Bernard Madoff demanded his inner circle rush to re-create years’ worth of fake account documents for a feeder fund that in 1992 attracted unwanted attention from regulators, the con man’s ex-finance chief told a jury.

Madoff began swearing and “throwing himself around the office like a lunatic” after hearing Avellino & Bienes, a Florida investment firm that funneled money to his fraud, was being probed for failing to register its promissory notes as securities, Frank DiPascali, 57, told a jury in Manhattan federal court yesterday at the trial of five former colleagues.

Annette Bongiorno, who ran Madoff’s investment advisory unit and is one of the defendants in the case, created fresh sets of fake stock purchases and randomized trading numbers for the new Avellino & Bienes statements and kept detailed notes of her efforts, said DiPascali, who pleaded guilty to aiding the fraud and is testifying in a bid for a lighter sentence.

DiPascali, who started working for Madoff as a researcher when he was 19 years old in 1975, is the highest-ranking former Madoff executive to testify in the first criminal trial stemming from the Ponzi scheme, which the U.S. has said began in the early 1970s and collapsed at the peak of the financial crisis. The scam deprived investors of $17 billion in principal.

The U.S. Securities and Exchange Commission started the investigation into Fort Lauderdale, Florida-based Avellino & Bienes, of which Madoff’s father-in-law was a founder, after receiving complaints that it might be a Ponzi scheme.

When Madoff heard about the review, he worried investigators would “peel away the onion” and reveal the fraud, DiPascali said. The con man began “ranting and raving to himself about the idiocy” of the feeder fund’s managers and “circled the wagons” to avoid the fallout, he said.

Madoff realized the feeder fund’s statements in his investment advisory business didn’t match the trading strategy that Avellino & Bienes had been disclosing to its own customers, DiPascali said. Since the discrepancy would attract too much attention, Madoff instructed his deputies to fix at least three years’ worth of account documents, he said.

Prosecutors showed the jury several hand-written pages of notes showing Bongiorno’s methodical approach to creating the new fake statements, according to DiPascali. One such page showed Bongiorno requesting that a money transfer listed on an old Avellino & Bienes statement be turned into a dividend payment from General Motors Corp., because such a payment would be less suspicious than a transfer from another account, he said. They also chose fake trades in Ford Motor Co., Intel Corp. and other popular companies to avoid drawing attention, he said.

SEC Probe

The SEC might have discovered Madoff’s fraud at the time if the probe had been handled differently, the agency determined in an internal report about Madoff’s fraud. The agency received client complaints about Avellino & Bienes and suspected the firm ran a Ponzi scheme.

The SEC, learning that Madoff controlled the firm’s funds, assembled an “inexperienced” inspection team that conducted a “brief and very limited examination of Madoff,” without seeking to determine how Avellino & Bienes repaid customers, according to the report.

The other defendants, who have pleaded not guilty, are Joann Crupi, who managed large accounts; Daniel Bonventre, who ran Madoff’s broker-dealer unit, where real trading took place; and computer programmers George Perez and Jerome O’Hara, who allegedly automated the production of fake account statements.

‘Pretty Extensive’

DiPascali said his deception was “pretty extensive” and that he personally lied to customers when he spoke with them on the phone. Bongiorno had similar conversations in which she lied to other investors, he said. DiPascali said Crupi, O’Hara and Perez were all deeply involved in the deception.

DiPascali told the jury about another incident involving an unexpected audit by KPMG, during which he was asked to provide a copy of a report he knew the company didn’t have because the trading was all fake. He said he called O’Hara and requested the report be delivered, and ignored O’Hara’s protestations on the other end of the line to avoid tipping off the auditor that something was wrong.

When he went to check on the fake report, which had just been printed and was still hot, DiPascali said Crupi, O’Hara and Perez were tossing it around “like a medicine ball” to make it look worn instead of new, and then put it in a refrigerator to cool it off, the former finance chief testified.

DiPascali also testified he could tell right away that fake trades were being used in customer accounts when he joined the firm after high school.

The fraudulent trading went on “for as long as I could remember,” he said. “It was virtually impossible not to know what was happening.”

DiPascali is among about half a dozen former Madoff employees who have pleaded guilty and are testifying in the case. Enrica Cotellessa-Pitz, Madoff’s ex-controller, and David Kugel, a former trader, testified earlier.

Defense lawyers have said cooperating witnesses such as DiPascali will lie on the stand and implicate others in a bid to spend less time behind bars. DiPascali said yesterday he’s hoping for a “substantial” reduction to his sentence. DiPascali, who faces as long as 125 years in prison, said yesterday he’s hoping for a “substantial” reduction to his sentence.

Madoff called DiPascali on the morning of Dec. 11, 2008, the day he was arrested, to say his brother, Peter Madoff, was in the office with the Federal Bureau of Investigation, the former finance chief testified yesterday. DiPascali said he yelled at Madoff, “Why are you calling me?” and he threw his phone across the room when he was told the news.

DiPascali pleaded guilty in August 2009 to 10 counts, including conspiracy, fraud and money laundering. He told U.S. agents that company employees asked him if the business was a “scam” before the world learned the truth, according to interview documents filed in the case.

Madoff, 75, is serving a 150-year sentence in a federal prison in North Carolina.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

–Editors: Peter Blumberg, Michael Hytha