SEC Charges Madoff Solicitors and Feeder With Fraud
FOR IMMEDIATE RELEASE
Washington, D.C., June 22, 2009 — The Securities and Exchange Commission today charged a New York-based broker-dealer and four individuals with securities fraud, alleging that they collectively raised billions of dollars from investors for Bernard L. Madoff's Ponzi scheme.
In a complaint filed in U.S. District Court for the Southern District of New York, the SEC charged Cohmad Securities Corporation as well as its chairman Maurice J. Cohn, chief operating officer Marcia B. Cohn, and registered representative Robert M. Jaffe for actively marketing investment opportunities with Madoff while knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud. In a separate complaint filed in the same court, the SEC charged California-based investment adviser Stanley Chais, who oversaw three funds that invested all of their assets with Madoff. When the Ponzi scheme collapsed, Chais investors' accounts were valued at nearly $1 billion.
The SEC previously charged Madoff and Bernard L. Madoff Investment Securities LLC (BMIS) as well as their auditors with committing securities fraud through a Ponzi scheme perpetrated on advisory and brokerage customers of BMIS.
"Madoff cultivated an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "In fact, he needed a constant in-flow of funds to sustain his fraud, and used his secret control of Cohmad to obtain them."
James Clarkson, Acting Director of the SEC's New York Regional Office, added, "These Madoff solicitors collectively received several hundred million dollars in fees over the past few decades while Madoff ruined the finances of countless investors."
The Cohmad Complaint
The SEC's complaint against the Cohmad defendants alleges that while bringing investors to Madoff, they ignored and even participated in many suspicious practices that clearly indicated Madoff was engaged in fraud. For example, the SEC's complaint alleges that the Cohns and Cohmad filed false Forms BD and FOCUS reports that concealed Cohmad's primary business of bringing in investors for BMIS. This referral business comprised as much as 90 percent of Cohmad's revenue in some years, brought in more than 800 accounts, and billions of dollars into BMIS' advisory business, for which BMIS paid them more than $100 million.
The SEC's complaint also alleges that the compensation arrangement between BMIS and Cohmad indicated fraudulent conduct at BMIS. Cohmad was paid an annual percentage of the funds its representatives (except Jaffe) brought into BMIS offset by any withdrawals from those investor accounts. This compensation arrangement indicated to Cohmad and the Cohns that BMIS was not providing any real returns to investors. For example, where the client's principal investment had been $10,000, Cohmad stopped receiving fees if a client withdrew $15,000 from an account, even if under BMIS' management the account had purportedly grown to $100,000. In Cohmad's internal records, such an account was designated with a negative $5,000 number.
The SEC alleges that Jaffe also participated in Madoff's fraud by soliciting investors and bringing more than $1 billion into BMIS. The SEC's complaint alleges, among other things, that Madoff compensated Jaffe with outsized returns in Jaffe's personal accounts that he knew, or was reckless in not knowing, were manufactured by BMIS employees entering fictitious, backdated trades onto trade confirmations and account statements for his personal accounts at BMIS.
The Chais Complaint
The SEC's complaint alleges that Chais committed fraud by misrepresenting his role in managing the funds' assets and for distributing account statements that he should have known were false.
According to the SEC's complaint, 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 more than $250 million in fees for his purported "services." Although Madoff managed all of the Funds' assets, 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 SEC's 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 against the Cohmad defendants specifically alleges that Cohmad violated Section 17(a) of the Securities Act of 1933, Sections 10(b), 15(b)(1), 15(b)(7), and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 15b3-1, 15b7-1 and 17a-3 thereunder and aided and abetted violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-3 thereunder; that the Cohns violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aided and abetted violations of Sections 10(b), 15(b)(1), 15(b)(7), and 17(a) of the Exchange Act and Rules 10b-5, 15b3-1, 15b7-1 and 17a-3 thereunder and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-3 thereunder; and that Robert Jaffe violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aided and abetted violations of Sections 10(b), 15(b)(7), and 17(a) of the Exchange Act and Rules 10b-5, 15b7-1 and 17a-3 thereunder and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-3 thereunder.
The SEC's complaint against Chais specifically alleges that he violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.
Both SEC's complaints seek injunctions, financial penalties and court orders requiring Cohmad, the Cohns, Jaffe and Chais to disgorge their 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.
# # #
For more information, contact:
Andrew M. Calamari - Associate Director, SEC's New York Regional Office - 212-336-0042
Robert J. Burson - Associate Director, SEC's Chicago Regional Office - 312-353-7428
Alexander M. Vasilescu - Regional Trial Counsel, SEC's New York Regional Office - 212-336-0178