career with Madoff as an arbitrage trader in the firm’s proprietary trading business, Madoff informed Kugel that BMIS managed money for outside clients. He asked Kugel to provide the firm’s IA operations with backdated convertible arbitrage trades for inclusion on investor account statements. Some of these trades replicated successful trades that Kugel had actually made for BMIS proprietary trading operations. Other trades were based on historical information that Kugel obtained from old newspapers.

According to the SEC’s complaint, Bongiorno and Crupi regularly asked Kugel for backdated information about trades amounting to millions of dollars. After Kugel provided the information, Crupi and Bongiorno would then design trades that totaled that amount. These fictitious trades were highly profitable on an annualized basis, and appeared on account statements and trade confirmations sent to investors. Kugel, who opened his own BMIS account, received these account statements and trade confirmations as well.

The SEC alleges that Kugel provided backdated trade information for IA accounts, including his own. He withdrew the purported “profits” of these trades even though he knew they weren’t proceeds of actual trading activity. One trade in S&P index options in 2007 earned Kugel a profit of more than $375,000 in just a few weeks. Kugel withdrew almost $10 million from his BMIS IA accounts from 2001 to 2008.

The U.S. Attorney’s Office for the Southern District of New York has filed parallel criminal charges against Kugel, who has pled guilty and also agreed to settle the SEC’s civil charges. Subject to court approval, the civil case will result in a permanent injunction against Kugel, who must forfeit his ill-gotten monetary gains upon entry of a criminal forfeiture order in the criminal case.