After several drinks at a Greek restaurant on Manhattan's ThirdAvenue in the summer of 2006, two computer programmers at BernardMadoff's investment firm asked their supervisor whether the boss'sbusiness was a scam.

Chief Financial Officer Frank DiPascali laughed off thequestion, telling George Perez and Jerome O'Hara that Madoff washonest. DiPascali would later tell the FBI he wondered why theytook so long to ask.

His chronicle of the dinner, and the lengths to which Madoffwent to convince employees that his massive fraud was a legitimatebusiness, were revealed for the first time in FBI reports madepublic last week. Attached to court filings by ex- Madoff employeesfacing fraud charges, they contain interviews with DiPascali —Madoff's chief aide — who in 2009 pleaded guilty to his role in thebiggest Ponzi scheme in U.S. history.

Once, when Perez and O'Hara confronted Madoff and asked whythere were no signs of stock trades, Madoff exploded, DiPascalitold the FBI.

“You are not going to tell me how to run my business,” Madoffinsisted during a meeting in the office of the firm's operationschief, Daniel Bonventre, according to DiPascali. “Trades occuroverseas.”

Madoff, 73, pleaded guilty to fraud in 2009 and is serving a150-year term for cheating investors out of $20 billion inprincipal. Five employees — Perez, O'Hara, Bonventre, AnnetteBongiorno and Joann Crupi — are accused of aiding Madoff in hisfraud. Defense attorneys said they'll use DiPascali's comments toestablish their clients were unaware of Madoff's scheme.

Starting in 1968

Bonventre and Bongiorno began working for Madoff in 1968, withBongiorno rising to the level of supervisor and account manager.Crupi, an employee since 1983, tracked daily bank account activity,prosecutors said. Perez and O'Hara started at the firm in the early1990s.

The five were arrested in 2009 and 2010. In addition toDiPascali, who began working for Madoff in 1975, former employeesDavid Kugel, Enrica Cotellessa-Pitz and Eric Lipkin have pleadedguilty and are aiding prosecutors.

Most of the FBI reports are snippets of DiPascali's debriefingsfrom mid-2009 to mid-2010, with one coming as recently as February.Yet to be sentenced and free on bail, DiPascali has beencooperating with the government.

His description in the heavily redacted files of the 2006 dinneris the most detailed account yet of how Madoff deceivedsubordinates.

A Crook?

Asked if his boss was a crook, DiPascali said he gave Perez andO'Hara the same explanation Madoff had given him.

“The explanation involved the idea that, because Madoff wastrading not as an agent but as principal, making these trades outof his own inventory that was kept at various places overseas, hewas able to allocate these trades to customers after the fact,back-date their trades, and do other things with the accounts abroker acting as an agent would not be able to do,” the FBI reportstates. DiPascali “reassured them that Madoff had so manyinvestments and assets.”

Identified in some FBI reports only as “Individual,” DiPascalidated Madoff's deception to the early 1970s, when Bernard L. MadoffInvestment Securities LLC was housed in a small office on WallStreet. In their guilty pleas, Madoff and DiPascali traced thePonzi scheme to the 1980s or later.

Creating Records

“Madoff would very vocally proclaim he had just had achieved greatfinancial success with a deal he had been arranging in Europe orsomewhere else,” DiPascali told the Federal Bureau ofInvestigation. The report stated that “while not understanding itat the time, Individual eventually realized those pronouncementswere calculated by Madoff to perpetuate” the impression that“trading activity was somehow backed up by his deals andinvestments overseas.”

Early on, Madoff began planning for a fraud that might last foryears, DiPascali told agents.

“Well before it actually happened,” Madoff expected that outsideauditors would want to see his firm's books, and he asked hislieutenant, DiPascali, to “start creating them,” they wrote in anFBI report.

“To accomplish this task, Individual needed the expertise ofO'Hara and Perez,” the report stated. “Without revealing the truereason why Madoff wanted the records, Individual needed to come upwith a plausible story as to why O'Hara and Perez needed to createrecords that they undoubtedly presumed already existed.”

Fooling Auditors

DiPascali succeeded, convincing the programmers that auditorswould require only a subset of data to be included on tradeblotters they could produce, according to the FBI report. Still,DiPascali said he faced “an even larger hurdle” in persuading themto fabricate the actual data, one report states.

So DiPascali reminded Perez and O'Hara that Madoff's purported“split-strike” strategy entailed the purchase of large blocks ofsecurities in piecemeal fashion, creating voluminous records thatwould confound outside auditors. To simplify matters, he told themhe'd gather a list of Madoff counterparties.

“Then Individual, O'Hara and Perez could populate more detailedblotters, using the 'actual' counterparties with whom BLMIS traded,without it being necessary to replicate precisely the dataassociated with each trade,” an FBI report states.

Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bhararain New York, and DiPascali's lawyer, Marc Mukasey, declined tocomment on the FBI documents.

Grew Suspicious

Eventually, O'Hara and Perez grew suspicious. After dinner withDiPascali at the Greek restaurant, they confronted Madoff and urgedhim to quit the financial advisory business, DiPascali told theFBI.

“Madoff began by politely reminding them he had been doing thisfor 40 years, that they were computer programmers — for an obsoletesystem no less — and they simply did not understand what they weretalking about,” DiPascali told the FBI. Seated at a desk reviewingsome figures, Madoff then regaled them with tales of his exploitsin the industry, DiPascali said.

According to the FBI documents, it wasn't just the programmerswhom Madoff duped. Madoff told DiPascali to hide from Bonventre therefusal of O'Hara and Perez to participate in what the reports saidwere “special programming” projects. Crupi also appeared to havefaith in Madoff, DiPascali told investigators.

“DiPascali surmised that Madoff may have fed Crupi the sametidbits of information as Madoff had fed to him over the years,”leaving the impression that Madoff had “things under control,” anFBI report states.

'A Home Run'

One of those tidbits was Madoff's occasional outburst that astock upstairs at his offices in Midtown Manhattan — where he ran alegitimate trading business — had “hit a home run,” DiPascali toldthe FBI. At other times, when Crupi asked why she was finding theprices of the stocks she was purportedly buying in the prior day'snewspaper, Madoff told her “the trades were happening in thetrading room even though she did not see them,” DiPascalireported.

“Crupi had convinced herself over the years that Madoff had avast array of assets all over the world,” DiPascali told the FBI.“In Crupi's mind, Madoff was illiquid in 2008 because the worldwideeconomic downturn had tied up all of Madoff's assets.”

After Madoff's arrest on Dec. 11, 2008, Crupi and Bonventre toldauthorities “exactly the same” story, one FBI report states. Askedwhy their comments matched, “DiPascali surmised that Madoff wasprobably telling Bonventre the same lies he told Crupi.”

Lied to Subordinates

DiPascali lied to subordinates until the moment of Madoff'sarrest, he told the FBI. The day before, after Madoff instructedhim to issue checks to favored employees, DiPascali said herealized that he couldn't do so until convincing Bongiorno “to cashout” certain accounts.

“DiPascali needed to fabricate a story to convince Bongiorno,”an FBI report states. “DiPascali did not know how Bongiorno wouldhandle the truth” so he “concocted a story” about an upcoming auditthat required her to cash out.

George Mehler, a lawyer for O'Hara, declined to comment, sayingonly that their court motion “speaks for itself.” Bonventre'slawyer, Andrew Frisch; Bongiorno's attorney, Maurice Sercarz; andPerez's lawyer, Larry Krantz, declined to comment.

“There's presumably more to come,” Crupi's lawyer, Eric Breslin,said of the FBI reports, submitted as part of the ex- workers'request in Manhattan federal court that prosecutors discloseadditional details about the government's allegations.

In papers filed with the FBI reports, the lawyers for Perez andO'Hara said the documents, which had been withheld for almost twoyears, “dramatically bolstered” their defense. They complainedabout multiple redactions in FBI reports and said they're now “inthe dark” as to when their clients are accused of having learned ofMadoff's fraud.

The disclosures “are nothing short of remarkable,” Mehler andKrantz wrote. “Given this disclosure, the current indictment ishard to understand at all.”

The case is U.S. v. Bonventre, 10-CR-228, U.S. District Court,Southern District of New York (Manhattan).

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