Our memory of seminal events tend to fade with each new and salient event, so after Bernard Madoff we could only vaguely remember Enron, and after the revelations of the enforcement action against Goldman, Sachs, it's hard to remember who Madoff was. (See Glom posts on SEC v. Goldman all over, but here, here and here.) However, a hardly noted piece of the Madoff prosecution may be instructional for what lies ahead in the Goldman action.
Much of the narrative surrounding the Madoff proseuction was that regardless of what Madoff maintains, he simply could not sustain a 20- or 30-year Ponzi scheme without no one else knowing about it. Bernard L. Madoff Investment Securities LLC relied on several key employees, auditors and feeder funds. It's headquarters was two floors down from Madoff's trading and market-making operations, which employed his two sons, his brother and many other people. No one seems to believe that Madoff could have fooled all of the people all of the time. So, the DOJ has charged a few people with criminal fraud: Frank DiPascali, who pleaded guilty, Daniel Bonventre, BLMIS director of operations who maintains his innocence, David G. Friehling, who pleaded guilty, and two computer programmers.
In addition, the SEC filed civil complaints against Cohmad Securities Corporation and its principals and Stanley Chais, for acting as feeder funds and recruiters to BLMIS. The first of these cases, against Cohmad and its recruiter Robert Jaffe, ended in dismissal by Judge Louis Stanton of the Southern District of New York. Note that Cohmad Securities was founded by Madoff and his friend Sonny Cohn and was housed on the same floor as BLMIS. Madoff owns 15% of Cohmad, his brother owns 9%, and Ruth Madoff was also a client. Jaffe recruited investors in Palm Beach for Madoff. However, the Southern District held that the SEC had not met its pleading burden for most of the fraud claims under Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). The court stated the Iqbal holding that
"A complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief."
Here is the SEC complaint, if you want to try your hand and picking out facts with possible inferences, plausible inferences and probable inferences. I am not a CivPro expert, but I am told that this case is a rather strict reading of Iqbal. I leave it to you people to parse the ongoing implications of that case. Just as an uninitiated observer, I disagree with the Cohmad court's ruling on at least one point. The complaint shows that Cohmad did not disclose its relationship with Madoff on required filings with the SEC. For example, Cohmad filings do not include any reference to BLMIS in answers to questions about referring or introducing customers or being affiliated with other advisory businesses. The court believes that the chain of inferences from lying to regulators about its relationship with an unregistered advisory business to which it funnelled accounts for fees accounting for as much as 90% of its annual revenue is "speculative and flimsy." As a minor victory, the court did not dismiss the counts for not correctly filing the required broker-dealer forms, but refused to make the leap from lying on the forms to knowing that BLMIS was not a legitimate business.
So, we always thought the SEC had it easier than private plaintiffs because it could bring actions against aiders and abetters and didn't have to deal with pleading requirements of the PSLRA. I guess Iqbal somehow levels that playing field, although possibly not in the right direction.
The Cohmad case seemed to be the easiest case to bring, and maybe it would have been for the DOJ, who operates under different and sometimes easier rules for securities cases than civil rules. Judge Stanton did dismiss without prejudice with leave to replead for 30 days, but that deadline passed over a month ago.
So, will the Goldman complaint survive the inevitable Motion to Dismiss? The judge seems to be Judge Barbara Jones, so perhaps we will have to wait for her interpretation of plausible inference and "speculative and flimsy."
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