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Bernard Madoff

Who Are Bernard Madoff’s “Feeders”?

June 23, 2009 02:41 PM
by Denis Cummings
The SEC has filed fraud charges against “feeders” that made millions by passing their clients' money along to disgraced financier Bernard Madoff.

Cohmad, Chais Charged With Fraud

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The Securities and Exchange Commission on Monday took its first action against the “feeders” to Bernard Madoff’s $65 billion Ponzi scheme, announcing civil fraud charges against one brokerage firm and four individuals.

In two separate lawsuits, the SEC accused brokerage firm Cohmad Securities—specifically its chairman Maurice Cohn, chief operating officer Marcia Cohn and broker Robert Jaffe—and California financial adviser Stanley Chais with “knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud.”

“This is what will be the beginning of a number of lawsuits brought by the trustee and the SEC to recover from the commission feeders the substantial revenue that they earned off the Madoff victims,” said Jerry Reisman, an attorney representing some Madoff investors. “It was this group of money seekers who assisted Madoff to prey off the victims and perpetrate his fraud.”

Background: Madoff’s “Feeders”

Madoff’s close friends, business partners and family invested directly with him, but the majority of his investors came through “feeder funds,” which collected investments and handed them over to Madoff to manage. The funds, says American Public Media’s Kai Ryssdal, “allowed for some distance between the sucker and the con man.”

In a profile of Madoff’s middlemen—including Jaffe and Chais—The Wall Street Journal tells how the heads of feeder funds earned the trust of upper-class circles and had no trouble finding investors.

The funds would collect fees for supposedly managing investors’ money, though all they were doing was passing the money along to Madoff. Many individual investors were unaware that Madoff was involved.

We, the investors, didn't know we were in feeder funds,” Robert Chew, who lost money through Chais, wrote in Time. “Had we known our life savings were being shunted over to another party that actually did the real work, we may have invested elsewhere. After all, why would we pay such piggy fees to people that did nothing?”

Madoff instructed the feeder funds not to say or advertise that they were invested with him, reports PBS’ Frontline, because he was unregistered with the SEC. As a result, even many of the feeder funds were unaware of how many others were investing with Madoff.

Sandra Manzke, founder of Maxam Capital, which lost about $300 million with Madoff, told Frontline, “Did I know about all the feeder funds in Europe? Absolutely not. … Many funds and investors were very secretive. They didn’t mention they had money with Madoff. It was something you didn’t talk about.”

In the wake of the Madoff scandal, many of these feeder funds have been sued by investors over the fees, which total at least $790 million, reported The Wall Street Journal. Targeting feeder funds may be the best chance for many investors to recover funds, said the Journal, though “statutes of limitations could limit recovery.”

With Madoff pleading guilty in March, regulators have turned their attention to feeder funds to determine if they were part of his con. In April, Massachusetts Secretary of State William Galvin became the first government official to take action against the feeders, filing charges against Fairfield Greenwich Group, Madoff’s largest feeder fund, with about $7.2 billion invested. He accused the group of failing to perform due diligence in examining Madoff’s investments.

Days later, New York State Attorney General Andrew Cuomo filed similar charges against J. Erzra Merkin.

Reference: Frontline documentary

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