Lawsuit targets Madoff associates:Fairfield claims many ignored obvious red flags
Lawsuit targets Madoff associates
Fairfield claims many ignored obvious red flags
By Genevieve Reilly
Updated: 03/31/2009 11:35:05 PM EDT
Click photo to enlargeAttorney David Golub speaks at a news conference in Fairfield, Conn., about a temporary...«12»
FAIRFIELD -- Town pension money was invested by "feeder" funds with financier Bernard Madoff even though officials of those firms knew the recently jailed Madoff's fund was a fraud, according to a newly filed town lawsuit seeking $75 million in compensatory and punitive damages.
A temporary restraining order was issued Monday by a Bridgeport Superior Court judge that freezes the assets of the 16 defendants, including Madoff and his family, as well as the Tremont Group Holdings and Maxam Capital feeder funds.
"These are entities that raised money and solicited money and fed money to Madoff to enable his Ponzi scheme to succeed," David Golub, a lawyer hired by the town to represent its claims over lost pension funds, said Tuesday.
"We believe that the feeder funds know Bernard Madoff was engaging in criminal activity, supported that criminal activity and abetted that criminal activity."
The town's joint pension board had invested a net of about $15 million with Madoff since 1997, and was led to believe that as of last November, that investment had grown in value to $42 million.
Golub said the $75 million claim in the lawsuit includes the $42 million lost with the collapse of Madoff's fund late last year, plus fees paid to the feeder fund managers over the years and punitive damages.
Filed along with the town's lawsuit was an affidavit from Edward A. Siedle, founder and president of Benchmark Financial Services, a firm that investigates
securities and money management abuses, primarily on behalf of pension funds.
"In his opinion, it is inconceivable these feeder fund defendants did not know something criminal was going on," Golub said. He said had the feeder fund managers conducted any of the due diligence they claimed they did, they would have known the Madoff fund was nonexistent.
One of those funds, the Fairfield Greenwich Group, Golub said, claimed its staff inspected every trade on a daily basis. "It's inconceivable that could be done and this kind of illegal conduct wouldn't be known," he said.
In addition to Madoff, the lawsuit names his wife Ruth; brother Peter; sons Andrew and Mark; son-in-law Andres Piedrahita; Tremont Partners Inc.; Tremont Group Holdings Inc.; Oppenheimer Acquisition Corp.; Maxam Capital Management LLC; Maxam Capital GP LLC; Maxam Capital Management Ltd.; Sandra Manzke; Robert I. Schulman; Walter M. Noel Jr.; and Jeffrey Tucker.
Siedle, in his affidavit, said Tremont Partners, Manzke, Schulman, Maxam Capital and the principals of the Fairfield Greenwich Group were "all aware that Bernard L. Madoff was engaging in illegal conduct in connection with his purported money management operations and intentionally chose to participate and support Madoff's illegal conduct in order to reap enormous illicit financial benefits."
He said numerous financial analysts and hedge fund managers without the access to information from Madoff enjoyed by Tremont, Maxam and Fairfield Greenwich Group had long been suspicious of Madoff's long-term investment performance, while major financial institutions such as Goldman Sachs and Merrill Lynch prohibited investments with Madoff because of numerous red flag indications of trouble.
"Given the enormously rich fees -- totaling in the hundreds of millions -- that these firms derived from the funds they placed with Madoff, there is simply no question" they had the financial resources to undertake rigorous due diligence examinations of Madoff called for by those red flags, Siedle said. "Each of these firms touted their exhaustive due diligence procedures to their prospective investors." In fact, he said, some of the procedures they claimed to follow are in his opinion "far beyond what is necessary or practical."
Siedle said the fee arrangement between Madoff and the feeder funds is not the norm. Madoff, who generated the exceptional returns, was paid a low commission-based fee, while the marketing firms -- Tremont, Maxam and Fairfield Greenwich Group -- received "rich performance-like fees."
Maxam, he said, was scheduled to receive more than $2.8 million in fees in 2008, while Tremont was to get more than $30 million and Fairfield Greenwich $75 million in management fees and $150 million in performance-based fees.
"All of these enormous fees were paid to the feeder firms for what was essentially marketing Madoff," Seidle said. "Madoff's willingness to part with such rich fees, which ordinarily would be retained by the investment manager, not the marketer, was a blatant red flag."
Golub said there are not enough known assets still held by Madoff or others named in the lawsuit to repay those who lost money in the investment fraud, which overall is believed to be more the $50 billion. "We are trying to locate assets in Connecticut and attach those assets in Connecticut," he said. "There are assets around. Tremont Partners is an affiliate of Mass Mutual Life Insurance Co."
A formal hearing on the restraining order freezing defendants' assets will be held at 9 a.m. April 13 in Bridgeport Superior Court. Andrew and Mark Madoff and Noel all own homes in Greenwich, and Fairfield's suit alleges the purchase of those homes can be directly traced to money generated by the investment fraud.
"We're very pleased by our attorneys' approach," Flatto said. "We are very hopeful this litigation will bear fruit."