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Madoff Securities
Bernie wanted to be rich; he dedicated his life to it.
John Maccabee, longtime friend of Bernie Madoff
Bernard Lawrence Madoff was born on April 29, 1938, in New York City.
Madoff spent his childhood in a lower middle-class neighborhood in the
borough of Queens. After graduating from high school, Madoff enrolled
in the University of Alabama but transferred to Hofstra College on Long
Island, now known as Hofstra University, at the beginning of his
sophomore year. Three years later in 1960, he graduated with a political
science degree from Hofstra.
According to a longtime friend, the driving force in Madoff’s life since
childhood was becoming wealthy. “Bernie wanted to be rich; he
dedicated his life to it.”
That compelling force no doubt accounted
for Madoff’s lifelong fascination with the stock market. As a teenager,
Madoff frequently visited Wall Street and dreamed of becoming a “major
player” in the world of high finance. Because he did not have the
educational training or personal connections to land a prime job on Wall
Street after he graduated from college, Madoff decided that he would set
up his own one-man brokerage firm.
While in college, Madoff had accumulated a $5,000 nest egg by installing
sprinkler systems during the summer months for wealthy New Yorkers
living in the city’s affluent suburbs. In the summer of 1960, Madoff used
those funds to establish Bernard L. Madoff Investment Securities LLC,
which was typically referred to as Madoff Securities. Madoff operated
the new business from office space that was provided to him by his
father-in-law, who was a partner in a small accounting firm. For nearly
five decades, Madoff served as the senior executive of Madoff Securities.
During that time, the shy New Yorker who had an occasional stammer
and several nervous tics would accumulate a fortune estimated at more
than one billion dollars.
Taking on Wall Street
Madoff’s brokerage firm initially traded only securities of small overthe-counter companies, securities commonly referred to as “penny
stocks.” At the time, the securities of most large companies were traded
on the New York Stock Exchange (NYSE). The rules of that exchange
made it extremely difficult for small brokerage firms such as Madoff’s to
compete with the cartel of large brokerage firms that effectively
controlled Wall Street. Madoff and many other small brokers insisted
that the NYSE’s rules were anticompetitive and inconsistent with a free
market economy. Madoff was also convinced that the major brokerage
firms kept securities transaction costs artificially high to produce
windfall profits for themselves to the detriment of investors, particularly
small investors.
Because of Madoff’s resentment of the major Wall Street brokerage
firms, he made it his mission to “democratize” the securities markets in
the United States while at the same time reducing the transaction costs
of trading securities. “Bernie was the king of democratization. He was
messianic about this. He pushed to automate the [securities trading]
system, listing buyers and sellers on a computer that anyone could
access.”
In fact, Madoff Securities was one of the first brokerage firms to utilize
computers to expedite the processing of securities transactions. Bernie
Madoff is also credited as one of the founders of the NASDAQ stock
exchange that was organized in 1971. The NASDAQ was destined to
become the world’s largest electronic stock exchange and the largest
global stock exchange in terms of trading volume. In the late 1980s and
early 1990s, Madoff served three one-year terms as the chairman of the
NASDAQ.
Madoff’s leadership role in the development of electronic securities
trading contributed significantly to his firm’s impressive growth
throughout the latter decades of the twentieth century. By the early
years of the twenty-first century, Madoff Securities was the largest
“market maker” on the NASDAQ, meaning that the firm accounted for
more daily transaction volume on that exchange than any other
brokerage.
By that time, the firm was also among the largest
market makers for the New York Stock Exchange, accounting for as
much as 5 percent of its daily transaction volume. This market-making
service was lucrative with low risk for Madoff Securities and reportedly
earned the firm, which was privately owned throughout its existence,
annual profits measured in the tens of millions of dollars.
In 1962, Madoff had expanded his firm to include investment advisory
services. For several years, most of the individuals who set up
investment accounts with Madoff Securities were referred to him by his
father-in-law. Although the firm was a pioneer in electronic trading and
made sizable profits from its brokerage operations, investment advisory
services would prove to be its most important line of business. By late
2008, the total value of customer accounts managed by Madoff
Securities reached $65 billion.
The key factor that accounted for the incredible growth in the amount of
money entrusted to Madoff’s firm by investors worldwide was the
impressive rates of return that the firm earned annually on the funds
that it managed. For decades, those funds earned an average annual rate
of return generally ranging from 10 to 15 percent. Although impressive,
those rates of return were not spectacular. What was spectacular was
the consistency of the returns. In 2001, Barron’s reported that some of
the Madoff firm’s largest investment funds had never experienced a
losing year despite significant stock market declines in several
individual years.
Even when the stock market collapsed in late
2008, individual Madoff funds continued to report net gains for the yearto-date period.
Although Madoff would eventually serve as an investment advisor to
dozens of celebrities, professional athletes, and other wealthy
individuals, most of the money he managed came from so-called “feeder
firms,” which were large hedge funds, banks, and other investment
companies. The individuals who had committed their funds to these
feeder firms were typically unaware that those funds had been turned
over to Madoff.
The reclusive Madoff and his subordinates disclosed as little as possible
about the investment strategy responsible for their firm’s success in the
stock market. On one occasion, Madoff told an executive of a feeder firm,
“It’s no one’s business what goes on here.”
The Wall Street
Journal reported that Madoff commonly “brushed off” skeptics who
questioned his firm’s investment results by pointing out that those
results had been audited and by insisting that his investment strategy
“was too complicated for outsiders to understand.”
The only substantive information Madoff Securities provided regarding
its investment policies was that it employed a “split-strike conversion”
investment model. In simple terms, this strategy involved purchasing
several dozen blue-chip stocks and then simultaneously selling both put
options and call options on those securities. Supposedly, this strategy
ensured a positive rate of return on those investments whether the
stock market went up or went down.
Competitors, financial analysts, and academics repeatedly attempted to
replicate the success of Madoff Securities’ investment strategy. None of
those attempts were successful, which only added to Bernie Madoff’s
stature and mystique on Wall Street. As one industry insider noted in
2001, “Even knowledgeable people can’t really tell you what he’s doing.”
A CNN reporter observed that by the turn of the century Madoff
was widely regarded as a stock market wizard and that “everyone” on
Wall Street, including his closest competitors, was “in awe of him.”
The Bubble Bursts
On December 10, 2008, Bernie Madoff asked his two sons, Andrew and
Mark, who worked at Madoff Securities, to meet him at his apartment
that evening. In this meeting, Madoff told his sons that the impressive
returns earned for clients of his firm’s investment advisory division over
the previous several decades had been fraudulent. Those returns had
been produced by an elaborate Ponzi scheme engineered and overseen
by Madoff without the knowledge of any of his employees or family
members.
The following day, an attorney representing Madoff’s
sons notified the SEC of their father’s confession. That evening, FBI
agents came to Madoff’s apartment. One of the agents asked Madoff “if
there was an innocent explanation”
for the information relayed to
the SEC from his sons. Madoff replied, “There is no innocent
explanation.”
The agents then placed Madoff under arrest and
within hours filed securities fraud charges against him.
The public announcement of Madoff’s fraudulent scheme in December
2008 stunned investors worldwide. That announcement further
undercut the stability of global stock markets that were already reeling
from the subprime mortgage crisis in the United States, which had
“frozen” the world’s credit markets, caused stock prices to drop
precipitously, and threatened to plunge the global economy into a deep
depression. Politicians, journalists, and everyday citizens were shocked
to learn that a massive investment fraud, apparently the largest in
history, could go undetected for decades within the capital markets of
the world’s largest economic power. Even more disconcerting was the
fact that the Madoff fraud went undetected for several years after the
implementation of the far-reaching regulatory reforms mandated by the
U.S. Congress in the wake of the Enron and WorldCom debacles.
News of the Madoff fraud caused a wide range of parties to angrily
demand that the federal government and law enforcement authorities
determine why the nation’s “watchdog” system for the capital markets
had failed once again. The accounting profession was among the first
targets of the public’s anger. On the day that Madoff’s fraud was publicly
reported, Floyd Norris, a New York Times reporter acquainted with
Madoff, asked a simple question that was on the minds of many people,
namely, “Who were the auditors?”
“Rubber-Stamped” Financial Statements
Business journalists quickly determined that the auditor of Madoff
Securities was Friehling & Horowitz, an accounting firm located in the
small New York City suburb of New City. Friehling & Horowitz had
issued unqualified opinions on the financial statements of Madoff
Securities since at least the early 1990s, audits for which the small firm
was paid as much as $200,000.
Further investigation revealed that Friehling & Horowitz had only one
active accountant, one nonprofessional employee (a secretary), and
operated from a tiny office occupying approximately two hundred
square feet. The active accountant was David Friehling who had
performed the annual audits of Madoff’s firm and signed off on the firm’s
unqualified audit opinions. Accounting and auditing experts interviewed
by the Associated Press insisted that it was “preposterous” to conceive
that any one individual could complete an audit of a company the size of
Madoff Securities by himself.
Friehling and his firm were members of the American Institute of
Certified Public Accountants (AICPA). A spokesperson for that
organization revealed that Friehling had reported to the AICPA each
year that he did not perform any audits. As a result, Friehling’s firm was
not required to submit to the AICPA’s peer review program for CPA
firms. Friehling’s firm was also not required to have a periodic peer
review at the state level. At the time, New York was one of six states that
did not have a mandatory peer review program for accounting firms.
In March 2009, the New York Times reported that Friehling had
maintained dozens of investment accounts with Madoff Securities,
according to documents obtained by the court-appointed trustee for that
firm. Those same documents indicated that Friehling & Horowitz had
another 17 investment accounts with Madoff’s firm. In total, Friehling,
his accounting firm, and his family members had nearly $15 million
invested in funds managed by Madoff. Federal prosecutors noted that
these investments had “flouted” the accounting profession’s auditor
independence rules and “disqualified” Friehling from serving as the
auditor of Madoff Securities.
David Friehling would be the second person arrested by federal law
enforcement authorities investigating Madoff’s fraud. Among other
charges, federal prosecutors indicted Friehling for securities fraud,
aiding and abetting an investment fraud, and obstructing the IRS. The
prosecutors did not allege that Friehling was aware of Madoff’s
fraudulent scheme but rather that he had conducted “sham audits” of
Madoff Securities that “helped foster the illusion that Mr. Madoff
legitimately invested his clients’ money.”
News reports of Friehling’s alleged sham audits caused him to be
berated in the business press. A top FBI official observed that Friehling’s
“job was not to merely rubber-stamp statements that he didn’t verify”
and that Friehling had betrayed his “fiduciary duty to investors and his
legal obligation to regulators.”
An SEC official maintained that
Friehling had “essentially sold his [CPA] license for more than 17 years
while Madoff’s Ponzi scheme went undetected.”
Many parties
found this and other denigrating remarks made by SEC officials
concerning Friehling ironic since the federal agency was itself the target
of scornful criticism for its role in the Madoff fiasco.
Sir Galahad and the SEC
On at least eight occasions, the SEC investigated alleged violations of
securities laws by Madoff Securities during the two decades prior to
Bernie Madoff’s startling confession. In each case, however, the
investigation concluded without the SEC charging Madoff with any
serious infractions of those laws. Most of these investigations resulted
from a series of complaints filed with the SEC by one individual, Harry
Markopolos.
On the March 1, 2009, edition of the CBS news program 60 Minutes,
investigative reporter Steve Croft observed that until a few months
earlier Harry Markopolos had been an “obscure financial analyst and
mildly eccentric fraud investigator from Boston.” Beginning in 1999,
Markopolos had repeatedly told the SEC that Bernie Madoff was
operating what he referred to as the “world’s largest Ponzi scheme.”
Between May 2000 and April 2008, Markopolos mailed or hand
delivered documents and other evidence to the SEC that purportedly
proved that assertion. Although SEC officials politely listened to
Markopolos’s accusations, they failed to vigorously investigate them.
One lengthy report that Markopolos sent to the SEC in 2005 identified
29 specific “red flags” suggesting that Madoff was perpetrating a
massive fraud on his clients. Among these red flags was Madoff’s alleged
refusal to allow the Big Four auditor of an investment syndicate to
review his financial records. Another red flag was the fact that Madoff
Securities was audited by a one-man accounting firm, namely, Friehling
& Horowitz. Also suspicious was the fact that Madoff, despite his firm’s
leadership role in electronic securities trading, refused to provide his
clients with online access to their accounts, providing them instead with
monthly account statements by mail.
Among the most credible and impressive evidence Markopolos gave to
the SEC were mathematical analyses and simulations allegedly proving
that Madoff’s split-strike conversion investment strategy could not
consistently produce the investment results that his firm reported.
Markopolos noted that if such an investment strategy existed, it would
be the “Holy Grail” of investing and eventually be replicated by other
Wall Street investment advisors. Even if Madoff had discovered this
“Holy Grail” of investing, Markopolos demonstrated there was not
sufficient transaction volume in the options market to account for the
huge number of options that his investment model would have required
him to buy and sell for his customers’ accounts.
In the months following the public disclosure of Madoff’s fraud, Harry
Markopolos reached cult hero status within the business press.
Markopolos was repeatedly asked to comment on and explain the scope
and nature of Madoff’s scheme. Markopolos’s dissection of Madoff’s
fraud suggested that three key factors accounted for it continuing
unchecked for decades. First, Madoff targeted investors who were
unlikely to question his investment strategy. According to Markopolos, a
large number of “smart” investors had refused to invest with Madoff
despite his sterling record. “Smart investors would stick to their
investment discipline and walk away, refusing to invest in a black-box
strategy they did not understand. Greedy investors would fall over
themselves to hand Madoff money.”
The second factor that allowed Madoff’s fraud to continue for decades
was his impeccable credentials. Even if his impressive investment
results were ignored, Madoff easily qualified as a Wall Street icon. He
was a pioneer of electronic securities trading and throughout his career
held numerous leadership positions within the securities industry,
including his three stints as NASDAQ chairman. Madoff’s stature on Wall
Street was also enhanced by his well-publicized philanthropy. He
regularly contributed large sums to several charities.
The final and most important factor that allowed Madoff to sustain his
fraudulent scheme was the failure of the regulatory oversight function
for the stock market. In testimony before Congress and media
interviews, Harry Markopolos insisted that the Madoff debacle could
have been avoided or at least mitigated significantly if federal
regulators, particularly the SEC, had been more diligent in fulfilling their
responsibilities. According to Markopolos, Madoff knew that the SEC’s
accountants, attorneys, and stock market specialists were “incapable of
understanding a derivatives-based Ponzi scheme”
such as the one
he masterminded. That knowledge apparently emboldened Madoff and
encouraged him to continually expand the scope of his fraud.
Even after Markopolos explained the nature of Madoff’s fraud to SEC
officials, they apparently did not understand it. “I gift wrapped and
delivered the largest Ponzi scheme in history to them … [but the SEC]
did not understand the 29 red flags that I handed them.”
The
outspoken SEC critic went on to predict that “If the SEC does not
improve soon, they risk being merged out of existence in the upcoming
rewrite of the nation’s regulatory scheme.”
Markopolos’s pointed criticism of the SEC and additional harsh criticism
by several other parties forced the agency’s top officials to respond. An
embarrassed SEC Chairman Christopher Cox admitted that he was
“gravely concerned”
by the SEC’s failure to uncover the fraud.
In an extraordinary admission that the SEC was aware of numerous red flags raised about
Bernard L. Madoff Investment Securities LLC, but failed to take them seriously enough, SEC
Chairman Christopher Cox ordered a review of the agency’s oversight of the New York
securities-trading and investment-management firm.
Epilogue
On March 12, 2009, Bernie Madoff appeared before Judge Denny Chin in a federal courthouse in New York City. After Judge Chin read the 11 counts of fraud, money laundering,
perjury and theft pending against Madoff, he asked the well-dressed defendant how he
pled. “Guilty,” was Madoff’s barely audible one-word reply. Judge Chin then told Madoff
to explain what he had done. “Your honor, for many years up until my arrest on
December 11, 2008, I operated a Ponzi scheme through the investment advisory side of
my business.”
Madoff then added, “I knew what I did was wrong, indeed criminal.
When I began the Ponzi scheme, I believed it would end shortly and I would be able to
extricate myself and my clients … [but] as the years went by I realized this day, and my
arrest, would inevitably come.”
Despite allegations his two sons, his brother, and his wife were at least knowledgeable
of his fraud and possibly complicit in it, Madoff refused to implicate any of them or any
of his other subordinates. Madoff claimed that he alone had been responsible for the
fraud and that the brokerage arm of his business, which had been overseen by his
brother and his two sons, had not been affected by his Ponzi scheme. On June 29, 2009,
Madoff appeared once more in federal court. After reprimanding Madoff for his actions,
Judge Chin sentenced him to 150 years in federal prison, meaning the 71-year-old felon
would spend the rest of his life incarcerated.
In August 2009, Frank DiPascali, Madoff Securities’ former chief financial officer,
pleaded guilty to complicity in Madoff’s fraudulent scheme. During an appearance in
federal court, DiPascali testified, “It was all fake; it was all fictitious. It was wrong and I
knew it at the time.”
As a result of DiPascali’s cooperation with federal law
enforcement authorities, more than one dozen other former subordinates or business
associates of Bernie Madoff, including his brother Peter, would plead guilty or be
convicted of various criminal charges. DiPascali died in May 2015 while awaiting
sentencing for his role in Madoff’s fraud.
David Freihling, Madoff’s long-time auditor, pleaded guilty in November 2009 to the
nine-count indictment filed against him by federal prosecutors. Freihling’s sentencing
hearing was delayed six times while he was cooperating with the ongoing investigations
of the Madoff fraud. Finally, in May 2015, a federal judge sentenced Freihling to one year
of home detention. The judge justified the lenient sentence by noting Friehling’s
extensive cooperation with law enforcement authorities investigating the Madoff fraud.
In 2009, the AICPA announced it had expelled Friehling for not cooperating with its
investigation of his audits of Madoff Securities; one year later, Friehling was stripped of
his CPA license by the state of New York. The controversy over the failure of Friehling’s
firm to undergo any peer reviews persuaded the New York state legislature to pass a law
in December 2008 requiring most New York accounting firms that provide attest
services to be peer reviewed every three years.
Although none of the Big Four accounting firms were directly linked to Madoff
Securities, legal experts speculated those firms would face civil lawsuits in the wake of
Madoff’s fraud. That potential liability stemmed from the Big Four’s audits of the large
“feeder firms” that entrusted billions of dollars to Madoff. Lynn Turner, a former chief
accountant of the SEC, contended that the auditors of the feeder firms had a
responsibility to check out Madoff’s auditor. “If they didn’t, then investors will have to
hold the auditors [of the feeder firms] accountable.”
In February 2009, KPMG became the first of the Big Four firms to be named as a
defendant in a civil lawsuit triggered by the Madoff fraud. A California charity sued the
accounting firm to recover the millions of dollars it lost due to Madoff’s scheme. KPMG
had served as the independent auditor of a large hedge fund that had hired Madoff to
invest the charity’s funds. Among critical risk factors allegedly overlooked by the KPMG
auditors was that Madoff’s huge organization was serviced by a tiny accounting firm
operating out of a strip mall in a New York City suburb.
In November 2015, Ernst & Young (E&Y) became the first of the Big Four firms to be
held civilly liable for losses suffered by investors in a Madoff feeder firm. E&Y was
ordered to pay those investors approximately $25 million. PricewaterhouseCoopers
settled a similar lawsuit in January 2016 by agreeing to pay $55 million to the investors
in another of Madoff’s feeder firms.
In early 2009, President Obama appointed Mary Schapiro to replace Christopher Cox as
the chairperson of the SEC. In the aftermath of the Madoff fraud, Schapiro reported her
agency would revamp its oversight policies and procedures for investment advisers
having physical custody of customer assets. Among the measures ultimately adopted by
the SEC were annual surprise audits of such firms to ensure customer funds are being
properly safe-guarded. Those investment advisory firms must also have internal control
audits by independent accounting firms to determine whether they have “the proper
controls in place.”
Finally, Schapiro pledged the SEC would implement specific
measures to ensure credible whistle-blowing allegations, such as those made by Harry
Markopolos regarding Madoff’s firm, would be investigated on a thorough and timely
basis.
Bernie Madoff’s victims included a wide range of prominent organizations and
individuals. The large asset management firm Fairfield Greenwich Advisers alone had
more than one-half of its investment portfolio of $14 billion invested with Madoff. Other
companies and organizations that had significant funds in the custody of Madoff
Securities included the large Dutch bank Fortis Bank, the large British bank HSBC, the
International Olympic Committee, Massachusetts Mutual Life Insurance Company, New
York University, Oppenheimer Funds, and Yeshiva University.
One media outlet reported that the list of individuals who had investments with Madoff
reads like a lineup from Lifestyles of the Rich and Famous, a popular television program
of the 1980s. Those individuals included award-winning actors and actresses,
Hollywood directors and screenwriters, media executives, journalists, professional
athletes, a Nobel Prize winner, and high-profile politicians. Among these individuals
were Kevin Bacon, Zsa Zsa Gabor, Jeffrey Katzenberg, Henry Kaufman, Larry King, Ed
Koch, Sandy Koufax, Senator Frank Lautenberg, John Malkovich, Stephen Spielberg, Elie
Wiesel, and Mort Zuckerman.
By early 2016, Irving Picard, the court-appointed trustee charged with recovering the
billions of dollars stolen or misused by Madoff, had filed more than 1,000 civil lawsuits
against a wide range of defendants. To date, he has recouped more than $11 billion of
the losses suffered by Madoff investors. Those recoveries, the seizure of assets by law
enforcement authorities when Madoff revealed the fraud, and other collected amounts
reduce the net estimated losses of Madoff’s victims to somewhere between $10 to $20
billion.
Questions
1. Research recent developments involving this case. Summarize these developments
in a bullet format.
2. Suppose that a large investment firm had approximately 10 percent of its total assets
invested in funds managed by Madoff Securities. What audit procedures should the
investment firm’s independent auditors have applied to those assets?
3. Describe the nature and purpose of a “peer review.” Would peer reviews of Friehling
& Horowitz have likely resulted in the discovery of the Madoff fraud? Why or why
not?
4. Professional auditing standards discuss the three key “conditions” that are typically
present when a financial fraud occurs and identify a lengthy list of “fraud risk
factors.” Briefly explain the difference between a fraud “condition” and a “fraud risk
factor” and provide examples of each. What fraud conditions and fraud risk factors
were apparently present in the Madoff case?
5. In addition to the reforms mentioned in this case, recommend other financial
reporting and auditing-related reforms that would likely be effective in preventing
or detecting frauds similar to that perpetrated by Madoff.
The Trolley Dodgers
In 1890, the Brooklyn Trolley Dodgers professional baseball team joined
the National League. Over the following years, the Dodgers would have
considerable difficulty competing with the other baseball teams in the New
York City area. Those teams, principal among them the New York Yankees,
were much better financed and generally stocked with players of higher
caliber.
After nearly seven decades of mostly frustration on and off the baseball
field, the Dodgers shocked the sports world by moving to Los Angeles in
1958. Walter O’Malley, the flamboyant owner of the Dodgers, saw an
opportunity to introduce professional baseball to the rapidly growing
population of the West Coast. More important, O’Malley saw an
opportunity to make his team more profitable. As an inducement to the
Dodgers, Los Angeles County purchased a goat farm located in Chavez
Ravine, an area two miles northwest of downtown Los Angeles, and gave
the property to O’Malley for the site of his new baseball stadium.
Since moving to Los Angeles, the Dodgers have been the envy of the
baseball world: “In everything from profit to stadium maintenance … the
Dodgers are the prototype of how a franchise should be run.”
During the
1980s and 1990s, the Dodgers reigned as the most profitable franchise in
baseball with a pretax profit margin approaching 25 percent in many
years. In late 1997, Peter O’Malley, Walter O’Malley’s son and the Dodgers’
principal owner, sold the franchise for $350 million to media mogul Rupert
Murdoch. A spokes-man for Murdoch complimented the O’Malley family
for the long-standing success of the Dodgers organization: “The O’Malleys
have set a gold standard for franchise ownership.”
During an interview before he sold the Dodgers, Peter O’Malley attributed
the success of his organization to the experts he had retained in all
functional areas: “I don’t have to be an expert on taxes, split-fingered
fastballs, or labor relations with our ushers. That talent is all available.”
Edward Campos, a longtime accountant for the Dodgers, was a seemingly
perfect example of one of those experts in the Dodgers organization.
Campos accepted an entry-level position with the Dodgers as a young man.
By 1986, after almost two decades with the club, he had worked his way up
the employment hierarchy to become the operations payroll chief.
After taking charge of the Dodgers’ payroll department, Campos designed
and implemented a new payroll system, a system that only he fully
understood. In fact, Campos controlled the system so completely that he
personally filled out the weekly payroll cards for each of the Dodgers’ 400
employees. Campos was known not only for his work ethic but also for his
loyalty to the club and its owners: “The Dodgers trusted him, and when he
was on vacation, he even came back and did the payroll.”
Unfortunately, the Dodgers’ trust in Campos was misplaced. Over a period
of several years, Campos embezzled several hundred thousand dollars
from his employer. According to court records, Campos padded the
Dodgers’ payroll by adding fictitious employees to various departments in
the organization. In addition, Campos routinely inflated the number of
hours worked by several employees and then split the resulting
overpayments 50-50 with those individuals.
The fraudulent scheme came unraveled when appendicitis struck down
Campos, forcing the Dodgers’ controller to temporarily assume his
responsibilities. While completing the payroll one week, the controller
noticed that several employees, including ushers, security guards, and
ticket salespeople, were being paid unusually large amounts. In some
cases, employees earning $7 an hour received weekly paychecks
approaching $2,000. Following a criminal investigation and the filing of
charges against Campos and his cohorts, all the individuals involved in the
payroll fraud confessed.
A state court sentenced Campos to eight years in prison and required him
to make restitution of approximately $132,000 to the Dodgers. Another of
the conspirators also received a prison sentence. The remaining
individuals involved in the payroll scheme made restitution and were
placed on probation.
Epilogue
The San Francisco Giants are easily the most heated, if not hated, rival of the Dodgers. In
March 2012, a federal judge sentenced the Giants’ former payroll manager to 21 months in
prison after she pleaded guilty to embezzling $2.2 million from the Giants organization. An
attorney for the Giants testified that the payroll manager “wreaked havoc” on the Giants’
players, executives, and employees. The attorney said that the embezzlement “included
more than 40 separate illegal transactions, including changing payroll records and stealing
employees’ identities and diverting their tax payments.”
A federal prosecutor reported
that the payroll manager used the embezzled funds to buy a luxury car, to purchase a
second home in San Diego, and to travel.
When initially confronted about her embezzlement scheme, the payroll manager had
“denied it completely.”
She confessed when she was shown the proof that prosecutors
had collected. During her sentencing hearing, the payroll manager pleaded with the federal
judge to sentence her to five years probation but no jail term. She told the judge, “I cannot
say how sorry that I am that I did this, because it’s not who I am. I have no excuse for it.
There is no excuse in the wo