Font Size: 
Madoff-Affiliated Firms Sued by Private Investment Fund
Daily Business Review
April 08, 2009
A family-run, Panama-based company with an office in Coral Gables, Fla., has sued a former bank subsidiary of American Express and a so-called feeder fund to Bernard Madoff's investment group. The suit alleges the bank, the fund and others caused $10.6 million in losses by ignoring the warning signs of a Ponzi scheme.
"This is a case about the defendants failing to do what they were supposed to do. Had they done their jobs, millions of dollars would not have been lost," said attorney Jorge Mestre, partner with Rivero Mestre & Castro in Miami. Mestre represents the plaintiff, Headway Investment Corp., which owned shares in Madoff-related funds worth around $10.6 million, according to the complaint, which was filed in Miami-Dade Circuit Court.
The lawsuit claims that in December 2002, the American Express Bank recommended Headway invest $6.5 million in the Madoff-related Sentry fund but did not reveal Madoff's link to Sentry.
Headway originally opened accounts at American Express Bank in Miami through Carlos Gadala-Maria and Raul Mas, who are named as individual defendants, and arranged for American Express to open a euro account in Geneva in 1997. London-based Standard Chartered Bank bought American Express' international banking unit for about $860 million in February 2008.
Following Gadala-Maria and Mas' recommendations, Headway had American Express place $8.5 million of Headway's assets into the Sentry and euro Sigma funds by the summer of 2005, according to the complaint. In August 2005, American Express also invested an additional $2.1 million into the Sigma Fund on Headway's behalf.
The fund was managed by the New York-based hedge-fund manager Fairfield Greenwich, another defendant in the Miami lawsuit. "Unbeknownst to Headway, the management of the Sentry Fund ... had been handed over to Madoff, who effectively controlled approximately 95 percent of the Sentry Fund's total assets," the complaint reads.
The complaint also alleges American Express acted as an intermediary between Headway and Fairfield Greenwich to justify collecting fees from Headway.
Mestre said he filed the complaint in the state court because "this happened in Florida, and it should be decided in Florida courts."
Lawyers representing clients with local links sometimes file in local courts for a home-field advantage, said Mike Seigel, who teaches securities fraud law at the University of Florida.
"State courts tend to be more favorable to plaintiffs," he said. "I would imagine we're going to see dozens of these lawsuits filed against others who were involved."
Fairfield Greenwich is one of the largest Madoff feeder funds, and by its own tally had $7.5 billion invested with Madoff out of a total portfolio of $14.1 billion. It already is under fire after Massachusetts' top securities regulator accused it of ignoring red flags as it collected millions in fees, and is also being sued in a New York class action, the Associated Press reported.
Massachusetts is seeking restitution. Fairfield Greenwich has denied the allegations.
The day after Madoff's Ponzi scheme was revealed, Jeffrey Tucker, one of Fairfield Greenwich's founding partners, said the fund was shocked by the news and vowed to pursue recovery of its money. "We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme," he wrote in a prepared release.
The lawsuit includes eight counts of negligence, breach of fiduciary duty and unjust enrichment against the American Express Bank, Fairfield Greenwich, auditors PriceWaterhouse Coopers in Ontario, Netherlands-based Citco and 10 individual defendants.
PriceWaterhouse Coopers spokeswoman Carolyn Forest in Toronto said that while the company did provide auditing services to the Fairfield Sentry and Fairfield Sigma funds, "it was not the auditor for Bernard Madoff Investments where the alleged fraud occurred," and that PriceWaterhouse's auditing of Fairfield Greenwich complied with professional standards.
In the wake of the Madoff scandal, The New York Times reported in December that Citco and Fairfield would probably become legal targets for angry investors.
The individual defendants named in the Miami lawsuit include American Express investment executives Robert Friedman, Samuel Perruchoud, Rodolfo Pages and John Dutkowski, who Headway alleges urged Gadala-Maria and Mas to promote the funds. The plaintiffs also sued Fairfield founders Walter Noel Jr., Andres Piedrahita and Tucker, and executive Amit Vijayvergiya, all of whom Headway alleges "failed to perform even minimal diligence with regard to Madoff," the complaint alleges.
Standard Charter spokeswoman Susan Atran in New York declined to comment on the litigation in Miami. Citco spokesman Jonathan Gasthalter and Fairfield Greenwich spokesman Thomas Mulligan, both in New York, also declined to comment. Phone calls requesting comment from other defendants in the circuit court suit were not returned by deadline.
The New York office of Boies Schiller & Flexner filed a lawsuit on behalf of a purported class of Fairfield Greenwich investors in U.S. District Court in New York in January, alleging Fairfield Greenwich and other defendants improperly paid themselves "phony profits" of $500 million.
Madoff's situation poses a perplexing legal quandary for lawyers seeking to recover money for investors who lost money in the scheme. In the present civil lawsuit, Mestre isn't going after Madoff at all, but companies who either invested with Madoff or were supposed to vet those investments.
And with as many as 6,700 investors reportedly lining up to file claims against Madoff directly, lawyers involved with Madoff litigation worry that the potential gains of waiting for a federal receiver to distribute Madoff's assets are too small to be worth litigating.
Asked why his client didn't sue Madoff directly, Mestre simply said, "We've chosen not to go that route right now; we may do that in the future."
The Securities and Exchange Commission has filed civil lawsuits against Madoff in the U.S. District Court in New York, seeking the equitable distribution of $50 billion in liabilities the commission said Madoff accrued with investors.
Yet despite the urge to move quickly and the international attention that Madoff's misdeeds have garnered, many law firms have had to turn away potential clients who want to sue Madoff directly.
Nationwide, there have been 14 federal lawsuits against Madoff. The network of clients he built over almost 50 years was so far-reaching and extensive, many major corporate law firms have passed on representing jilted Madoff investors because it could conflict with their representation of their existing client base. Lawyers also are girding for potential "claw-back" lawsuits, in which victims sue other Madoff investors who got out before Madoff revealed the scheme in December.
"Some people through luck or other reasons got out early; they are whole," said Michael Perino, a law professor at St. John's University law school in New York. "What claw-back does is try to even out the recoveries among the various investors."
Last Wednesday, federal authorities also seized Madoff's Palm Beach mansion and two boats he kept in South Florida.
Bloomberg reported on Friday that HSBC Holding's Luxembourg subsidiary was sued by Madoff investor Herald Fund SPC. The fund filed suit to recover 1.6 billion euros ($2.15 billion), alleging that HSBC failed to protect the funds by using a Madoff company as a sub-custodian.
Madoff could face a maximum of 150 years in prison and is currently in jail awaiting sentencing.
For more coverage of the Bernard Madoff case, see the Law.com Madoff Watch page.
For continuous updates, follow Law.com's Madoff Watch on Twitter.
