Madoff - Who is culpable?

Given the amount of corporate fraud cases and lack of due diligence that has been brought to light as as a result of the current financial crisis, litigators will be clambering all over it trying to find some means of recourse for their clients who have suffered substantial financial losses.

In the case of the alleged Madoff $50 billion Ponzi scheme, there could be a number of potential targets in the firing line for litigators to take action against. Investors whose money ended up in Madoff's scheme are likely to turn to the managers of the "feeder funds" who earned commissions from feeding funds into the alleged Ponzi scheme. Questions also remain over the due diligence conducted further down the line by those banks that have revealed exposure to the Ponzi scheme.

Some experts also question whether the US securities regulator, the Securities Exchange Commission (SEC) is culpable. According to the latest newspaper reports, the SEC missed "red flags" regarding Madoff's alleged Ponzi scheme when it investigated an accountancy firm with ties to Madoff back in 1992. The New York Times claims that the SEC's probe found that the accountancy firm kept "almost no records", and that one of the partners told investigators that the $441 million it controlled was managed by Mr Madoff.

Forensic accountants currently working on the Madoff case in New York and London, say there appeared to be a “patent lack of segregation of duties” as the management, administration and custody of the fund in question was conducted either by Madoff or associated parties. However, standards of due diligence in this area are still developing and there was no apparent legal onus on Madoff to separate these duties.

One source I spoke to involved in the Madoff investigation recalled the BCCI scandal in the UK in 1991 when the Middle Eastern bank collapsed with £7 billion of undeclared debts. The financial regulator at the time was the Bank of England and victims of BCCI, led by the liquidator Deloitte & Touche, later brought a lawsuit against the Bank of England claiming up to £1 billion in damages. The victims alleged the Bank of England was "guilty of negligence amounting to 'misfeasance', or wilful misconduct." The case later collapsed.

Questions now remain about whether the SEC could have done more to uncover the alleged Madoff Ponzi scheme. As to whether it could face its day in court is debatable as the SEC may be able to declare immunity from being sued. As the BCCI lawsuit also demonstrated it may also be difficult to prove that the SEC "deliberately" failed in its duties.