The saga of Ponzi scheme king Bernard Madoff continues with the filing of a new action by New York Attorney General Andrew Cuomo against an investment adviser who is alleged to have had information of the fraud by the late 1990s. The complaint suggests that millions of dollars in investor losses could have been avoided if the defendants had complied with their fiduciary obligations. The People of the State of New York v. Ivy Asset Management LLC (N.Y.S.Ct. Filed May 11, 2010).

Mr. Cuomo’s action is against New York investment adviser Ivy Asset Management, now owned by Bank of New York Mellon, and its two principals, Lawrence Simon and Howard Wohl. Beginning in the late 1990s and continuing up through 2008 when Madoff’s scheme collapsed, Ivy, a 1940 Act registered investment adviser, and its principals facilitated the investment of large sums of advisory client money with Madoff’s scheme. Those clients included John P. Jeanneret and entities he controlled, Joel Danziger and Harris Makhoff and entities they controlled, the Trustees of the Engineers Joint Pension Fund, Local Unions Nos. 17, 106, 410, 463, 545 and 832 of the International Union of Operating Engineers, AFL-CIO.

By the time the Madoff Ponzi scheme collapsed, Ivy had caused its clients to invest, reinvest and maintain at least $227 million with the Ponzi king. The firm had been paid at least $40 million in advisory fees. During the years of those investments, according to the complaint, the defendants failed to tell any of those clients that beginning as early as 1997 they had leaned material facts demonstrating that funds should not be invested with Madoff including:

• In 1997 and 1998 that Madoff was not investing funds in accord with his representations to investors. In the Spring of 1997, Ivy learned that while Madoff’s investment strategy called the use of OEX options, there were not enough of those contracts traded on the CBOE to support the claimed strategy. Ivy’s concerns were heightened when Madoff offered three different explanations for the discrepancy.

• In early 1997 that Madoff was misappropriating client funds to support his market making business. Madoff had previously represented that client funds were not used to support those operations.

• In May 1997 that Madoff appeared to be managing the income stream from his investment fund.

• In May 1997 that Madoff trade confirmations for OEX calls recorded more trades than reported by Bloomberg and at prices below those on the exchange.

Based on these concerns, in 1998 Ivy’s Chief of Investment Management recommended total withdrawal of its proprietary money from the Madoff fund. Those investments were small. Defendants concluded at the same time, however, that they could not withdraw the significant client positions they had placed with Madoff. A 2001 e-mail from Mr. Simon to Mr. Wohl explained the reason client funds were left with Madoff – it helped build their assets under management and there were large fees generated. Rather, clients whose funds were paced with Madoff were told by the defendants that they had no reason to believe there was anything improper in the claimed investment fund. In fact, Ivy told clients its only concern was the large amount of money Madoff had under management.

Prospective clients were told a different story. They were advised that because of Ivy’s fiduciary duties, the firm could not recommend investments with Madoff. Other potential clients were simply told not to invest with Madoff. None of this advice was shared with those whose funds were already with Madoff.

The complaint which claims fraud, failure to disclose and breach of fiduciary duty, is based on alleged violations of New York’s Martin Act and Executive Law. It seeks an injunction, accounting, restitution, disgorgement, damages, punitive damages and attorney fees and costs.

In the wake of the market crisis, Ponzi scheme cases continue to be a staple of SEC enforcement. It seems the turmoil in the markets in recent times is exposing the schemes. SEC Chairman Schapiro cited these actions last week in discussing significant cases the division is bringing. Speech by SEC Chairman: Keynote Address at the Compliance and Legal Society of the Securities Industry and Financial Markets Association 2010 Annual Seminar, May 6, 2010. Likewise, criminal prosecutors are also bringing an increasing number of Ponzi scheme cases.

Last week, a scheme which had been going on for over a decade came to an end when Gregory Cronin pleaded guilty to a two count information charging wire and securities fraud based on his scheme. U.S. v. Cronin, Case No. 1:10CR154 (E.D. Va. Filed May 7, 2010). According to the agreed Statement of Facts filed with the plea, Mr. Cronin raised over $6.7 million from individuals who where were largely friends and former clients from the time he was employed as a retail broker for a large bank. Mr. Cronin solicited investors to place their money in his firm, Investment Advisors, Inc., obtaining discretionary trading authority. Frequently he encouraged potential investors to refinance their homes to obtain cash to invest. Many clients gave Mr. Cronin the funds in their retirement accounts.

Typically, each month investors would receive a statement showing that their funds had been invested in an individual account in stocks such as Coca-Cola, Duke Energy and Apple Computer. The statements showed clients that their investment was increasing. In fact the statements were false. Client funds were pooled in a single bank account and used to trade options. The trading had losses, not profits. When clients insisted on withdrawing funds, Mr. Cronin used cash obtained from other investors to pay them.

The scheme began to unravel in June 2009 when the Virginia Corporation Commission interviewed defendant Cronin. During the discussion he falsely told the officials that his trading business “had wound down” and that he no longer had any clients or records. By September 2009, Mr. Cronin tried unsuccessfully to borrow funds from one of his investors, falsely claiming he needed the money to cover a short position in his personal account. About two weeks later he admitted his scheme to Postal Inspectors and turned over his computer records. Sentencing is scheduled for July 23, 2010.