More fallout from Bernard Madoff’s actions.
The Pomerantz firm says they have filed a derivative complaint, that was brought by the 2005 Tomchin Family Charitable Trust, on behalf of the Rye Select Broad Market XL Fund.
The plaintiff alleges that the Fund’s general partner, Tremont Partners Inc., other Tremont-related defendants such as Tremont Holdings Group, Inc.; Rye Investment Management; Robert Schulman; Stuart Pologe; and Patrick Kelly, and also the Fund’s auditor, KPMG LLP, all breached their professional, fiduciary and contractual duties.
At the end of December 2007, The Rye Select Broad Market XL Fund reported assets of $213 million. It was a “feeder fund” to Bernard L. Madoff Investment Securities. Now, two years later, its value appears to be zero.
The Basis of the Claims
Marc Gross, one of the Pomerantz Partners, explained the basis of the claims:
Tremont collected millions of dollars in management fees from the Fund while turning a blind eye to numerous red flags indicating that Madoff was a fraud and that the Fund’s assets were in grave danger.
Tremont could not have done this, however, without the imprimatur received from the Fund’s auditor, KPMG, which told the Fund that there was nothing to worry about and that its assets were safely invested. We hope this case is a major step in recovering the Fund’s losses caused by these derelictions of duty. [Globe Newswire]
First Madoff-Related Complaint Against KPMG
This is the first complaint lodged that asserts claims against KPMG, related to Madoff. According to the release, KPMG is alleged to have ignored its professional obligation to carefully audit the Fund’s financial statements. The firm’s obligations included the need to investigate “red flags” that should have suggest Fund assets were being used as part of a Ponzi scheme.
It also alleges KPMG knew the Tremont-prepared financial statements claimed the Fund’s assets were 100% invested in Treasury Bills each year on December 31. It says KPMG failed to recognize this was a suspicious claim. Apparently Investment Securities was supposed to be investing the Partnership’s assets in what they called a “complex split strike strategy.” That complex strategy required the purchase and sale of a wide range of financial instruments such as stocks and derivatives.
If that buying and selling was actually being done, how would it have been possible to convert all of those investments to cash, so they could be 100% invested in Treasury Bills on December 31 every year? They say KPMG should have been smart enough to realize that was a big problem, and they should have looked at the option trades that were alleged to have ben undertaken prior to the liquidation to cash. They should have seen it, because Madoff’s own brokerage firm did all of the trading exclusively.
The legal Complaint says KMPG relied upon Madoff representations to Tremont, that were passed on to them. It says there were warning signs that pointed to those representations being unreliable.
One of the suspicious parts of the operation was Madoff’s auditor, Friehling & Horowitz. This company only had three employees. One employee was 78 years old and lived in Florida. One was a secretary, and the third was an active accountant aged 47. Given the scale and scope of the Madoff company’s alleged activities, this operation was “miniscule.” The Pomerantz Partner, Marc Gross said, “in light of these facts, and others, KPMG had a duty to probe further.”
The Complaint also alleges the Tremont-related defendants breached their fiduciary duties because they ignored many other red flags that should have pointed to Madoff’s operation being a sham.
Here is what the Complaint alleges the facts those defendants ignored:
a) Madoff’s claimed investment strategy was incapable of delivering
the returns he was getting. It is illogical and mathematically
impossible for a strategy using index call options and index put
options to have such a low correlation to the market from where
its returns are supposedly generated. Indeed, Madoff’s returns
were unrealistically consistent, despite the volatile nature of
Madoff’s split-strike conversion method.
b) The options contracts Madoff would have had to trade did not show
up on any of the options exchanges. Even if the trading was being
done over-the-counter (“OTC”) — outside of the exchanges — a
good number of those trades would still have to have been offset
in the listed market, and there was no evidence that they ever
c) Family members were running the firm:
i. Peter Madoff, Bernard Madoff’s brother acted as chief
compliance officer of the firm; and
ii. Only Madoff’s family was privy to the investment strategy.
Madoff’s was the only multi-billion dollar hedge fund that
did not have outside, non-family professionals involved in
the investment process.
d) Madoff, despite his “success,” operated under a veil of secrecy.
He did not allow outside performance audits by investors, such as
e) Madoff had a clear conflict of interest in that, through
discretionary brokerage agreements, it initiated trades in the
accounts, executed the trades, and custodied and administered the
assets. Lack of segregation of duties is a clear red flag.
f) Investors had no electronic access to their funds accounts at
Madoff. Thus, Madoff had the ability to manufacture paper trade
tickets that confirmed fictitious results.
The press release says investors who invested in the Rye Select Broad Market XL Fund are advised to contact Marc I. Gross, Esq., Dan L. Berger, or Jason S. Cowart, at Pomerantz Haudek Block Grossman & Gross LLP at 888-476-6529 or 212-661-1100.