Madoff Victims Look for Ways to Recover Their Money
Victims of the alleged Bernard Madoff investing scam are finding they
have more legal options than usual to try to get back their stolen funds,
but experts say that won't make recovering their losses any easier.
Besides Madoff and his firm, lawyers representing investors who lost tens of
billions are looking into suing the numerous firms that sold access to
Madoff's asset management business. Also on the radar of lawyers are those
firms' auditors and administrators, which include some of the biggest
accounting firms in the country. (Read TIME's Top 10 Financial Collapses of
2008.)
"Some investment advisers did their due diligence, and told their clients
not to invest with Madoff," says Brad Friedman, a partner at the Milberg law
firm, who is vetting suits for dozens of Madoff clients. "Others didn't do
their research. I think there is a liability there."
Many of Madoff's victims never had an account with his firm. Instead, Madoff
got much of the money he allegedly stole through so-called feeder funds.
These hedge funds were set up by outside investment advisory firms, which
marketed the funds to high net-worth individuals and pension funds based on
Madoff's supposed long-term track record of positive returns. Other
investors lost money through so-called hedge funds of funds, which invested
with Madoff as well as other asset management firms.
Of the $23 billion in losses that have been reported by investors so far,
more than half have come from those who invested in Madoff through these
feeder funds. These investors may be in a worse position than those that
were direct customers of Bernard Madoff Investment Securities. On Monday, a
judge ruled that Madoff's direct customers would be covered by the
Securities Investor Protection Corporation, which typically covers up to
$500,000 in losses when a brokerage firm defaults. Investors in the feeder
funds are not usually eligible for the SIPC protection.
Lawyers, though, say investors in the feeder funds may have more legal
options to recover their funds. That's because, they say, the firms that ran
the feeder funds had a duty to their clients to verify that Madoff's returns
were genuine. Many of the firms pocketed large fees and in return provided
little more than access to what now appears to be a fraud. What's more, a
number of large accounting firms signed off on the quarterly statements the
feeder funds sent to clients.
"This is a guy that openly claimed he would not answer questions about his
strategy," says lawyer Harry Susman, a Houston lawyer who is looking into
bringing a suit against one of the feeder funds. "If you put all your eggs
in one basket, you better be able to watch that basket well."
But legal experts say winning a case against the managers of feeder and fund
of funds may be tougher than it seems. Last year, a judge threw out a
similar claim against well-known hedge fund consulting firm Hennessee Group.
That firm was sued for advising clients to invest in Bayou Management, a
hedge fund that collapsed after its managers swiped hundreds of millions of
dollars from investors. But the judge ruled Hennessee, just like the SEC and
the IRS, was duped, and could not be held liable. The case is being
appealed.
"My case shows that anybody who wants to sue these feeder funds will have a
hard time," says Ted Poretz, the lawyer who brought the case against
Hennessee on behalf of former Bayou investors.
Nonetheless, a number of investors who lost money are pursuing their legal
options and they say they are looking closely at suing the firms that led
them into the Madoff fraud. One such investor is the city of Fairfield,
Conn. In 1997, Fairfield's pension board hired advisory firm Tremont Capital
Management to help it manage its investments. Among the funds Tremont
recommended was the Tremont Broad Market fund, which was run by the firm and
invested all its assets with Madoff. Fairfield's pension funds invested $22
million in the fund over the next three years. Broad Market was one of
Madoff's largest feeder funds. Investors in the fund may have lost as much
as $3 billion.
Three years ago, Fairfield moved its investment to a new feeder fund MAXAM,
which was started by Tremont founder Sandra Manzke, who had recently started
a new firm. MAXAM, like Broad Market, invested all its money solely with
Madoff. As recently as June 30, Fairfield officials received a statement
from MAXAM saying their investment was now worth $42 million. That
investment along with the rest of the nearly $300 million invested in the
MAXAM fund is now gone.
"We were surprised that there wasn't more oversight by either MAXAM or their
auditor," says Fairfield First Selectman Ken Flatto. "Why didn't anyone
question Madoff's accounting?" Despite the loss Fairfield's pension plan is
well funded. Yet, says Flatto, "We plan to seek recourse to try to recover
the funds.
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