US: Madoff Suits Add Details About Fraud

Publisher Name: 
New York Times

Three lawsuits filed on Monday provided new details about what regulators say went on inside Bernard L. Madoff's long-running Ponzi scheme, including information about who might have helped perpetuate the fraud for so long.

No one but Mr. Madoff and his accountant have faced criminal charges
so far. But in two civil fraud cases filed Monday, federal regulators
contend that a prominent investor and a small brokerage firm both
helped Mr. Madoff sustain the Ponzi scheme by steering billions of
dollars into it, in exchange for hundreds of millions of dollars in
fees and profits.

Taken together, the new lawsuits expand on what regulators have
previously disclosed about Mr. Madoff's swindle, which wiped out
customer account balances totaling almost $65 billion.

In one lawsuit, the Securities and Exchange Commission filed civil fraud charges
against Stanley Chais, a prominent California money manager and one of
Mr. Madoff's earliest investors, with accounts dating to 1970.

The lawsuit accused Mr. Chais of deceiving his clients and ignoring obvious signs of fraud.

Some of those signals, regulators say, included Mr. Madoff's
ability to comply with a request from Mr. Chais that none of the Chais
accounts should ever report a single losing trade. The second civil fraud case,
also filed by the S.E.C., contended that three senior executives at the
Cohmad Securities Corporation, a small brokerage firm co-founded by Mr.
Madoff, knowingly helped finance the Ponzi scheme and conceal it from
regulators for years.

The third suit, filed in federal bankruptcy court
by the trustee seeking assets for Madoff victims, also named Cohmad and
its three senior executives, along with more than a dozen of its
current or former employees. It seeks to recover millions of dollars in
fees and profits the defendants received from Mr. Madoff over the years.

Cohmad, which rented space in Mr. Madoff's Manhattan offices, was
little more than a stealth marketing arm that allowed Mr. Madoff to
maintain his aura of exclusivity, the S.E.C. contended.

In each case, the defendants deny that they knew about Mr. Madoff's
fraud. They also emphasized that they, like other Madoff victims, lost
enormous sums of money when the scheme collapsed with Mr. Madoff's
arrest in December.

For the most part, the S.E.C. case mirrors accusations in a lawsuit the Madoff trustee, Irving H. Picard,
filed against Mr. Chais last month. However, it adds the claim that Mr.
Chais demanded that Mr. Madoff never incur losses in his accounts.

Eugene R. Licker of Loeb & Loeb, a lawyer for Mr. Chais, denied
the S.E.C. accusations. "Like so many others, Mr. Chais was blindsided
and victimized by Bernard Madoff's unprecedented and pervasive fraud,"
Mr. Licker said in a statement. "Mr. Chais and his family have lost
virtually everything - an impossible result were he involved in the
underlying fraud."

He added that his client "has faith that the judicial system will
allow him to fight these reckless charges and restore his hard-earned
good name."

The Cohmad executives named in the suits were Maurice J. Cohn, its
co-founder and chairman; his daughter Marcia Beth Cohn, its president
and chief operating officer; and Robert M. Jaffe, its vice president.
The two new lawsuits against Cohmad and the executives included new
accusations about the firm's role in the fraud.

Both lawsuits asserted that Mr. Madoff paid fees to Cohmad
executives and brokers based on the amount of cash they steered into
his hands. But according to the lawsuits, those fees were based on
records that showed only the actual cash status of customer accounts -
the amounts of cash invested and withdrawn - without including the
fictional profits shown in the statements provided to customers.

When a customer's withdrawals exceeded the cash invested, Cohmad's
employees no longer earned fees on that account, even though the
customer's statements still showed a substantial balance, according to
the suits.

This unusual arrangement indicated that Cohmad and its
representatives knew that the profits that investors were supposedly
earning were bogus, according to the trustee's lawsuit complaint.

The S.E.C. complaint also asserted that Mr. Jaffe - who is the
son-in-law of Carl Shapiro, a philanthropist whose family reported
losing hundreds of millions in the scheme - personally brought more
than $1 billion into Mr. Madoff's investment business.

According to regulators, Mr. Jaffe was rewarded with outsize profits
of more than 40 percent in his personal Madoff accounts. Some of those
profits were generated after the fact to comply with Mr. Jaffe's
requests for specific long-term gains on particular days, the lawsuits
contend.

Mr. Jaffe "knew or recklessly disregarded" that these trades were
fictitious and continued to raise cash for Mr. Madoff from other
investors, according to the S.E.C. complaint.

Steven R. Paradise of Vinson & Elkins, representing Cohmad and
the Cohn family, denied any link between his clients and Mr. Madoff's
fraud.

"Our clients continue to be as shocked as anyone at the revelations"
about Mr. Madoff, Mr. Paradise said. "We look forward to the
opportunity to challenge both the S.E.C.'s and Mr. Picard's allegations
in court."

Mr. Jaffe's lawyers, led by Stanley S. Arkin, released a statement
saying that the S.E.C. complaint "smacks of impulsiveness and efforts
at self-justification. It is unfair, baseless in the law, and is
inaccurate in its understanding of the facts and of Mr. Jaffe."

Although Cohmad's offices were on the 18th floor of the three-floor
suite that housed Mr. Madoff's business, Ms. Cohn also had a key card
for the 17th floor, where the fraudulent investment management
operations was located, and records show that she used it regularly,
according to the trustee's lawsuit.

Exhibits filed
with the trustee's case showed that someone had used Ms. Cohn's card to
enter that area more than five dozen times during 2008, including two
occasions on the morning of Dec. 11, the day Mr. Madoff was arrested.

According to the trustee's lawsuit, all the individual Cohmad
defendants "knew or had access to facts" that raised serious doubts
about the legitimacy of that money management business and "had strong
financial incentives to participate in, to perpetuate and to keep quiet
about Madoff's fraudulent scheme."

AMP Section Name:Corruption
  • 106 Money & Politics
  • 186 Financial Services, Insurance and Banking
  • 208 Regulation