NY Sues Bank Of New York Mellon Unit In Connection With Madoff Investments - Read Key E-Mail Here

New York State today filed a lawsuit against Ivy Asset Management, LLC, its former Chief Executive Officer Lawrence Simon, and its former Chief Investment Officer Howard Wohl for allegedly deliberately misleading clients about investments tied to Bernard Madoff. The suit 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 revealed 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.
 
According to N.Y. Attorney General Andrew Cuomo:  The damaging information that Ivy discovered about Madoff and then failed to disclose included:
·         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.
 
According to Cuomo: Internal documents obtained through the investigation revealed that Ivy, Simon, and Wohl 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!).”

 
Cuomo alleged that internal e-mails revealed that Simon and Wohl intentionally failed to disclose their doubts about Madoff to their clients with heavy Madoff-related investments:

• On December 16, 1998, the day after Madoff gave Ivy his third explanation about his option trades, Wohl recommended to Simon that Ivy withdraw all of the funds they personally managed from Madoff, including some of their own money, writing:
  “I’m concerned that he [Madoff] now admits that he does not execute all of the index options on the exchange that there are ‘unknown’ counterparties that if these options are not paid off he’d lose less than 100%. It remains a matter of faith based on great performance - this doesn’t justify any investment, let alone 3%.”
• In response, Simon argued that Ivy should not withdraw the investment it had placed with Madoff because that could lead Ivy’s clients to withdraw their money from Madoff as well, which would significantly impact their total revenue, writing:
  “Amount we now have with Bernie in Ivy’s partnerships is probably less than $5 million. The bigger issue is the 190 mil or so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17+% returns …. [to be] $1.275 Million… Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by $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?”

The suit further alleged that Ivy, Simon, and Wohl deliberately misled clients with heavy Madoff-related investments:

• In 1999, Ivy sent letters to clients falsely stating that, “we have no reason to believe there is anything improper in the Madoff operation.”
• Between 1998 and 2004, Ivy sent numerous letters to their heavily Madoff-invested clients falsely listing Ivy’s only concern about Madoff to be an “ability to manage what must be an enormous pool of capital with such consistently outstanding results.”

The lawsuit charged Ivy, Simon, and Wohl with violating New York’s Martin Act for fraudulent conduct in connection with the sale of securities; violating Executive Law 63(12) for persistent fraud in the conduct of business and for persistent illegality; and breaching their fiduciary duty in connection with the advice they gave to their clients.
 
The 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.