Legal Briefing: BoNY Unit Charged With Knowing Silence on Madoff

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Was Bank of New York Mellon Unit Bought Off by Madoff?

Ivy Asset Management, a division of Bank of New York Mellon (BK), made big fees by placing client funds with Bernard Madoff, who ran a huge Ponzi scheme. During its due diligence, Ivy figured out Madoff was lying about how he made his money but left its clients' funds with him anyway rather than forgo the fees, charged New York Attorney General Andrew Cuomo in a suit filed against the fund and two of its executives yesterday.

When Madoff's Ponzi scheme imploded, hundreds of Ivy's investors, including 76 union pension and welfare plans, lost over $227 million.

AG Cuomo claims Ivy realized in 1997 that not enough OEX, options on the Standard & Poor's 100 stock index, existed for Madoff's reported strategy to be true; that from 1997 to 1998 Madoff gave three very different explanations of his OEX strategy to Ivy, none of which made sense to the investment adviser; and Ivy received tips from industry associates that Madoff wasn't doing what he claimed. Cuomo asserts that none of this information was passed on to clients.

Cuomo also cites some damning internal communications, one of which shows individual defendant Chief Investment Officer Harold Wohl writing to a subordinate in 2002: "Ah, Madoff. You omitted one possibility -- he's a fraud!"

In a 1998 document cited by Cuomo, ex-CEO Larry Simon rejected Wohl's recommendation that, because of what Ivy knew about Madoff, the investment adviser should pull its own funds from the scammer because such a move could jeopardize the Madoff fees:

"Amount we now have with Bernie in Ivy's partnerships is probably less than $5 million. The bigger issue is the 190 mil or so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17+% returns...[to be] $1.275 Million.... Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by $1.6 million or more, and, one wonders if we ever "escape" the legal issue of being the asset allocator and introducer, even if we terminate all Madoff related relationships?"

BoNY issued a statement that didn't take the charges head on, other than the obligatory statement that it would defend itself. Instead, the bank sought to contextualize the situation as small, in the past and otherwise barely relevant to BoNY. Am Law Daily reports that former CEO Larry Simon, took a much stronger stand. Simon insisted that he had consistently told clients to leave Madoff's fund, and he released communications supporting his position.

Novartis Sex Discrimination Trial Goes to Jury

The five-week sex discrimination trial against Novartis (NVS) is in the jury's hands as of late yesterday. As Am Law Litigation Daily reports, in closing argument the plaintiffs' counsel reminded the jurors of the horror stories that had been shared, including that of a woman whose career had been derailed after she reported being raped on the job. But the plaintiffs' counsel stressed that the individual stories were merely examples of a big, systematic problem at the company. Will the jury agree? We'll know soon...

And in the business of law...

According to the ABA Journal, lawyers -- particularly male lawyers -- are overconfident about their chances of winning pending litigation.

And via Above the Law, here's an argument in favor of making law schools subject to securities-law-style disclosure requirements and holding law schools liable for fraud if they make material misstatements or omissions. The idea is that potential law students are entitled to accurate information about their job prospects upon graduation if they're going to incur law-school-size student loan debt. The post includes good but grim graphics for current law school applicants to consider.