Pressure mounts on Madoff middlemen

By Svea Herbst-Bayliss - Analysis

BOSTON (Reuters) - After rebuffing subpoenas for weeks, a close associate and key middleman for Bernard Madoff essentially had one thing to say when he finally showed up to testify before Massachusetts regulators: I'm not talking.

Robert Jaffe, who had delivered clients to Madoff, invoked the "Fifth Amendment," a constitutional right of witnesses who do not want to incriminate themselves, when he testified last week, court documents released on Wednesday show.

The documents and Jaffe's silence in the face of a barrage of questions by Massachusetts Secretary of State William Galvin illustrate the intensifying focus on middlemen and so-called "feeder-funds" that funneled investor money to Madoff.

"Galvin is taking a novel and aggressive approach to scrutinize the middlemen more closely and find out what they knew and when," said Jay Gould, who heads law firm Pillsbury Winthrop Shaw and Pittman LLP's hedge-fund practice.

"Ultimately he is looking if any of these middlemen committed criminal fraud," added Gould, who once worked for the U.S. Securities and Exchange Commission. "Even being stupid could end up getting you a very severe penalty."

Growing scrutiny of those who channeled funds to Madoff also follows the filing of court documents on the Massachusetts island of Nantucket suggesting that another middleman, Frank Avellino, may have known crucial information about Madoff's losses a week before the New York money manager was arrested for running a purported $50 billion investment fraud.

Harry Markopolos, a former investment manager who tried to warn regulators about Madoff, told a congressional hearing this month that Madoff could not have acted alone, pointing to accountants and people helping to convey money to his firm. Several lawyers working on the case told Reuters they agree.

Markopolos said he knew of at least a dozen feeder funds that have not been publicly identified.