The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

An astonishing amount of litigation followed in the wake of the Madoff scandal revelations, as I have detailed here. But thought the litigation filings have surged, the question remains whether the plaintiffs’ desperate attempts to recover their losses from third parties have any chance of success.

This question was underscored by the March 4, 2010 ruling by a Luxembourg court that individual investors who lost money in Madoff’s scheme lack standing to sue UBS AG and its auditor Ernst & Young for losses in the bank’s LuxAlpha funds. According to news reports, the court said that the investor plaintiffs had failed to show they had suffered individual damage separate and apart from the funds themselves. They also failed to show any individual damage suffered by the alleged behavior of UBS or Ernst & Young.

But though the Luxembourg dismissal received widespread coverage, there was a largely overlooked earlier Madoff-related case ruling out of Florida, in which the investor plaintiffs’ claims largely survived the defendants’ motions to dismiss. (The Florida case is mentioned in a March 5, 2010 Wall Street Journal article, here, which otherwise is devoted to the Luxembourg court ruling.)

The Florida case arose on May 7, 2009, when seventeen plaintiffs filed a 62-page complaint in Palm Beach County Circuit Court against Madoff feeder funds Tremont Group Holdings and Tremont Partners, as well as three associated Rye Select funds. The complaint also names KPMG, which had serves as the Rye funds’ auditor, as a defendant.

The plaintiffs’ complaint alleges that the Tremont and Rye Select Fund defendants failed to perform their professional duties, but rather simply turned invested funds over to Madoff. The plaintiffs allege that the defendants "did not analyze Madoff, investigate his companies, conduct significant due diligence, or ensure that there were rudimentary safeguards." The plaintiffs further allege that the defendants took tens of millions of dollars in management and other fees from the funds.

The complaint alleges that the defendants violated Florida securities laws, committed common law fraud, negligent misrepresentation, professional malpractice and negligence. The complaint also alleges that defendants breached their contractual and fiduciary duties. The defendants moved to dismiss.

In a February 5, 2010 order (here), Circuit Court Judge David E. French granted in part and denied in part the defendants’ motions to dismiss.

With respect to the Tremont and Rye funds defendants, Judge French granted the motions to dismiss, without prejudice, as to plaintiffs’ claims of breach of fiduciary duty (Count VI), breach of statutory fiduciary duty (Count VII), breach of contract (Count XI), and adding and abetting breach of fiduciary duty (Count XII), all essentially on the grounds that the plaintiffs had failed to allege individualized injury, apart from the injuries to the funds themselves.

However, Judge French denied the Tremont and Rye funds defendants’ dismissal motions as to plaintiffs’ claims for violation of state securities laws (Count I), Negligence Per Se (Count II), Fraud in the Inducement (Count III), Negligent Misrepresentation (Count IV), and Deceptive and Unfair Practices (Count VIII), as these are claims where the investor plaintiffs suffered their own individual injuries.

Judge French also granted without prejudice KPMG’s dismissal motions as to plaintiffs’ claims for Negligent Misrepresentation (Count V), Professional Malpractice (Count X) and Aiding and Abetting Breach of Fiduciary Duty (Count XIII), but denied KPMG’s dismissal motion as to plaintiffs’ allegations against KPMG for deceptive or unfair practices (Count IX).

While the defendants’ dismissal motions were granted in part, substantial portions of the plaintiffs’ complaint survived and the case will now go forward, showing that at least some Madoff victims may be able to allege claims sufficient to survive initial dismissal motions.

The February 5 ruling seems significant because as far as I am aware it represents the first instance in which a private plaintiff against a Madoff feeder fund has survived a motion to dismiss.

To be sure, on February 8, 2010, New York Supreme Court Judge Richard B. Lowe III did enter an order (here), denying the defendants’ motions to dismiss in the New York Attorney General’s civil fraud lawsuit pending against Ezra Merkin and his Madoff-related feeder funds. But the Florida ruling is the only ruling of which I am aware in which a private plaintiff lawsuit against a Madoff feeder fund has survived a dismissal motion and will be going forward.

Obviously, the massive amount of Madoff-related litigation will continue to grind through the courts for years to come. The Florida decision shows that plaintiffs may be able to survive dismissal motions in at least some of these cases. Of course, whether the plaintiffs will ever recover even a very small part of their losses remains to be seen.

Special thanks to a loyal reader for calling my attention to the Florida decision and providing me with a copy of the opinion.

Class Act on the Danube: Here at The D&O Diary, we scour the globe looking of interest for our readers. By way of example, we refer readers to the article that appeared in the March 8, 2010 issue of the Budapest Business Journal (here), in which it is reported that "a revision to the standing civil code will shortly introduce class action lawsuits to the Hungarian legal system and already has a number of nongovernmental interest groups revving up to start the proceedings."

The prospects for class litigation outside the U.S. apparently continue to spread. Everyone here will remain vigilant.

If You Are Even Thinking about Starting a Blog: As we have pointed out before, a blog is a harsh mistress, as we know all too well. However, there may be those at this very moment who may be thinking about starting a blog. For all the aspiring bloggers, we recommend an essay by Mark Herrmann (now an ex-blogger since relinquishing his role as co-author of the essential Drug and Device Law Blog) in the Winter 2010 issue of the ABA Section of Litigation Journal entitled "Memoirs of a Blogger" (here, hat tip to the WSJ.com Law Blog).

Although much of the article is focused on the question whether a law blog is a good idea for a big firm attorney, there are many more universal truths as well. Among other indispensible pointers with which we concur, Herrmann states: "If you’re thinking of launching a legal blog, have your eyes open. Once you launch a blog, you will face the relentless, mind-numbing, never-ending task of finding worthwhile material to publish. That burden begins on the day of your first post, and ends only the day you call it quits."

Amen, brother.

And along those lines, everyone here at The D&O Diary is always grateful when readers send along blog ideas and suggestions. We get our best material from readers, so please let us know if you see anything interesting out there.

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Could Madoff-related losses be insured under a homowners’ insurance policy? That is what is claimed in a class action complaint filed on August 19, 2009 in the Southern District of New York by Robert and Harlene Horowitz against their homeowners’ insurer and related entities. Their complaint (which can be found here) alleges that the insurer denied coverage under its policy for the more than $8 million that the Horowitzes claim to have lost in the Madoff scandal.

The plaintiffs claim that their homeowners’ policy contains a so-called Fraud SafeGuard provision, which insures against the "loss of money, securities or other property … resulting from fraud, embezzlement or forgery perpetrated against [policyholders] or [policyholders’] family member[s] during the Policy Period."

The Horowitzes claim that they had a family trust account, of which Robert Horowitz was trustee, with Bernard Madoff Investment Securities. They claim that their final balance on the BMIS account was over $8.5 million.

The complaint alleges that when they submitted their claim seeking payment for their claimed losses (which they assert is the full $8.5 million amount), the insurer denied coverage "on several grounds, all of which are erroneous."

The complaint is filed as a class action on behalf of all the policyholders under the defendants’ homeowners’ insurance policies with coverage for Fraud SafeGuard events and that lost money in the Madoff scheme.

The complaint asserts claims for breach of contract; breach of the implied covenant of good faith and fair dealing; and unjust enrichment. The class action seeks compensatory damages as well as "declaratory and injunctive relief to end the Defendants’ improper practices."

Though the complaint alleges that the defendants’ have denied coverage entirely for the plaintiffs’ claimed loss, a significant portion of the complaint is devoted to the plaintiffs’ contention that they are entitled to recover the full amount of their claimed $8.5 million loss, and not just the (unspecified) amount of the initial investment. They claim entitlement to the supposed investment gains that the plaintiffs’ believed they had earned on the BMIS account.

The plaintiffs argue that their loss is "the amount shown on their last account statement," and that their loss "cannot be erased by Defendants’ ad-hoc, after the fact definition of covered loss." The plaintiffs argue that in any event, they are at least entitled to implied interest on the initial investment as well as non-recoverable tax payments that had been made based on the Madoff statements.

The complaint also recites and refutes the applicability of the long list of policy exclusions on which the insurer relied in denying coverage, including, for example, that the policy does not cover loss caused by "the confiscation, destruction or seizure of property by any government or public entity or their authorized representative"; and that the policy does not cover "indirect loss resulting from any fraud guard event, including, but not limited to, an inability to realize income that would have been realized had there been no loss or damage to money, securities or other property."

It is interesting that the complaint was filed by the Milberg law firm, which may not be the first firm you think of when you think of insurance coverage litigation -- but on the other hand over the years, the firm has been in the forefront of class action litigation (albeit usually in the securities context), which may explain in part the fact that the complaint was filed as a class action.

When I noted recently (here) the arrival of the Madoff coverage litigation, I predicted that there would be a great deal more litigation to come. But I never expected that the first class action coverage lawsuit would be based on homeowners’ coverage. For that matter, I have to confess that I didn’t foresee the involvement of homeowners’ coverage at all. But if the Horowitzes get any traction with their lawsuit, I suspect that we could see a whole lot more litigation raising similar allegations. There may be many more claims to come under other kinds of first-party coverages, as well.

The one thing I know for sure is that earlier this year, when various commentators were putting out their estimates on the likely aggregate insurance losses from the Madoff scandal, they did not factor in the possibility of losses under homeowners’ insurance policies.

In any event, I have added the new class action complaint to my register of Madoff-related litigation, which can be accessed here. The insurance coverage litigation of which I am aware so far is listed in Table V of the Madoff lawsuit register.

I continue to believe that there will be a great deal more Madoff-related insurance coverage litigation, and as I become aware of any new cases I will add them to the register. I hope readers who become aware of Madoff-related insurance coverage lawsuits will please let me know (anonymity protected upon request, of course).

Special thanks to a loyal reader for bringing the Howowitz lawsuit to my attention.

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Given the massive amount of litigation arising out of the Madoff scandal as well as the enormous sums of money involved it is perhaps inevitable that the scandal would also generate its own category of insurance coverage litigation. As the two cases described below demonstrate, the Madoff-related coverage litigation has now arrived. There undoubtedly will be much more to come in the weeks and months ahead.

The first of the two recently filed coverage complaints was filed on July 14, 2009 in Hennepin County (Minn.) District Court by Upsher-Smith Laboratories, a pharmaceutical company. A copy of the complaint can be found here. Since 1995, Upsher-Smith had invested all of its funds in its profit sharing plan with Bernard L. Madoff Securities LLC. As of December 2008, the company had invested $12 million in plan assets with Madoff. The company had also invested millions of its own with Madoff.

As a result of the plan losses, the U.S. Department of Labor launched an investigation, and by letter dated June 30, 2009, the DOL has demanded that the company "restore losses" to the plan, or the DOL may file a lawsuit.

Upsher-Smith filed a claim with its "Employee Benefits Plan Administrative Liability" insurer in connection with the plan losses and the DOL’s actions. The company has also filed an action with its crime insurer in connection with its own separate losses. Both carriers have denied coverage. In its July 14, 2009 complaint, Upsher-Smith seeks a judicial declaration of coverage under both policies, and also alleges breach of contract against both insurers.

The second of the two complaints was filed on July 15, 2009 in the Southern District of New York by Ann & Hope, Inc., which operates retail stores, as well as by an affiliated entity and affiliated persons. The complaint, which can be found here, was filed against the company’s crime insurers. The complaint alleges that on August 14, 2008, Madoff’s firm "caused $5 million to be transferred" from the affiliated company to Madoff’s account with JP Morgan. As a result of Madoff’s fraud, the funds have been lost. The company submitted a claim to its crime insurer, which has denied the claim. The complaint seeks a judicial declaration of coverage and also alleges breach of contract.

Merely because these complaints have been filed does not, of course, mean that they are meritorious. In that regard, I note that both complaints neglect to mention the specific grounds on which the respective carriers have denied coverage, an omission that may be telling. The stilted wording on the Ann & Hope complaint alleging that Madoff "caused the funds to be transferred" may suggest the kind of coverage problems that the companies seeking coverage under their crime policies for Madoff losses will have to solve.

There may well have been other Madoff-related insurance coverage litigation before these two cases, although I have been keeping track of all Madoff-related litigation fairly attentively and I have not seen any other coverage lawsuits before. The one thing I know for sure is that these lawsuits won’t be the last.

Madoff may be in prison for the next 150 years, but while he does his time outside the prison walls, the litigation his crimes have engendered will grind on for many years. I predict that the litigation will live on long after his obituary appears.

I have in any event added the two insurance coverage cases to my register of Madoff-related litigation, which can be accessed here. In recognition of the distinction that these two new coverage cases represent, I have created a new table on my litigation chart (Table V) for Madoff-related coverage litigation. I hope readers will help me to maintain the table by supplying me with copies of complaints of which they may become aware.

Special thanks to loyal reader Bill Sweeney for providing me with copies of the two coverage complaints.

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Something hit me this past week as I was reviewing the latest Madoff-related complaint to cross my desk. The class action complaint (here), was filed on May 29, 2009 in the Middle District of Florida by a Florida physician who had a Swiss Life variable annuity policy that was invested in the Platinum All Weather Fund (the "Fund"), a mutual fund offered by Nomura. The Fund in turn was invested in certain other investment vehicles that had simply turned their assets over to Madoff. According to the complaint, the entire Fund has now been written down to zero.

The Madoff-related losses alleged in the complaint are all too familiar, but what struck me as I reviewed these latest allegations is what an incredibly far-flung, diverse and many-tentacled monster the Madoff fraud scheme was. And as diverse and dispersed as the consequences of the Madoff scandal have been, so too is the wave of litigation that has followed in the wake of the scheme’s collapse.

When I first started tracking the Madoff-related litigation last December, it seemed like a relatively straightforward undertaking. But now the list of Madoff-related lawsuits (which can be accessed here) runs to some 18 pages, and the lawsuits continue to pour in. In reviewing this now-lengthy and growing catalog of claims, the most striking thing is what a varied assortment of lawsuits the Madoff scandal has produced. Even though there is a great deal of duplication among the claims, the list encompasses a spread and scope of lawsuits that defied brief summarization.

At first, the stream of lawsuits involved the money managers that ran the now-infamous rogues’ gallery of Madoff-related "Feeder Funds," such as Walter Noel, Stanley Chais and Ezra Merkin. Lawsuits involving these individuals and their associated firms continue to come in. But as the lawsuits have piled up, the claims have targeted an ever-broadening array of individuals and entities, as demonstrated by the lawsuit described above against a Swiss insurer and a Japanese investment management firm.

The list of litigation targets includes Spanish and Austrian banks, Cayman Island hedge funds, Irish investment custodians, private banks based on Gibraltar, investment management firms in Luxembourg, and many other individuals and entities spread across the entire globe. The overall impression from this geographically diverse mix of defendants is that until the scheme collapse, the entire world seems to have gone completely Madoff.

Several other recently filed complaints highlight the geographic dispersion of defendants targeted in the Madoff-related lawsuits.

For example, on May 15, 2009, an investor filed a derivative complaint (here) in New York (New York County) Supreme Court against Kingate Global Fund Limited, a British Virgin Island fund, as nominal defendant, as well as against related Kingate entities and individuals. The complaint alleges that the fund was a Madoff feeder fund with substantially all of its assets invested with Madoff or his firm. (On April 17, 2009, Irving Picard, the liquidator of Madoff’s firm, separately filed an action, here, in the Southern District of New York bankruptcy court against Kingate and related funds.)

On May 7, 2009, investors who had purchased limited partnership interests in investment funds offered and managed by Swiss bank Union Bancaire Privée (UBP) and related entities filed a class action complaint (here) in the Southern District of New York against UBP and associated entities and individuals, alleging that the defendants had invested a "material amount of the investment capital of the UBP funds" with Madoff’s firm.

On May 29, 2009, the R.W. Grand Lodge of Free and Accepted Masons of Pennsylvania filed a complaint (here) in the Eastern District of Pennsylvania against Meridian Diversified Fund, a Cayman Island "fund of funds" that had invested in the Rye Select Broad Market XL Fund managed by Tremont Partners, which in turn had invested significant assets with Madoff. (The Meridian funds have themselves initiated a separate action, here, against Tremont and related entities.)

The claim diversity is not merely geographic. In looking over the lengthy list of lawsuits, some of the claims seem to have taken their inspiration from the theater for the absurd. For example, there is the pro se complaint (which can be found here and that is described in greater detail here), in which the plaintiff purported to sue, among others, Brittney Spears and Kevin Federline, on Bernard Madoff’s supposed behalf, alleging among other things that Spears had "secret affairs with Madoff in return for Saks Fifth Avenue gift certificates."

Some of the lawsuits reveal the private pain that has accompanied Madoff victims’ losses, as shown for example in the lawsuit (here) filed in New York (New York County) Supreme Court by Steven Simkin against his former wife Laura Blank, in connection with the Madoff-related investment the couple had maintained while married. It appears that in their divorce, Simkin had paid millions to buy out his wife’s share of the Madoff investment, which is now worthless. Simkin’s suit seeks reformation of the agreement in which the couple had divided the marital assets. A tough situation for Mr. Simkin, no doubt; one can only wonder about his former wife’s sympathies for his plight.

So much of this Madoff-related litigation is like that of Mr. Simkin, a desperate bid to salvage something from the losses on now worthless investments. Some of these lawsuits, particularly those against solvent, deep-pocketed defendants potentially could result in substantial recoveries. But in far too many of the other lawsuits, there may be no assets against which to recover, even if the claims are otherwise successful.

In some instances, the defendants may have insurance that these claims could implicate. However, the costs of litigation may erode or even deplete the available limits long before any claimants have a chance to access the policy proceeds. Moreover, in many cases, the same defendants have been targeted so many times by so many different claimants that whatever assets or insurance the targets may have are likely to satisfy only a very small amount of the various plaintiffs’ claims.

Despite these obvious difficulties, the Madoff-related lawsuits continue to pile up. In most instances, the complaints are salvage operations fueled by anger and frustration. The one thing that is clear is that the collapse of Madoff’s fraudulent scheme will be keeping lawyers occupied for years and years to come.

I would be remiss in closing this post if I did not recognize the contributions of the many loyal readers who have provided me with copies of complaints or alerted me to lawsuits that were missing from my list. The list truly is a product of this blog’s community of readers. My very special thanks to all who have contributed.

A Classical Allusion: Readers of a certain age may recognize the title of this post as an allusion to the 1963 movie, It’s a Mad, Mad, Mad, Mad World. The movie, whose all-star ensemble cast included, among others, Jimmy Durante, Spencer Tracey, Phil Silvers, Sid Caesar, and Jonathan Winters, involves the mad scramble of various drivers to recover the hidden loot revealed in the dying words of the automobile accident victim whose death they all witnessed.

Cherished memories of my childhood enjoyment of this movie motivated me to buy a DVD of the movie for my own children. Suffice it to say that both movie-making and kids’ taste in comedy have changed dramatically in a generation. Even I have to admit that by contrast to the pace of today’s movies, the pace of this movie classic is absolutely glacial. And the slapstick humor I remembered enjoying so much in my youth failed to amuse my kids. After the scene in which an enraged Jonathan Winters destroys a filling station with his bare hands, which I had remembered as hilarious, my then-eight year old son said, "Why would anyone think that is funny?"

Due to this failed attempt to take my family down my own memory lane, my access to the family’s movie queue on Netflix has been permanently barred. And whenever anyone in the house wants to veto a proposed movie, all they have to say is "It’s a classic!" and they can be sure no one will want to watch that particular film.

All of that said, a reference to the 60’s movie and its portrayal of an every-man-for-himself race to try to recover hidden and possibly nonexistent funds seemed particularly apt in connection with a discussion of the Madoff-related litigation scrum.

Even though my kids panned it, I still think the movie is funny. Readers unfamiliar with but curious about the movie may want to watch this trailer which captures the level of the movie’s humor (check out Jimmy Durante "kicking the bucket")

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Although a wide variety of surprising details have come to light as the Madoff scandal has been exposed, there has as yet been no reported connection between the scandal and Britney Spears—that is, until now. A handwritten complaint filed in the Eastern District of Michigan on March 16, 2009 raises a number of, well, colorful allegations involving Spears and an assortment of other unexpected persons.

The complaint (here) purports to be filed on behalf of none other than Bernard L. Madoff himself, whom the complaint further characterizes as "d/b/a Jonathan Lee Riches," who in turn is described as "a/ka Gino Romano, Inc." The named defendants include Spears, her ex-husband Kevin Federline and the Securities and Exchange Commission.

Among other things, the complaint alleges that Spears is in possession of "1.6 billion of Ponzi money from victims of ours." Riches claims that he and Spears met on eHarmony.com in 1996 and that Spears "stole" his American Express Black card to "purchase her circus tour outfits." (You were wondering where she got those, weren’t you?)

The complaint links Spears in some rather unexpected ways to two of the most prominent names in the current financial crisis. First, the complaint alleges that Spears has a "secret affair" with Angelo Mozillo. Next, the complaint alleges that Spears has been visiting Madoff’s New York Penthouse for "secret affairs with Madoff" in return for Saks Fifth Avenue gift certificates.

Riche’s real objection to Spears seems to be that allegedly she has tattooed his name to her, um, back, which she allegedly displays during concerts. Riches seeks $20 million from Spears and a restraining order against Spears’s younger sister, Jamie Lynn, who allegedly has "threatened Plaintiffs with various unknown teenagers who are pregnant."

Riches (a/k/a Gino Romano) is a prisoner in the federal prison system. According to Wikipedia (here), he has filed over 1,000 federal lawsuits since 2006, against, among others, George W. Bush, Steve Jobs and Martha Stewart. Readers may recall a prior post (here), in which I described an earlier lawsuit Riches had filed against Madoff.

Indeed, this lawsuit is not even the first complaint Riches has filed against Spears. According to news reports (here), Riches previously alleged that Spears held him at gunpoint and forced him to commit an array of crimes. He also alleged that Spears forced him to pay for abortions, breast implants, cocaine and alcohol.

I certainly don’t want to seem like I take threats involving unknown pregnant teenagers lightly. But even though the allegations do have a certain entertainment value, somebody needs to take away this guy’s pencil.

I have in any event added this Riches complaint, along with a variety of other recently filed Madoff-related actions, to my register of Madoff-related lawsuits, which can be accessed here. I have to say that I never anticipated that I would be referring to Britney Spears on this blog, for any reason whatsoever. Just goes to show, you never know.

Special thanks to a loyal reader for providing me with a copy of the Riches complaint. Thanks also to the alert reader who previously steered me to the Wikipedia item about Riches.

Repeat After Me: Correlation is Not Causation: And speaking of unexpected connections, we feel compelled to report on the February 18, 2009 article "Regulators and Redskins" (here), which discloses the unexpected connection between federal government activity and the performance of the Washington Redskins.

The authors report "a significantly positive, non-spurious, and robust correlation between the Redskins’ winning percentage and the amount of federal government bureaucratic activity as measured by the number of pages in the Federal Register."

The authors’ explanation for this "surprising result" is that "a winning football team makes for a commonly shared source of joyous optimism to lubricate [the bureaucrats’] negotiations." The authors note however that they do not find the same correlation when examining Congressional activity "which we attribute to legislator loyalty to their home state’s team(s)."

Hat tip to the Ideoblog (here) for the link to this truly groundbreaking academic study.

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Following close on the heels of the Massachusetts regulator’s action filed last week against Madoff feeder-fund Fairfield Greenwich and related individuals, on April 6, 2009, New York Attorney General Andrew Cuomo initiated a civil action in New York (New York County) Supreme Court against J. Ezra Merkin and Madoff feeder fund Gabriel Capital Corporation. The AG’s April 6 press release, which links to the complaint and accompanying exhibits, can be found here.

The complaint alleges that over the course of many years beginning in the 90s and going through December 2008, Merkin earned $470 million in management and incentive fees, representing to investors and to nonprofits on whose boards he sat that he was managing their money when in fact he was simply handing much of the money over to be managed by Bernard Madoff, whom Merkin "failed to adequately oversee, audit or investigate."

The complaint alleges that through his "misrepresentations, concealment, self-dealing, reckless conduct and gross negligence," Merkin "abused the trust of investors" and "breached the fiduciary duties" he owed to the nonprofits on whose boards he sat. As a result, the complaint alleges, investors lost approximately $2.4 billion.

Merkin not only misrepresented his role as a money manager, but also, according to the complaint, concealed Madoff’s critical role in (supposedly) managing the funds. The complaint also alleges that not only was Madoff perhaps uniquely aware of many of the "red flags" about Madoff (including his uncanny returns, his suspicious clearing of trades every quarter end, and the suspicious identity of his auditor), but he also received numerous warnings about Madoff from "his closest and most trusted advisors." The complaint alleges that Merkin disregarded these warnings because his "financial incentive to keep funds with Madoff blinded him."

The complaint alleges that the Ascot funds, one of the groups of funds Merkin founded and supposedly managed, turned virtually all of its investor funds over to Madoff to handle. Of the $1.7 billion in the Ascot funds as of May 2008, $215 million, or about 12 percent, belonged to 35 nonprofit groups, of which more than half ($115 billion) belong to organizations on whose board Merkin sat as a director. The complaint alleges that "Merkin embedded himself in charitable boards and used those positions to solicit new investments."

The complaint charges Merkin with violations of the Martin Act for fraudulent conduct in connection with the sale of securities; with other statutory violations for "persistent fraud in the conduct of business"; and with violations of New York’s Not-for-Profit Corporation Law and breaches of fiduciary duty in connection with Merkin’s service on the boards of certain nonprofit entities. The complaint seeks payment of damages and disgorgement of fees, restitution and other equitable relief.

The NYAG’s complaint obviously presents a host of factual and legal issues. Among other things, it also raises some potentially complex and even vexing insurance complications as well.

Merkin will obviously seek to resort to his firm’s D&O and/or E&O coverage in connection with his defense against the AG’s claims. However, his firm’s insurance coverage may already be under significant pressure as a result of the extensive civil litigation already pending against him and his firm.

Moreover, his firm’s insurance coverage would only cover him as excess insurance in connection with the allegations against him in his capacity as a director of the referenced nonprofit entities. Insofar as he is named as a defendant in those capacities, his firm’s policy would cover him, if at all, after both the nonprofit’s available insurance and indemnification obligations were exhausted.

In other words, as a result of the allegations against him in his capacity as a director of those nonprofits, he would as a theoretical matter be in a position to attempt to resort to those organization’s insurance policies as well as to seek indemnification from those organizations.

The potential implications that these nonprofits insurance policies (and even indemnification obligations) would be called upon to respond to the claims against Merkin would raise a host of complex issues, including, for example, allocation issues (owing to the fact that Merkin is named as a defendant in multiple capacities). But as a strictly theoretical matter – and without expressing any opinion as to the merits of the effort or the justice it would or would not represent – Merkin certainly might well seek to access the various nonprofits’ insurance policies, at least to the extent he is named as a defendant in his capacities as a director of the nonprofits. However, even to the extent the policies afforded coverage in connection with this claim it would only be for Merkin as an individual and to the extent of his insured capacity under each particular policy, and it would not in any event extend to his funds.

One additional complicating factor, at least as a preliminary matter, is that the various nonprofit organizations are not referenced by name in the complaint. This initial hurdle is likely surmountable through discovery, and seemingly would quickly be overcome. (According to an April 7, 2009 Wall Street Journa article about the AG's law suit, which can be found here, the institutions on whose Boards Merkin sat and which had funds invested with Merkin included New York University, New York Law School, Yeshiva University and Bard College.) Whether or not the potentially affected policies would in fact respond to these claims would of course have to be determined according to the applicable allegations and the applicable policy language.

Ironically, as least some of these nonprofit institsutions have separtely initiated their own actions against Merkin and his funds -- for example, New York Law School (refer here for the complaint) and New York University (refer here) have each filed suit against Merkin . These separate actions against Merkin would likely trigger the insured vs. insured exclusion found in most D&O insurance policies and therefore would not themselves implicate coverage. The irony is that these same institutions, who are pursuing substantially the same claims against Merkin as is the NYAG,  could  see their insurance policies accessed and potentially depleted by the NYAG's complaints, assuming for the sake of discussion that the policies are in fact implicated as discussed here.

A detailed and particularly compelling portrait of the long relationship between Madoff and Merking is set out in New York Magazine’s February 22, 2009 article entitled "The Monster Mensch" (here). The article describes Merkin as "an intellectual showman" and a "marvel of erudition" who commanded respect as a civil and philanthropic leader and as Chariman of GMAC, the finance arm of General Motors. He was, according to a friend quoted in the article, the "wisest man on Wall Street." Which may explain a lot, unintentionally and in retrospect, about Wall Street.

I have in any event added the NYAG’s complaint to my roster of Madoff-related lawsuits, which can be accessed here. (The list also includes a separate action filed against Merkin, Gabriel and the funds' auditor on April 6 by publisher and real estate magnate Mortimer Zuckerman, who claims in his complaint that he lost $40 through his investments with Merkin.)I note that this list gets considerably longer every day, as new complaints continue to arrive. Special thanks to the many readers who continue to provide me with copies of the new lawsuits, particularly to Jon Jacobson of the Greenberg Traurig firm.

And Finally: Although arguably it has nothing to do with Merkin himself or any of the foregoing, I nevertheless feel compelled to alert readers to the interesting and somewhat peculiar meaning that the work "merkin" has in the English language.

According to Wikipedia (here), a "merkin" is "a pubic wig, originally worn by prostitutes, after shaving the genitalia to eliminate lice or disguise the marks of syphilis." The Wikipedia entry helpfully provides a picture of "a mock merkin."

Now you know.

Special thanks to the loyal reader who pointed out this fact – which, upon further reflection, may not be quite so unrelated after all.

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In an April 1, 2009 administrative complaint (here), Massachusetts Secretary of the Commonwealth William Francis Galvin accused Madoff feeder fund Fairfield Greenwich Advisors and its Bermuda affiliate of "complete disregard of its fiduciary duties to its investors" and of "flagrant recurring misrepresentations" that "rise to the level of fraud."

If you have not yet seen the complaint, you should take a look, because it contains some rather striking allegations, the most provocative of which are based on the transcript of a telephone conversation in which Bernard Madoff coaches senior Fairfield officials on how to respond to inquiries from the SEC.

At one time Fairfield has a much as $14 billion of assets under management, of which nearly $7 billion was invested with Madoff through its flagship funds. The firm earned hundreds of millions of dollars in fees from investors in connection with the Madoff related investments. (Detailed background regarding the Fairfield group can be found here.) UPDATE: Fairfield's principals were on track for payouts totalling over $117 million in 2008, before the scandal surfaced, as reflected in documents filed with complaint, according to the Dealbook blog (here).

The complaint alleges that Fairfield’s managers were "blinded by the fees they were earning" and "did not engage in meaningful due diligence" but instead "turned a blind eye to any fact that would have burst their lucrative bubble."

The complaint alleges that in contrast to the due diligence efforts Fairfield claimed in its marketing materials, the firm "neglected to do any meaningful check into whether Madoff was actually making trades he said he was making." The complaint further alleges that "the concept of due diligence was merely part of Fairfield’s marketing pitch, not an activity it meaningfully engaged in with respect to Madoff."

The centerpiece of the complaint is a transcript of a December 2005 telephone conversation between Madoff and several senior Fairfield officials. Fairfield apparently recorded the conversation then apparently unbeknownst to Madoff and produced the recording in connection with the Massachusetts investigation. The transcript of the call can be found here.

The SEC was about to interview the Fairfield officials in connection with the SEC’s investigation of allegations against Madoff by Harry Markopolos. The transcript shows that Madoff opened the call by stating "obviously, first of all, this conversation never took place, okay?"

Madoff then gave the Fairfield officials precise instructions on what to say in response to the SEC’s questions, noting at one point that "the secrecy as to information is the key issue for everybody," even going so far as to say to the Fairfield officials that "the less you know about how we execute… the better you are."

The complaint alleges with respect to this phone conversation that Madoff was "manipulating the flow of information to the SEC" and that as a result of its cooperation, Fairfield helped Madoff "evade SEC detection."

The complaint also alleges that Fairfield’s reliance on the outside audit firm’s audit of Madoff’s investment company was "absurd," and that Fairfield made "patently false representations" about the audit and the auditor even though Fairfield "did not know one thing about this one-person auditing firm."

The complaint also alleges that as 2008 progressed, client redemptions and larger problems in the financial marketplace began to trouble the Fairfield officials. They began to debate internally about "gaps" in their knowledge about Madoff. Their internal communications reflect liquidity concerns as well as concerns about Madoff’s counterparty exposures.

The complaint alleges that the officials did not follow up on these concerns. Instead, in response to Madoff’s anger about increasing fund redemption in the late fall 2008, they tried to support him by marketing against redemptions as well as by placing their own cash in new Madoff funds formed at the eleventh hour.

The complaint seeks a cease and desist order and restitution to all investors who invested in Madoff through Fairfield, as well as disgorgement of related fees and an administrative fine.

In response to the complaint, Fairfield issued an April 1, 2009 statement (here) in which it characterized the complaint as "false and misleading" and asserted that it "conducted vigorous and robust monitoring [of Madoff] on an ongoing basis." The complaint, according to the statement, is based on "nothing more than 20-20 hindsight that supposes that anyone familiar with Madoff’s operation should have determined that it was a Ponzi scheme." But, the statement notes, not one person detected the fraud.

Among the Fairfield officials mentioned by name in the complaint is Andres Piedrahita (a Fairfield partner and son-in-law of Fairfield founding partner Walter Noel), whom the complaint alleges in 2007 alone earned in excess of $45 million. The March 31, 2009 Wall Street Journal ran a fascinating front-page article about Piedrahita entitled "The Charming Mr. Piedrahita Finds Himself Caught in the Madoff Storm" (here), reporting among other things that Piedrahita had once told a friend that his "real job" was "to live better than any of my clients."

Piedrahita, trading on his "outstanding public relations skills," played a key role in "expanding the reach of the Madoff fraud by wooing wealthy Latin Americans and Europeans." Piedrahita is now under investigation with both Spanish and U.S. authorities, and is a defendant in numerous class action lawsuits, along with Fairfield and other Fairfield officials.

Meanwhile, the April 2009 issue of Vanity Fair has a lengthy article (here) about Fairfield founder Walter Noel and his family. The article features a particularly striking photgraph of Noel's five daughters, one of whom is the wife of Piedrahita. An October 2002 Vanity Fair article focused just on the five daughters can be found here. After awhile, trolling through the backstory on these sidelights to the Madoff scandal begins to create the same sensation as reading an overwritten novel.

A comprehensive list of the Madoff-related lawsuits, including the numerous lawsuit filed against Fairfield and related entities and individuals, can be accessed here. I have added the new Massachusetts complaint to the list.

Hat tip to the Wall Street Journal for the Fairfield Statement.

Other Stories We’re Following: According to news reports (here), a man in Newark, Ohio has been charged with drunk driving on a bar stool. The man apparently had built a motorized bar stool using a dismantled lawn mower. He managed to crash the stool, apparently as a result of the 15 beers he reportedly consumed prior to the accident. Readers interested in seeing this amazing (albeit unexpectedly dangerous) vehicle will want to refer here.

Meanwhile, on March 27, 2009, the Macomb (Ga.) Daily reported (here) that "a woman who sued a city of Warren police dog that she says bit her on the buttocks was ordered by a judge to pay $500 for frivolously naming the dog as a defendant." Frivolous? Has the judge ever been bitten on the butt by a police dog? Incidentally, the dog’s name is "Liberty" which is clearly what the dog took with the plaintiff’s behind

And in world news, Barrack Obama has apparently given Queen Elizabeth II an iPod as a gift in connection with his visit to Buckingham Palace today, as reported here. Alas, it is too late now, but had I been consulted in advance, I would have suggested loading the device with the music of this year’s inductees into the Rock and Roll Hall of Fame, in particular the songs of Run-D.M.C.

The Rock Hall induction, by the way, is this Saturday, April 4, 2009, in Cleveland, Ohio. (Cleveland Rocks, baby.)

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In a recent post (here) discussing the New York state court lawsuit recently filed against Banco Santander and related entities on behalf of Madoff-related victims, I mentioned that among the claims asserted in the complaint is a cause of action under New York General Business Law Section 349. This item caught the attention of Albany Law School professor Christine Sgarlata Chung, who has a particular interest in the question whether Section 349 is applicable to securities claims.

At my invitation, Professor Chung has submitted the following brief guest post relating to the plaintiffs’ Section 349 claims:

I read with interest your recent post on the Madoff-related class action filed by the Coughlin Stoia firm.  As you note, the complaint asserts a variety of state law claims, including claims under §349 of the New York General Business Law.   This is an interesting approach, given the reluctance of some New York courts to apply §349 to securities transactions. 

 For example, in Gray v. Seaboard Securities, Inc., 788 N.Y.S 2d 471 (N.Y. App. Div. 2005), plaintiffs alleged that they opened accounts at Seaboard, purchased stock recommended by Seaboard, and paid full service brokerage commissions to Seaboard based on Seaboard’s promise to provide proprietary research.   Plaintiffs alleged that Seaboard engaged in a deceptive business practice within the meaning of §349 by failing to provide the promised investment advice.

The district court dismissed the plaintiffs’ claims on the grounds that §349 does not apply to securities transactions.  On appeal, plaintiffs argued that §349 does not contain a "wholesale exclusion" for securities transaction.  They also argued that their claims arose from Seaboard’s furnishing of services (i.e., investment advice) and not from securities transactions per se. 

The appellate court affirmed the dismissal of the plaintiffs’ claims, noting that the "vast majority of [New York] courts which have considered the issue have found general Business Law §349 inapplicable to securities transactions for essentially two reasons."   First, the court reasoned "individuals do not generally purchase securities in the same manner as traditional consumer products, such as vehicles, appliances or groceries, since securities are purchased as investments and not goods to be consumed or used."  Second, the court held that because the securities arena is highly regulated at the federal level, "it is questionable that the legislature intended to give securities investors an added measure of protection beyond that provided by securities acts." 

It is important to note that in 2001, a different department of the New York appellate court held that § 349 does not contain a blanket exception for securities transactions.   See Scalpe & Blade, Inc.  v. Advest, Inc., 722 N.Y.S. 2d (N.Y. App. Div. 2001).  Still, given Gray and its ilk, I am curious to see how the Coughlin Stoia plaintiffs fare with their § 349 claim.

Special thanks to Professor Chung for her interesting commentary on this issue. The D&O Diary welcomes guest posts from responsible commentators and we are always interested in submissions and contributions from readers.

Other Madoff-Related Notes: A February 18, 2009 Wall Street Journal article entitled "Accounting Firms that MIssed Fraud at Madoff May be Liable" (here) suggests that accounting firms for Madoff feeder funds could be "legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts."

And a February 17, 2009 article in The (London) Times reports (here) that lawyers from firms in 21 different countries (including the U.S.) recently met in Madrid and formed a global alliance to represent claimants who lost money as a result of the Madoff scheme. Hat tip to the Securities Docket (here) for the linkl to the Times article.  

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In a case demonstrating the range of both the potential legal theories and the prospective litigants that could become involved in Madoff-related litigation, a pension fund has filed an ERISA class action against an investment advisory firm for the advisory firm’s investment of the pension fund’s assets in a Madoff "feeder fund."

On February 12, 2009, the Pension Fund for Hospital and Health Care Employees – Philadelphia and Vicinity filed an ERISA lawsuit against Austin Capital Management Ltd. in the Eastern District of Pennsylvania, on its own behalf as well as on behalf of all employee benefit funds for whom Austin acted as investment manager and whose assets were invested in whole or in part by Austin in any Madoff-related investment during the period February 12, 2005 to the present.

A copy of the complaint can be found here. A copy of the plaintiffs’ lawyers February 13, 2009 press release can be found here. A February 17, 2009 Law.com article describing the lawsuit can be found here.

The complaint alleges that in June 2008, the plaintiff’s investment consultant retained Austin "for the purpose of managing a portion of the [plaintiff’s] assets, to be invested in hedge funds." At the time, Austin, which is a wholly-owned subsidiary of Cleveland-based KeyCorp, had approximately $2.3 billion of assets under management.

In July 2008, the plaintiff’s investment consultant placed $10 million of the plaintiff’s assets with Austin for investment with the Austin Capital Safe Harbor Dedicated ERISA Fund, Ltd., an exempt corporation operating under the laws of the Cayman Islands. Austin is the investment manager for Austin Safe Harbor.

The complaint alleges that Austin invested a portion of Austin Safe Harbor assets in "Madoff-related investments, specifically funds managed by Tremont Holdings." According to a February 3, 2009 Bloomberg article (here), Tremont in turn "placed money through its Rye Select Broad Market Prime Fund, L.P.," which in turn invested with Madoff’s firm.

The complaint alleges that Austin was a fiduciary to the class of benefit funds, but that Austin failed to conduct adequate due diligence prior to recommending and investing monies in Madoff-related funds. The complaint also alleges that Austin ignored "red flags."

The complaint identifies several other public pension funds for which Austin acted as investment manager. The complaint states that Austin managed $170 million for the Massachusetts Pension Reserves Investment Management Board, of which $12 million was exposed to Madoff-related investment, and also managed $170 million for the New Mexico Education Retirement Board, of which $8-10 million was in Madoff-related investments. According to news reports (here), the Massachusetts pension fund recently voted to fire Austin due to the Madoff-related losses.

There are a number of interesting things about this lawsuit. The first is that it seeks relief under ERISA. So far as I am aware, this is the first Madoff-related lawsuit asserting claims under ERISA. The interesting thing about an ERISA class action, as opposed to a securities class action, is that the ERISA action is not subject to the PSLRA’s discovery stay and other procedural requirements. So the ERISA plaintiff is free to conduct discovery even while the dismissal motion is pending.

The opportunity under ERISA to avoid some of the challenges of litigating under the federal securities laws clearly was one of the plaintiffs’ attorney’s motivations in bringing the action. The Law.com article linked above quote the attorney as saying that ERISA provides "an easier and quicker route in repairing the damage."

By was of comparison, the attorney cites as the shortcomings (from his perspective) of seeking relief under the securities laws, the "high burden of proving fraud" and the "limitations on showing third parties were at fault." The attorney said that while Madoff may have been involved in fraud, "it would be much more difficult to prove that third-party investment funds that invested with Madoff were also defrauding clients."

The other interesting thing about the fact that this lawsuit was filed under ERISA is that it at least potentially draws into the mix yet another type of insurance. Up to this point, the likeliest source of insurance funds in connection with the prior Madoff-related lawsuits has been the target defendants’ D&O insurance or errors and omissions (E&O) insurance. A claim under ERISA at least potentially triggers coverage under applicable fiduciary liability policies (if any). The spread of Madoff-related insurance exposure to include fiduciary liability coverage may not have been among the factors considered in earlier estimates about aggregate Madoff-related insurance losses.

The final interesting thing about this lawsuit is what it says about just how broad the pool of Madoff-related defendants has become. The plaintiff pension fund in this lawsuit did not invest with Madoff. It did not even invest with a Madoff feeder fund. Instead, it invested with an investment advisor that invested with a feeder fund that in turn invested with Madoff. (Got that?) The sheer span of these increasingly remote connections required to establish the Madoff-related link underscores just how widespread the Madoff litigation may yet become.

I have in any event added the new lawsuit to my running tally of all Madoff-related litigation, which can be accessed here.

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 When the Madoff scandal news first broke, I thought it would be like so many other fraud controversies, dominating the headlines briefly and then fading into the background – as seemingly has happened with the Marc Dreier debacle. But perhaps as a result of the scale and breadth of the harm caused, the Madoff scandal story just seems to keep escalating.

Today’s headline revelation is the widely reported news (refer here), that Ruth Madoff, Bernard Madoff’s wife, allegedly withdrew a total of $15.5 million from a brokerage account just prior to Mr. Madoff’s now-famous confession to his sons and subsequent arrest.

This allegation first arose in a footnote of a complaint filed on February 11, 2009 by Massachusetts Secretary of State William F. Galvin to revoke the broker-dealer registration of Cohmad Securities Corporation. The complaint and related exhibits can be found here.

The Enforcement Section of the Massachusetts Securities Division of the Officer of the Secretary of the Commonwealth had "sought to determine whether the businesses of Cohmad and Madoff Investments were so intertwined that they could be viewed as a common enterprise, and not as separate entities, for purposes of imputing liability and obtaining investor relief." The complaint alleges that Madoff was one of Cohmad’s co-founders and directors.

As detailed in the complaint, Galvan contends that Cohmad "categorically refuses to discuss its actions with regulators" and therefore "has no right to continue to engage in the securities business in the The Commonwealth of Massachusetts."

As part of the complaint’s contention that Cohmad and Madoff’s securities firm are "so intertwined that they could be viewed as a common enterprise," Galvin cites, among other things (in footnote 4, on page 25 of the complaint) wire transfer records showing the "flow of funds" between the two enterprises, referring specifically to documents showing that "Ruth Madoff withdrew [from Madoff-related accounts at Cohmad] $5,500,000 on November 25, 2008 and withdrew $10,000,0000 on December 10,2008." Madoff was arrested on December 11, 2008.

The documents reflecting these two wire transfers can be found on the last two pages of Exhibit 16 (refer to pages 51 and 52, here).

A news wire story (here) quotes a spokesman from Galvin's office as saying "We're not accusing her of anything wrong." The spokesman added "Now, what someone in New York or the feds may think of it may be entirely different."

A Painful Situation: And under the general heading of marital complications related to the Madoff scandal, I reference the difficulties facing Steven Simkin, formerly married to Laura Blank. On February 3, 2008, Simkin filed a complaint in New York State (New York County) Supreme Court (here) against his former wife in connection with the Madoff-related investment the couple had maintained prior to their divorce.

According to the complaint, the couple entered a June 27, 2006 agreement providing for the division of their marital assets. The couple "mistakenly believed" that their largest asset was their account with Madoff Investment Securities, which they believed to be valued at $5.4 million. As part of the agreement, Simkin agreed to pay Blank half of the assumed account value in cash. (Ouch.)

The account is now "worthless, literally not worth the paper on which the parties’ valuation rested." Simkin’s complaint alleges that

As a result of the parties’ clear mistake of fact, Steven paid Laura millions of dollars believing, as did Laura, that it represented her share in the "Account" (as the parties understood it to be) and retained the "Account" as a portion of his equitable share of the couple’s assets. As a result, Laura obtained a windfall and Steven did not receive an equitable share of the couple’s joint assets. Accordingly, by this action, Steven seeks to reform the Agreement, which is grounded upon a material and mutual mistake respecting the couple’s assets at the time …and recover from Laura so as to accomplish the goal the parties intended by executing the Agreement.

Mr. Simkin, you have my sympathy.

Special thanks to the several readers who send me links to the Massachusetts Secretary of State’s complaint and to Jon Jacobson for help in finding the Simkin complaint. I have added the two complaints to my register of Madoff-related litigation, which can be accessed here.

A Clawshank Redemption?: And under the general heading of trying to recover previously paid out amounts, one issue that has gained a great deal of attention is whether the trustee in the Madoff liquidation proceeding can recover ("clawback") amounts paid out to fund investors who cashed out before the scandal was revealed. The Securities Docket has a post on the topic (here), discussing efforts that some of the investors who redeemed their shares to change the claims bar date in the Madoff liquidation proceeding out of concern for anticipated clawback efforts. .

In a February 2009 memorandum entitled "How Long and Strong is Trustee Piccard’s Claw?" (here), the Seyfarth Shaw law firm takes a detailed look at the trustees’ powers, and reviews the similar clawback efforts undertake in the Bayou funds scandal.

The memo concludes that the trustee’s ability to clawback redemption payments is "not unbridled" and that there are "powerful defenses that can and will be advanced, including the good faith defense that protected many redeeming investors in the Bayou case." The memo also notes that "additional defenses also are likely to be developed as the facts surrounding what Madoff did come into sharper focus."

Meanwhile, in Europe:  According to press reports (here), European investor rights group Deminor has initiated a legal proceeding in a Luxembourg court in order to compel two Luxembourg units of UBS to provide informatoin and materials relating to the entities' role in steering clients to Madoff-related investmens.

The action, which Deminor initiated on February 11, 2009, is filed against UBS S.A. and UBS Fund Services, as well as against the Luxalpha SICAV Fund, Luxembourg Third Party Management Company SA and Access Management Luxembourg SA.

According to the news reports, the action seeks information regarding contracts between the UBS units, Madoff, and Luxalpha, an investment fund that UBS allegedly promoted. Regulators closed Luxalpha last week for not complying with regulatory requirements. The action also seeks to obtain audit reports of the fund, prepared by Ernst & Young.

Deminor claims that it represents individual and institutional investors that had lost over $1.3 billion as a result of the Madoff scheme.

I would be very grateful to any reader who might be able to provide me with a copy of the new Luxembourg complaint.

Gender Issues: A February 11, 2009 Washington Post article entitled "In Banking Crisis, Guys Get the Blame" (here) raises the question whether the current global economic crisis is a result of the fact that the financial industry and its regulators are "overwhelmingly male-dominated."

The article quotes one commentator as saying that "you can argue that the men have made a right mess of it, and now the ladies should have a go." Another commentator observes that "maybe if we had some more women in the boardrooms, we may not have seen as much risk-taking behavior."

Finally, one commentator with an odd notion of human anatomy, commenting on London’s top financial sector officials, observed that "there are quite a lot of alpha males with testosterone steaming out their ears."

At least when it comes to relying on women to clean things up, Iceland "is leading the way," having appointed a female prime minister as well as two women to lead two of its major banks. The prime minister’s spokesperson is quoted as saying "Men, especially young men, made a mess of things. There is a strong discussion that women would have taken a more cautious approach in the financial sector."

And Finally: I have added a Twitter button in the right hand column. Readers interested in receiving Twitter updates (or "tweets" as they are known) between blog posts will want to click on the Twitter button and register to become a "follower" of my Twitter site. I also add "tweets" when I have added new blog posts. I have come to appreciate that there are many web denizens who prefer to receive their information as "tweets", so that is why this blog now has a Twitter button.

The New York Times has a nice February 11, 2009 article (here) with a good overview of what Twitter is all about.

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Even though Madoff victims previously filed a securities class action lawsuit against Banco Santander and other parties in the Southern District of Florida (as discussed here), a different group of claimants has now filed a separate lawsuit in the Southern District of New York against substantially the same set of defendants. However, the new lawsuit purports to represent a different approach, and also presents specific allegations pertaining to Banco Santander’s public offer (here) to compromise the Madoff-related claims.

On February 4, 2009, plaintiffs filed a purported class action lawsuit in the Southern District of New York "on behalf of all persons or entities who owned shares of Optimal Strategic U.S. Equity Ltd. on December 10, 2008." The defendants include Banco Santander S.A. and related entities; Optimal Investment Services; PricewaterhouseCoopers; several HSBC-related entities; and several individual defendants. A copy of the complaint can be found here.

Both the purported class and cast of defendants named in this new lawsuit are similar to the class and defendants named in the previously filed Southern District of Florida lawsuit (about which refer here). However, unlike the prior lawsuit, the most recent lawsuit does not assert any claims under the federal securities laws.

Even though the new lawsuit purports to involve a class action, it asserts, rather than alleged violations of the federal securities laws, common law claims against all defendants for negligent misrepresentation, breach of fiduciary duty, and unjust enrichment. The complaint also asserts a claim for aiding and abetting a breach of fiduciary duty claim against PricewaterhouseCoopers. In addition, the complaint asserts a claim against all defendants under Section 349 of the New York General Business Law.

What makes this class action complaint’s lack of securities law allegations noteworthy is that it was filed by one of the leading plaintiffs’ securities class action law firms. A number of possibilities suggest themselves as to the reasons for the omission of a claim based on the firm’s area of specialty.

The first is the possibility that the firm hopes to maintain its own lawsuit separately and without consolidation with the previously filed lawsuits.

Another more interesting possibility is that the law firm wants to avoid the discovery stay under the PSLRA. Indeed, press reports (here) relating to the lawsuit expressly noted that "unlike other Madoff-related cases, the suit does not contain a securities claim, meaning plaintiffs can receive relevant information about the case before any trial that could bring to light previously unknown details on the case."

A leading plaintiffs’ securities firm’s use common law claims as a tactical way to insert a discovery tentacle, possibly to support later amended securities claims, is a disturbing possibility that would represent a circumvention of the PSLRA’s intended protections. Of course, there is always the possibility that the plaintiff lawyers in fact intend to pursue the common law claims without later adding securities claims, which would represent an interesting development in and of itself.

Yet another reason the plaintiffs’ lawyers may have dispensed with a federal securities claim is suggested in the claim asserted against PricewaterhouseCoopers. Under Stoneridge, the plaintiffs have no aiding and abetting claim against the audit firm under the securities laws. The complaint nevertheless asserts an aiding and abetting claim against the audit firm, but for fiduciary duty violations, not Securities law violations, suggesting an attempt to avoid Stoneridge’s limitations.

The new complaint in any event expressly references Banco Santander’s public offer to compromise the Madoff-related claims (about which refer here). Among other things, the complaint describes Santander’s offer as "woefully inadequate," citing the fact that the offer "does not compensate Class members for any interest or gain their money would have earned," and asserting that the preferred stock Banco Santander is offering would be substantially discounted in the open market.

For their part, the plaintiffs in the action previously filed in the Southern District of Florida have filed an "emergency motion" to enjoin Banco Santander from contacting putative class members to try to secure a release from them of their claims. In the memorandum filed in support of the motion (a copy of which can be found here), the plaintiffs allege that Santander "has launched a misleading and coercive campaign to pick off class members one by one, by pressuring them to release their claims based on incomplete and misleading information."

The memorandum cites Santander’s supposed use of closed door meetings, in which class members are presented with "onerous conditions and take-it-or-leave-it terms with quick expiration dates." The memorandum also references Santander’s "failure" to inform the putative class members of the existence of the lawsuit that "seeks recovery in excess of the compensation proposed."

The motion seeks to enjoin Santander from contacting class members, in order to prevent an "end-run around the Court’s jurisdiction and power to preside over this Class Action."

Whatever else may be said about the multidirectional litigation, it seems fairly certain that Banco Santander is getting a quick indoctrination into the battlefield tactics of the U.S. plaintiffs’ bar.

I have in any event added the new lawsuit to my running tally of the Madoff-related litigation, which can be accessed here. The new lawsuit appears in Table IV, in which I have identified "additional lawsuits against related defendants" and that are distinct from the federal securities class action lawsuits separately listed in the document.

Special thanks to Adam Savett of the Securities Litigation Watch blog for a copy of the complaint of the new lawsuit.

More Bank Closures: The expanding wave of bank failures swelled again this past Friday night when the FDIC announced the closure of three more banks, bringing the number of 2009 year-to-date closures to nine.

The three latest bank closures are Alliance Bank, previously a $1.14 billion asset bank in Culver City, CA (about which refer here); County Bank, previously a $1.3 billion bank in Merced, California (refer here); and First Bank Financial, previously a $279 million asset bank in McDonough, Georgia (refer here). The FDIC’s complete list of failed banks can be found here.

The closure of nine banks already in 2009, including in particular the closure of six banks in just the last two weeks, is extraordinary in and of itself. It is also noteworthy in context, as the number of bank closures just in the opening weeks of this year already exceeds the total number of all bank closures during the four years between January 1, 2003 and January 1, 2007. Indeed, during the period January 1, 2000 to January 1, 2008, only one year (2002, with 11 closures) had more bank closures than the nine already in the first six weeks of the year.

As I recently noted (here), the increasing number of bank closures is a difficult and disturbing trend, Unfortunately, all signs are that the number of bank closures will continue to grow as the year progresses.

Event Registration Update: If you are planning on attending the PLUS D&O Symposium on February 25 and 26, 2009 at the Marriott Marquis hotel in New York but you have not yet registered, you may want to get your registration in at your earliest opportunity. Event registration is rapidly filling, and so you may want to register now before it is too late. Registration information can be found here.

This year’s conference promises to be particularly interesting and informative. I am co-Chairing this year’s Symposium with my good friends, Chris Duca of Navigators Pro and Tony Galban of Chubb. The key note speakers include former Secretary of States Madeline Albright and New York Insurance Superintendent Eric Dinallo. Other panelists and speakers include a number of noteworthy individuals, including Stanford Law Professor Joseph Grundfest, Wilson Sonsini partner Boris Feldman and many others.

The Symposium will also feature a reprise of the excellent video, first shown at the PLUS International Conference in November, of "The Life and Times of Bill Lerach." The Securities Docket recently featured a trailer of the video, here.

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Banco Santander, the Spanish bank whose customers may have suffered as much as $3.1 billion in Madoff-related losses, is reportedly offering some clients compensation for their losses. Reports of this compensation proposal follow one day after investors filed a securities class action lawsuit against Banco Santander and related entities in federal court in Miami.

According to a January 27, 2009 Wall Street Journal article (here), Banco Santander is offering its private banking clients up to $1.79 billion in compensation for losses from the Madoff scheme. The offer would not apply to institutional investors.

According to the Journal, the bank has approached its Latin American clients, offering them preferred stock with a 2% coupon in exchange for an agreement not to sue and an agreement to keep their deposits with the bank. (The great majority of Santander customers who suffered Madoff losses were Latin American, perhaps as many as 70%.) UPDATE: Banco Santander's January 27, 2009 statement regarding the proposed compromise can be found here.

Meanwhile, according to their January 27, 2009 press release (here), on January 26, 2009 plaintiffs’ lawyers initiated a Madoff-victim securities class action lawsuit in the Southern District of Florida.

The class action complaint (which can be found here) was filed by a Chilean company and an Argentinean individual. Both named plaintiffs claim they lost money through their investment in the Optimal Strategies U.S. Equity Fund, a subfund managed by Optimal Investment Services ("Optimal SUS") and marketed by Banco Santander S.A. in the United States. The complaint alleges that substantially all of the Optimal SUS fund was invested with Madoff’s firm.

The complaint is filed on behalf of persons who owned Optimal SUS shares on December 10, 2008 or who purchased shares of Optimal SUS between January 23, 2004 and December 10, 2008.

The complaint names as defendants Banco Santander S.A., Banco Santander International, Optimal Investment Services S.A. (Santander’s Geneva-based hedge fund unit) and certain individuals related to Optimal.

In addition, the complaint also names as defendants PricewaterhouseCoopers, whose Dublin office serves as the Optimal Fund’s auditors. The complaint also names as defendants two related HSBC entities, HSBC Securities Services (Ireland) Ltd. and HSBC Institutional Trust Services (Ireland) Ltd., which acted as administrator, registrar, transfer agent and custodian for the Optimal Funds.

According to the press release, the complaint alleges that the defendants violated the U.S. securities laws by

issuing materially false and misleading statements about their due diligence and oversight of Madoff and BMIS. Among the allegedly false statements made in the Explanatory Memorandum dated January 7, 2008, that was distributed to investors, was the assurance that Optimal "bases its investment decisions on a careful analysis of many investment managers." The complaint further asserts that had the Defendants conducted a reasonably "careful analysis" of Madoff and BMIS, Defendants would not have lost billions of dollars belonging to the investors.

In addition to the securities claims, the complaint also alleges common law causes of action including breach of fiduciary duty, negligence, negligent misrepresentation, and unjust enrichment. The complaint also alleges professional negligence against PricewaterhouseCoopers.

The new Banco Santander lawsuit is similar in many respects to the other securities class action lawsuits that have been filed against Madoff "feeder funds." What makes the case interesting is that both the named plaintiffs and the defendants are foreign domiciled (or at least owned by a foreign parent company). To be sure, one of the named plaintiffs, the Chilean company, specifically alleges that it invested in the Optimal SUS subfund through a Banco Santander International bank account in Miami, Florida.

Notwithstanding the lawsuit’s international flavor, the class action against Banco Santander may be unsurprising, as the bank has disclosed that its clients’ exposure to Madoff through the Optimal SUS fund was as much as $3.1 billion, which the Journal reports is the largest loss by any single bank. (Only investment companies Fairfield Greenwich and Tremont, both of which already face securities litigation, had larger losses).

It remains to be seen where Santander’s proposed compromise leaves the newly filed lawsuit. At least according to the Journal’s account, the proposed compromise does not apply to institutional investors. The Journal also reports that "some of those who have privately received the offer were unhappy with its terms and vowed to hold out for a better deal."

The Journal does report that the Spanish law firm that joined in bringing the suit is scheduled to meet with bank officials on February 6, 2009. Bloomberg quotes the Spanish attorney (here) as saying that the Santander offer is " a step in the right direction"; he added, however, that "at first sight, it looks insuficient."

In any event, I have added the Banco Santander suit to my list of Madoff-related securities class action lawsuits, which can be accessed here. According to my tally, there have now been eleven Madoff-related securities class action lawsuits filed.

Special thanks to the several readers who forwarded me copies of the Banco Santander complaint.

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We are barely into the New Year, but all signs are that two of the critical securities litigation trends of 2008 – the subprime/credit crisis related litigation wave and the Madoff-related litigation wave – remain significant factors and apparently will continue to drive new lawsuit filings as we head into 2009, as the recent lawsuit filings discussed below suggest.

The New RBS Lawsuit

First, with respect to the credit crisis litigation, on January 12, 2009, plaintiffs’ lawyers issued a press release (here) stating that they had initiated a securities class action lawsuit in the Southern District of New York on behalf of purchasers of Series S American Depositary Shares (ADSs) of the Royal Bank of Scotland Group and related entities and certain directors and officers. The complaint also names as defendants the offering underwriters that conducted the June 2007 offering of the shares.

The Complaint (which can be found here) alleges misrepresentations and omissions in the offering documents, which incorporated the Company’s 2004, 2005 and 2006 financial statements. The Complaint alleges that the company "ultimately announced huge multi-billion pound impairment charges associated with its exposure to debt securities, including mortgage-related securities tied to the U.S. real estate markets, causing the price of RBS’s Series S ADSs issued in the Offering to decline." The ADSs, which were originally offered at $25/share, now trade around $10/share.

According to the Complaint, the offering documents omitted that:

(a) defendants’ portfolio of debt securities was impaired to a much larger extent than the Company had disclosed; (b) defendants failed to properly record losses for impaired assets; (c) the Company’s internal controls were inadequate to prevent the Company from improperly reporting its debt securities; (d) the Company’s participation in the consortium which acquired ABN AMRO would have disastrous results on the Company’s capital position and overall operations; and (e) the Company’s capital base was not adequate enough to withstand the significant deterioration in the subprime market and, as a result, RBS would be forced to raise significant amounts of additional capital.

RBS is actually the second company from the ill-fated consortium that was the "successful" bidder in the ABN AMRO buyout to get dragged into U.S. securities litigation.

As I noted here, another consortium member, Fortis, was also hit with a securities class action lawsuit in October 2008. As I noted in that prior post, "it is one more of those amazing things about the current circumstances that, despite the size of the ABN AMRO calamity, it is effectively just background noise in the larger cataclysm." (An abridge version of the ABN AMRO debacle can be found here.) Both RBS and Fortis have also been the recipients of massive bailout efforts from their respective governments.

The ABN AMRO losses to RBS continue to amount. For example, on January 12, 2009, Bloomberg reported (here) that, as a result of loans RBS acquired as part of the ABN AMRO deal, RBS is the biggest lender to bankrupt U.S. chemical maker Lyondell Chemical Co., and may face losses on its $3.47 billion of loans. The loans were part of the $20.5 billion raised to finance Bassell AF’s 2007 leveraged buyout of Lyondell.

More Madoff Litigation

According to their release (here), on January 12, 2009, plaintiff’s counsel initiated another Madoff-related securities class action lawsuit in the Southern District of New York on behalf of investors in the Herald USA Fund, Herald Luxemburg Fund, Primeo Select Funds, and Thema International Funds, against the Funds, Medici Bank, Bank Austria Creditianstait, Unicredit S.A., Pioneer Alternative Investments, HSBC Holdings plc and Ernst & Young LLP, as well as Medici Bank’s founder Sonja Kohn and its former CEO Peter Scheithauer. A copy of the complaint in the case can be found here.

Austrian regulators took control of Bank Medici after the bank revealed that it had invested as much as $3.2 billion in funds managed by Bernard Madoff and his firm. Bank of Medici is 25% owned by Unicredit. As reported here, one of the Bank’s largest customers was Unicredit’s Pioneer Investments, which invested as much as €805 with the Funds. Further background can be found here.

According to the press release, the Complaint alleges defendants caused the Funds "to concentrate almost 100% of their investment capital with entities that participated in the massive, fraudulent scheme perpetrated" by Madoff and his firm.

Run the Numbers: With the addition of the RBS case, the total number of subprime and credit crisis-related securities lawsuits going back to 2007 now stands at 143, of which two have been filed already in 2009. My updated tally of the subprime and credit crisis-related cases can be accessed here.

The new lawsuit on behalf of the Bank Medici Funds investors brings the total of Madoff-related securities class action lawsuits to eight, as reflected on my running tally of the cases, which can be accessed here.

Keeping Count: In my analysis (here) of the recently released Cornerstone/Stanford Clearinghouse report regarding the 2008 securities litigation, I noted that the report’s count of new 210 securities lawsuit filings through December 15, 2008 contrasted with my own count of 224 securities lawsuits through December 31, 2008. As I noted in my analysis, the additional lawsuits filed between December 15 and December 31 were critically important in understanding fully 2008 filing trends, as they significantly affect relative and absolute filing numbers during the year.

The Stanford Law School Securities Class Action Clearinghouse website has now updated its count through year’s end, bringing their 2008 tally to 226. The Stanford website can be accessed here.

On further review of their figures, my account appropriately should be adjusted from 224 to 226.

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Investors whose fortunes were tied to Bernard Madoff and his firm have already been counting (and mourning) their losses. But for the insurers that provided coverage for financial firms targeted in the Madoff-related litigation, the losses have only just begun to accumulate.

How high the insurance losses ultimately may run remains to be seen, but early estimates suggest that that the insurance losses, even just for defense expenses, could be significant.

A January 9, 2008 Bloomberg article (here) reports that Madoff-related claims "may cost insurers who cover financial institutions more than $1 billion as they pay legal costs for investment managers who gave client money to Madoff." Indeed one respected industry participant is quoted as saying that a total of $1 billion "feels a little low to me."
 

The losses could well affect not only D&O insurers, but also insurers offering"error and omissions" E&O insurance. For many of the kinds of investment firms involved in these cases so far, the type of insurance protection they would most likely purchase provides both coverages within a single package.

The article correctly points out that how large the insurance losses ultimately turn out to be depends on how many of the Madoff "feeder funds" and other litigation targets actually have purchased these kinds of insurance. As one observer quoted in the article notes, hedge funds and other investment vehicles "often don’t buy coverage."

There are a variety of other factors that also could affect the total cost to insurers of the Madoff-related claims. The first is the question of who is insured under the policies. In many of these Madoff-related lawsuits (a complete list of which can be accessed here), the plaintiffs have named a laundry list of related defendants, often including not only investment managers and advisors, but also investment funds, offshore entities, and a squadron of associated individuals.

These claims are going to stress-test the insurance policies involved. The policyholders will find out how well put together the policies were, in light of the entities’ related structures and operations. There may well be instances where the entire family of advisors, managers and funds were not fully yoked together under the coverage umbrella.

But an even more important set of issues that potentially could affect the scope of insurance losses are the potential coverage defenses the carriers may seek to assert. In particular, insurers will be looking closely to see whether the allegations raised in these lawsuits trigger one of more of the standard conduct exclusions, particularly the personal profit and the fraud exclusions.

The conduct exclusions typically are written on an after adjudication basis, meaning that the only apply to preclude coverage only after an adjudicated determination that the prohibited conduct actually took place (as I recently noted in my discussion of the potential coverage insurance issues arising in connection with the Satyam scandal, here).

Moreover, at this point the fraud involved appears to involve misconduct of Madoff himself, rather than the feeder funds, although obviously investigators are probing the potential complicity of a wide variety and number of persons associated with Madoff.

The personal profit exclusion may prove to be the more relevant. A typical exclusion precludes coverage for loss "based upon, arising from, or in consequence of … an Insured having gained any profit, remuneration or advantage to which such Insured as not legally entitled, if a judgment or final adjudication in any proceeding establishes the gaining of such remuneration or advantage."

Investors have already claimed that the feeder funds inappropriately exacted management fees or other compensation without conducting appropriate due diligence or otherwise earning their fees. However, an adjudicated determination of these allegations would be required for the profit exclusion to preclude coverage.

Although there is currently no reported reason to suggest that the "feeder funds" were aware of Madoff’s scheme, insurers will also be looking closely at who know what and when, looking for possible bases to rescind coverage based on alleged misrepresentations in the policy application.

Yet another factor that could restrict the total insurance losses is the limitation on the amount of insurance potentially involved. In my experience, many investment advisory firms and hedge funds buy relatively lower limits of insurance coverage. Thus, in many cases, the available insurance involved could be relatively slight and could quickly be exhausted by defense costs alone. As a result, a portion of the potential defense expense and the amount of some settlements could wind up being uninsured.

I suspect that as a result of the Madoff-related events, many investment advisory firms, hedge funds and other financial firms will now need far less persuading of the value of this type of insurance or that more than just minimal limits could well be advised. Unfortunately, for the firms acquiring this insight for the first time now, this type of coverage could well become much more expensive even if otherwise available.

As noted in a December 31, 2008 publication of the Lloyd’s insurance market entitled "Madoff Scandal Poses Challenges for Directors" (here), the "sheer scale of the fallout from Madoff could seriously affect the financial insurance market’s dynamics, affecting the availability and cost of both professional indemnity and directors and officers coverage." The article quotes one source as stating with respect to this type of coverage that "prices are going to increase and cover will be restricted."

More Madoff Lawsuits: Meanwhile, the Madoff-related lawsuits continue to flood in. For example, on January 8, 2009, Pacific West Health Medical Center, Inc. Employees Retirement Trust sued Fairfield Greenwich Group and related entities and individuals in the Southern District of New York on behalf of all persons who purchased shares of the Fairfield Sentry funds, alleging that the defendants breached their fiduciary duties. The defendants are also accused of negligence, unjust enrichment and breach of contract.

A copy of the Pacific West complaint can be found here. A copy of a January 9, 2009 Bloomberg article describing the complaint can be found here.

It also looks as if overseas investors are about to get involved in Madoff litigation, which may be unsurprising give that, as the Financial Times reports (here), as much as half of the Madoff losses have been borne by non-U.S. investors.

According to a January 8, 2009 Reuters story (here), investment activist group Deminor is readying to sue UBS, HSBC, Hyposwiss and others in courts in Luxembourg and Ireland in connection with the Madoff scandal. The charge is that the defendant banks acts as depositories for sponsored funds that invested clients’ money in Madoff-related vehicles. The allegation is that the depository banks were responsible for the sponsored funds and negligently failed to check what was inside the clients’ portfolios.

According to an earlier Financial Times article (here), UBS at least sought to exculpate itself from any responsibility for clients’ assets through the subscription documents it used.

In any event, I have updated my running tally of the Madoff-related litigation, which can be accessed here.

Special thanks to David Demurjian for the link to the Bloomberg article, and to a loyal reader who prefers anonymity for the Reuters and Financial Times articles.

Can Madoff Losses Be Recovered?: In addition to all of the factors noted above that could diminish the aggregate Madoff-related insurance losses, there is also the question whether the investors’ claims are meritorious. That is, do the claimants actually have a legitimate basis upon which to try to recover their losses from the Madoff "feeder funds" and others?

These questions will be addressed in a webinar entitled "Madoff Litigation: Can the Lost Billions Be Recovered?" to be hosted by Securities Docket on January 14, 2009 at 2:00 P.M. The speakers include Gerald Silk of the Bernstein Litowitz firm, Brad Friedman of Milberg LLP, and Fred Dunbar of NERA Economic Consulting. Further background regarding the webinar can be found here. Registration for the webinar can be accessed here.

A replay of a prior Securities Docket webinar entitled "2008: A Year in Review" can be accessed here. (I was one of the speakers at this prior session.)

"Hitler Previews the Cubs’ Winter Meeting": This video is in questionable taste, contains foul language, and is very very funny, at least for those having some acquaintance with the Chicago Cubs. (The humor is more accessible if, for example, you know who Kerry Wood is.) Special thanks to a loyal reader for sending along a link to this video.

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THE TABLE OF CASES LINKED BELOW WAS LAST UPDATED ON February 25, 2010.

All signs are that the collapse of Bernard Madoff’s Ponzi scheme will produce a flood of litigation. By my count, there have already been at least seven federal securities class action lawsuits against Madoff, his firm, or the "feeder firms" that invested their clients’ funds with Madoff. There have also been a number of state court lawsuits as well.

It is already difficult to keep track of the lawsuits that have been filed. In all likelihood, there will be extensive additional litigation against other feeder funds and other third party defendants, which will make it even more difficult to keep track.

In order to monitor the Madoff-related litigation in a more orderly way, I have created a table of the lawsuits that have been filed to date.

The table can be found here.

I believe the table is complete, but I welcome any additional or clarifying information that readers may wish to bring to my attention.

I will update the table as new or different lawsuits emerge. Readers are strongly encouraged to let me know about any additional litigation I may have missed or to provide me with any information necessary to make the table more accurate.

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UPDATE: A regularly updated list of all Madoff investor litigation, including in particular Madoff "feeder fund" litigation, can be accessed here.

As further proof that the losses associated with the Madoff fraud scheme will trigger a wave of litigation, on December 23, 2008, plaintiffs’ lawyers initiated a lawsuit in the Southern District of New York on behalf of investors in the FM Low Volatility Fund, against Family Management Corporation ( the Fund’s general partner and manager) and certain of FMC’s directors and officers; three "fund of funds" in which FMC invested investor funds (Andover, Beacon and Maxam); and the Funds’ auditor.

The complaint, which can be found here, alleges violations of the federal securities laws and related stated and common law violations, and also asserts derivative breach of fiduciary duties on behalf of the Funds.

According to the plaintiffs’ lawyers’ December 24, 2008 press release (here), FMC

concentrated more than half of the Fund’s investment capital with at least three funds of funds ("FOFs") -- Andover, Beacon and Maxam -- that, in turn, all heavily invested in entities managed by Bernard Madoff ("Madoff") or Madoff-related entities. Investors who entrusted their savings to FMC suffered millions in damages as a result of Madoff’s fraudulent scheme.
 

The complaint further alleges that the defendants failed to perform requisite "due diligence" and "knew or should have known" about Madoff’s Ponzi scheme.

The plaintiffs’ also allege that FMC and its defendant directors and officers issued misleading offering documents that

falsely stated that FMC would not invest more than 35% of the Fund’s net asset value with any one investment vehicle, but, in reality, more than 60% of the Fund’s assets were funneled through three FOFs – Defendants Andover, Beacon and Maxam – and invested in Madoff-related entities. The Offering Memorandum also falsely stated that FMC would (i) endeavor to verify the integrity of each manager of a FOF in which the Fund was invested; (ii) attempt to monitor the performance of each manager; and (iii) request detailed information regarding the historical performance and investment strategy of each of the selected investments for the Fund. Plaintiffs allege that Defendants, with no or inadequate due diligence or oversight, abdicated their responsibilities and entrusted the Fund’s assets to Madoff-run investment vehicles.

Even More Madoff Investor Litigation: In earlier post (here), I noted the class action lawsuit that had been filed against Tremont Group Holdings, certain of its directors and officers, and its corporate parents, on behalf of investors in the American Masters Prime Fund, whose assets Tremont managed and that had suffered losses due to Tremont’s investment of those funds with Bernard Madoff and his firm.

On December 23, 2008, plaintiffs filed a similar but separate lawsuit against Tremont and related entities, but on behalf of the class of investors in the Rye Funds, who also claim that they lost their investment due to Tremont’s investment with Madoff and his firm. The Rye Funds complaint also includes as a defendant Tremont’s auditor, KPMG. A copy of the Rye Funds’ investors’ complaint can be found here. A copy of the plaintiffs’ lawyers December 23 press release can be found here.

In addition, according to a December 24, 2008 Bloomberg article (here), New York University has initiated a New York state court lawsuit against J. Ezra Merkin, Gabriel Capital, and Ariel Fund, in which it alleges that $24 million of endowment investments due to the defendants’ investment of the assets with Madoff and his firm. A copy of the NYU lawsuit complaint can be found here.

An earlier class action lawsuit that previously had been filed against Gabriel and related defendants can be found here.

Special thank to Adam Savett of the Securities Litigation Watch (here) for providing a copy of the Rye Funds Complaint.

Keeping Track: By my tally, the Family Management Corporation case is at least the seventh federal class action lawsuit filed in the wake of the revelation of the Madoff fraud. Of these, six of these seven are directed against so-called "feeder funds," the seventh directly against Madoff and his firm. In addition, there are several other state court lawsuits, including the one identified above and the earlier lawsuit filed against the Fairfield Greenwich fund firm (about which refer here).

If the early returns are any indication, there could be a flood of litigation yet to come. Of course it remains to be seen whether or to what extent any of these claims succeed. But in the meantime, indications are that these Madoff-related lawsuits will continue to mount.

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In the latest of what undoubtedly will prove to be a surge of Madoff-related litigation, investors have filed two more lawsuits against investment firms that invested their clients’ money with Bernie Madoff, resulting in massive investor losses.

UPDATE: Please note that a regularly updated table of all Madoff investor litigation, including in particular Madoff "feeder fund" litigation, can be accessed here.

The Tremont Lawsuit

First, as reflected in their December 22, 2008 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Southern District of New York on behalf of investors in the American Masters Broad Market Prime Fund, L.P., a Delaware limited partnership which is managed by Tremont Group Holdings, which is also the Fund’s General Partner. The defendants in the lawsuit include Tremont; Oppenheimer Acquisition Corporation, which acquired Tremont in 2001; Massachusetts Mutual Life Insurance Company, Oppenheimer’s parent; and Ernst & Young, the Fund’s auditor.

The complaint (which can be found here) alleges violations of the federal securities laws as well as state common law fraud, negligence and breach of fiduciary duty. The complaint also assets derivative breach of fiduciary duty claims on behalf of the Fund.

According to the plaintiffs’ lawyers’ press release, the complaint alleges that

defendant Tremont, general partner of the Fund, concentrated over half of its investment capital with entities that participated in the massive, fraudulent scheme perpetrated by Bernard Madoff ("Madoff"). Investors who entrusted their savings to Tremont have suffered millions in damages and are faced with financial ruin.
 

The complaint also alleges that the defendants "failed to perform the necessary due diligence that they were being compensated to perform as investment managers and fiduciaries" and that the defendants "either knew or should have known that the Fund’s assets were employed as part of a massive Ponzi scheme and took no steps in a good faith effort to prevent or remedy that situation, proximately causing billions of dollars of losses and possible complete collapse of the Fund." Oppenheimer and Mass Mutual are named defendants as controlling persons of the Fund.

The complaint alleges with respect to Ernst & Young that the firm was "reckless or grossly negligent" in connection with its performance of its auditing duties, and specifically that the firm failed to detect "a myriad of ‘red flags’ indicating a high risk to Tremont from concentrating its investment exposure in Madoff."

The complaint alleges that the defendants allowed Tremont to invest $3.3 billion, over half of its assets, with Madoff.

The Fairfield Lawsuit

In addition, investors have also initiated a lawsuit in New York County (New York) Supreme Court against the Fairfield Greenwich Group, the hedge fund firm that has as much as $7.5 billion invested with Madoff. A December 22, 2008 Bloomberg article describing the Fairfield lawsuit can be found here. A copy of the complaint can be found here.

The lawsuit, which is filed as a class action on behalf of in the Fairfield Sentry fund, names as defendants Fairfield itself; Fairfield’s founding partners, as well as two principals of a Bermuda affiliate of Fairfield. It alleges breach of fiduciary duty, negligence, and unjust enrichment.

According to the news reports, the complaint alleges that the fund’s managers "had an obligation to look into Madoff’s investment methods and that the team ignored the ‘red-flag warning’ that Madoff’s investment produced small, steady gains in a declining market." The article also quotes the plaintiffs’ attorney as saying that the case has been filed in state court rather than federal court so that discovery can go forward quickly.

The arrival of these new lawsuits, following closely in the wake of the prior Madoff-related litigation suggests that there could substantial associated litigation yet to come, particularly with respect to the so-called feeder funds that invested clients’ assets with Madoff. The press coverage certainly suggests that there will be extensive additional litigation, as reflected, for example, in the December 22, 2008 National Law Journal article entitled "Lawyers from Florida to New York Besieged by Madoff Investors" (here).

The Tremont lawsuit’s inclusion of Ernst & Young corroborates an article published in the December 22, 2008 New York Times entitled "In Madoff’s Wake, Scrutiny of Accounting Firms" (here), which suggests that investors suffering losses from their investments in Madoff feeder funds may attempt to target the firms’ auditors. As noted in the article, the lawsuit filed last week against Madoff feeder fund Ascot Partners (about which I wrote here) also named the fund’s auditor, BDO Seidman, as a defendant in that case.

Credit Crisis Litigation Issues: A November 17, 2008 paper entitled "Legal and Economic Issues is Litigation Arising from the 2007-2008 Credit Crisis" (here) written by Harvard Law Professor Allen Ferrell, and Jennifer Bethel and Gang Hu of the Babson Business School surveys the marketplace conditions behind the credit crisis litigation and reviews the legal issues that are likely to arise as the litigation goes forward.

The article focuses on three principles that the authors believe will be critical in the credit crisis related securities litigation (1) no fraud by hindsight; (2) truth on the market defenses; and (3) loss causation issues.

With respect to the truth on the market defense, for example, the authors contend that "the quality of disclosures in the mortgage backed securities registration statements (and virtually all mortgage backed securities were registered) actually improved between 2001 to 2006 (in part due to the promulgation of Regulation AB in 2004) and that it was quite clear from these registration statements that the quality of the underwriting in a number of instances had declined."

With respect to the "loss causation issue," the authors contend with respect to the banks that suffered massive writedowns during 2007 and 2008, that the banks"suffered substantial losses due to their ‘super senior’ positions in CDOs and various liquidity guarantees to asset backed commercial paper conduits, rather than directly on their mortgage-backed security holdings."

Hat tip to The Harvard Law School Corporate Governance Blog (here) for the link to the authors’ paper.

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If today’s filings are any indication, a huge wave of Madoff victim lawsuits could be coming. Madoff investors were quick to sue Madoff and his firm, with the first complaint filed last Friday (as noted here). But with Madoff’s firm in liquidation and the money likely long gone, investors who lost money as a result of Madoff’s scheme are casting around for other targets from whom to try to recover their losses. Early returns suggest that investment firms and Madoff "feeder funds" could find themselves facing substantial Madoff victim litigation.

UPDATE: Please note that a regularly updated table of Madoff investor litigation, including "feeder fund" litigation can be accessed  here.

First, as reflected in their December 16, 2008 press release (here), plaintiffs’ lawyers have filed a securities lawsuit in the Southern District of New York against investment partnership Ascot Partners L.P., its founder and general partner (Merkin), and its auditor, BDO Seidman. The class members are persons who purchased limited partnership interests in Ascot.

According to the press release, the complaint alleges that Ascot and Merkin

caused and permitted $1.8 billion -- virtually the entire investment capital of Ascot -- to be handed over to Madoff to be "invested" for the benefit of plaintiff and the other limited partners of Ascot. Plaintiff's investment in Ascot has been wiped out, as a direct result of: (a) defendant Merkin's abdication of his responsibilities and duties as General Partner and Manager of Ascot and its investment funds and; (b) the failure of Ascot's auditor Seidman, in light of "red flags" indicating a high risk to Ascot from concentrating its investment exposure in Madoff as sole third-party investment manager for all of the Partnership's assets, to perform its audits and provide its annual audit reports in conformance with generally accepted auditing standards.

The press release states that the complaint alleges ’34 Act violations as well as related statutory and common law breaches. A copy of the complaint can be found here.

UPDATE: On December 16, 2008, investors also filed a separate lawsuit against a different fund affiliated with Merkin, Gabriel Partners. A copy of the December 17, 2008 press release can be found here.  A copy of the complaint can be found here.  A WSJ.com Law Blog post about the Ascot and Gabriel lawsuits can be found here.

Second, and also on December 16, another plaintiffs’ firm initiated a separate securities lawsuit in the Central District of California. The lawsuit is filed against Madoff and his firm, but also names as defendants Brighton Company, a California limited partnership and a so-called "feeder fund," and its principal ( Stanley Chais). The firm’s press release (here) states that Brighton was "one of the many feeder funds that directed investor capital" to Madoff and his firm. The press release says that Chais "managed several investment groups [including Brighton], the monies for which were given to Madoff" and his firm.

The complaint (here) alleges that the plaintiff invested money through CMG Ltd., a California limited partnership. The complaint alleges that CMG provided all of its investment capital to Chais as general partner for Brighton, which in turn invested all of CMG’s money with Madoff. The complaint alleges that "all defendants contributed to the false, misleading, unlawful, unfair and fraudulent acts and practices associated with the Ponzi scheme."

The purported class consists of two groups; all persons who invested capital with Chais and Brighton, and all persons who invested with Madoff and his firm. The complaint alleges violations of the ’34 Act.

The press release also states that "the firm is investigating the actions of other feeder firms on behalf of investors." The December 17, 2008 Wall Street Journal has an article (here) discussing Stanley Chais and his investment funds'  (and charitable organizations') relation to Madoff
 

Given the magnitude and widespread dispersion of the Madoff losses, and given the fact that there appears to be little money left with Madoff and his fund, it seems highly likely that there will be other (perhaps many other) investment funds, "feeder funds," hedge funds, funds of funds, and other entitles, targeted by Madoff victims. The attention in the press (for example, here) to alleged failures of investment firms to catch supposed red flags or to conduct due diligence will only increase the likelihood of this kind of litigation. The inclusion of the auditor in the Ascot lawsuit suggests that some of these claims could range pretty far afield.

A December 16, 2008 Business Week article discussing the likelihood of Madoff investor claims against hedge funds and others, also discussing the Ascot lawsuit, can be found here.

The Wall Street Journal is helpfully collecting a list of Madoff’s victims here. It is a long list but it is also clearly incomplete; for example, Fairfield Greenwich Advisors may have been hit with $7.5 billion in losses, but those amounts in reality represent the losses of Fairfield’s own investors. The list would be substantially longer if all of these and other fund investors and customers were listed individually. The fund investors are the ones, like the plaintiffs in the cases described above, that will likely target the investment funds.A December 17, 2008 Wall Street Journal article entitled "Fairfiled Group Forced to Confront its Madoff Ties" (here) conveys some pretty strong suggestions along those lines.

In any event, going forward, the number one question D&O insurance underwriters will be asking financial institution applicants will be whether the applicant invested funds with Madoff.

Meanwhile, the Credit Crisis Litigation Wave Churns On: It seems as if the plaintiffs’ lawyers have kicked it into high gear as the year end approaches. There has been a flood of new securities lawsuit filings so far in December. By my informal count, there have already been at least 20 new securities lawsuit filings so far this month (if you count the two cases described above), an unusually high number for December, which historically is a quiet month for securities filings.

And though the filings have included a diversity of cases (as I discussed here), the filings have also included a number of new subprime and credit crisis related lawsuits, including at least four new cases that have been filed or become public this week.

For example, as reflected in their press release (here) on December 16, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in the Southern District of New York against investors in the C-Bass Trust Certificates backed by residential mortgage loans and issued by Credit-Based Asset Servicing and Securitization LLC. The defendants include C-Bass, the issuing trusts, and the offering underwriters. The complaint, which can be found here, asserts claims under the ’33 Act.

In addition, on December 4, 2008, plaintiffs’ initiated a securities class action on behalf of investors who purchased AIG shares in shelf offerings conducted during the period 2003 to 2007. The complaint (here) asserts claims against AIG, certain of its directors and officers, and its offering underwriters under the ’33 Act.

And on December 8, 2008, defendants removed to federal court a lawsuit that previously had been filed in New York County (New York) Supreme Court against Residential Asset Securitization Trust (which issued certain residential mortgage pass-through certificate), its offering underwriter, and two rating agencies. A copy of the removal petition, to which the original complaint is attached, can be found here.

Finally, plaintiff shareholders have initiated a securities class action lawsuit (here) against private equity firm American Capital Ltd. in the District Court of Maryland, alleging among other things that the firm failed to disclose its exposure to disruptions in the credit market.

I have added these new lawsuits to my running tally of subprime and credit-crisis related litigation, which can be accessed here. With the addition of these new lawsuits, the running tally of subprime and credit-crisis securities lawsuits now stands at 138, of which 98 have been filed during 2008.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing information and links about these new lawsuits.

And Finally: Before writing this post, I had no prior acquaintance with the phrases "Madoff victims" and "feeder funds." I guess I better get used to them.

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From this week’s news, it almost appears as if there had been some kind of an unannounced competition for most outrageously fraudulent or corrupt scheme. First, there was Marc Dreier’s incredibly brazen plot to peddle bogus notes to hedge funds using assumed identities. Then there was Illinois Governor Rod Blagojevich’s apparent attempt to flog Barrack Obama’s vacant Senate seat for personal enrichment. And finally there was New York financier Bernard Madoff’s massive Ponzi scheme, which may have taken investors for as much as $50 billion.  

The scale of the corruption and deception involved in these schemes is almost incomprehensible. It could be said of the three perpetrators of each of these scandals, as Time Magazine said (here) of Blagojevich, he is “either delusional, stupid or some combination of both.” But as astonishing as these developments may all be, they really don’t represent anything new.

Buried underneath the week’s headlines were the latest developments in an older but equally unsavory tale, which may serve as a reminder that there is, regrettably, nothing new about massive schemes of deception and corruption.

According to a December 12, 2008 Bloomberg article entitled “Siemens Agrees to Pay Fine to Settle Bribery Charges” (here), Siemens AG has agreed to plead guilty to Foreign Corrupt Practices Act violations and pay $800 million to settle U.S. charges that it paid $1.36 billion in bribes to government officials in at least a dozen countries.

The FCPA Blog (here) has an extensive review of the charges against Siemens, as well as links to the supporting documents, including the criminal information filed against Siemens and the DoJ’s sentencing memorandum. As the FCPA Blog puts it, the criminal charging documents detail “years of systematic and intentional violations of the internal controls and books and records provisions. It's a story of fraud, deceit and concealment -- filled with phony contracts, fake invoices, slush funds, and a boardroom feigning ignorance. “

A hearing on the deal under which Siemens would pay a $450 million fine and forfeit $350 million in profits will take place on December 15. If accepted, the penalty would be by far the largest FCPA penalty ever, far eclipsing the prior record payment of $44 million in the Baker Hughes case (about which refer here).

The Siemens case is a reminder that, as startling as this past week’s revelations have been, there is nothing new about fraudulent schemes or deceptive behavior. In the timeless words of the Book of Ecclesiastes (here), “What has been will be again, what has been done will be done again; there is nothing new under the sun.”

Next Up: The Litigation: One inevitable byproduct of the developments like those of the past week is litigation, and so it comes as no surprise that a lawsuit against Bernard Madoff and his firm has already emerged.

On December 12, 2008, an investor initiated a purported securities class action lawsuit in the Eastern District of New York against Madoff and his firm (BMIS), on behalf of “all persons and entities who purchased securities sold by or through” Madoff and his firm, “from the early formation of BMIS in the 1960s until December 12, 2008.” Refer here for news coverage of the lawsuit.

The complaint (reproduced below) alleges that its claims arise “from one of the most damaging Ponzi schemes in the history of Wall Street and the United States,” and that the defendants “swindled investors out of monies estimated to exceed $50 billion.” The complaint alleges breaches of the federal securities laws, civil RICO violations, and related state and common law violations.

Meanwhile, other plaintiffs’ firms have announced (for example, here) that they are investigating the alleged “massive fraud.” UPDATE: Please refer here to access my regularly updated list of all Madoff investor litigation, including in particular "feeder fund" lawsuits.

The filing of this lawsuit may not be surprising, and there may be further litigation yet to come. As detailed in the lead story in the December 13, 2008 Wall Street Journal (here), the victims of Madoff’s scheme include a host of institutional investors, hedge funds, and funds of funds. It may well be that these entities’ investors, eager to recoup losses as well as to assign blame, will also file lawsuits in a daisy-chain of litigation based on the Madoff firm’s collapse.

Hat tip to the Dealbook blog (here) for the text of the Madoff class action complaint, which can be viewed here:

Class Action Lawsuit Against Madoff

Another Friday Night Special: December 12, 2008 was a Friday, and that can only mean one thing – after the close of business, the FDIC announced another round of bank closures.

First, the FDIC announced (here) that state banking regulators had closed, and the FDIC had been appointed receiver of, Haven Trust Bank of Duluth, Georgia. Next, the FDIC announced (here) that state regulators had closed, and the FDIC had been appointed receiver of, Sanderson State Bank of Sanderson, Texas.

These two closures represent, respectively, the twenty-fourth and twenty-fifth bank failures so far this year. The FDIC’s complete list of failed banks during the period October 2000 to the present can be found here. Haven Trust is the fifth Georgia bank to close this year, which represents the highest total for any one state. The Sanderson bank’s closure is the second in Texas this year.

As I have noted before (here), the pace of bank closures has accelerated as the year has progressed. Of the 25 bank closures in 2008, 21 have taken place since July 1, eight of them just since November 1. The trend certainly suggests that there will be further bank closures in the weeks and months to come. And, pertinent to the preceding discussion, there likely will also be further bank-related litigation (refer here).

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