Legal News

Madoff Litigation Mounts: Largest Feeder Funds (and SEC) Get Sued

By Dan Slater

If you put your ear to the ground you can almost hear it. Almost. The trickle of Madoff-related lawsuits is turning into a stream.

Among the latest defendants: the two largest institutional investors in the Madoff fund — Tremont Group Holdings Inc., a hedge-fund owned by Massachusetts Mutual Life Insurance Co.; and Fairfield Greenwich Group, Walter Noel’s hedge-fund.

Investors Arthur E. Lange and Arthur C. Lange sued Tremont, its parent and its units for investing with Madoff and ignoring numerous “red flags,” according to Bloomberg. The Langes, in a complaint filed today in federal court in Manhattan, seek class-action status on behalf of other investors whom they say lost $3.1 billion. Here’s the Bloomberg report. And here’s another suit, filed by Hagens Berman’s David Nalven, on behalf of Richard Peshkin.

Tremont “did not act as a reasonably prudent investor would have,” the complaint says, citing the fund’s decision to put “all of the class’s eggs in one basket.”

Bloomberg’s call to Tremont was not immediately returned. Massachusetts Mutual spokesman Jim Lacey didn’t have an immediate comment.

Noel’s Greenwich Sentry fund and Fairfield Sentry fund invested $7.5 billion million with Madoff, jeopardizing investors’ interests while collecting “millions of dollars in fees,” the complaint, filed Dec. 19 in New York State Supreme Court, reportedly says. “FG defendants failed to perform even a minimum level of due diligence regarding the activities of Madoff,” the complaint says. Here’s the Bloomberg report.

Noel and other defendants didn’t immediately return Bloomberg’s calls seeking comment. Fairfield Greenwich spokesman Thomas Mulligan declined to comment to Bloomberg.

Meanwhile, 61 year-old Phyllis Molchatsky, a New York woman who lost nearly $2 million investing with Madoff, is aiming her ire at the SEC. Molchatsky, reports the WSJ, sued the SEC for $1.7 million, alleging the agency was negligent in failing to detect the alleged fraud.

The SEC’s “statutory purpose is to protect the public interest. We feel they fell down on the job in this instance,” said Howard Elisofon, a former SEC enforcement attorney and the lawyer representing Molchatsky. The SEC declined to comment.

An administrative claim for relief, notes the Journal, is the first step in filing a lawsuit against the government. If the SEC doesn’t negotiate or respond to the claim within six months, the investor can file a lawsuit in federal court. “It’s an uphill battle to succeed with this,” Gregory Sisk, a law prof at the University of St. Thomas School of Law, told the WSJ. He said courts are reluctant to find that government agencies should act as insurance against any losses.

Full post as published by Law Blog - WSJ.com on December 23, 2008 (boomark / email).