Suit Claims Madoff’s Role Was Kept From Investors

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Suit Claims Madoff’s Role Was Kept From Investors


By NELSON D. SCHWARTZ and JULIA WERDIGIER
Published: January 16, 2009
How did Bernard L. Madoff manage to raise so much money for so long from so many supposedly sophisticated investors?

Apparently, by keeping many of them in the dark about his own role.

That fresh perspective on Mr. Madoff’s alleged Ponzi scheme emerged in recent days from a lawsuit filed in federal court in New York that claims he specifically forbade managers who gathered assets for him from mentioning his name in their marketing literature and other reports.

The lawsuit, which names Mr. Madoff as well as Bank Medici, the Viennese firm that invested more than $3 billion of its clients’ money with him, helps lift the veil on the network of middlemen who proved so effective at gathering funds for Mr. Madoff.

Many of them, including Bank Medici’s chairwoman, Sonja Kohn, have said they had no idea Mr. Madoff was a fraud and that they were victimized by him like other investors.

Judging from the lawsuit as well as interviews with investors, it appears there were different strategies for collecting money. In certain affluent circles and with professional managers, the Madoff name was quietly bandied about. But many other clients were not in the know about who exactly was supposed to deliver the stellar returns investors were promised for years.

Ms. Kohn gathered assets for Mr. Madoff and sometimes played up her longstanding friendship with him and promises of exclusive access to his firm, according to interviews with several money managers.

But the lawsuit, filed by Repex Ventures, a company incorporated in the British Virgin Islands that invested $700,000 in one of the feeder funds, contends that many other investors never knew of Mr. Madoff’s role, and instead considered Bank Medici to be the actual investment manager.

A spokesman for Ms. Kohn and the bank declined to comment on the lawsuit, as did a lawyer for Mr. Madoff.

In presentations for potential investors in the feeder funds, as well as internal marketing documents from Bank Medici that have now come to light, there is no mention of Mr. Madoff’s firm, Bernard L. Madoff Investment Securities.

Instead, according to a June 2008 statement of assets from one Medici-managed feeder fund, Thema International, holdings like United States Treasury bills and foreign exchange currency contracts are duly recorded.

In another section, seemingly safe blue-chip stocks are listed as having been bought and sold, with millions of shares of companies like General Electric, Microsoft, Exxon and AT&T changing hands.

“It’s a very strange setup, since most prospectuses disclose the names of the actual portfolio managers,” said Drago Indjic, a project manager at the Hedge Fund Center of the London Business School. “If you’ve been in the industry, this doesn’t pass the smell test.”

Also named in the lawsuit are Bank Austria and its parent, UniCredit of Italy, as well as HSBC Holdings, the fund’s custodian; Ernst & Young, its auditor; and Bank Medici’s former chief executive, Peter Scheithauer.

This group, according to the lawsuit, promised investors “steady returns, sometimes in excess of 10 percent.”

Bank Austria and UniCredit are in a particularly difficult situation, because they have deep pockets and their reputations were trumpeted in Bank Medici’s promotional material as a reason to invest. Bank Medici is 75 percent owned by Ms. Kohn, with Bank Austria holding the rest.

Bank Austria declined to comment on the lawsuit and its relationship with Bank Medici and the Madoff funds.

Bank Medici has no connection with the influential Italian Renaissance family whose name it adopted. “Medici is just a fantasy name,” Ms. Kohn said in an interview with Wirtschaftsblatt, an Austrian magazine, in 2004. “Medici also means doctors.”

But the name as well as the company’s coat of arms — three lions and a crown — suggest a bank whose roots go back much farther than just 14 years.

While the vast majority of Bank Medici’s assets were invested with Mr. Madoff, even some of the bank’s insiders are now claiming they were never told of his role.

Ferdinand Lacina, the former Austrian finance minister who sits on Bank Medici’s board, said last week in an interview with an Austrian magazine, Format, that he heard the name Madoff for the first time when the news media reported the alleged Ponzi scheme. “The name was never mentioned,” Mr. Lacina told Format.

Early this month, friends and associates of Ms. Kohn and her husband, Erwin, said the couple had dropped out of sight, apparently in fear of retribution from angry clients. But Ms. Kohn resurfaced this week, with an e-mail statement in which she said she, too, had been deceived by Mr. Madoff.

“Having fallen victim to a company supervised by a U.S. regulator, as did many of the world’s most illustrious financial institutions, does not ease the pain,” she said in the statement, according to Bloomberg News.

“Reading that some voices believe that I should have known better makes the pain even more unbearable,” she added.

Ms. Kohn also indicated that she was not a friend of Mr. Madoff, as her “agenda did not allow for socializing or private friendships — neither with Mr. Madoff nor others.”

Bank Medici may face a second lawsuit in the next two weeks. Robert S. Schachter, a lawyer for a New York law firm, Zwerling, Schachter & Zwerling, said he was preparing a claim on behalf of a dozen individuals and institutions in Austria and Germany with total investments of “tens of millions of dollars” allegedly placed with Mr. Madoff.