L.A.-Based Madison Financial Hit With Fraud Allegations


Securities regulators filed a complaint Wednesday against Los Angeles-based Madison Financial Group and its two principals, alleging they fraudulently solicited thousands of customers to open commodity option accounts by promising big profits that never materialized.

The Commodity Futures Trading Commission alleged that, from April 1998 to March of this year, Madison principals Richard A. Cohen and Ronald G. Scott instructed employees to "make up a story" when soliciting customers by phone. Employees used high-pressure tactics in their calls, the agency said.

"This in our view was a classic piece of telemarketing, designed to get as many investors involved as possible," said Jack Barrett, head of the CFTC's Los Angeles office.

Madison misrepresented its performance record and failed to disclose the risks involved in trading commodity options, the complaint alleges.

Madison opened more than 2,800 accounts with a total of about $20 million in customer funds. About 97% of the accounts suffered net losses, the CFTC said.

The average investment was between $8,000 and $12,000 and the average loss about $6,000, the complaint alleges. Most of the customers had some familiarity with options trading, Barrett said.

The CFTC alleged that total net losses in Madison's accounts were more than $17 million, while Madison made more than $9 million in commissions and fees.

Phone calls to Madison on Wednesday were forwarded to Man Financial Inc., a broker-dealer in Chicago that cleared trades for Madison's clients.

"I think the company shut down in April, but I can't be sure," said Phil Tanzar, assistant general counsel for Man Financial. "We're getting calls from their electric company, their clients, everyone. Their customers call up and say, 'What happened to Madison?' Some of them are pretty angry."

Calls to Madison's lawyer in Chicago, who also is representing Cohen and Scott, weren't returned.

The CFTC said Madison had as many as 50 brokers in the last few years. The firm operated at 1964 Westwood Blvd.

Scott, a resident of Beverly Hills, has been in the commodities business since 1983 and was with five firms before Madison, the CFTC said. Seven investors have formally sought damages against Scott in previous years, CFTC records show.

Cohen, a Los Angeles resident, has been in the options business since 1992, the agency said.

The CFTC said a public hearing will be scheduled to determine whether the allegations are true. Possible sanctions include cease-and-desist orders, restitution to customers and registration revocations, suspensions or restrictions.

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