U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21096 / June 22, 2009
Securities and Exchange Commission v. Stanley Chais, (S.D.N.Y. Civ. 09 CV 5681)
SEC Charges California Madoff Feeder With Fraud
The Securities and Exchange Commission (SEC) today charged Stanley Chais (Chais), a California-based investment adviser who acted as adviser to, and general partner of, three funds that invested all of their assets with Bernard Madoff (Madoff), with fraud for misrepresenting his role in managing the funds' assets and for distributing account statements that he should have known were false.
As alleged in the complaint filed today in federal court in Manhattan, for the last 40 years, Chais has held himself out as an investing wizard who managed hundreds of millions of dollars of investor funds in three partnerships, the Lambeth, Popham and Brighton Companies (the Funds). Chais made a number of misrepresentations over the years to the Funds' investors indicating that he formulated and executed the Funds' trading strategy. In reality, Chais was an unsophisticated investor who did nothing more than turn all of the Funds' assets over to Madoff, while charging the Funds well over $250 million in fees for his purported "services." Despite the fact that Chais turned all of the Funds' assets over to Madoff, many of the Funds' investors had never heard of Madoff before the collapse of his Ponzi scheme, and had not known that Chais invested with Madoff until Chais informed them after Madoff's arrest.
The SEC also alleges that Chais ignored red flags indicating that Madoff's reported returns were false. For example, Chais told Madoff that Chais did not want there to be any losses on any of the Funds' trades. Madoff complied with Chais's request, and from 1999 to 2008, despite reportedly executing thousands of trades on behalf of the Funds, Madoff did not report a loss on a single equities trade. Chais however, with the assistance of his accountant, prepared account statements for the Funds' investors based upon the Madoff statements, and continued to distribute them to the Funds' investors even though he should have known they were false.
According to the complaint, Chais also opened and exercised control over approximately 60 other accounts at Madoff's firm on behalf of his family members and related entities. Taking all of these accounts collectively, between 1995 and 2008, Chais and his family members and related entities withdrew more than $500 million more than they actually invested with Madoff.
The SEC's complaint specifically alleges that Chais violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
Among other things, the SEC's complaint seeks financial penalties and a court order requiring Chais to disgorge his ill-gotten gains.
The SEC acknowledges the assistance of the Trustee for the Securities Investor Protection Corporation, and California Attorney General Jerry Brown. The SEC's investigation is continuing.