Will Madoff's enablers get hard time?
There are several avenues lawyers may use to go after the alleged swindler's network of conduits.
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(Fortune Magazine) -- Nice work if you can get it: Hanging out at the Palm Beach Country Club and introducing friends to an exclusive and seemingly safe place to stash your cash - Bernard L. Madoff Investment Securities.
That was life for Robert Jaffe, a South Florida philanthropist and son-in-law of one of Madoff's earliest investors, Carl Shapiro, founder of the clothing brand Kay Windsor. Nearly 20 years ago Shapiro set up Jaffe with a job introducing people to Madoff. As Jaffe told the Palm Beach Daily News, he would earn a small percentage of an investor's first profits. "A common practice in the business," as he described it.
But now that Bernie Madoff has been accused of masterminding a $50 billion Ponzi scheme, Jaffe's sweet life has turned sour. And defrauded Madoff investors are wondering what happens to conduits like Jaffe. Though prosecutors haven't commented on the go-betweens, "the feds will work hard to press charges against them," says a New York attorney representing a Madoff investor. "There's no Ponzi scheme without its marketers."
But can simply being a conduit get you prison time? The criminal statutes for fraud require "knowledge and intent," says Thomas Piesch, a former Boston prosecutor now a defense attorney with Conn Kavanaugh. This is tough to prove, basically requiring smoking-gun evidence, like a damning e-mail.
A shakier tactic at prosecutors' disposal is arguing that Jaffe and other intermediaries practiced "willful blindness." The classic example: If you're in Colombia, given a package, and handed $10,000 for delivering it to the U.S., it's hard to deny it may be drugs. In the Madoff case this could mean ignoring warning signs like a tiny accounting firm or returns too good to be true.
Of course, plenty of others didn't catch on either, including the SEC and investors like Mort Zuckerman. (See clarification.) Speaking for his family to the Palm Beach Daily News, Shapiro, who himself lost millions, says they did not suspect fraud and called the revelation a "knife in the heart." This would indicate that the marketers were blind-sided rather than willfully blind.
Another key variable in determining the fate of Madoff's intermediaries is whether Madoff tells the feds they were in on the scam, which would provide grounds for conspiracy charges. Even if they're innocent, Madoff may have reason to rat: Giving up the names of accomplices could help reduce his sentence, says Robert Ridge, a defense attorney with the firm Thorp Reed & Armstrong.
Fraud carries prison time of up to 20 years, though at this magnitude "it could be decades," says Piesch. And there's no such thing as helping a little bit when it comes to being an accomplice to fraud: If convicted, Madoff's marketers would be guilty of the full scheme. That's just the criminal side. On the civil side, the intermediaries are likely to face lawsuits from defrauded investors - and civil charges, lawyers say, are a lot easier to prove.
"We don't have to prove fraud," says Reed Kathrein, whose Seattle-based litigation firm is investigating go-betweens. "Our case will probably evolve into breach of fiduciary duty." In other words, think twice before giving any investment advice to your golf buddies.
Joining the club
It wasn't easy getting access to Madoff, who often turned away billionaires. A few in his circle, however, could make an introduction.
- Stanley Chais: Based in Beverly Hills, he controlled firms that helped hedge funds invest in Madoff, according to an investor lawsuit. Chais, whose own charity lost money to Madoff, did not return calls for comment.
- Maurice Cohn: Securities regulators are looking into Cohmad Securities (for "Cohn" and "Madoff"), which is part-owned by Cohn, shares an address with Madoff in New York City, and employs Jaffe.
- Robert Jaffe: Son-in-law of one of Madoff's earliest investors and member of the Palm Beach Country Club. He says he earned a small profit when Madoff took on an investor Jaffe introduced to him.
Clarification: After this story was published Zuckerman sent Fortune the following letter:
Managing Editor, FORTUNE
In the article in your issue of January 19, 2009 entitled, "Will Madoff Get Hard Time," you say that "Plenty of others didn't catch on either, including the SEC and investors like Mort Zuckerman."
I did not invest with Mr Madoff, had never spoken to him nor heard of him when the scandal broke. It was a charitable trust called the Mortimer B. Zuckerman Charitable Trust that invested in the Ascot Fund run by Ezra Merkin.
Mr Merkin's Ascot Fund was supposed to be a fund of funds but turned out to be a fund of fund since the entire fund was invested with Madoff without the knowledge of most of the people who invested in the Ascot Fund, including me. Indeed, the $27 million per year that Mr Merkin was receiving for the management of the fund was to perform due diligence on a diverse group of funds, for it was this diversity that was represented by Mr Merkin as the investment philosophy to the clients of the Ascot Fund.