Two former employees for Bernard Madoff programmed an old IBM computer to generate false records that concealed the money manager's massive Ponzi scheme and were given hush money when they threatened to stop lying, federal prosecutors said on Friday.
Madoff gave orders to pay the pair "whatever they wanted to keep them happy," a criminal complaint said.
The computer programmers, Jerome O'Hara, of Malverne, New York, and George Perez, of East Brunswick, New Jersey, were arrested Friday at their homes. They were to appear in a Manhattan court to face conspiracy, falsifying records and other charges. "Without the help of O'Hara and Perez, the Madoff fraud would not have been possible," George S. Canellos, director of the Securities and Exchange Commission's New York Regional Office, said in a statement.
Their attorneys did not immediately return calls for comment. Prosecutors alleged that O'Hara and Perez were hired by Madoff's firm in the early 1990s to develop and maintain programs using a computer known as "House 17." The programs allowed Madoff to generate account statements for thousands of clients "that purported to confirm the purchases of securities that, in fact, had not been purchased," the complaint said.
Madoff and his chief financial officer, Frank DiPascali, directed the defendants to use their computer skills to produce other false documents designed to deceive the SEC. The agency brought similar charges against the men on Friday in a parallel civil complaint. In what the SEC called "a crisis of conscience" in 2006, O'Hara and Perez deleted 218 of the 225 special programs from the House 17 computer, and withdrew thousands of dollars from their own accounts with the firm, authorities said.
Around the same time, the pair met with Madoff and told him they would no longer participate in the scheme. Handwritten notes found by FBI agents in O'Hara's desk read, "I won't lie any longer. Next time, I say 'ask Frank."'
DiPascali, who is cooperating after pleading guilty in August, has told investigators that Madoff responded by ordering him to buy their silence. They both received $60,000 bonuses and 25 percent pay raises, the complaint said.
"Their subterfuge was designed to conceal the fraud from regulators and others, and when they told Madoff they would no longer lie for him, their continued complicity was bought for a price," Joseph Demarest, head of the FBI's New York office, said in statement.
Madoff, 71, was sentenced in June to 150 years in prison for orchestrating a decades-long Ponzi, or pyramid, scheme in which investors are paid with other investors' money rather than actual profits on their investment. The scheme destroyed thousands of people's life savings and wrecked charities.
O'Hara, 46, and Perez, 43, face up to 30 years in prison if convicted on all counts.