Brown Sues Beverly Hills Investment Adviser Stanley Chais for Misleading Investors and Concealing Ties to Bernard Madoff
Los Angeles – Continuing his fight against financial fraud, Attorney General Edmund G. Brown Jr. today filed suit against “Madoff middleman” Stanley Chais, who directed hundreds of millions of dollars of his clients’ investments to Bernard Madoff, while actively concealing the link between the two.
This suit seeks at least $25 million in civil penalties, restitution for victims, disgorgement of profits and compensation and an injunction prohibiting future violations of California law.
“For decades, Stanley Chais posed as an investment wizard, but in truth, he was nothing more than a Madoff middleman, channeling hundreds of millions of dollars in investor funds to his friend’s Ponzi scheme,” Brown said. “Chais intentionally concealed his close ties to Madoff, while collecting nearly $270 million in fees.”
From the early 1970s until December 2008, Chais directed hundreds of millions of dollars to Madoff through three funds -- the Brighton, Lambeth and Popham companies -- collectively known as the Chais Funds.
Chais, who operated out of Beverly Hills, attracted hundreds of investors to these funds by producing annual returns of 20 to 25 percent.
Chais claimed that he generated these high returns through superior skill and experience, use of advanced technology and connections to sophisticated brokers in New York. Investors were discouraged from asking about his investment strategy and were led to believe that he utilized a complex and diversified approach involving arbitrage, derivates, stock, currency and futures trading.
In reality, Chais turned over all of the Chais Funds’ investments to Madoff, who relied on such feeder funds and middlemen to attract the cash flow needed to prop up his Ponzi scheme. In return, Madoff produced made-to-order returns.
Chais told Madoff that he did not want any losses on the Chais Funds’ trades, and Madoff accommodated his request. Between 1999 and 2008, despite supposedly executing thousands of trades on behalf of the Chais Funds, Madoff did not report a loss on a single equities trade. The Chais Funds received improbably high and consistent returns of between 20 and 25 percent, with only three months of negative returns between 1996 and 2007.
For his services, Chais charged investors an astronomical annual fee of 25 percent on all profits. Over the past decade, Chais collected almost $270 million in fees.
Although Chais turned over all the Chais Funds’ assets to Madoff, most investors had never heard of Madoff and were completely unaware of the connection between the two men until after the Ponzi scheme collapsed and their investments were lost.
After conducting a seven-month investigation, Brown today filed suit in Los Angeles Superior Court. The suit demands:
• An injunction prohibiting Chais, his successors, agents, representatives and employees from continuing to operate;
• Full restitution of any money or other property acquired through these illegal actions;
• Disgorgement all profits and compensation obtained through these illegal actions; and
• Payment at least $25 million in civil penalties.
Brown is suing Chais for:
• Committing securities fraud in violation of California Corporations Code Section 25401;
• Engaging in acts, practices or a course of business as an investment advisor that are fraudulent in violation of California Corporations Code Section 25235;
• Making or disseminating untrue or misleading statements in violation of California Business and Professions Code Section 17500; and
• Engaging in unfair competition in violation of California Business and Professions Code Section 17200.
On March 12, 2009, Madoff pleaded guilty to 11 felony counts and admitted to defrauding thousands of investors of billions of dollars. Federal prosecutors estimated client losses, which included fabricated gains, of almost $65 billion. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum allowed.
On June 22, 2009, the SEC filed a complaint against Chais in U.S. District Court for the Southern District of New York alleging that he committed fraud by misrepresenting his role in managing the funds' assets and for distributing account statements that he should have known were false.