REVENGE OF THE NERDS: The Rise of the Ponzi Hacker

Madoff Fail

A new class of hackers has emerged: the Ponzi Hacker. Well maybe hackers perpetrating frauds isn't new, but assisting a billionaire to fool the Securities and Exchange Commission through clever coding as part of a much larger ponzi scheme is, well, novel. Yes, you guessed it, we're talking about good old Bernie Madoff. Here is a quote from the Register:

"A federal grand jury has indicted two computer programmers on fraud and conspiracy charges for developing programs used by Bernard Madoff to cook the books in his billion-dollar ponzi scheme.

Jerome O'Hara and George Perez knowingly created the programs that removed or altered key data contained in reports submitted to regulators in the United States and Europe, according to the indictment filed Wednesday in US District Court in Manhattan. Among other things, their code contained algorithms to randomly generate times for purported orders that in fact were never made.

The reports were generated on 'House 17,' an IBM AS/400 server kept on the 17th floor of Madoff's offices that had no link to the outside world, prosecutors allege. To ensure the reports appeared genuine, the server pulled partial information from a separate AS/400 that was linked to the Depository Trust Company and other third parties...

The document goes on to claim that the programmers knew their programs were being used to falsify information being provided to the Securities and Exchange Commission and the European Accounting Firm, and sought to profit from their expertise. In 2006, O'Hara and Perez cashed Madoff checks worth $976,000 and $289,000 respectively.

That same year, the pair threatened to leave their jobs unless they received raises of 20 per cent. Madoff not only met their demands, he also gave them raises of $64,812 and $60,165.

They were charged with one count each of conspiracy, falsifying records of a broker-dealer and falsifying records of an investment adviser. If convicted on all counts, the programmers each face 30 years in federal prison and fines of more than $5m. O'Hara's attorney told numerous news outlets that his client intends to plead not guilty."

Well maybe they didn't become billionaires, or even millionaires, in their assistance to Mr. Madoff, but it appears that they may have assisted Madoff in amassing his wealth. From the story above, one of the more difficult elements of the crime for the prosecutors to prove may be knowledge. Surely there will be the "play dumb" defense of, 'we didn't know what the program was for, we were just programmers.' But then again, intentionally coding a special server to randomly make up false trading data would be a difficult position to defend. I haven't seen the indictment or any of the facts yet so it's hard to say exactly how it will play out.

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