Lawsuits by victims of Bernard Madoff's alleged $50 billion Ponzi
scheme are already appearing on court dockets nationwide. But
as the economy continues its freefall, the cases filed so far could
be just the tip of a much larger litigation iceberg. If so, they
may provide a preview of how future lawsuits will play out.
As Wall Street markets dropped, Madoff's alleged scheme seemed to crumble under
its own weight. His was not the only one. Recent weeks have already brought news
of another alleged massive Ponzi scheme. Texas businessman R. Allen Stanford
is alleged to have defrauded investors of some $8 billion through the sale of
fraudulent certificates of deposit.
The weak economy, it seems, may have an ironic upside. Fraud that long went undetected
is suddenly coming to the surface.
Whether other cases will emerge remains to
be seen. What seems certain, however, is that Madoff's alleged scheme will dwarf
any others. For that reason, as desperate investors scramble to recover some
portion of their losses, their litigation strategies portend what may be a
coming tide of investor lawsuits.
Giant Ponzi Scheme
FBI agents arrested Madoff Dec. 11 after he allegedly confessed
to his two sons that his investment advisory business was "a
giant Ponzi scheme" that "paid investors with money
that wasn't there."
A
federal grand jury is expected to hand down an indictment of
Madoff by the middle of this month. Prosecutors have filed a
criminal complaint charging him with losses to investors of $50
billion.
But even
as the grand jury continued to consider the criminal case against Madoff, his
victims began filing civil lawsuits seeking to recoup at least some of their
losses. Of the lawsuits filed in federal and state courts so far, the majority
share one characteristic in common – they do not target Madoff.
Instead,
the lawsuits target the middlemen who, the victims say, should have known better.
A leading example of such a suit is the securities class action filed Jan.
26 in Miami against Spain's Banco Santander and its private-banking fund Optimal
Investment Services. Customers of Banco Santander, many of them high net worth
individuals, are reported to have lost as much as $3.1 billion in investments
with Optimal.
The name
plaintiffs in the Miami case, two Latin American investment firms, allege that
Optimal "failed to conduct reasonable and adequate due diligence" of
Madoff and his investment firm. The lawsuit was brought by the securities class
action firm Labaton & Sucharow in conjunction with the Spanish firm Cremades & Calvo-Sotelo
and the Coral Gables firm Hanzman Gilbert.
Even before
the lawsuit was filed, Banco Santander made a pre-emptive offer to its clients
to settle their claims. Some news reports say that as many as 70 percent of
the bank's clients who lost money to Madoff have signed settlement agreements
with the bank. The bank has now agreed to notify its clients of the class action
so that they can assess the bank's offer in light of their other potential
remedies.
While the
Miami case was the first class action against Banco Santander, a second was
filed just a week later. On Feb. 4, Serol Holding Corporation and other plaintiffs
sued Banco Santander in federal court in Manhattan over Madoff-related losses.
The plaintiffs in the New York suit are represented by the firm Coughlin Stoia
Geller Rudman & Robbins.
Other
lawsuits, although not class actions, similarly seek to recoup
substantial losses from investment advisors who allegedly steered
clients to Madoff. One of the most sizeable to date was filed
in February on behalf of the town of Fairfield, Conn. It seeks
to recover $42 million in losses to the town's pension fund investments.
Filed in
Superior Court in Bridgeport, Conn., the lawsuit names NEPC, the Cambridge,
Mass., firm that was the pension fund's investment advisor, and the Montvale,
N.J.-based KPMG, which performed an audit of the hedge fund that invested with
Madoff.
The lawsuit alleges that NEPC performed "no due diligence
investigation of Madoff" and rated funds invested with him
as conservative in their risk. The suit alleges that KPMG used
inaccurate data in its audits of the feeder funds and failed
to tell the pensions that financial statements could not be verified.
The lawyer for the town, David Golub, said that this was only
the first in a series of lawsuits the town would file, with others
planned against Madoff feeder funds Maxam Capital Management
and Tremont Partners and still others under consideration.
A different tack is being taken in the lawsuit filed in federal
court in Newark, N.J., by the family foundation of U.S. Sen.
Frank R. Lautenberg (D-N.J.). It targets Madoff's brother, Peter
Madoff, who was chief compliance officer and the second-highest
ranking official at Bernard L. Madoff Investment Securities.
The suit alleges that Peter Madoff was responsible for directing
the firm's policies and verifying its financial condition. "He
had a duty to protect the individuals and entities that invested
with the firm from fraud and misconduct," said the lawyer
who filed the suit, Ronald J. Riccio, of the firm McElroy, Deutsch,
Mulvaney & Carpenter.
The private Lautenberg foundation had invested $7.3 million with
Madoff. The last statement it received reported that the account
had grown to $15.4 million.
While many lawsuits target middlemen and investment advisors,
Madoff is not getting off unscathed. Besides the pending criminal
complaint, the U.S. Securities and Exchange Commission has brought
a civil action against Madoff. In addition, at least two class
actions have been filed against Madoff, alleging violations of
securities laws.
In federal court in Brooklyn, N.Y., a class action was filed
Dec. 12 against Madoff and his investment firm on behalf of all
who invested with him. The complaint alleges violations of federal
conspiracy and securities laws, among several counts. It was
filed by the Uniondale, N.Y., firm Ruskin Moscou Faltischek.
A second class action against Madoff and others allegedly involved
in the Ponzi scheme was filed Jan. 11 in federal court in Manhattan.
The lawsuit was filed on behalf of Repex Ventures, a British
Virgin Islands corporation, and others who lost their money through
alleged Madoff feeder funds. The complaint was filed by the New
York and Los Angeles law firm of Stull, Stull & Brody.
A number of other lawsuits relating to the Madoff scandal have
been filed and even more are sure to follow. Other lawsuits filed
to date include:
In Hartford, Conn., two doctors who invested their retirement
savings with Madoff filed a lawsuit Feb. 13 in state court
against Westport National Bank, the custodian of their investment
accounts, and Westport-based PSCC Services Inc., the pension
consulting firm that recommended Madoff's fund.
The two doctors, Stephen R. Levinson of Westport, Conn., and
Richard E. Layton of Baltimore, Md., allege that the bank and
pension firm failed to recognize "numerous red flags" that
should have tipped them off to concerns about Madoff's fund.
The suit says that Westport National "deprived [them] of
the security that an independent custodian is retained to provide" and
that both defendants violated the federal RICO law as well as
their fiduciary duties.
In federal court in Philadelphia, the Pension Fund for Hospital
and Health Care Employees filed a class action Feb. 12 against
Austin Capital Management of Austin, Texas. Said to be the
first Madoff-related ERISA case, the pension fund's complaint
alleges that it lost $700,000 because of Austin's failure to
exercise care in its research of Madoff's company and to invest
its funds prudently.
The $295 million pension fund invested $10 million with Austin
in July 2008, according to the complaint. Austin directed a portion
of that investment to Tremont Holdings, which in turn invested
with Madoff, the complaint alleges. The pension fund is represented
by the Philadelphia law firm Spector, Roseman Kodroff & Willis.
In Superior Court in Los Angeles, Eric Roth, the trustee
of a profit-sharing plan, filed a lawsuit Dec. 24 against Stanley
Chais, a Beverly Hills investment advisor. The lawsuit alleges
that Chais negligently turned over the entire investment to
Madoff to manage. It does not specify the value of the plaintiff's
losses. The plaintiff is represented by the Los Angeles firm
Kinsella Weitzman Iser Kump & Aldisert.
In federal court in Manhattan, a securities class action
was filed Feb. 27 against The Royal Bank of Scotland Group
on behalf of purchasers of RBS securities. The complaint alleges
that RBS falsely reassured investors that it was well capitalized
when it was actually nearly insolvent. One cause of the near
insolvency, the complaint alleges, was RBS's loss of $500 million
invested through Madoff. The complaint was filed by the law
firm Coughlin Stoia Geller Rudman & Robbins.
In federal court in Manhattan, investors filed a class action
complaint in December against Tremont Group Holdings, OppenheimerFunds
Inc. and others. The complaint alleges that the defendants
grossly neglected their professional and fiduciary duties by
investing some $3.1 billion of plaintiffs' capital with Madoff.
The lawsuit was filed by the law firm Hagens Berman Sobol Shapiro.
In federal court in Manhattan, New York Law School filed
a class action Dec. 16 against Ascot Partners, BDO Seidman
and J. Ezra Merkin. The law school owned a limited partnership
interest in Ascot, an investment partnership managed by Merkin.
The complaint alleges that Merkin turned over to Madoff virtually
all of Ascot's investment capital – some $1.8 billion.
The complaint was filed by the firm Abbey Spanier Rodd & Abrams.
In federal court in Manhattan, Scott Berrie filed a securities
class action Dec. 16 against Gabriel Capital, J. Ezra Merkin
and BDO Seidman. Berrie, a limited partner in Gabriel, alleges
that its general partner, Merkin, invested at least 27 percent
of Gabriel's capital with Madoff. The complaint was filed by
Abbey Spanier Rodd & Abrams.
In state court in Manhattan, Pasha and Julia Anwar filed
a class action complaint against Fairfield Greenwich Group
and others. The complaint alleges that the defendants mismanaged
the assets of the Greenwich Sentry investment partnership by
investing them with Madoff. The complaint was filed by the
law firm Lovell Stewart Halebian in New York.
In federal court in Manhattan, David B. Newman and others filed
a complaint Dec. 23 against Family Management Corp. and others
on behalf of investors in the FM Low Volatility Fund. It alleges
that the fund "blindly entrusted" its assets to Madoff,
resulting in losses to investors of at least $15 million. The complaint
was filed by the firm Wolf Haldenstein Adler Freeman & Herz.
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