A federal court dismissed fraud claims brought by the U.S. Securities and Exchange Commission against three Cohmad Securities Corp executives accused of helping Bernard Madoff conduct a $65 billion Ponzi scheme.

In an order released on Tuesday, U.S. District Judge Louis Stanton in Manhattan dismissed the fraud claims against Cohmad Chairman Maurice Sonny Cohn, Chief Operating Officer Marcia Cohn and former Vice President Robert Jaffe.

Stanton's ruling is a victory for the defendants, who worked for many years with Madoff and his investment advisory firm Bernard L. Madoff Investment Securities LLC, but claimed not to know he was defrauding thousands of customers.

There is nothing inherently fraudulent about referring customers to an investment adviser for fees, Stanton wrote in his 16-page opinion. One who conducts normal business activities while ignorant that those activities are furthering a fraud is not liable for securities fraud.

Indeed, Stanton said the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions, and regulators.

The ruling was a blow to the SEC, which was widely criticized for missing Madoff's fraud in the first place.

Stanton let the SEC pursue possible civil fines against Cohmad and the Cohns for aiding and abetting violations of a federal law governing investment advisers, and a claim against Maurice Cohn for failing to correct various regulatory filings. He said the SEC has 30 days to file an amended complaint.

We are reviewing the order and will proceed accordingly, SEC spokesman John Nester said.

Stanley Arkin, a lawyer for Jaffe, said: We are pleased that the court dismissed every single fraud claim against Robert Jaffe, and that it rejected the SEC's obvious overreaching.

Clifford Thau, a lawyer for Cohmad and the Cohns, said his clients are pleased the fraud claims were dismissed and that he believes the remaining claims will eventually be dismissed.


In its June 2009 lawsuit, the SEC accused the defendants of aggressively marketing Madoff's services, receiving $98.4 million of payments from 1996 to 2008, while concealing their scheme through false regulatory filings, court records show.

Irving Picard, the court-appointed trustee liquidating Madoff's firm, the same month sued Cohmad, the Cohns and Jaffe in Manhattan bankruptcy court to recover money for Madoff victims. He alleged that at least 90 percent of Cohmad's income came from referrals to Madoff.

Picard was in bankruptcy court on Tuesday at a hearing on how the claims of Madoff victims should be valued. He was not immediately available for comment on Stanton's ruling.

Jaffe is a son-in-law of one of Madoff's largest investors, Carl Shapiro. He worked in Cohmad's office in Boston and relied on his deep roots in the city to introduce wealthy investors to Madoff.

Madoff is serving a 150-year sentence in a North Carolina federal prison.

The case is SEC v. Cohmad Securities Corp et al, U.S. District Court, Southern District of New York, No. 09-5680.

(Reporting by Svea Herbst-Bayliss in Boston and Jonathan Stempel in New York; additional reporting by Emily Chasan in New York; editing by Tim Dobbyn and Andre Grenon)