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: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

Action Alleges that Auditor of Feeder Fund to Madoff Breached Fiduciary Duty

Investors in a feeder fund to the Madoff fund have alleged that the Big Four independent
auditor of the feeder fund violated GAAS and breached its duty of care by ignoring red flags and failing to identify the risk of loss associated with its client fund entrusting its investment capital to the Madoff fund. It was alleged that the auditors knew that the fund had no way to evaluate the veracity of the financial returns claimed by Madoff. The auditor failed to demand from the fund?s general partner or from Madoff evidence supporting those returns and did not have access to information verifying the veracity of the financial date. It was alleged that the auditor negligently ignored the myriad red flags that indicated that the feeder fund?s recorded assets, which were all in the custody of Madoff, were non-existent. (2005 Tomchin Family Charitable Trust, derivatively on behalf of Rye Select Board Market XL Fund v. Tremont Partners, Inc., NY S CT, Feb 4, 2009).

In order to audit purported Treasury bill holdings and capital appreciation, the auditor relied entirely upon the paper account statements that Madoff sent to the general partner and Madoff?s own audited financial statements. The auditor knew, said the complaint, that unlike most broker-dealers, Madoff refused to provide electronic access to holdings and instead provided paper account statements. The auditor was also said to be aware that Madoff?s financial statements were audited by an obscure three-person audit firm that had no other clients. Despite this knowledge, it was alleged that the auditor relied upon these Madoff documents as if they were self-authenticating.

The complaint maintains that, had the auditor heeded the red flags and conducted a GAAS compliant audit, it would have known that the pieces of paper it reviewed were generated in connection with fraudulent activity and alerted the fund to the fact that it was a victim of a massive Ponzi scheme. In turn, such an alert would have allowed the firm to limit its losses.

Full post as published by Jim Hamilton's World of Securities Regulation on February 09, 2009 (boomark / email).