Corporate defense lawyers have been known to make some ludicrous claims from time to time.
One example of such a claim was an assertion last week by defense lawyer Andrew. J Levander.
Mr. Levander claimed that his client, New York financier J. Ezra Merkin, conducted ‘extensive diligence,’ on the firm controlled by money manager Bernard L. Madoff (perpetrator of the infamous ponzi scheme in which investors lost billions of dollars) prior to and during the period where Merkin entrusted the disgraced money manager with more than $2billion of his clients funds (refer article).
This claim would appear to be utter rubbish, and I would think the prospect of such a claim standing up to scrutiny in court would be quite unlikely.
Nor should it – the practice of handing client funds over to scam artists can never be considered to represent appropriate diligence, particularly given the extent of the warning signs that something was amiss in the Madoff world.
(Lavendar’s client, Merkin, is the subject of a civil lawsuit being filed by the State of New York, for his role in handing more than $2billion of client funds to Mr. Madoff.
The complaint, which does not accuse Merkin of knowing about Madoff’s fraud, charges that he: (a) failed to carry out proper diligent research and investigation before investing with Madoff; (b) in some cases, purposely deceived clients about his investments with Madoff; and (c) had improperly collected more than $470 million worth of fees)
What ‘extensive diligence’ would not have missed
As I mentioned in an earlier discussion, there were numerous red flags and warning signals that something about Madoff and his firm was not right.
Frankly speaking, it is difficult to believe that any form of ‘extensive’ investigation on the part of fund managers would not have picked these up.
Investigations involving ‘extensive diligence,’ would not have failed to detect:
• a lack of accountability – including the practice of clearing his own trades, and the use of a firm which employed just one qualified accountant as an auditor;
• an unrealistic degree of consistency in reported investor returns;
• a lack of transparency, including refusal to allow clients online access to accounts, and ejecting from meetings investors who asked difficult questions; and
• Madoff’s claim to use hedging strategies in the S&P 100 options market, which at least one independent investment firm concluded was too small to handle a portfolio of his size.
Madoff’s credentials and fraud concealment no excuse
To be fair, Madoff did go to considerable lengths to conceal his scheme, and as a former chairman of the NASDAQ stock exchange, he had earned a great deal of credibility. Because of this, it is not difficult to understand why fund managers like Merkin entrusted client funds to his firm.
But this is no excuse. Despite his credentials, the warnings signs mentioned above should have sent off loud warning bells. Any fund manager who either ignored or failed to detect these signs cannot, in my view, claim to have exercised ‘extensive diligence’ in the performance of their duties.
I doubt that such a claim will stand up to scrutiny in court – is does not deserve to.
Debty Says:
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