About a week ago, in a post titled Colorado Business Litigation: Does Colorado
Recognize a “Declaimer Defense” for Feeder Funds? I reported
that sophisticated auditors for feeder funds sometimes rely upon disclaimers
as a “pretend justification” for ignoring their due diligence
responsibilities to their feeder fund clients. For example, the national
accounting firm of BDO Seidman knew that its client Ascot Partners had
invested $1.8 billion with Bernie Madoff. When Madoff’s Ponzi scheme
fell apart, Ascot’s investors lost the entire $1.8 billion.
One of Ascot’s investors was New York Law School which lost $3 million of its endowment funds when Ascot placed that investment with Madoff. The law school sued Ascot’s national accounting firm BDO Seidman claiming that BDO should have alerted Ascot to Madoff’s palpable fraud. BDO knew its feeder fund clients were relying upon the auditor to inform them of risks associated with investing in Madoff. The auditors were being paid enormous annual fees for helping safeguard investments. BDO, along with auditors for the other feeder funds, were periodically providing their clients self-serving and dishonest statements from Madoff claiming his investments were worth millions and his track record always on the upswing even during times when the equity markets were experiencing downturns.
It appears the auditors did little, if anything, to verify the financial stability of the Madoff investment machine. Of course, that would have required that they do some actual work.
The auditors also knew that Madoff was not a registered investment firm and thus was not being audited by an accounting firm registered under the Public Company Accounting Oversight Board. For privately-held brokerage firms like Madoff, there was no requirement for auditor registration.
Knowing all of this, one asks why BDO made no effort to communicate with Madoff’s auditor. A simple phone call to Madoff would have uncovered the fact that his auditor was located in a strip mall and consisted of three persons: a secretary, one partner and a gentleman in his 70’s living in Florida. About a month ago the SEC charged Madoff’s strip mall auditing firm with securities fraud. SEC chairman Mary Schapiro announced that the SEC will “continue this investigation (of the auditors) and hold accountable all those who helped facilitate this massive fraud.” Small comfort, isn’t it?
A trial against these auditors could sink into a huge black hole of competing and complex accounting rules. I have been asked by a number of clients how I would simplify the issues for a jury. The first thing I would do is blow up a photograph of the strip mall office of Madoff’s three person auditing firm. The courtroom exhibit would look something like:
SHOULD BDO HAVE TOLD ITS CLIENTS THIS?
Madoff auditor’s strip mall office.
A Colorado business will lose its case if the case bogs down into technicalities. But, your contingent fee lawyer can help you win your case by keeping it simple and motivating the jury. I have dedicated my career to winning high risk and complex litigation based on this tactic. I would enjoy the opportunity to discuss with you how I can work with you on these types of colorado business litigation claims.