Corporate Governance

Madoff and Stoneridge

By J. Robert Brown

As the debacle of the Madoff ponzi scheme continues to unravel, there is a delicious potential irony in all of this.  It now seems clear that investors will apparently find somewhere in the vicinity of $50 billion gone. 

The investors include not only individuals and charities but also hedge funds (according to one source, the "two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund, run by Kingate Management."), and banks (HSBC, a London based bank, The Royal Bank of Scotland, apparently from assets purchased from ABN Amro, and Banco Santander, a Spanish Bank, BNP Paribas and Japan's Nomura Holdings, are reputed to have exposure).

As the case unfolds, the search will develop for deep pocket defendants.  Attention has already shifted to Madoff's accounting firm, although the office appears to be a small one and not likely to expand the recovery pool much.  The only class action securities suit to be filed so far (Chaleff v. Madoff) has named, in addition to Madoff and his entities, one of the intermediaries that placed funds with Madoff.  The complaint names Stanley Chais and The Brighton Company.  The complaint describes Chais as "General Partner of Defendant the Brightain Company."  Brighton "is believed to be a California-based limited partnership" that "appears to be engaged in the business of managing investments for various investor groups."  According to the complaint, Chais and Brighton invested funds with Madoff and Madoff Investment Securities. 

As the search continues, a potential roadblock will be Stoneridge.  Recall that in Stoneridge, the Court found vendors at least one of whom was alleged to have fabricated documents to facilitate false disclosure by Charter, to be outside the boundaries of Rule 10b-5 unless there was some type of actual reliance.  Investors may find themselves unable to reach defendants that played an active role in the fraud but were not affirmatively disclosed to investors.

To the extent that wrongdoers exist and, because of Stoneridge, they are beyond the reach of private plaintiffs (the SEC has aiding and abetting authority but is unlikely to touch all responsible entities), it will, perhaps, cause Congress to consider a legislative reversal of the High Court's decision.

Complaints and other documents in private suits filed against Bernard Madoff can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on December 24, 2008 (boomark / email).