Former Madoff Employee Faked Trades, Pleads Guilty

The SEC charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges against David 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.

The SEC alleges that Kugel, who worked at Bernard L. Madoff Investment Securities 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 operations used the information provided by Kugel to formulate fictitious trades to appear on investor account statements.

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.

The SEC alleges that Kugel provided backdated trade information for various 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, according to the SEC. Kugel withdrew almost $10 million from his BMIS accounts from 2001 to 2008.

Kugel started his career with Madoff as an arbitrage trader in the firm’s proprietary trading business.

-- This article first appeared on Securities Technology Monitor.