An interesting turning point in Manhattan court where US District judge Victor Marrero basically forced feeder funds, investment introducers, and their accountant to settle with duped investors in the Bernard L. Madoff Ponzi scheme. Investors suffered big losses due to the introduction in Bernard L. Madoff Investment Securities LLC. According to court papers losses by investors via Fairfield Greenwich in Madoff’s investment fund exceed 7 Billion USD.
Investors accused PwC of failing to exercise reasonable care and acting negligently in auditing the financial statements of the Fairfield Sentry, Fairfield Sigma, Fairfield Lambda and Greenwich Sentry funds from 2002 to 2007. The settlement agreement, for the amount of 55 Million USD, involved claims against PricewaterhouseCoopers LLP in Canada, PricewaterhouseCoopers Accountants NV in the Netherlands and PricewaterhouseCoopers International Ltd.
The settlement of PwC is not unique. Hedge fund administrator Citco Group and Fairfield Greenwich itself already agreed to compensate investors for respectively 125 Million USD and 80,3 Million USD. It can create a precedent for future losses in the financial industry that involve introducers or feeder funds. Boies, Schiller & Flexner, the firm representing the investors said in a statement that the resolution was an ‘exceptional result’.
Intermediaries and those making introductions can be held accountable and even liable when the services offered do not produce the desired outcome. Significant due diligence must be performed when an introduction to a third party is made. Even when the service is fully executed and administered by this third party. The precedent of these settlements can even have an impact on introducers and service providers in other investment schemes and even for bank failures. Moreover, when the intermediary gets paid for making the introduction there is direct causality and responsibility that evolves into liability upon failure.
Bernard Madoff, the main character in what is said to be the largest Ponzi scheme in history, is sentenced to 150 years imprisonment. In March 2009, Madoff pleaded guilty to fraud, only three months after his investment scheme was uncovered and he was arrested.