A key to the long-running success of Bernard L. Madoff's $65-billion Ponzi scheme was its secrecy and exclusivity. You had to know someone to get a piece of the action.
In Hollywood, that someone was often Beverly Hills money manager Stanley Chais, authorities say. On Monday, the Securities and Exchange Commission offered new details about how big a player regulators believe Chais was.
When the Ponzi scheme collapsed, Chais investors' accounts were valued at nearly $1 billion, authorities said. Although those accounts may now be worthless, Chais and his family took out nearly $546 million in ill-gotten profits from Madoff accounts from 1995 to 2008, the SEC said in a civil complaint.
On top of that, Chais collected nearly $270 million in fees from investors, the government said.
Madoff's misdeeds have been known for months, but the SEC lawsuit provided the most significant glimpse yet into the "feeder funds" that provided the new cash that allowed Madoff's operation to thrive.
Through his attorney, Chais denied wrongdoing and insisted that he too was a victim of the Madoff scheme.
Chais was prominent in Jewish philanthropy for decades.
To clients, he cast himself as an "investing wizard," never revealing that Madoff was actually pulling the strings, the complaint said. What's more, the SEC said that Chais knew, or was reckless in not knowing, that Madoff was running a Ponzi scheme.
From 1999 to 2008, for example, Madoff did not report a single loss on thousands of purported stock trades on Chais' accounts, "which should have made clear to Chais that Madoff's reports to Chais were false," the SEC said.
The sweeping accusations were contained in a lawsuit against Chais filed in federal court in Manhattan.
While thousands of investors lost money in the Madoff scheme, the SEC said it was a profitable arrangement for the 82-year-old Chais, who had more than 40 accounts with Madoff for himself, his family and related entities.
That news infuriated some Southern California investors, still reeling from their enormous financial losses.
Mark Peel, executive chef and part owner of Campanile restaurant, said he lost $6 million from investments that Chais allegedly made secretly with Madoff.
"The allegations against Stanley are definitely deeply disturbing," said Peel, who said he was forced to sell his Hancock Park home as a result of his loss and is now renting nearby. Four of his five children lost their college funds as well, he said.
Peel said he met Chais 25 years ago, through his former father-in-law, Larry Silverton. Chais is a part owner of the La Brea Boulevard building that houses Campanile and is also an investor in the restaurant, Peel said.
Another Chais client was Oscar-winning screenwriter Eric Roth, who wrote "The Curious Case of Benjamin Button." Roth has sued Chais for breach of fiduciary duty and negligence.
Chais now lives in New York, reportedly in ill health, and could not be reached. His attorney, Eugene Licker, issued a statement that Chais and his family were victims of the Madoff fraud and had no idea that Madoff was defrauding investors.
In a second lawsuit filed Monday, the SEC accused Cohmad Securities Corp.; Chairman Maurice J. Cohn; his daughter, Chief Operating Officer Marcia B. Cohn; and executive Robert M. Jaffe for actively marketing investment opportunities with Madoff while disregarding evidence that Madoff was operating a fraud.
"Madoff cultivated an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors," said Robert Khuzami, director of the SEC's enforcement division. "In fact he needed a constant in-flow of funds to sustain his fraud and used his secret control of Cohmad to obtain them."
An attorney for Cohmad did not return a call seeking comment.
The two SEC lawsuits seek to obtain financial penalties and the repayment of ill-gotten gains.
Chais and his wife, Pamela, a playwright and screenwriter, were mainstays of Jewish philanthropy for three decades. Their family foundation supported many charities, most of them related to improving education in Israel.
Chais holds honorary doctorates or has served on the boards of a number of schools and universities in Israel, among them the Weizmann Institute of Science, the Hebrew University of Jerusalem and the Technion-Israel Institute of Technology.
According to the SEC's lawsuit, Chais has been a close friend of Madoff since the 1960s and formed the Lambeth, Brighton and Popham investment funds in the 1970s for the purpose of investing through Madoff.
Another Chais investor, Bob Chew, said he invested for several years, all the while thinking that Chais was handling trades himself. Never, he said, did Chais mention Madoff. He said he welcomed the SEC's involvement, although he was uncertain whether he can recover any of the more than $1.2 million he had under Chais' management at the time the Madoff investment scheme collapsed.
"What it does collectively for all the [Chais] investors, it will help find out exactly how far the alleged wrongdoing went. If he was in any way liable, it may start other civil actions and may lead to the freezing of his assets so whatever money he has can go back to investors," Chew said. "It kind of exposes people like Stanley Chais. He purposely misled us."
Madoff was arrested in December and charged with operating the largest Ponzi scheme in U.S. history, pegged at $65 billion in real and artificial assets.
He pleaded guilty last month in Manhattan federal court to 11 counts and is awaiting sentencing.