Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, November 30, 2010

Madoff Investors Fail to Show Uncontroverted Evidence of Peter Madoff's Involvement in Bernie's Fraud

An interesting case in the federal district court in New Jersey involves the attempt by some of Bernie Madoff's investors to recover damages from Bernie's brother Peter Madoff on a control person theory.  Peter Madoff worked at Bernard L. Madoff Investment Securities (BMIS) for almost forty years, serving as its senior managing director, director of trading, chief compliance officer and general counsel.  According to the Uniform Application for Investment Adviser Registration filed by BMIS with the SEC, Peter Madoff was listed as a control person.  The court earlier denied defendant's motion to dismiss the complaint in The Lautenberg Foundation v. Madoff (D.N.J. Sept. 9, 2009) (Civ. Act. 09-816(SRC)).

In a recent opinion (Nov. 19, 2010), the court denied plaintiffs' motion for a summary judgment on the count alleging control person liability under section 20(a) of the Securities Exchange Act.  Applying the Third Circuit precedent, Rochez Brothers v. Rhoades, 527 F.2d 880 (3d Cir. 1975), the court set forth the elements of a 20(a) claim as follows: (1) the defendant controlled another person or entity; (2) the controlled person or entity committed a primary violation of the securities laws; and (3) the defendant was a culpable participant in the fraud.  For purposes of the summary judgment motion, the court assumed that the first and second elements were met and focused on the element of culpable conduct. 

Under Third Circuit precedent, inaction that intentionally furthers the fraud committed by the controlled person or entity establishes culpable participation, but mere inaction is insufficient.  The court notes that plaintiff's argument was essentially that Peter Madoff, because of his position in the firm, must be at fault for not implementing appropriate safeguards.  However, the court stated that the record contained "a dearth of evidence as to what controls and procedures are considered standard or even minimally requisite in the industry."  Moreover, "we know very little of what Bernard Madoff did and how he did it."  While Peter's long association in his brother's business, his corporate positions, and the scope of the fraud  cast "substantial suspicion" about Peter's involvement, that is insufficient to impose control person liability.  Accordingly, because there is insufficient specific evidence of Peter's conduct and responsibilities, plaintiffs' motion for summary judgment fails.

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