The Madoff Scandal: Suits Seeking Recovery

The Madoff scandal is spawning an array of law suits. The basic cases are those filed by the Department of Justice, he SEC and SIPC. U.S. v. Madoff, Case No. 1:08-mj-02735 (S.D.N.Y. Filed Dec. 11, 2008); SEC v. Madoff, Case No. 1:08-cr-10791 (S.D.N.Y. Filed Dec. 11, 2008); SIPC v. Bernard L. Madoff Investment Securities, LLC, Case No 08-01789 (U.S. Bk. S.D.N.Y. Filed Dec. 11, 2008); see also Rosenman Family, LLC v. Picard, Case No. 09-1000 (U.S. Bk S.D.N.Y. Filed Jan. 1, 2009)(adversary proceeding against Trustee for SIPA Liquidation). These are typical government actions although the claimed fraud on which they are based is anything but typical.

Also typical are the investor suits against Mr. Madoff and the entities he once controlled. The allegations are the millions and in some cases billions were invested. To date nobody seems to know quite where the funds are despite some reports that Mr. Madoff is cooperating with prosecutors. Typical of these cases are:

• Sciremammano v. Madoff, Case No. 08 CV 11332 (S.D.N.Y. Filed Dec. 30, 2008). The plaintiffs in this case are individuals who have invested with Mr. Madoff since at least 1995. They claim to have invested over $1.7 million. The suit, based on claims of “ongoing fraudulent offerings of securities and investment advisory fraud by Madoff . . .’ seeks injunctive relief to halt the fraud, disgorgement and damages.

• Kellner v. Madoff, Case No. CV-08 5026 (E.D.N.Y. Filed Dec. 12, 2008) is a class action alleging violations of the securities laws and RICO. The complaint seeks damages in an unspecified amount.

• Chaleff v. Madoff, Civil Action No. CV 08-8260 (C.D/ Cal. Filed Dec. 15, 2008) is a class action which alleges violations of the securities laws. It also seeks damages.

Less typical are the suits based on the alleged Madoff fraud but which have not been brought against him and his entities but others. These suits are being brought by those who invested with another entity which in turn invested with Mr. Madoff — the so-called “feeder funds.” Examples of these cases include:

• New York Law School v. Ascot Partners, L.P., Civil Action No. 08 CIV 10922 (S.D.N.Y. Filed Dec. 16, 2008). This is a class action by those who invested in Ascot Partners, L. P., against the fund, its general partner J. Ezra Merkin, and the auditors of the partnership BDO Seidman. The complaint alleges that virtually all of Ascot’s assets were invested with Madoff. That $1.8 billion investment has been wiped according to plaintiffs. The suit alleges that defendants missed numerous “red flags” and breached their duty regarding the investments. The claims are based on alleged violations of the securities law as well as common law principles. See also The Clibre Fund, LLC v. J. Ezra Merkin, Case No. 08 Civ. 11002 (S.D.N.Y. Dec. 18, 2008)(similar complaint by fund that invested over $10 million with Ascot).

• Group Defined Pension Plan & Trust v. Tremont Market Neutral Fund, L.P., Case No. 08 CV 11359 (S.D.N.Y. Filed Dec. 3, 2008). This is a class action against an investment partnership, related entities, and its auditors, Ernst & Young, LLP. The complaint alleges that about 27% of the investment capital of Tremont, was invested with Madoff. The suit alleges violations of the federal securities laws and seeks damages.

No doubt the number of law suits will continue to rise in the days to come. In view of the magnitude of the projected losses and what appears to be the relatively small amount of assets available to pay them, it seems apparent that the feeder fund type of suit will become all the more prevalent.

The Madoff Scandal Continues to Haunt the SEC

The Madoff scandal continued to take center stage this week. The Inspector General of the SEC, H. David Kotz, testified before the Financial Services Committee of the House of Representatives. In his testimony, Mr. Kotz promised a full and swift inquiry into the allegations that the SEC failed to properly investigate Mr. Madoff years ago.

Mr. Kotz began by reiterating the three-part directive he received from SEC Chairman Cox regarding the Madoff matter. First, investigate the reasons that the SEC found allegations of possible misconduct by Mr. Madoff not credible. Second, examine the internal policies that govern when allegations of fraudulent activity should be brought to the Commission. Third, analyze contacts between the staff and the Madoff family and firm to determine their possible impact on the staff investigation.

The internal inquiry, which has already commenced, will however, be broader than what Mr. Cox requested, the Inspector General promised. Specifically, Mr. Kotz stated that “It is our opinion that the matters that must be analyzed regarding the SEC and Bernard Madoff may go beyond the specific issues that SEC Chairman Cox has asked us to investigate. We believe that in addition … our oversight efforts must include an evaluation of broader issues regarding the overall operations of the Division of Enforcement and OCIE (Office of Compliance Inspections and Examinations) that would bear on the specific questions we are examining, and provide overarching and comprehensive recommendations to ensure that the Commission fulfills its mission of protecting investors, facilitating capital formation and maintaining fair, orderly and efficient markets.”

Mr. Kotz went on to identify seven specific areas that will be covered by his investigation: 1) The SEC’s response to complaints it received regarding the activities of Bernard Madoff; 2) Allegations that there were conflicts of interest involving the staff and the Madoff family; 3) The examinations and inspections of the Madoff firm; 4) The extent to which the reputation and status of Mr. Madoff may have impacted any inquiry; 6) The complaint handling procedures of the Division of Enforcement; 7) The OCIE examination and inspection procedures; and 7) The relationship between different divisions and offices within the Commission and whether there is sufficient intra-agency collaboration and communication among those sections. This inquiry may illuminate much more than what happened with the Madoff case. Potentially, the inquiry could result in an overall and reform of the way in which the Division of Enforcement conducts law enforcement investigations.

While Mr. Kotz was testifying, prosecutors were back in court in the criminal case pending against Mr. Madoff requesting that his bail be revoked. According to a report published by Bloomberg.com, prosecutors claim that Mr. Madoff violated an asset freeze order by mailing $1 million of valuables to relatives. Counsel for Mr. Madoff denied that there was any violation of the order or the terms of the bail and downplayed the events, claiming that Mr. Madoff’s actions were innocent and involved heirlooms which are being returned to the government. The Court asked each side to file a brief.

Tuesday there is a free webcast titled:
2008 Year in Review–Securities Litigation and Enforcement.

And the link to go sign up is here.