A Bernard Madoff feeder fund and three of its employees were charged with securities fraud by the Securities and Exchange Commission on Monday. The SEC alleges they acted as a "stealth sales force" and "knowingly or recklessly" participated in the Ponzi scheme by funneling billions of dollars to Bernard L. Madoff Investment Securities Corporation LLC.
Cohmad and three of its employees, Maurice Cohn, Marcia Cohn and Robert Jaffe, were "instrumental to the success of Madoff's scheme" for more than 20 years, according to documents filed in the United States District Court in the Southern District of New York.
The SEC alleges the defendants specifically recruited "affluent but financially unsophisticated investors."
"Madoff communicated to the Defendants that he would not accept investments from anyone who worked in the finance or banking industry. Madoff communicated his concern to Cohmad and the Cohns that sophisticated investors would ask 'too many questions,'" according to the civil complaint.
The three defendants were paid an excess of $100 million in fees for recruiting investors who accounted for more than 800 accounts at Madoff's investment advisory business.
The complaint alleges that Robert Jaffe was paid directly through his personal account at Bernard L. Madoff Investment Securities and received "outsized" returns of up to 46% despite the fact that the clients he referred received returns of 12% to 18%.
Jaffe withdrew at least $150 million from his accounts between 1996 and 2008 and "made specific request to BMIS seeking a specific dollar amount of gains for a given period," according to the SEC.
"The complaint filed today by the Securities and Exchange Commission, which we learned about only from the press, 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," Jaffe's lawyer said in a statement.
Lawyers for the Maurice and Marcia Cohn did not return calls for comment.
Ruth Madoff Withdrew $15.5M from Cohmad
Ruth Madoff withdrew $15.5 million from an account at Cohmad prior to her husband's arrest, according to documents released by the Massachusetts Secretary of State's office which is investigating Cohmad.
Cohmad Securities Corporation was founded in 1985 by Bernard Madoff and Maurice "Sonny" Cohn who is the Chief Executive officer. Maurice's daughter, Marcia, is the President, Chief Operating Officer and Chief Compliance Officer for Cohmad. Robert Jaffe serves as Vice President.
According to the court documents Bernard Madoff owns 15% of Cohmad, while Maurice and Marcia Cohn each own 48% and 25% respectively. Madoff's brother, Peter Madoff, own 9% of the company but has not been charged with any wrongdoing.
Cohmad shared offices with Bernard L Madoff Investment Securities in the "Lipstick" building on Third Avenue in Manhattan.
Stanley Chais Charged with Securities Fraud
In a separate complaint the SEC also charged Stanley Chais, an investment advisor based in California, with securities fraud for "misrepresenting his role" in managing the assets of three funds and for "distributing account statements that he should have known were false," according to the SEC.
Chais has known Madoff since the 1960s and recruited investors for nearly forty years, according to the court documents.
The SEC alleges Chais created three funds and earned nearly $270 million in commission fees from 1995 to 2008.
"The Complaint filed today by the SEC paints a distorted and false picture of Stanley Chais, borrowing liberally from baseless allegations by private plaintiffs trying to benefit themselves. Like so many others, Mr. Chais was blindsided and victimized by Bernard Madoff's unprecedented and pervasive fraud," according to a statement released by Chais' lawyer.
Court documents allege in the mid-1990s Chais told Madoff that "he did not want there to be any losses in any of the Funds' trades."
"Between 1999 and 2008, despite purportedly executing thousands of trades on behalf of the funds, Madoff did not report a loss on a single equities trade," according to the complaint.
Chais deposited approximately $12 million into his funds while withdrawing more than $355 million since 1995, according to the court documents.
A lawyer for Chais said his family has lost everything, "an impossible result were he involved in the underlying fraud."