Madoff Suits Add Details About Fraud

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."

(Published by NY Times - June 22, 2009)