Madoff FOF Litigation Evolves as Plaintiffs
Reject First Offer, Sue Auditors Over Losses
Suits involving funds of funds entangled in Bernard L. Madoff's alleged fraud scheme continued to evolve as investors Jan. 30 rebuffed a settlement offer by Banco Santander as inadequate and misleading, and a MAXAM Capital Management LLC fund of fund sued its auditors for relying on false account statements from Madoff's firm.
Santander proposed terms Jan. 27 for settling claims by private banking clients that invested in its Optimal Strategic U.S. Equity Fund. A day earlier, a class of investors—including Santander's institutional and private clients—filed a complaint in the U.S. District Court for the Southern District of Florida charging Santander with failing to conduct reasonable and adequate due diligence before reinvesting Optimal's assets with Madoff. As a result of Santander's wrongdoing, the plaintiffs claimed to have lost nearly $3.1 billion (Inversiones Mar Octava Limitada v. Banco Santander S.A., S.D. Fla., 09-20215, 1/30/09).
Rejecting the proposed settlement terms as misleading and inadequate, the investors moved the court for an emergency order to preempt Santander from communicating with them about their Madoff-related claims.
Also Jan. 30, MAXAM Absolute Return Fund LP sued McGladrey & Pullen LLP and Goldstein Golub Kessler LLP for negligently relying on information from Madoff, instead of independently confirming trades and assets, when auditing the fund's financial statements (MAXAM Absolute Return Fund LP v. McGladrey & Pullen LLP, Conn. Super. Ct., 1/30/09).
In the Santander case, investors said the entity is the principal banking subsidiary through which a large number of investors in North and Latin America invested indirectly with Madoff and his firm. They estimated that approximately $1 billion of the funds invested with Madoff originated from Santander accounts. According to the Securities and Exchange Commission's Dec. 11 charges, Madoff told the agency that total loss of all investors connected to his activities could reach $50 billion.
In its Jan. 27 release, Santander stated that it had “decided to offer a solution to its private banking clients” that invested in Optimal. The solution would grant these investors the right to exchange their investments in the fund for Santander shares. However, the offer did not refer to institutional investors of Optimal.
In their emergency motion, the investors contended that by failing to mention the pending class action, Santander's settlement offer violated the Federal Rules of Civil Procedure. Moreover, the face value of the shares would equal only the original amount invested, and would not include appreciation, commissions paid, or accrued interest. As such, the settlement offer is “illusory.”
The motion further contended that the offer is “coercive” because it allegedly requires investors to maintain their current level of assets at Santander “for as long as Santander chooses.” As such, the “offer is not a settlement offer but a heavy-handed attempt to prevent a stampede of its private clients' deposits, which would circumvent and threaten the integrity of the Class Action process.”
MAXAM, meanwhile, sought to recover for the accounting firms' allegedly deficient auditing procedures and testing. As a result of deficient audits of the fund's 2006 and 2007 financial statements, according to the complaint, McGladrey and Goldstein failed to identify certain indicia of fraud in connection with the fund's investment with Madoff. Auditors are “uniquely positioned … indeed hired, to spot” such indicia, the fund contended.
All of the fund's assets were invested with Madoff, but the auditors “did nothing” to verify that those assets existed. The auditors also allegedly failed to test the veracity of the returns that Madoff reported to the fund, or whether Madoff's auditor actually audited the firm. The SEC indicated in its Dec. 11 action that Madoff's auditor had no other clients and was too small relative to the size of Madoff's advisory business.
As relief, the fund sought compensatory damages and reimbursement of all management fees.
Good for them that they are suing the auditors. If you are auditing a company whose only asset is an investment in something else, you had damn well better do some thorough testing of the underlying assets and the transactions at that level, or at least do some due diligence on the audit firm doing the lower-tier work so that you can rely on their report. And I'm not just saying that because one of the firms named is a competitor of ours.
"Pride cometh before thy fall."
Grixit wrote:Hey Diller: forget terms like "wages", "income", "derived from", "received", etc. If you did something, and got paid for it, you owe tax.