A Ray of Hope for Bernie Madoff's Victims

Bernie Madoff committed massive fraud against his investors
Bernie Madoff committed massive fraud against his investors

I checked Facebook to see whether U.S. District Court Judge Victor Marrero was listed. He probably isn't allowed to participate in social networking sites. Too bad. I wanted to be his friend.

On Aug. 18, 2010, Judge Marrero issued an extraordinary decision in Anwar v. Fairfield Greenwich, Ltd., which is pending in the U.S. District Court for the Southern District of New York (09 Civ 0118).

Obscene Fees for Little Work

The underlying lawsuit is a class action brought by hapless investors who lost their shirts investing in funds operated by Fairfield Greenwich Group. Fairfield was the most notorious of the "feeder funds" that took money from investors and turned it over to Bernie Madoff for "investment management." We all know what happened to those funds.

Fairfield invested "billions" with Madoff. It was paid handsomely for basically endorsing investors' checks to him. It received about $547 million in "performance fees" and $200 million as a "management fee" between 2002 and 2008. This was the holy grail of the securities biz: Obscene fees for little work.

Confronted with this epic fraud, Fairfield and others who "fed" their clients' assets to Madoff had two choices. The principled choice would be to admit their mistake, make their clients whole, and seek recovery from anyone they could prove misled them. The other would be to lawyer up, claim to be a victim themselves, and engage in a scorched-earth defense intended to defeat the claims of its defrauded clients. Guess which one they chose?

They drew the wrong judge.

A Litany of Red Flags

Plaintiffs alleged that a litany of red flags should have alerted Fairfield (and others) that Madoff was a fraud. These included his use of a one-person accounting firm, no independent custodian, blind acceptance of his fraudulent trade confirmations and others.

The Court summarized the allegations of the Complaint (which haven't been established) as describing Madoff as "a vampire" and "the various [Fairfield] defendants his glamoured familiars who procured the sleeping victims." I don't know who wrote that line, but I envy it.

Judge Marrero skillfully wove through a "virtual minefield of lawyerly defenses" strewn by Fairfield in an effort to get this pesky case dismissed without a trial. He refused to dismiss the vast majority of the claims against Fairfield and even left open the possibility of punitive damages, "given the magnitude of the fraud and the reckless state of mind alleged in the complaint."

We can only hope this decision encourages Fairfield and others to do the right thing and compensate their defrauded clients. That's about as likely as Judge Marrero signing up for Facebook and accepting my friendship invitation.