MadoffDec 29, 2008 | Parker Waichman LLP
The investigation into the Bernard Madoff investment fraud is turning to "middlemen" who convinced investors to sink their money into Madoff's alleged Ponzi scheme. According to The Wall Street Journal, many of those at the center of the Madoff probe claim to be victims themselves, but investigators want to know exactly what these recruiters told investors, and whether or not they even disclosed that Madoff would be the one managing investors' money.
The 70-year-old Madoff was arrested on one count of securities fraud on December 11. Madoff - once a chairman of the Nasdaq stock exchange - is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is 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 reportedly told employees that his fraud could cost investors as much as $50 billion.
According to The Wall Street Journal, Madoff was able to keep his alleged Ponzi scheme going for decades due to his continuing ability to lure investors. His "middlemen" were key to this, the Journal said. These recruiters pitched the investing strategy and received fees from the Madoff in return. Many of them became wealthy in the process.
According to The Wall Street Journal, the following individuals are being investigated:
- Robert Jaffe - Jaffe Became the manager of the Boston office of Cohmad Securities in 1989. According to the Journal, the firm was co-owned by Madoff, and helped attract investors to his fund. The Massachusetts Secretary of State has subpoenaed Cohmad seeking details of its relationship with Madoff.
- Stanley Chais - According to the Journal, Chais, who was headquartered in Los Angeles, ran an exclusive investment pool known as "the Arbitrage". Four Chais investors interviewed by The Wall Journal say they assumed their money had been managed by Chais, when in reality he had turned the funds over to Madoff. A spokesperson for the Chais family foundation told the Journal that both Chais and the foundation lost a great deal of money as a result of the Madoff fraud. In June, Chais sent a letter to clients, saying that he was moving to Jerusalem for six months for medical reasons, the Journal said.
- Jeffry Tucker - Founding partner in Fairfield Greenwich Group. According to The Wall Street Journal, one of the group's funds, Fairfield Sentry, which charged clients a 1 percent management fee plus 20 percent of the fund's profit, had invested all of its funds with Madoff .
- Andres Piedrahita - A partner in Fairfield Greenwich. According to The Wall Street Journal, he may have been trying to sell Fairfield Sentry just days before Madoff's alleged pyramid scheme collapsed.
- Robert Schulman - Ran Tremont Group Holdings for 14 years until he retired in July. According to the Journal, he claimed a close relationship with Madoff. Investors in Tremont's Rye Select Broad Market funds run by Madoff paid annual fees to Tremont of 1 percent to 1.75 percent of assets, the Journal said. Tremont also was a conduit for professional money managers running funds that invested in other hedge funds.
Right now, there are no allegations that any of these middlemen was aware of Madoff's alleged fraud. However, some have been named in lawsuits by angry clients, who say that they failed to perform due diligence, and in some cases didn't reveal they were actually invested Madoff.