The “How” and “Who” Of Madoff: New Insights

Since the Madoff Ponzi scheme scandal emerged, key questions have been “how” and “who.” How did he bilk so many people for so long? Who else knew and helped him? Mr. Madoff, whose sentencing is scheduled for Monday, June 29, 2009, has said little about how it was done except to insist he acted alone. It’s fair to say that everyone wants to know how, and few believe Mr. Madoff about the who.

To date, the authorities have said little. Some insights came from the suit by the New York AG against Ezra Merkin and his feeder fund Gabriel Capital, discussed here. Other insights come from the actions by the SEC and DOJ against the auditors, SEC v. Friehling, Civil Action No. 09 cv 2467 (S.D.N.Y. Filed Mar. 18, 2009) and U.S. v. Friehling, Case No. 09-mj-00729 (S.D.N.Y. Filed Mar. 18, 2009), both of which are discussed here. Still, little is known about what has been called the Ponzi scheme of the ages.

More pieces are emerging however, with two new suits by the SEC, SEC v. Cohn, Civil Action No. 09 cv 5680 (S.D.N.Y. Filed June 22, 2009) and SEC v. Chais, Civil Action No. 09 cv 5681 (S.D.N.Y. Filed June 22, 2009). The Cohn case names as defendants New York broker dealer Cohmad Securities, its chairman Maurice Cohn and registered representative Robert Jaffee. The firm, located in the same building as Madoff’s securities operation, is owned by Maurice Cohn, Marcia Cohn, Bernard Madoff, Madoff’s brother, Maurice Cohn’s brother, Robert Jaffee and another Cohmad employee.

For more than two decades the defendants in Cohn facilitated Mr. Madoff’s fraudulent operations by aggressively marketing the Ponzi scheme. According to the complaint, defendants projected a “false aura of exclusivity and privilege that came to be associated with the opportunity to invest with the great Madoff. Madoff’s secret marketing operations were housed within the office of Bernard L Madoff Investment Securities Corporation LLC (“BMIS”) under the façade of a separately registered broker-dealer, defendant Cohmad.” The marketing targeted affluent, but financially unsophisticated investors, according to the SEC. The firm’s extensive dealings with Madoff were concealed from regulators by falsifying its filings with the SEC — acts which furthered Mr. Madoff’s efforts to evade detection. In fact, Mr. Madoff directed defendants to maintain secrecy about their arrangements.

During their years of marketing the Ponzi scheme king, the Cohmad defendants ignored numerous red flags suggesting the true nature of the fraudulent operation they were selling unsuspecting victims. Those included the fact that BMIS employees were generating false confirmation and statements that reflected backdated trades in Mr. Jaffe’s own personal accounts at the Madoff firm.

The Cohmad defendant faired far better than the investors they lured into the scheme. Their marketing efforts yielded them more than $100 million paid through Cohmad. Maurice Cohn and Robert Jaffee were paid, in addition, millions of dollars directly from Madoff’s brokerage firm.

The complaint alleges violations which include Section 17(a) and 10(b) of the Securities Act and the Exchange Act as well as Section 206 of he Advisers Act. The case is in litigation. See also Lit. Release No. 21095 (June 22, 2009).

The Chais defendants also fed the Madoff money abyss. The suit is against a California investment adviser who has funneled money to the Ponzi operation since the early 1970s. Mr. Chais, according to the SEC, held himself out as an “investing wizard, purporting to execute a complex trading strategy on behalf of hundreds of investors . . .” Mr. Chais claimed to operate three investment funds, Lambeth Company, the Brighton Company and the Popham Company.

Contrary to the representations he made to his investors, Mr. Chais lacked any real investment skills. The money he raised from investors was, unknown to them, simply turned over to Mr. Madoff for use in his fraudulent scheme. Despite clear indications of fraud, Mr. Chais continued to distribute account statements to the investors in his three funds based on the purported returns of the Madoff scam. By November 2008, Mr. Madoff claimed that the investors in the three funds had over $900 million invested, all of which has been wiped out.

Mr. Chais and his family however profited from the Madoff relationship. Through an array of accounts Mr. Chais and his family received about a half a billion dollars over a thirteen year period according to the SEC.

The complaint in Chais, alleges violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Section 206 of the Advisers Act. The case is in litigation. See also Lit. Release No. 21096 (June 22, 2009).

Two more Madoff complaints. More defendants who were paid handsomely to ignore the repeated warnings that those whose money they gave to Mr. Madoff were being defrauded. Slowly the “how” and the “who” is emerging. There undoubtedly will be more.