Madoff Feeder Cohmad Was Fraud’s ‘Facade,’ SEC Claims

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Madoff Feeder Cohmad Was Fraud’s ‘Facade,’ SEC Claims (
By David Scheer and Joshua Gallu

June 22 (Bloomberg) -- Cohmad Securities Corp., three of its executives and a California-based investment adviser were sued by U.S. regulators on claims they fraudulently fed investor funds to Bernard Madoff’s $65 billion Ponzi scheme.

Cohmad, the New York brokerage Madoff co-founded in 1985, operated as his “facade,” sending him investors while he projected a “false aura of exclusivity and privilege,” the U.S. Securities and Exchange Commission said in a complaint filed at federal court in Manhattan today. Cohmad Chairman Maurice “Sonny” Cohn, 78, Chief Operating Officer Marcia Cohn, 49, and Vice President Robert Jaffe, 65, were named in the suit.

The defendants “were instrumental to the success of Madoff’s scheme,” the SEC said in its complaint. “Contrary to the illusion they fostered that only the privileged few could invest with Madoff, the defendants were, in fact, engaged in a well-organized marketing operation.” New York, said in an interview. The Cohns are father and daughter, the SEC said.

The lawsuit and a separate claim today against investment adviser Stanley Chais are the SEC’s first to target so-called feeder funds in Madoff’s fraud. Madoff, 71, has pleaded guilty to charges that he paid off old investors with money from new clients and faces as many as 150 years in prison when he is sentenced June 29.

Irving Picard, the bankruptcy trustee for Madoff’s firm, today sued Cohmad, Maurice Cohn and more than two dozen related individuals and trusts in U.S. Bankruptcy Court in New York. Cohmad had a “symbiotic” relationship with Madoff and reaped hundreds of millions of dollars, Picard said in his suit. The Cohmad name is a combination of Cohn and Madoff.

$100 Million Sought

Picard claims as much as 90 percent of Cohmad’s income came from referring clients to Madoff. The suit seeks to recover more than $100 million paid to Cohmad in the six years before Madoff’s firm declared bankruptcy.

Chais, a resident of New York and Beverly Hills, California, had since the early 1970s steered assets from three investment funds to Madoff, “despite having clear indications” the money manager was engaged in fraud, the SEC said in the separate suit in Manhattan.

The arrangement was “extremely profitable” for Chais, the suit said. From 1995 to 2008, withdrawals from Madoff’s firm by Chais and his family exceeded their investments by about $500 million, the SEC said.

“These Madoff solicitors collectively received several hundred million dollars in fees over the past few decades while Madoff ruined the finances of countless investors,” said James Clarkson, acting director of the SEC’s New York office.

‘Inherently Suspicious’

The way Cohmad was compensated by Madoff was “inherently suspicious,” the SEC said. Rather than being compensated for profits on the assets Cohmad had secured for Madoff, the company was allegedly only paid for acquiring new funds. Cohmad’s internal records didn’t reflect the returns Madoff had paid its clients, only the flow of funds, suggesting the profits were “fictitious.”

Jaffe, who brought in more than $1 billion since 1989, was allegedly compensated at least $150 million directly from Madoff’s scheme from 1996 to 2008, SEC said. Jaffe solicited funds from Florida retirees and investors while he “knew or recklessly disregarded that Madoff generated outsized returns using fictitious trades,” the SEC said

Allegations against Cohmad and the Cohns “are not based on any facts or evidence that we have seen,” Steven Paradise, an attorney for the company and the Cohns at Vinson & Elkins LLP in New York, said in an interview.

‘Baseless, Inaccurate’

The SEC’s complaint is “baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe,” attorneys Stanley Arkin, Howard Kaplan and Peter Pope at Arkin Kaplan Rice LLP said in a statement released by public relations firm Sloane & Company.

Chais’s lawyer, Eugene Licker at Loeb & Loeb LLP in New York, said the complaint “paints a distorted and false picture” of his client, who was “blindsided and victimized” by Madoff.

The cases are Securities and Exchange Commission v. Cohmad Securities Corp., Maurice J. Cohn, Marcia B. Cohn, and Robert M. Jaffe, 09-cv-5680, Southern District of New York (Manhattan); Securities and Exchange Commission v. Stanley Chais, 09-cv-5681, Southern District of New York (Manhattan); and Picard v. Cohmad Securities Corp., 09-AP-1305, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.