Investors Looking to Ernst & Young to Recoup Madoff Losses

Nearly seven years after Bernie Madoff’s investment empire was revealed to be a $17.5 billion fraud, the battle by investors to recover their losses ramps up in a case that goes to trial this week in Seattle, the Associated Press reported.

A Washington state investment company is seeking to pin about $100 million of its losses from Madoff’s crimes on New York-based auditor Ernst & Young (FY15 gross revenue of $9.9 billion).

FutureSelect Portfolio Management of Redmond and some related firms, headed by hedge fund manager Ronald Ward, lost a total of about $129 million in the pyramid scheme. In court papers, the company alleges that Ernst & Young would have uncovered the scheme if it had taken even the most basic steps to verify Madoff’s assets – something the auditing firm denies it had any obligation to do.

“This case is about the Madoff fraud and how it got to Washington state and how it’s impacting real people in Washington state,” FutureSelect lawyer Steven Thomas told the AP. “Because Ernst & Young said the numbers were good, FutureSelect invested. Ernst & Young said over $4.2 billion in assets were real; they were fake.”

FutureSelect invested on behalf of other funds, retirees, a New York church and others, Thomas said. The investments were made in a collection of funds managed by Tremont Partners, which were invested with Madoff. Ernst & Young was the certified public accounting firm that audited Tremont’s funds from 2000 to 2003.

In a trial brief filed this month, Ernst & Young argued that it had a very limited role: to audit the financial statements for four of the 10 years FutureSelect invested in Madoff’s funds. Its audits, for which it was paid $40,000 apiece, were simply to provide “reasonable assurance” that Tremont’s financial statements were free of misstatements. Tremont’s financial statements said its funds owned securities in Madoff’s custody, which Ernst & Young said it confirmed by checking with Madoff.

Ernst & Young said its approach was consistent with that taken by every other auditor of every Madoff-advised fund.

And in contrast with the modest fees it received, the auditing firm said, Ward and Future Select received tens of millions of dollars in management fees.

Madoff revealed his fraud in December 2008, admitting that account statements showing clients held nearly $68 billion were a sham. The roughly $17.5 billion in principal invested by retirees, charities and other clients over decades was mostly gone – paid out as fake profits or raided by Madoff’s family and cronies.

Madoff, now 77, pleaded guilty to fraud charges a few months later and was sentenced to 150 years in prison. A federal trustee based in New York has recovered or made agreements to recover about $11 billion of the lost principal.