New York sues money manager in Madoff scandal

New York's attorney general sued a hedge fund management firm and two of its former executives on Tuesday, claiming they discovered a decade ago that Bernard Madoff wasn't being truthful about his investment methods, but kept their suspicions quiet.

Ivy Asset Management customers, which included several union pension funds, wound up losing US$227 million ($NZ316.87 million) when the scheme collapsed, according to the suit.

Attorney General Andrew Cuomo said the firm and its former principals, CEO Lawrence Simon and CIO Howard Wohl, had a duty to tell clients about their concerns.

The suit claims they stayed silent because pulling their clients money entirely would have cost them millions of dollars in management fees.

"Ivy and its former co-principals saw the trouble with Madoff coming around the bend, but instead of guiding their clients through the financial waters, they sold them down the river," Cuomo said in a statement.

Ivy's chief restructuring officer, Douglas Squasoni, said the company would defend itself against the lawsuit. He disputed Cuomo's charge that the company didn't tell customers that something about Madoff didn't add up.

"Ivy informed its clients that it had questions about Madoff that it could not answer and recommended to its clients that they reduce their exposure to Madoff," he said in a written statement.

Squasoni said the clients who lost money were primarily other investment advisors who chose to maintain their Madoff exposure, despite being warned of the firm's concerns.

Ivy is now owned by Bank of New York Mellon Corp. Mellon had previously acknowledged in public filings that it was a subject of an investigation by Cuomo's office and said it was in discussions about a possible settlement.

Cuomo's civil suit focused on internal emails showing that Ivy had repeatedly analyzed Madoff's purported investment strategy and failed to make sense of it.

As early as 1997, the suit said, Ivy managers had evidence that Madoff wasn't executing the stock trades he claimed to be making. By 1998, they decided that they shouldn't invest further with Madoff, but waffled over what action to take.

"Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by US$1.6 million or more, and, one wonders if we ever 'escape' the legal issue of being the asset allocator and introducer, even if we terminate all Madoff related relationships?" Simon wrote in en email dated December 16, 1998.

Cuomo's suit acknowledges that the firm did, indeed, begin warning some clients away from Madoff, but claims it didn't tell others who had already invested heavily.

Spokespeople for Wohl denied that allegation, saying in a statement that he had repeatedly sounded the alarm with the fund managers his firm advised.

"In fact, he urged them to drastically reduce their positions in Madoff investments. These fund managers rejected his counsel, and their investors suffered significantly as a result," the statement said. It added that Wohl "never knew or concluded that Madoff was running a Ponzi scheme."

"It is regrettable that the Attorney General would turn this situation on its head by suing Mr Wohl who shared his Madoff concerns, while not pursuing the fund managers."

According to the suit, Wohl continued to express concerns internally about Madoff as the years ticked by. He responded to one subordinate who had attempt to analyse Madoff by writing, "Ah, Madoff. You omitted one other possibility - he's a fraud!"

Madoff, 72, is serving a 150-year prison term after admitting that his investment advisory business never bought any securities. Instead, he used new investments to pay returns to existing clients.

AP