by Robert Ambrogi BullsEye: November 2009 IMS ExpertServices™ is the legal industry's premier full-service
expert witness provider.
Lawyers were quick out of the gate to file lawsuits on behalf of victims
of Bernard Madoff's $50 billion Ponzi scheme. In the U.S., however,
the pace of those lawsuits quickly slowed from a gallop to an amble
as various procedural maneuvers kept cases from moving forward.
As
a result, many lawyers have held off on retaining expert witnesses.
But the longer they hold off, the more questions arise as to whether
there will be a sufficient supply to meet the demand for experts who
have the right combination of subject-matter expertise and litigation
experience.
The issue is made even more urgent by the sheer complexity
of many of these lawsuits. Given the number of parties these cases
involve and the tangled relationships among them, lawyers will have
to be particularly diligent about finding experts who have no conflicts
of interest.
The
potential for conflicts in these cases is demonstrated by the fact
that it was that very issue that initially slowed the progress of some
of these cases. The conflicts in question, however, involved not experts,
but the law firms themselves.
Major law firms found themselves having
to choose sides, in effect, between plaintiffs and defendants. For
some, that meant having to make difficult decisions to jettison long-standing
clients in order to be able to represent other existing clients.
"I
can tell you that there was a lot of discussion of this within my firm," said
a partner at an AmLaw 100 firm who asked not to be identified. "We can't
be on both sides of this."
"There
was a traffic jam among lawyers who had to figure out what they were doing," agreed
Charles Grice, a compliance consultant and principal of CRI Compliance in New
York City. "Many of these cases are dominated by huge law firms and a handful
of major clients."
Lawyers are Beginning to Shop Grice explained that because of this traffic jam, lawyers in Madoff-related
litigation have so far been slow to retain expert witnesses. But he believes
the traffic jam is beginning to ease and the hunt for experts is starting
to get underway.
Grice predicts that among Madoff litigants, demand will
be for experts in forensic accounting and accounting standards. But because
the major accounting firms are directly involved in these cases, lawyers will
be unlikely to tap their employees as experts. Instead, lawyers are likely
to look to academia and other sources for accounting experts.
"The question in these cases will focus on how far an audit firm should
have gone," Grice explained. "What was the standard of practice for
auditors and what was a reasonable standard?"
College and university professors
are likely candidates to serve as experts in these cases, Grice said.
But he cautioned that lawyers could have a difficult time finding experts
who have the right combination of expertise and litigation experience.
"I think lawyers are beginning to shop but they don't know what
they want to buy yet," he observed. The issues in these cases are unique
and many lawyers are still wrestling with defining their litigation
strategy. Until they decide on that, they cannot identify the types
of experts they will need.
Cases Could Travel Uncharted Waters
A partner at a major law firm who is involved in the defense of Madoff-related
litigation echoed many of Grice's observations. The lawyer discussed
his observations on the condition that neither he nor his firm is
identified.
The
lawyer agreed that, since the initial flurry of lawsuits were filed,
their progress has been very slow. Because of that, he has not started
actively seeking to retain expert witnesses.
A
major reason he has not hired experts is that he is not able to settle
on his litigation strategy until certain legal issues are resolved. "These
cases could present novel questions that will require expertise beyond
that of the typical accounting-malpractice expert," the lawyer said.
For
the plaintiffs to succeed, the lawyer explained, they will have to
find experts who are willing to say that an auditor's scope of responsibility
is much broader and goes much deeper "than any case I've ever seen."
For
both plaintiff and defense lawyers, that will require them to retain
experts qualified to testify on generally accepted standards of accounting
and auditing. In and of themselves, "these
are not very technical or difficult accounting precepts," the lawyer
said.
But if
plaintiffs are able to convince a judge that the auditors should have
gone deeper and investigated Madoff's funds directly, then it "would
turn auditing on its head" and require parties to plot their litigation
strategies in largely uncharted waters.
Layers of Complexity The
complexity of these cases stems from the sheer number of victims,
the layers upon layers of feeder funds and sub-feeder funds that
funneled those victims to Madoff, and the ancillary entities – most
notably auditors – that
many plaintiffs are now targeting.
Earlier
this year, the Wall Street Journal's Web site published the list
of Madoff's alleged victims. It runs 163 pages of tiny, four-point
type. It literally contains thousands of names.
The
victims' funds found their way to Madoff via any number of giant
feeder funds. The largest of these was the Fairfield Greenwich Group,
but there were dozens of other such funds that invested with Madoff.
Many
of those major feeder funds were handling money received from various
sub-feeder funds. In some cases, the sub-feeders were subsidiaries
of the main funds; in others, they were not.
Even
these sub-feeder funds depended on an extensive network of much-smaller
entities and individuals to bring in investments. This largely
unregulated group included lawyers, accountants, investment managers
and even doctors. A Business Week article referred to these layers
of feeders as "the
Wall Street equivalent of a Russian nesting doll."
Apart
from the funds and the entities that helped feed investments into
those funds, there are the auditors – most notably, the Big Four
accounting firms – and the fund administrators.
These
add up to hundreds of potential defendants, many with intertwined
corporate structures or longstanding business relationships. A
single lawsuit might name a web of defendants, ranging from corporate
parents to small sub-entities.
Complex
factual patterns and potentially novel legal issues add up to one
unavoidable conclusion: Madoff litigation is only in its infancy.
As
Charles Grice put it: "We are looking at a six- or seven-year litigation
cycle that has yet to really begin."
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