Who Gets Sued In Madoff Case? Everybody, Say Experts

The Madoff Ponzi scheme scandal is sparking an explosion of legal actions that will likely hit fund investors, as well as insurers, auditors and lawyers, among others, a panel of legal experts advised today.

Their comments came during a Webinar organized by New York-based consulting firm Advisen, which included David Bradford, Advisen executive vice president and chief knowledge officer; Mike Adler, vice president of Ironshore Claims LLC; Ray DeCarlo, Frank Crystal & Company senior management director; Marshall Gilinsky, a shareholder in Anderson Kill & Olick; and Karen Mariscal, counsel with Edwards Angell Palmer & Dodge.

Mr. Adler said hedge funds and other firms that invested with the Bernard Madoff investment fund operation, including not-for-profits, are likely to be targeted for litigation. Defendants will include directors and officers, as well as financial advisors, auditors and attorneys. Actions will also be filed between insureds and insurers, along with suits coming from attorneys general and securities regulators.

The losses created by Mr. Madoff's rob-Peter-to-pay-Paul pyramid scheme, Mr. DeCarlo noted, are "enormous" and litigation is likely to dwarf actions that resulted from the Enron scandal, option timing cases and subprime investments.

Causes of action, he said, could include lack of due diligence and failure to diversify, and there will be issues over how gains from the fund should be apportioned against market losses.

As Mr. DeCarlo described matters, there are "thousands of funds" involved, and "we don't know how many got caught up in this."

Mr. Gilinsky said policies that could provide coverage for damage related to the Madoff fund could include coverage for errors and omissions and directors and officers, as well as coverage for misdeeds by investment advisors, accountants and auditors.

He also mentioned general partners legal liability, commercial general liability, crime and fidelity bond, and homeowners protection against theft of securities. "Leave no insurance policy unturned," he counseled.

Ms. Mariscal said insurers hit with Madoff claims could seek to rescind D&O and E&O policies on the basis that misrepresentations were made to secure the coverage concerning due diligence.

Mr. Madoff's scheme, she said, was "brilliant. He even got his auditor not to ask questions."

She said Mr. Madoff had told investors if they asked for his methods they would be thrown out of his fund. Insurers, she said, will probably initially take a wait-and-see attitude to find out what the fallout is from revelations about the Madoff fund and will likely rescind coverage where they believe the insured was in on the scam.

Defense costs from Madoff cases, she advised, are likely to be high.

Panelists said that investors could be the subject of "clawback" suits from the Madoff fund bankruptcy trustee looking to recoup what they earned.

Nonprofits, they said, could be hit with suits from donors charging mismanagement of charitable assets by failure to diversify.

Mr. DeCarlo said there would not be enough insurance coverage to cover the $50 billion Mr. Madoff's scheme is said to have vaporized.