Ex-Madoff CFO working with FBI

NEW YORK "I was loyal to him. I ended up being loyal to a terrible, terrible fault," Frank DiPascali told a judge during a hearing at which his long-rumored cooperation deal with the government was confirmed.

Both prosecutors and defense attorneys portrayed DiPascali as the man who could unlock his former boss' epic Ponzi scheme and potentially make cases against other defendants. Since Madoff revealed the fraud to his sons in early December and was arrested by FBI agents, investigators have looked into the actions of his wife, Ruth, his brother and two sons, who ran a trading operation under the same roof, and other insiders. No other Madoff family members have been charged.

Attorneys argued the former chief financial officer should be free on bail to help investigators sift through a mountain of evidence. But U.S. District Judge Richard Sullivan surprised both sides by ordering DiPascali jailed immediately -- a rarity for a cooperator in a white-collar case who had pleaded guilty.

Sullivan said he felt compelled to keep 52-year-old DiPascali locked up after hearing the defendant admit that, at Madoff's direction, he lied to the Securities and Exchange Commission in 2006 when he thought they might discover the fraud. The judge said he was troubled too that DiPascali also lied repeatedly "to people who entrusted him with their life savings."

Defense attorney Marc Mukasey told Sullivan his client was "completely unprepared for this" and tried several times to persuade the judge to change his mind. He described DiPascali as a genuinely repentant cooperator who won the trust of FBI agents by speaking to them nearly every day since late last year.

But in the end, a dejected-looking DiPascali was handcuffed and led out of the courtroom.

The cooperation deal may still earn him leniency against charges which carry a potential penalty of up to 125 years in prison for securities fraud, money laundering and other crimes. It was agreed that sentencing won't occur before May 2010.

Madoff is serving 150 years in prison for a Ponzi scheme that destroyed thousands of people's life savings, wrecked charities and shook confidence in the financial system. During his guilty plea in March, Madoff insisted that he acted alone. Only one other person -- his accountant -- had been charged during the seven-month investigation before the charges were revealed against DiPascali.

The conspiracy charge against DiPascali and his cooperation deal are likely to increase speculation that investigators might learn who else was involved in the multi-decade fraud that led thousands of investors to sink at least $13 billion into Madoff's firm only to lose all.

Madoff told investors late last year that their accounts contained nearly $65 billion, when he actually had only several million dollars left of their money.

During his plea, DiPascali described himself as a "kid from Queens" who began working for Madoff in 1975, just after he finished high school. He said he became aware of the fraud by the 1980s or early 1990s.

DiPascali said account statements showing the firm was making trades for clients were "all fake" -- something "I knew, Bernie Madoff knew and other people knew." He claimed he thought "for a long time" that Madoff had other assets to cover the claims of any investors who might demand their money back.

"That's not an excuse. I knew everything I was doing was wrong and criminal," he said.

The SEC, in a complaint filed Tuesday against DiPascali, said one reason the fraud "was not detected for so long was DiPascali's considerable success in overseeing the creation of large quantities of false books and records that corroborated the fictitious trading."

The agency said new investments were dumped into a bank account that amounted to a slush fund used to pay out redemptions when investors asked for money.

The SEC said Madoff and DePascali used the fund to enrich themselves, with DiPascali in 2002 setting up an account for himself named after his fishing yacht, "Dorothy Jo." It said he withdrew over $5 million from the account between 2002 and 2008 to fund personal expenses, including the purchase of a new boat. He also received $2 million in salary and bonuses.

By the summer of 2008, the value of the account exceeded $5.5 billion. But investor redemptions spiked dramatically following the market collapse in September 2008 -- to more than $6 billion -- in the final three months of the fraud, the SEC said.

When the account dwindled last fall to a few hundred million dollars, DiPascali and Madoff discussed using the remaining funds to liquidate the accounts of family and friends of the firm, including employees, rather than honor redemption requests from institutional investors, the SEC said.

It said DiPascali reviewed investor lists and identified which accounts should be liquidated and then, with Madoff's approval, instructed that checks be prepared. Those checks, totaling more than $150 million, were found by investigators when Madoff was arrested.

Mariam Siegman -- calling herself a 65-year-old, near-homeless Madoff victim -- was the only victim to take up the judge's invitation to speak at the hearing.

She said she opposed acceptance of the plea because it prevents a trial and "the kind of justice that allows truth to be spoken out loud in a courtroom."

The judge said that he did not believe "the quest for truth ends today."

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