Federal appeals court to hear Madoff jail argument

[March 19, 2009]  NEW YORK (AP) -- A federal appeals court is to get a chance to decide whether Bernard Madoff should remain in prison until he is sentenced for defrauding investors of billions of dollars.

The 2nd U.S. Circuit Court of Appeals was slated to hear arguments from a prosecutor and a defense lawyer on Thursday morning. Madoff, 70, was sent to prison after pleading guilty last week to securities fraud and other charges, admitting a ruse that lasted decades.

His lawyers appealed his immediate jailing, saying other white-collar defendants -- including those in the Enron, Adelphia and WorldCom scandals -- had remained free on bail while awaiting sentencing. Madoff is scheduled to be sentenced in June for up to 150 years in prison for telling investors they had $65 billion when he actually had lost nearly all of their money.

Meanwhile, Madoff's longtime accountant and son-in-law, David Friehling, was arrested Wednesday on fraud charges as authorities blamed him for failing to make the most basic auditing checks that would have exposed the epic fraud.

Friehling is the first person to be arrested in the scandal since Madoff's two sons turned in their father, and his prosecution signals that the government is intent on bringing Madoff's associates to justice as they try to figure out who helped him carry out the fraud.

Prosecutors say the 49-year-old Friehling essentially rubber-stamped Madoff's books for 17 years, serving as Madoff's auditor from 1991 through 2008 while operating from a discreet building in suburban New York.

Authorities said that if Friehling had done his job, Madoff's financial statements would have shown his company owed tens of billions of dollars to his customers and was insolvent.

"Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money," said acting U.S. Attorney Lev L. Dassin.

The relationship between the accountant and Madoff was so cozy that Friehling and his family accessed $5.5 million from accounts with Madoff since 2000 and had a balance of more than $14 million as recently as November. Prosecutors said it's a conflict for accountants to have such large sums invested with clients.

Friehling did not comment as he left the courthouse after being released on bail, and his lawyer, Andrew Lankler, also declined comment.

Madoff confessed to his sons in early December that his investment empire was actually a giant Ponzi scheme in which he paid off old investors with money from new ones. Though he reported to 4,800 investors that they had $65 billion in November, investigators have found only about $1 billion.

Prosecutors now believe that Madoff received help from Friehling as he carried out his fraud, although Friehling is not charged with knowing about his Ponzi scheme.

If convicted, Friehling faces up to 105 years in prison. He is charged with securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the SEC.

Madoff pleaded guilty to securities fraud, perjury and other charges on Thursday. During his plea, Madoff said he began the Ponzi scheme in the 1990s in response to the pain of a recession -- around the time that Friehling took over his accounting. He said he never recovered, though, and knew prison awaited him.

[Associated Press; By LARRY NEUMEISTER]

Associated Press writers David B. Caruso, Tom Hays, Jim Fitzgerald in New York and Business Writer Marcy Gordon in Washington contributed to this report.

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