Former Madoff Employee Pleads Guilty, Agrees to Settle with SEC

Former Madoff Employee Pleads Guilty, Agrees to Settle with SEC

The continuing saga of the Madoff Ponzi scheme has yielded another guilty plea and another Commission compliant. This time criminal and civil charges were brought against David Kugel, a longtime employee of Bernard L. Madoff Investment Securities LLC who is alleged to have participated in the fraud at the advisory business. SEC v. Kugel (S.D.N.Y. Filed Nov. 21, 2011).

Mr. Kugel began working for Mr. Madoff's brokerage operations in early 1970 as an arbitrage trader in the firm's proprietary trading operation, according to the SEC's complaint. Subsequently, he worked at the firm as a trading compliance analyst ensuring in part that the computer systems facilitated compliance with regulations affecting the market-making and proprietary trading operations.

At some point in the early 1970s, Mr. Madoff informed defendant Kugel about the advisory business. Mr. Kugel was asked to furnish historic or backdated convertible arbitrage trades for inclusion on investor account statements. The staff of the advisory business subsequently obtained historical trade data from Mr. Kugel periodically. In some instances that data replicated trades he had done. In others the data was drawn from historic information obtained from sources such as the Wall Street Journal. The claimed transactions were used on investor account statements.

Mr. Kugel also furnished backdated trade data for fictitious trades for his own advisory account. From 2001 through 2008 he withdrew almost $10 million from his accounts at the brokerage firm and the advisory business although he knew that the so-called profits "were not proceeds of actual trading activity . . . "according to the SEC.

The Commission's complaint alleges violations of Exchange Act Sections 10(b) and 15(c), Securities Act Section 17(a) and Advisers Act Sections 206(1), (2) and 204.

Mr. Kugel has pleaded guilty to criminal charges. He has also agreed to settle the SEC's action, consenting to the entry of a permanent injunction and to the forfeiture of his ill-gotten monetary gains upon entry of a criminal forfeiture order in the criminal case.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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