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Univ. of Toledo College of Law

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Tuesday, May 11, 2010

NY AG Sues Bank of New York Mellon Adviser Alleging Madoff-Related Fraud

New York Attorney General Cuomo today filed a lawsuit against Ivy Asset Management, LLC (“Ivy”), its former Chief Executive Officer Lawrence Simon, and its former Chief Investment Officer Howard Wohl, alleging that they deliberately misled clients about investments tied to Bernard L. Madoff. The complaint alleges that Ivy and the two principals kept their clients in the dark about damaging financial information about Madoff so Ivy could bring in millions in advisory fees.

Ivy is a New York-based investment adviser that is wholly owned by Bank of New York Mellon. Between 1998 and 2008, Ivy was paid over $40 million to give advice and conduct due diligence for clients with large Madoff investments. The lawsuit alleges that while conducting this due diligence, Ivy learned that Madoff was not investing funds as advertised. However, internal e-mails reveal that Ivy did not disclose this information to clients for fear of losing revenue from fees. As a result, Ivy’s clients lost over $227 million after Madoff’s Ponzi scheme collapsed. Among the victims were hundreds of investors as well as dozens of New York union pension and welfare plans.

Specifically, the complaint alleges that:

  • In 1997, Ivy learned that there were not enough options to support Madoff’s purported trading strategy. Specifically, the volume of Standard and Poor’s 100 Index options (“OEX”) available would only support half of the amount of assets Ivy believed Madoff had under management. This strongly suggested that the trades Madoff had been reporting were not actually being made.
  • Between 1997 and 1998, Madoff gave Ivy three vastly different explanations as to where and with whom he traded OEX options, all of which were inconsistent with Ivy’s observations and understanding of OEX options.
  • Ivy received information from industry contacts indicating that Madoff was misusing client assets to fund his broker-dealer business instead of investing the money as he claimed he was doing.


In addition, the complaint quotes from Internal documents that allegedly show that the defendants knew that investing with Madoff was too much of a risk:

An internal Ivy memorandum from 1997 about Madoff states, “[t]his is a clear example of our inability to make sense of Madoff’s strategy, and one where his trades for our accounts are inconsistent with the independent information that is available to us.”
  • When writing to a subordinate in 2002, Wohl wrote “Ah, Madoff, You omitted one possibility - he’s a fraud!”
  • When listing managers who should be recommended to a prospective client in 2003, Wohl wrote, “Madoff (NOT!).”
  • Attorney General Cuomo’s lawsuit seeks payment of restitution, damages, and penalties from Ivy, Simon, and Wohl, as well as the disgorgement of all fees that Ivy received. The lawsuit also seeks to bar Simon and Wohl from acting as investment advisors.

    http://lawprofessors.typepad.com/securities/2010/05/ny-ag-sues-bank-of-new-york-mellon-adviser-alleging-madoffrelated-fraud.html

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