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SEC Charges Cohmad Securities, 4 Individuals in Connection with Madoff Ponzi Scheme

Jun 23, 2009 | Parker Waichman Alonso LLP

Federal securities regulators have charged Cohmad Securities Corp. and three of its officials with helping admitted swindler Bernard Madoff raise money from investors that was used to fuel his $65  billion Ponzi scheme.  In a separate case, the Securities and Exchange Commission (SEC) also charged California-based investment adviser Stanley Chais - who ran three feeder funds that funneled money to Madoff - with securities fraud.

Madoff pleaded guilty to 11 criminal charges last March, including securities fraud, wire fraud, mail fraud, money laundering and making a false filing with the U.S. Securities and Exchange Commission. At the time of his plea, Madoff publicly admitted he had run a Ponzi scheme.

Madoff is being detained at the Manhattan Correctional Center in New York City, where he is awaiting sentencing scheduled for later this month. He faces as much as 150 years in prison.  However, it was recently learned that Madoff's defense attorney has written the judge scheduled for the sentencing, urging a 12-year-sentence.  According to the Associated Press, attorney Ira Sorkin wrote that such a sentence - which many of  Madoff's defrauded clients would likely consider too lenient - would acknowledge Madoff's voluntary surrender late last year.

According to a press release issued by the SEC, it has charged Cohmad Securities Corporation, its chairman Maurice J. Cohn, chief operating officer Marcia B. Cohn, and registered representative Robert M. Jaffe for actively marketing investment opportunities with Madoff while knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud.  The complaint alleges that while bringing investors to Madoff, the Cohmad defendants ignored and even participated in many suspicious practices that the SEC says clearly indicated Madoff was engaged in fraud.

The SEC's complaint against Stanley Chais alleges that for the last 40 years, he has held himself out as an "investing wizard" who managed hundreds of millions of dollars of investor funds in three partnerships, the Lambeth, Popham and Brighton Companies. In reality,  the SEC claims Chais was an unsophisticated investor who did nothing more than turn all of the Funds' assets over to Madoff, while charging the Funds more than $250 million in fees for his purported "services." Although Madoff managed all of the funds' assets, many of the his investors had never heard of Madoff before the collapse of his Ponzi scheme, and had not known that Chais invested with Madoff until Chais informed them after Madoff's arrest.  The SEC also alleges that Chais ignored red flags indicating that Madoff's reported returns were false.

Finally, the SEC complaint alleges that Chais also opened and exercised control over approximately 60 other accounts at Madoff's firm on behalf of his family members and related entities. Taking all of these accounts collectively, between 1995 and 2008, Chais and his family members and related entities withdrew more than $500 million more than they actually invested with Madoff, the SEC said.

Both SEC complaints seek injunctions, financial penalties and court orders requiring Cohmad, the Cohns, Jaffe and Chais to disgorge their allegedly ill-gotten gains. Both complaints were filed in U.S. District Court for the Southern District of New York.