Madoff Litigants Lag in Lining up Experts

By Robert Ambrogi Esq
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."



Robert Ambrogi Esq

We are proud to partner with an author of Bob’s caliber to provide exclusive articles for our legal clients and leading industry experts. Robert J. Ambrogi is a news media veteran and the only person ever to hold the top editorial positions at the two leading national U.S. legal newspapers, the National Law Journal and Lawyers Weekly USA. He is currently a Massachusetts lawyer who represents clients at the intersection of law, media and technology. He is also internationally known for his writing and blogging about the Internet and technology. Media and Technology Law Bob represents a range of businesses and individuals, concentrating in print and electronic media companies and the editorial, sales, marketing and technology professionals who work in them. He also counsels businesses and individuals in employment matters. Arbitration and Mediation An established professional in alternative dispute resolution, Bob has been an arbitrator since 1994, focusing on labor and employment and securities disputes. A mediator in a range of civil disputes, Bob completed the training required by Massachusetts law to protect confidentiality.

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