Tufts has array of legal options in wake of Madoff losses
Published: Monday, December 22, 2008
Updated: Wednesday, December 24, 2008 17:12
Should Tufts' losses in the Madoff scandal affect donations to the university?
After $20 million in losses from an alleged Ponzi scheme, legal experts say it might be time for Tufts to dig in its claws.
As court-appointed trustee Irving Picard liquidates the firm of disgraced Wall Street guru Bernard Madoff in hopes of returning funds to investors, Tufts may be able to lessen some of the damage through a variety of legal options.
While University President Lawrence Bacow said in a Friday e-mail to the community that Tufts will work to recover its losses, he did not specify the methods the school would employ. Even so, experts have speculated that Tufts could have the help of the legal "clawback" doctrine.
But not all former Madoff investors are thrilled by this prospect, since for a few, the money would come out of their own pockets. Essentially, clawbacks allow the courts to demand that parties who make money in a fraudulent scheme return some of their earnings to the losers.
In Madoff's case, the so-called winners are the investors who withdrew their money before the alleged $50 billion Ponzi scheme fell apart.
"The fraudulent transfer law says even if the person who pulled the money out was not part of the fraud, if at the time they pulled it out Madoff was insolvent … they may be forced to give it back," Harvard Law School Professor John Coates told the Daily. "The basic theory is that once a firm is insolvent, it shouldn't be able to prefer some of its investors over others."
If permitted in this case, clawbacks could serve as one prong of Tufts' legal approach, which remains in the planning stages. Other potential options include suing Ascot Partners, the firm that directed Tufts' funds to Madoff, or pursuing legal action directly against Madoff.
Regardless, it is unlikely that the university will recover the full sum of the investment. The chances are "bleak," attorney Alfred Ellis of the Boston firm Zimble & Brettler told the Daily.
Ellis represented investors duped in another Ponzi scheme uncovered in 2006, a multi-million dollar fraud carried out by Wakefield, Mass., businessman Frank Russo. Ellis said that by their very nature, Ponzi schemes only come to light when they have run out of steam – and cash.
"There was basically nothing left at the end of the day," he said of Russo's assets. "Nothing substantial – pennies on the dollar."
Meanwhile, the first lawsuit filed against Ascot Partners as a result of the Madoff scandal relies heavily on a legal strategy that appears to be unavailable to Tufts. (Click to view an interactive PDF of the lawsuit)
Charging Ascot; its general partner, Jacob Ezra Merkin; and its auditor with recklessness that might have risen to the level of "gross negligence," the New York law firm Abbey Spanier Rodd & Abrams filed a class-action suit on behalf of New York Law School, which lost $3 million in the Madoff fallout, and other forthcoming investors.
In the suit, which was submitted on Dec. 16, lawyers repeatedly argue that Ascot Partners deceived investors by not telling them the extent to which the fund was entrusted to Madoff.
"[Neither] the Offering Memorandum nor any other offering material used in soliciting investment in Ascot ever disclosed that virtually all of Ascot's assets were invested with … Madoff controlled entities," according to a copy of the suit provided to the Daily by Nancy Kaboolian, an attorney with Abbey Spanier Rodd & Abrams.
The suit alleges that investors were instead under the impression that Ascot Partners was following a diverse strategy.
"In fact, the General Partner … had abandoned diversity by giving a single third-party manager, Madoff, management responsibility and discretion over Ascot's funds," the suit reads.
"The allegations of the complaint speak for themselves," Kaboolian told the Daily. "The allegations … are that the investors in Ascot did not know that Ascot was invested in Bernie Madoff."
Not so in Tufts' case, according to Director of Public Relations Kim Thurler. "I can confirm that the university was aware of the extent to which Ascot Partners was invested in Madoff Securities at the time of the investment," Thurler told the Daily in an e-mail.
The fact that the university knew about the investment has the potential to restrict its legal grounds, according to Ellis.
But Tufts still has some footing, he said, noting that Ascot Partners could be liable if it failed to do due diligence checks on Madoff's investments. A lack of investing standards has emerged as a common thread among funds that depended heavily on Madoff, he explained.
"None of these people did due diligence. They just used their access without doing any due diligence," Ellis said.
Coates said that the sheer volume of poor investment decisions can – somewhat ironically – actually serve as a defense for Ascot. "One thing that Ascot will be able to use as a defense is that everybody was fooled," he said.