By Joseph Ax
NEW YORK (Reuters) - During three decades of working for Bernard Madoff, Frank DiPascali said knew his boss was running an illegal scheme.
But the longtime aide also maintained he believed Madoff's claims that he had hidden assets to cover his customers' liabilities - until a meeting in Madoff's office one evening in late 2008.
"He turned to me and said, crying: 'I'm at the end of my rope,'" DiPascali testified in federal court in New York on Tuesday. "'I don't have any more goddamn money. The whole goddamn thing is a fraud.'"
Only days later, Madoff was under arrest.
DiPascali's testimony came during the trial of five former Madoff employees accused of helping pull off a Ponzi scheme that cost investors an estimated $17 billion.
All five - computer programmers Jerome O'Hara and George Perez, portfolio managers Annette Bongiorno and Joann Crupi, and back office director Daniel Bonventre - have said they are innocent of the charges and, like many others, were duped by Madoff into believing the business was legitimate.
DiPascali, who pleaded guilty and is the prosecution's star witness, has been testifying in the U.S. District Court in Manhattan for more than a week, detailing how he and the defendants conspired to falsify documents, fool regulators and hide the fraud from the firm's clients.
Despite those efforts, which he knew at the time were illegal, DiPascali said Madoff convinced him that he had money elsewhere, such as investments in a French bank and an airplane-leasing company.
He knew the purported trading in customer accounts was fake but thought the promised returns were realistic, backed by Madoff's hidden assets. Madoff went so far as to leave prospectuses for overseas real estate as "props" on his office couch, DiPascali said.
"I understood the entire fraud to be something other than it was," DiPascali said, getting emotional himself as he described the fateful meeting with Madoff.
The scheme collapsed almost exactly five years ago, when Madoff was arrested on December 11, 2008. The economic downturn prompted many customers to ask for redemptions, leaving Madoff unable to cover their requests, DiPascali said.
Earlier on Tuesday, DiPascali described how three of the defendants became worried about their own fates in 2006 after three U.S. Securities and Exchange Commission audits.
Following dinner at a Greek restaurant where O'Hara and Perez drank a "considerable amount" of alcohol, O'Hara said "something to the effect of, 'Could this whole thing be a fraud?'" DiPascali testified.
DiPascali said he brushed off the question as "ridiculous," but over the next few weeks both programmers expressed concern about their work altering records for the SEC.
That led to a meeting with Madoff, in which O'Hara and Perez suggested that he shut down the investment advisory business where the scheme originated, causing Madoff to become belligerent, DiPascali said.
"'You're not going to tell me how to run my business,'" Madoff said, according to DiPascali. After the meeting, he told DiPascali to "offer them anything they want," he said.
The two programmers told DiPascali they didn't want to have massive salary and bonus increases on paper and at one point suggested that they might be paid in diamonds, DiPascali said.
"I kind of flew off the handle," DiPascali said. "Where am I going to get a bag of diamonds?"
Eventually they agreed on a sizable raise, he said.
A few weeks later, also in 2006, DiPascali said he and Bonventre had a drink at a local restaurant, where Bonventre asked if Madoff had "an exit strategy."
"If he does, he hasn't explained it to me," DiPascali said he replied.
Bonventre said he had his own plan: He would maintain that Madoff told him the trades were all occurring in Europe and that Bonventre should mind his own business, DiPascali said.
Madoff is serving a 150-year prison sentence and has denied involving others in his scheme. Defense lawyers are expected to begin questioning DiPascali on Wednesday, the five-year anniversary of Madoff's arrest.
The case is USA v. O'Hara et al, U.S. District Court for the Southern District of New York, No. 10-cr-0228.
(Reporting by Joseph Ax; editing by Gunna Dickson)