The Madoff-Medici Mess

When Irving H. Picard, trustee for the victims of Bernard L. Madoff’s gigantic Ponzi scheme filed a $19.6 billion complaint in the Southern District Court of New York Dec. 10, Austrian banker Sonja Kohn was catapulted into the limelight of the investigations. Referring to Kohn as "Madoff’s criminal soulmate," Picard alleges in the brief that she was his main collaborator in the 23-year conspiracy, and that Austria, through Medici Enterprise, was the worldwide connecting platform for the biggest financial fraud in history.

Many of the Madoff-Medici victims are now being represented by the Viennese law firm of Lansky, Ganzger and Partner, who, since early 2009, has been assembling a case to prove, along with Picard, that Kohn was not a victim as she claims but a major component of the pyramid scheme.  They will also be suing intermediaries and other local investment advisors, who failed to do the necessary due diligence to protect their clients’ interests.

When Madoff’s Ponzi scheme started to fall apart on Dec. 12, 2008, records revealed some €51 billion in losses to thousands of investors, destabilizing governments, undermining venerable institutions, destroying life savings – and unleashing an international uproar. As his firm’s insolvency was revealed in full and the tangled mess of shadow businesses and feeder funds unraveled, the extent of the damage continued to expand. In March 2009, Madoff was convicted of 11 felony counts, security fraud, money laundering and perjury.

With Madoff sentenced to a record-breaking 150-years in prison on June 29, 2009, followed by his imprisonment July 14 at the Butner Federal Correctional Complex in North Carolina, the case was closed to most Austrians. Other domestic financial scandals, more troublesome local cases such as the Meinl Bank, IMMO Finanz, AWD and Grasser affairs demanded more attention from the Austrian public.

The claim against Kohn was filed under the U.S. Racketeer Influenced and Corrupt Organizations Act (RICO), amid what The New York Times described as "a blizzard of lawsuits" against Bernard L. Madoff Investment Securities (BLMIS), just ahead of the December legal filing deadline. To date, Picard has recovered an average $1.5 billion (€1.1 billion) for his American clients through asset sales and out of court settlements. Similar outcomes are possible for Austrian victims.

The Kohn-Madoff business relationship lasted for 23 years, with what Picard described as frequent and intense contact between the two of them, revealing her as a major contributor to the Ponzi scheme.

"The Medici Enterprise profited on the back of those who invested with BLMIS," the complaint reads. "For over 15 years, the Medici Enterprise Feeder Funds fed almost $4 billion into the Ponzi scheme and generated hundreds of millions of dollars in management, distribution and other fees and other illicit proceeds."

Sonja Kohn lived and worked in New York from 1983 to 1994. During this period, supposingly in the mid 80s, Kohn was introduced to Madoff by Maurice Cohn of Cohmad Securities, an introduction for which Madoff paid an estimated $526,000. It was a fateful meeting, leading to an agreement to cooperate: Kohn would act as solicitor for investors for Madoff’s Ponzi scheme in New York, in return he would pay her in secret, Picard alleges in the RICO statement, thus initiating their illegal business relationship and laying the corner stone for Medici Enterprise.

The Medici Enterprise flourished, acquiring it’s banking license in 2003 with the assistance of Bank Austria, with Kohn holding a 75% interest and Bank Austria the rest. Thus, Bank Austria is also at the center of the investigation, and is deeply involved in the structure of the Madoff-Kohn fraud.

Altogether, the Austrian case is huge, amounting to 46% of the entire loses involved. The complaint involves 173 named defendents, including seven Kohn family members, 17 sham entities in five countries, including two (Sofipo Austria, and M-Tech Services) in Austria, eight Bank Medici corporate defendents, seven Bank Medici individual defendents, Three Bank Austria corporate defendents, including the home office UniCredit Bank Austria AG and Bank Austria Worldwide Fund Management Ltd, seven Bank Austria individual clients including the former general director Gerhard Randa, plus 134 other corporate and individual defendants and agents named specifically in the complaint, and some unknown number of others. (See here)

No one knows exactly how many investor-victims have been affected through the Medici and Bank Austria activities – estimates are as high as 3 million "direct and indirect" victims worldwide, according to the Spanish law firm Cremades Calvo-Sotelo and based on information collected from over 30 law firms around the world as reported by Agence France Presse (AFP).

Lansky, Ganzger first got involved in this high profile case when a young woman from Eastern Europe, who had invested through Bank Medici, got in touch with the law firm at the beginning of 2009. Other Medici investors followed soon and parter Gerald Ganzger and attorneys Peter Gumpel and Jörg Zarbl is now representing 40 former Medici clients with the full range of personal stories behind their losses. For some, it was corporate assets or retirement funds, or the endowments of a charity, for others, their children’s college accounts, or simply their life savings.

Once Lansky, Ganzger began collecting information regarding the case, they quickly became aware of the dimension it had taken on in Austria.

"Forty Six percent of all the money went through Sonja Kohn," Gerald Ganzger told The Vienna Review. Before getting involved in the case, the firm had known little about the bank. "We knew that there was a Bank Medici but no more. It worked secretly – for good reasons." Medici turned out to be the second biggest feeder of Madoff’s investment pool – an estimated $5 to $9 billion (€3.7 to €6.5 billion).

Ganzger leaned back in his chair, crossing his arms across his chest, making himself comfortable before lighting another cigarette. This is a complicated story and will take some time. And as to the cigarettes – well, this is still Austria and few are willing to get overly judgmental about human foible. Fraud on a Madoff scale, however, is something else.

So it was just a few weeks after Madoff’s breakdown when the law firm began to act, collecting piles of documents on Medici, its clients  and the network of feeder funds -- in short anything that could give them insight on the pattern of transactions. Kohn, they learned, moved the funds through her sham companies Herald Asset Management (HAM), Eurovaleur, Infovaleur, Erko, Tecno Italy, Windsor and Gibraltar. The legal complaints involved include acts of mail fraud, money laundering, wire fraud and financial institution fraud. Above all, she used a number of different names and identities within her companies actions.

Strong as evidence might be, Kohn still claims to be a victim of the financial scandal. Her lawyer Clemens Trauttenberg is outraged: "Mrs. Kohn is a victim herself and wouldn’t think of paying any money," Trauttenberg told the Austrian weekly NEWS in December.

The main problem the lawyers faced during the early months of their investigation was that no one seemed to understand the extent of the fraud to Austrian investors. At first, Lansky, Ganzger could not get a public prosecutor to investigate the accusations. They persisted, and early in 2009, the firm filed an official complaint against Sonja Kohn, Bank Medici and the bank’s directors.

A year later, Public Prosecutor Michael Radasztics agreed to review the case and parallel inquiries were launched with the U.K. and Switzerland as well as with the American CIA. The Zurich public prosecutor issued a search warrant for Kohn’s house in Switzerland. Among other things, the firm wanted to demonstrate that this was not just a U.S. case, but that it had major repercussions on Austrian financial institutions, as well as individual investors here and in many other countries with whom Kohn had done business.

But the search would take time. Kohn has numerous houses and flats in various parts of the world including New York, Zurich and Israel, and is thus subject to different laws and separate warrants govern the various sights. However, "bank accounts from Kohn have been opened, in order to prove the money transfer from Madoff to Kohn and the other way round." clarifies attorney Zarbl, another attorney at LG&P working on the case.

Ganzger went on to itemize the evidence of their close professional relationship: Kohn visited Madoff at least twice a year, the RICO report states the last time Kohn visited was in 2008, and the two called each other on a regular basis.  However, Kohn was extremely careful not to put things in writing. Email did not become common until the late 1990s, thus, there is almost no written correspondence between Madoff and Kohn. According to Zarbl "the relationship between Kohn and Madoff was so close, that it is actually unthinkable that she did not know" that Madoff was committing fraud.

"It would make absolutely no sense to found companies all over the world to collect Madoff’s money, if she weren’t aware of the system," Gumpel said.

Further investigations began to uncover the mechanisms of the Kohn-Madoff matrix. Kohn had created a series of small securities firms who were then commissioned by Madoff to do investment research.

"It was all ‘Scheinrechnungen’," Gumple said, "payments for research that was apparently not done." There were at least 25 companies, in Italy and Gibraltar and elsewhere, amounting to some $62 million was transferred. "But that is only the amount that shows on the transcripts," clarified Gumpel. The actual number, he said, is most likely far higher.

"We suspect Sonja Kohn to be part of the system and that she knew that Madoff did not do any actual investing," Ganzger said, with a rueful shake of the head -- that "she knew he did not invest one cent." Medici should have acted as investment advisors but delegated the role as well to Madoff.

While there is an enormous accumulation of evidence, however, standards of proof are high. "To show that this was a fraud, we have to prove it beyond all reasonable doubt," Gumpel reiterated. And finding incontrovertible hard evidence remains a challenge.

"We and the public prosecutor have not been able to find the bloody knife or the smoking gun," admited Ganzger shaking his head. But he is confident they can prove the business relationship between Kohn and Madoff.

At the moment, Sonja Kohn is thought to be somewhere between Israel, Italy, Switzerland and Australia. According to her Viennese lawyer Andreas Theiss in an interview in Wirtschaftsblatt, she is currently on business trips telated to renewable energy resources.

With every new piece of information, the case for Kohn’s involvement in Madoff’s system becomes stronger. However, until evidence is sufficient, Sonja Kohn still enjoys the presumption of innocence. And in the meantime, no one knows exactly where she is.