Investors Sue KPMG, Feeder Fund Over Madoff Losses

Investors Sue KPMG, Feeder Fund Over Madoff Losses
Sued hedge fund has acknowledged losing $3.3 billion of its clients' money in the Madoff scam
Jordana Mishory
Daily Business Review
May 8, 2009

A group of investors who claim they lost up to $13 million with fraudster Bernard Madoff are suing a feeder fund and accounting firm KPMG, alleging the firms failed to keep tabs on their investments in one of the largest Ponzi schemes in U.S. history.

The Palm Beach Circuit Court suit filed Tuesday contends Rye, N.Y.-based hedge fund manager Tremont Partners, three of its funds that invested most of their money with Madoff and auditing firm KPMG failed to properly manage the investments and "simply turned plaintiffs' money" over to Madoff. He was not named in the complaint.

The defendants "did not analyze Madoff, investigate his companies, conduct any significant due diligence or ensure that there were even rudimentary safeguards in place to protect plaintiff's investments," the 62-page complaint contends. The investors claim the defendants collected millions of dollars in fees while mismanaging the investments.

Madoff, a former chairman of the Nasdaq stock exchange, pleaded guilty in March to defrauding thousands of investors out of nearly $65 billion. He could face up to 150 years in prison at sentencing next month. Madoff, who revealed his scheme in December, said he was using money from new investors to pay previous investors without investing any money for years.

The federal government seized his Palm Beach mansion and boats docked in South Florida.

Plaintiff attorney Jeff Ross, a partner at Ross & Orenstein in Minneapolis, said the defendants were obligated to conduct proper oversight and failed at that task. Ross' co-counsel are Marshall Adams and Richard Serafini of Adams Cassidy & Phillippi of Fort Lauderdale and Michael Cockson and James Volling at Faegre & Benson in Minneapolis.

The defendants "shut their eyes to the risks and problems of the Madoff investments when in fact they had a duty to protect my clients' assets," Ross said. "It caused huge losses for my clients and impacted the local Florida economies in a devastating way.

The plaintiffs -- 16 people, the Norman Shulevitz Foundation of Delray Beach, RM Management and PEF Associates -- want the court to make them whole again. Dr. Jerry Weiss and Donna Weiss are individual plaintiffs related to the foundation and RM. Individual plaintiff Penni Fromm of Boca Raton is a principal with PEF Associates.

Tremont spokesman Montieth Illingworth denied the allegations.

"Tremont believes these claims are wholly without merit and will vigorously defend itself while continuing to maintain a focus on efforts to pursue avenues for recovery that may be available to its funds and investors," Illingworth said.

KPMG spokesman Dan Ginsburg said he couldn't comment on the suit because he hadn't seen it yet but added, "KPMG's audit work for Tremont Group Holdings and Rye Investment Funds conformed to all professional standards."

Tremont has acknowledged losing $3.3 billion of its clients' money in the Madoff scam. Similar lawsuits are pending against Tremont, other feeder funds, KPMG and other auditing firms around the country stemming from the Madoff fraud.

Each plaintiff had their retirement accounts, employee pension accounts and other funds invested in one or more of three Tremont funds: Rye Select Broad Market Fund, Rye Select Broad Market Prime Fund and Rye Select Broad Market XL Fund.

Tremont Partners, an investment adviser and parent Tremont Group Holdings were in charge of the marketing and management of the funds. The complaint cited a Tremont memo saying Rye funds had "lost substantially all of their value" and "it appears that there is no prospect for meaningful recovery of those assets."

The lawsuit contends a number of red flags should have made Tremont wary of investing with Madoff.

The plaintiffs contend they depended upon the information supplied by Tremont in making their investment decisions and received false reports indicating the value of their investments was steadily rising.

Plaintiffs also said they were led to believe Tremont diversified its investments instead of putting all the money in one basket. The complaint contends Tremont promised clients it would monitor the investments and change the strategy if necessary. The lawsuit contends Tremont would have found the fraud with proper oversight.

Instead of finding problems, however, the complaint said Tremont's Rye Investment Management boasted its funds have "historically displayed steady and consistent performance, especially during market downturns," implying a conservative investment scheme.

The lawsuit also states several plaintiffs reached out to Rye managers about how the funds were doing. A supervisor told one plaintiff that his accounts had not lost value despite market weaknesses last fall. A supervisor told another investor around the same time that the fund had not suffered losses because it was shielded from the subprime crisis.

The plaintiffs also maintain KPMG did not adequately do its job as auditor despite saying it performed its audits to national standards.

"KPMG's audits failed to reveal the fact that the assets reported on each of the Rye funds' financial statements did not actually exist," the plaintiffs stated.

They sued for fraud, securities violations, negligence, negligent misrepresentation, breach of fiduciary duty, breach of contract and professional malpractice, and are seeking a jury trial.

"This is a case about the greed of investment professionals and their auditors taking priority over the most basic adherence to their contract, tort and fiduciary duties," the complaint contends.

Editor's note: For additional news this week on the Madoff case, see New York Law Journal articles "Madoff Trustee Seeks $500 Million Clawback" and Peter Madoff Set to Move for Dismissal of Law Student's Suit."

For more coverage on the Madoff case, visit Law.com's Madoff Watch