Law May Protect Feeder Funds

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Law May Protect Feeder Funds

The securities laws may be your worst enemy if you lost money in the Madoff scam. Investors are suing the feeder funds that channeled their money to Bernard Madoff, charging the feeders with fraud, negligence or breach of fiduciary duty. On the surface, the cases sound like slam dunks.

They’re not. Congress and the courts have spent more than a decade writing and affirming laws that protect companies from irate investors. Those laws may turn out to be feeder fund protection acts.

For bilked investors, the problems begin with the federal Private Securities Litigation Reform Act (PSLRA), passed in 1995. It was designed to reduce the number of “frivolous” securities lawsuits filed in federal courts. In essence, it says that investors can’t proceed with a case unless they already have facts in hand that strongly suggest a deliberate fraud.

By this standard, it’s not enough to claim that the feeders failed to investigate Madoff or issued financial statements later found to be false. (Feb. 11)