Nearly seven years after Bernard Madoff’s Ponzi scheme was first discovered, a Seattle jury demonstrated that investors’ efforts to recover their lost money are still going strong. On Friday, the Washington Superior Court jury in the FutureSelect Portfolio Management, Inc. v. Tremont Group Holdings, Inc. case found Ernst & Young liable for approximately $25 million in damages for its flawed audits of a Madoff feeder fund.
Plaintiff FutureSelect Portfolio Management Inc. (“FutureSelect”) lost approximately $120 million as the result of their investment in the Rye Funds, which were managed by Tremont Group Holdings Inc. (“Tremont”)—the second largest feeder fund invested with Bernard L. Madoff Investment Securities (“BLMIS”). Ernst & Young (“EY”) audited the Rye Funds from 2000–2003, and occasionally up until 2008. After Madoff liquidator Irving Picard sued Tremont for $2.1 billion, Tremont and several associated entities agreed to pay approximately $1 billion to settle the Trustee’s claims. FutureSelect opted out of that settlement to pursue its own case in Washington State, where the securities laws are more favorable to investors than their federal counterparts.
FutureSelect argued that EY failed to adhere to generally accepted accounting standards in its audits of Tremont and the Rye Funds, claiming that EY took the audits allegedly performed by the auditor of BLMIS at face value, when even a basic inquiry would have revealed that the BLMIS auditor wasn’t properly qualified. FutureSelect claimed that EY made material misstatements to FutureSelect when it verified the BLMIS financial statements as fairly presenting the financial position of the Rye Funds in unqualified opinions. EY argued that it properly performed its limited role of providing reasonable assurance that Tremont’s financial statements were free from misstatements. The jury ultimately found that EY was liable for approximately $10 million in damages to FutureSelect investors, which results in liability of approximately $25 million with the addition of prejudgment interest. The verdict is the first against an auditor in connection with the Madoff fraud.
Over the past six-plus years, more than $10.9 billion of the estimated $17.5 billion in principal lost by investors has been recovered, and the Trustee is still pursuing approximately $5 billion of potential recoveries. There are currently more than 700 ongoing legal actions, and an unknown number of additional lawsuits could still be brought where parties have entered into private agreements to toll the statute of limitations on investors’ claims. It remains to be seen how this latest verdict will inform investors who have interests in currently pending litigation or may have entered into tolling agreements. In particular, those involved with the negligence class action against PricewaterhouseCoopers are likely analyzing the outcome as they prepare for a January 2016 trial in the Southern District of New York. While recoveries from the Madoff fraud have so far exceeded initial industry estimates, it’s clear that plaintiffs are not done yet.
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