Madoff Middlemen Face ProbesFeb 13, 2009 | Parker Waichman LLP
Middlemen who recruited investors for Bernard Madoff are coming under closer scrutiny, as investigators try to determine how much they knew about Madoff's alleged Ponzi scam. But as Reuters has reported, it is uncertain how cooperative they will be - recently, one such middleman who was summoned to testify before Massachusetts regulators used his 5th Amendment rights and refused to talk.
Bernard Madoff was arrested on one count of securities fraud on December 11. Madoff - once a chairman of the Nasdaq stock exchange - was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm was primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.
According to the FBI complaint against Madoff, that business was largely a Ponzi scheme. The FBI said Madoff “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”
Madoff employed dozens of middlemen who recruited for so-called feeder funds that funneled money to Madoff. In some cases, those who invested with these go-betweens had no idea they were ultimately putting money into Madoff's funds.
According to Reuters, Massachusetts Secretary of State William Galvin has been one regulator who has been aggressively pursuing Madoff's recruiters. Robert Jaffe is one of those middlemen. He became the manager of the Boston office of Cohmad Securities in 1989.
According to The Wall Street Journal, the firm was co-owned by Madoff, and helped attract investors to his fund. Galvin is trying to prove that Cohmad was so intertwined with Madoff’s firm that it constituted a “common enterprise.” According to the Journal, Galvin is seeking to revoke Cohmad’s state securities registration because it allegedly withheld information about the Madoff case. As part of his investigation, Galvin subpoenaed Jaffe, but according to court documents, Jaffe invoked his right against self-incrimination.
Yesterday, we reported that Galvin's complaint against Cohmad had also revealed that Madoff's wife, Ruth, had withdrawn $10 million from Madoff's funds the day before he was arrested. While she has not been named in any criminal complaint, one legal expert told CBS News that new revelations “could be used to put pressure on her to assist with the investigation.”
Reuters is also reporting that court documents have been filed on the Massachusetts island of Nantucket suggesting that another middleman, Frank Avellino, may have known crucial information about Madoff's losses a week before he was arrested.
Meanwhile, The Wall Street Journal reported yesterday that federal prosecutors in Manhattan have interviewed two assistants who worked at Madoff's investment business. The Journal said the interviews mean prosecutors are ramping up their investigation into who else may have been involved. The assistants are not charged with anything, and it is not known if they implicated anyone else.