Finding accusations "speculative and flimsy," a judge has dismissed civil securities fraud charges against a Manhattan brokerage firm and its executives that resulted from a probe into Bernard Madoff's epic fraud.
The charges brought by the Securities and Exchange Commission were dismissed Monday against Cohmad Securities Corp., its chairman, Maurice Cohn, his daughter, chief operating officer Marcia Cohn, and vice president and broker Robert Jaffe.
U.S. District Judge Louis L. Stanton gave the SEC permission to refile the charges but only if it can provide facts to back them up.
"Nowhere does the complaint allege any fact that would have put defendants on notice of Madoff's fraud," Stanton wrote. "Rather, the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions and regulators."
Madoff, 71, is serving a 150-year prison sentence after admitting that he operated a giant Ponzi scheme for at least two decades, cheating thousands of individuals, charities, celebrities and institutional investors out of billions of dollars.
Clifford Thau, a lawyer for Cohmad Securities and the Cohns, welcomed the ruling, saying in a statement: "We remain confident that the SEC will not be able to allege any new facts that will cure the deficiencies that Judge Stanton found in the SEC's complaint."
SEC spokesman John Nester in Washington said, "We are reviewing the order and will proceed accordingly."
A message seeking comment from a lawyer for Jaffe wasn't immediately returned.
Last year, the SEC accused the defendants in a lawsuit of securities fraud, saying they collected several hundred million dollars in fees from Madoff to solicit affluent though financially unsophisticated people to trust their money to him.
The regulators said the defendants were crucial to Madoff's success because they gave the impression that one could only invest with Madoff as a favor through special access.
In his ruling, the judge noted that Madoff had operated his business since 1960 and that Maurice Cohn is Madoff's former neighbor.
Cohmad was formed in 1985 and Marcia Cohn joined in 1988, three years before Madoff says he began operating his business as a fraud, the judge said. He also noted that the Cohns worked in Cohmad's New York office on the same floors as Madoff's legitimate market-making business.
Jaffe, who lives in Palm Beach, Fla., previously headed Cohmad's Boston office. He is a son-in-law of Carl Shapiro, a prominent Boston-area businessman and philanthropist whose family was said to have lost hundreds of millions of dollars from their investments with Madoff.
In its complaint, the SEC said Madoff directed Cohmad and the Cohns to maintain a cloud of secrecy about his business and banned all written marketing materials, cold calls and e-mails. It said he also told the defendants he would not accept investors from the finance and banking industry because sophisticated investors ask too many questions.
The Cohns countered the allegations by saying an aura of exclusivity is a common marketing tactic.
The judge rejected the SEC's conclusion that the defendants' fraudulent intent could be inferred from allegations that Cohmad failed to disclose the full extent of its relationship with Madoff in its regulatory filings and books and records.
He said the argument "that that concealment was because any defendant knew that Madoff was committing fraud is speculative and flimsy."