Bernard Madoff's former top lieutenant Thursday said his boss sometimes acted like a "frantic lunatic" and gave the most detailed description yet of the extreme steps the Ponzi schemer used to dodge a 2004 SEC audit, in testimony at the trial of five Madoff aides.
Frank DiPascali, appearing for a third day as a government witness in federal court in Manhattan, said Madoff sometimes spoke too openly for his own good in forums with staffers, who "had no clue" as he supervised the creation of an alternate set of records to deflect the Securities and Exchange Commission.
"A lot of these discussions he would have with himself, out loud," DiPascali said. "He did that all the time. . . . It was an open environment and at times he didn't know when to shut up. At times I cringed at what came out of his mouth. He was a frantic lunatic at times."
The five former aides -- including account manager Annette Bongiorno, 65, of Manhasset, and computer programmer Jerome O'Hara, 50, of Malverne -- are charged with conspiracy and fraud. They are accused of helping Madoff fool investors and regulators.
The 2004 SEC examination has long been a target of critics who have faulted the agency for completely missing a $60 billion Ponzi scheme under their noses. The examination was initiated by Eric Swanson, an SEC lawyer who later married Madoff's niece, but that connection did not come up in DiPascali's testimony.
DiPascali said that for years, Madoff had sent out account statements to investors claiming to be holding nonexistent securities for them. But as soon as the SEC asked for records of his business, Madoff feared he would have to show he held securities that didn't exist.
"If you opened the hatch," DiPascali said, "there were a lot of things that couldn't be explained."
So Madoff ordered the creation of an alternative universe of new phony records that would portray him as merely an "executing broker" who took cash from an investor, used it to purchase securities, and then transferred custody back to the investor's bank.
But the new records had glitches. At one point, DiPascali said, Madoff insisted that they all be redone because the headings had a client's name and address, and he thought they would be more likely to fool the SEC if they had the name and address of a custodial bank.
"My response was, 'Where do we get these banks?' " DiPascali said. "His response was, 'Make them up.' "
"As he was speaking, he said he preferred foreign banks. . . . There's much less likelihood the commission would call Hong Kong or Luxembourg."
Madoff also brainstormed with aides to trim his list of hundreds of customers, identifying for the SEC only the most widely known to keep the scope of his operation a secret, and then ordered up "blotters" for those customers detailing trades through foreign brokers that could not be easily checked.
"What we're going to do," DiPascali said he told the firm's computer programmers, "is just fudge it."
DiPascali's testimony is scheduled to resume Monday.