One of Madoff’s victims was a feeder fund named Ascot Partners. New York Law School invested $3,000,000 of its endowment funds in Ascot. When Madoff’s scheme fell apart, Ascot was unable to repay New York Law School its $3,000,000 investment.
In recognition of the substantial legal and practical roadblocks to a
lawsuit against Madoff and the feeder fund Ascot, New York Law School
instead sued BDO Seidman, the auditor for Ascot claiming that Ascot failed
to adequately audit and assess the risk of Ascot’s investments with Madoff.
The law school argued that even a minimal investigation by its auditor
BDO would have triggered a full-throated warning to Ascot’s investors:
“Be careful. This Madoff investment is risky!” Instead, BDO,
a large sophisticated national accounting firm sought to justify its lack
of due diligence and failure to investigate Madoff by hiding behind the
fine print of a disclaimer that said, “We conducted no independent
review of Madoff.”
How much effort would it have taken for someone at BDO to pick up the
phone, call Madoff and ask for the name, address, and phone number of
Madoff’s auditor/accounting firm? You know what that five minute
call would have uncovered? The feeder funds’ auditor BDO would have
learned that the Madoff auditor was housed in a local strip mall and had
three employee: a secretary, accountant and partner in his 70’s
who lived in Florida.
Imagine the courtroom impact of Exhibit A, a photograph of the Madoff
auditor’s strip mall office! For one hundred bucks the feeder fund
auditor could have taken such a photograph years before and would have
prevented a loss of millions to the feeder funds’ investors. Instead,
the auditor crafted a pretend justification for sitting on its hands by
“disclaiming” any responsibility to investigate.
A disclaimer defense by a sophisticated auditor reminds us of the “Three
Wise Monkeys” from Japanese lore who “hear no evil, speak
no evil, see no evil.” The BDO auditors, being the wise monkeys
they were, elected to turn a blind eye to Madoff’s scam. Madoff’s
scam was no less consequential merely because BDO ignored it.