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Last Updated: Nov 2nd, 2009 - 17:32:57 |
NEW YORK (Reuters) - A brokerage firm that was a key middleman for Wall Street thief Bernard Madoff was hit with civil fraud charges on Monday, accused of unscrupulously luring new clients into the swindler's lair as he sought to keep his massive Ponzi scheme running.
The U.S. Securities and Exchange Commission filed fraud charges against Cohmad Securities Corp, which Madoff and his brother, Peter, partially owned; Cohmad's chairman, Maurice Cohn; and executives Marcia Cohn and Robert Jaffe.
The SEC said Cohmad and its top officers deceived investors who funneled billions of dollars into Madoff's money management business by portraying Madoff as virtually off-limits to new investors. In fact, the SEC said, Madoff wanted new clients to further his fraud, and rewarded Cohmad and its executives with more than $100 million in fees as reward for their referrals.
"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 enforcement division. "In fact, he needed a constant inflow of funds to sustain his fraud, and used his secret control of Cohmad to obtain them."
The lawsuit said Cohmad executives ignored many warnings that Madoff ran a fraud. Madoff, for instance, directed the Cohns to turn away any prospective client who worked in the financial industry as such investors would ask "too many questions," the SEC said.
Also charged in a separate SEC case was California investment adviser Stanley Chais, who oversaw three funds that had invested all of their assets with Madoff. Regulators say Chais, whose clients lost $1 billion in the scam, ignored red flags that Madoff's returns were false.
Chais, 83, known for handling investments for Hollywood's elite, including director Steven Spielberg, has said previously that he too was one of Madoff's victims.
A lawyer for Chais said the SEC lawsuit "paints a distorted and false picture of Stanley Chais" and that "like so many others, Mr. Chais was blindsided and victimized" by Madoff's fraud.
Chais already faces a lawsuit by the court-appointed trustee who is shuttering Madoff's business and seeking assets that can be returned to investors.
Madoff is set to be sentenced on June 29 after pleading guilty in March to bilking his customers out of $65 billion through a long-standing investment swindle in which he used money deposited by newer investors to pay earlier ones.
The SEC previously charged Madoff with fraud, as well as outside auditor David Friehling, who also faces charges of criminal wrongdoing. No one else has been charged criminally.
The SEC cases filed on Monday were brought in U.S. District Court in Manhattan, and seek financial penalties and disgorgement of ill-gotten gains.
Jaffe, 65, of Palm Beach, Florida, said though his attorneys that the SEC lawsuit is "unfair, baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe."
Jaffe is the son-in-law of one of Madoff's longtime customers, Carl Shapiro.
Attorneys for the other defendants were not immediately available.
FEEDERS UNDER FIRE
Since Madoff's December arrest, investigators have been circling around the middlemen who attracted billions in client funds for him. Madoff was long sought after by investors for providing steady returns in any market environment.
Madoff has admitted his returns were phony, and that he did not even trade in client accounts for years.
The SEC case against Cohmad -- a contraction of the names "Cohn" and "Madoff" -- portrays a firm that played a key role in the Ponzi fraud by finding new Madoff clients. Without new money, such scams collapse under their own weight.
The SEC said Cohmad's representatives planted themselves at golf and country clubs in search of new clients. The Cohmad representatives would project themselves as individuals who became wealthy through Madoff, and when asked, would agree to make an introduction to Madoff.
Cohmad and its representatives would then assist and arrange the opening of accounts with Madoff, the SEC said.
Cohmad's operations were housed in the same building as Madoff's investment arm. The SEC said Cohmad and the Cohns filed false regulatory forms that concealed Cohmad's primary business of bringing in investors for Madoff.
Separately, the trustee shutting down Madoff's business, Irving Picard, sued Cohmad, the Cohns and Jaffe in U.S. Bankruptcy Court in Manhattan, saying any fees it earned from referring clients to Madoff should be returned.
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