for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up

Pressure mounts on Madoff middlemen

BOSTON (Reuters) - After rebuffing subpoenas for weeks, a close associate and key middleman for Bernard Madoff essentially had one thing to say when he finally showed up to testify before Massachusetts regulators: I’m not talking.

Robert Jaffe, who had delivered clients to Madoff, invoked the “Fifth Amendment,” a constitutional right of witnesses who do not want to incriminate themselves, when he testified last week, court documents released on Wednesday show.

The documents and Jaffe’s silence in the face of a barrage of questions by Massachusetts Secretary of State William Galvin illustrate the intensifying focus on middlemen and so-called “feeder-funds” that funneled investor money to Madoff.

“Galvin is taking a novel and aggressive approach to scrutinize the middlemen more closely and find out what they knew and when,” said Jay Gould, who heads law firm Pillsbury Winthrop Shaw and Pittman LLP’s hedge-fund practice.

“Ultimately he is looking if any of these middlemen committed criminal fraud,” added Gould, who once worked for the U.S. Securities and Exchange Commission. “Even being stupid could end up getting you a very severe penalty.”

Growing scrutiny of those who channeled funds to Madoff also follows the filing of court documents on the Massachusetts island of Nantucket suggesting that another middleman, Frank Avellino, may have known crucial information about Madoff’s losses a week before the New York money manager was arrested for running a purported $50 billion investment fraud.

Harry Markopolos, a former investment manager who tried to warn regulators about Madoff, told a congressional hearing this month that Madoff could not have acted alone, pointing to accountants and people helping to convey money to his firm. Several lawyers working on the case told Reuters they agree.

Markopolos said he knew of at least a dozen feeder funds that have not been publicly identified.

Galvin issued a 39-page complaint on Wednesday seeking to revoke the securities registration of Jaffe’s firm, Cohmad Securities Corp, in Massachusetts and providing extensive details of its tight links with Madoff.

“The relationship was so close that Galvin seems to be doing the right thing by probing this middleman at a time other prosecutors are concentrating mainly on Madoff himself,” said a lawyer who declined to be identified so he could speak freely.

Cohmad, a conjunction of the last names of investor Maurice Cohn and Madoff, is a small brokerage house in which Madoff has a 10 to 25 percent stake.

It operates out of the same Manhattan office as Madoff’s stock-trading operation. Jaffe is vice president.

“DARK SIDE”

Galvin’s 39-page complaint offers a possible glimpse into the inner-workings of a key Madoff associate.

Over the past eight years, Madoff made more than $67 million in monthly payments to Cohmad, providing about 84 percent of Cohmad’s total income in that period, it said.

The money appeared to be based on assets that clients referred by Cohmad had under Madoff’s management, it said.

Cohmad would keep a portion and then distribute the rest to its staff, said the complaint, which noted that the information was based on “limited documents” and failed to include commissions Jaffe received from Madoff.

The complaint suggests Madoff had held Cohmad together, paying for its electricity, market data and exchange fees, telephone lease, long-distance calls, employee benefits and other expenses each month over that period.

The most sensational revelation was that Madoff’s wife Ruth withdrew $10 million from Madoff funds on December 10, the day before her husband was arrested and charged, after pulling out $5.5 million on November 25.

Galvin also found that Cohmad had ties to another possible investment conduit to Madoff -- Sonja Kohn, the high-profile Viennese banker who founded Bank Medici in Austria. The bank was placed under state supervision in December. It had sold more than $3 billion of Madoff-exposed funds to investors.

Through Cohmad, Madoff paid about $526,000 to Kohn even though she was not listed as a Cohmad employee or registered in any way with Cohmad, the complaint said.

When Galvin’s team asked Jaffe about commissions and other issues on February 4, Jaffe invoked the Fifth Amendment.

Jaffe has said he is as much a victim as anyone, telling the Palm Beach Post in December that while he earned 1-to-2 percent of an investor’s first profits in Madoff’s fund, he knew nothing about his “dark side.”

“Ultimately, Galvin is trying to determine if these people were part of the scheme,” said Gould.

Editing by Jason Szep and Ted Kerr

for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up