Federal regulators on Monday charged a New York brokerage firm said to be secretly controlled by Bernard Madoff and a prominent California investment adviser with securities fraud, accusing them of funneling billions of dollars from investors into Madoff's Ponzi scheme.
The Securities and Exchange Commission announced civil fraud charges against Cohmad Securities, its chairman, Maurice "Sonny" Cohn, his daughter, Chief Operating Officer Marcia Cohn, and vice president and broker Robert Jaffe. Named in a second SEC lawsuit was investment adviser Stanley Chais, a longtime Beverly Hills philanthropist, who allegedly oversaw three funds that invested all of their assets — nearly $1 billion — with Madoff.
They were crucial to the success of Madoff's $50 billion fraud scheme, targeting affluent yet financially unsophisticated investors by burnishing the impression that one could only be accepted as an investor with Madoff with special access and as a favor, the regulators said. Cohmad and Chais were said to have gained nearly all their revenue from introducing investors to Madoff in a well-oiled marketing operation.
Madoff secretly controlled New York-based Cohmad and used it to procure a steady stream of funds for his multibillion-dollar fraud, the SEC said. Cohmad's main office was in the Lipstick Building on Manhattan's Third Avenue — the same address as Madoff's investment and securities brokerage firms.
While channeling billions in investor funds to Madoff, the associates together collected several hundred million dollars in fees from the now-disgraced money manager, the SEC alleged.
The agency's lawsuits were filed in federal court in Manhattan. One accuses Cohmad, the Cohns and Jaffe of actively marketing Madoff's funds to prospective investors "while knowingly or recklessly disregarding" facts that indicated he was running a fraud. A second suit alleges that Chais committed fraud by misrepresenting his role in managing the three funds' assets and providing account statements to investors that he should have known were false.
Also Monday, the court-appointed trustee overseeing the liquidation of Madoff's assets said he had filed a complaint in bankruptcy court in Manhattan against Cohmad. It alleges that Madoff's firm paid Cohmad more than $100 million for recruiting unsuspecting investors to infuse the Ponzi scheme with billions of dollars. Trustee Irving Picard has filed similar complaints against other big money managers — including Chais — and investors in recent months in an aggressive, far-reaching bid to retrieve funds to pay off thousands of claims from cheated Madoff clients. Chais has denied any wrongdoing.
"Although Madoff stated he was operating alone, our investigation has yielded significant evidence that, in fact, a variety of other people helped Madoff prey on innocent victims," David Sheehan, a lawyer for Picard, said in a statement.
Chais has protrayed himself for the past 40 years as an investment "wizard," who managed hundreds of millions of dollars of investor funds in the three partnerships, according to the SEC. In truth, he was little more than a middleman who merely turned over all of the funds' assets to Madoff while charging the funds more than $250 million in fees, the agency said. Since the early 1970s, Chais was one of the biggest "feeders" of funds to Madoff, the SEC said.
Attorneys for the Cohns, Jaffe and Chais didn't immediately return telephone calls seeking comment. Maurice Cohn, 78, lives in Manhasset, N.Y.; Marcia Cohn, 49, is a resident of New York City. Jaffe, 65, lives in Palm Beach, Fla.
Madoff, 71, has been jailed since March, when he pleaded guilty to securities fraud, perjury and other charges. He admitted stealing billions of dollars from some investors to pay fraudulent profits to others. He faces up to 150 years in prison and is scheduled to be sentenced next week in Manhattan federal court.
The thousands of investors who lost money included ordinary people, Hollywood celebrities and scores of famous names in business and sports — as well as big hedge funds, international banks and charities in the U.S., Europe and Asia.
Massachusetts' secretary of state, William Galvin, has had Cohmad's registration as a securities broker revoked, saying the firm had refused to provide information about its connections to Madoff, who was a co-owner. Cohmad was fined $100,000.
Cohmad has denied Galvin's claim that it appeared to have received more than $67 million from Madoff's investment firm in "account supervision" fees from 2000 to 2008, representing a large share of Cohmad's income.