SEC 'provided credibility' to Madoff-sued adviser

* SEC "provided credibility" to Madoff-adviser says

* Denies being one of main feeders to swindler

By Grant McCool

NEW YORK, Oct 21 (Reuters) - Hollywood investment adviser Stanley Chais said U.S. Securities and Exchange Commission allegations against him in the Madoff fraud should be thrown out because the regulator "provided credibility" to the epic swindler, a court document said on Wednesday.

In a June lawsuit against Chais, the SEC said he held himself out for 40 years as an investing wizard but did nothing more than turn investors' assets over to Bernard Madoff, losing clients nearly $1 billion while pocketing $250 million of fees.

The SEC was criticized by lawmakers and an internal watchdog for failing to catch Madoff in five probes over the years. Investors have also said Madoff had close ties to the SEC and that led them to believe investments were safe.

"Plaintiff's claims are barred by virtue of plaintiff's own conduct, which provided credibility to Madoff," Chais' lawyers said in Manhattan federal court in their answer to the SEC's lawsuit.

SEC spokesman John Heine declined to comment.

Madoff, 71, is serving life prison sentence for running a decades-long, global multibillion-dollar Ponzi scheme, Wall Street's biggest investment fraud.

An internal SEC investigation found that regulators missed "numerous" red flags that might have led to the detection of Madoff's $65 billion scheme. An internal report published in September said its investigators never did a "thorough and competent" probe despite complaints dating to 1992. A Ponzi scheme is one in which early investors are paid with money of new clients.

Madoff's scheme collapsed in the faltering economy in 2008 as redemptions overwhelmed his ability to keep paying. The FBI arrested him last December and he pleaded guilty in March to numerous crimes.

The SEC said Chais, known for handling investments for Hollywood's elite including director Steven Spielberg, oversaw three funds that invested all of their assets with Madoff, ignoring red flags that Madoff's returns were false.

Chais "denies the allegation that he served as one of the largest feeders into Madoff" and "denies the allegation that as of November 2008 Madoff was representing that Chais' funds collectively held over $900 million," Wednesday's filing said.

The case is SEC v Stanley Chais, U.S. District Court for the Southern District of New York, No. 09-05681 (Editing by Steve Orlofsky)