California Sues Madoff ‘Middleman’ Chais for Fraud
Brown’s suit follows actions against 82-year-old Chais by the U.S. Securities and Exchange Commission, a trustee liquidating Madoff’s defunct investment firm and former investors, and is the latest in a wave of suits against feeder funds accused of fueling Madoff’s decades-long fraud.
Chais and his lawyers were not available for comment Tuesday. His attorneys said in June that Chais too was a victim of Madoff’s fraud.
Courts will decide if the SEC, Brown or a $1 billion “clawback” lawsuit by Madoff trustee Irving Picard takes precedence at trial, but litigants in all feeder funds cases should strategize to avoid a “feeding frenzy” over limited assets, said former federal prosecutor Robert Mintz.
“All of these entities are trying to serve the same constituency: the defrauded investors,” said Mintz, a white collar defense attorney at McCarter & English.
“These suits are ultimately all about money so there is usually a time when the money that is available and the cost of pursuing it intersect and it makes some sense to reach some resolution.”
‘MADE TO ORDER’
Earlier this month, Massachusetts’ top securities regulator reached an $8 million settlement with Fairfield Greenwich Group for investing $7.2 billion of its clients’ money with Madoff.
The case was the first investor relief ordered by a regulator in the Madoff scandal and could serve as a template for other claims stemming from the largest-ever Ponzi scheme.
The California lawsuit accuses Chais — whose phone number was first on Madoff’s speed dial list — of hiding his relationship with the disgraced financier and of demanding “made-to-order” returns for his three funds, which targeted the Jewish community in Los Angeles and included the likes of director Steven Spielberg.
“In or around the mid-1990s, Chais told Madoff that he could not tolerate losses and that he did not want there to be any losses in any of the Chais Funds’ trades,” the California lawsuit said. “Madoff apparently accommodated Chais’s request and seems to have produced made-to-order returns for him.”
Chais, an unregistered financial advisor, made more than $270 million in fees between 1995 and 2008, charged 25 percent fees on profits and claimed to make 20 percent to 25 percent returns on investments, Brown said.
The suit demands disgorgement of those fees, $25 million in penalties and an injunction against Chais.
“(Chais) knew that the returns came in good years and bad, and you know the market has its ups and downs, so flows that just keep coming and never go down are a pretty good indication that something is wrong,” Brown said at a news conference in Los Angeles, where the lawsuit was filed Tuesday.
(Reporting by Gina Keating; additional reporting by Edwin Chan and Peter Henderson; editing by Andre Grenon)