Madoff clients' lawsuits look to others for recompense

Hoping to restore the broken nest egg Anwar and his wife had built to send their two children to college, Stewart sued the Fairfield Greenwich Group and its principals for alleged negligence, failure to perform fiduciary duty and unjust enrichment.

"If they had been doing even a modicum of what they were supposed to be doing, they would have vetted Bernie Madoff to begin with. And they would have checked on him as time went on," says Stewart, a partner at Lovell Stewart Halebian in New York. "They weren't doing any due diligence of any kind."

Although Fairfield Greenwich says the investment company and its executives were fooled by Madoff, too, Stewart calls that claim "the height of arrogance."

Molchatsky, a 61-year-old New York resident forced into retirement by Parkinson's disease, is taking a legal gamble to recover her life savings by suing the SEC.

In most cases, federal agencies are immune to negligence lawsuits such as the one filed on Molchatsky's behalf by Howard Elisofon, a Herrick Feinstein law partner in Manhattan. But the Madoff scandal includes reports that the SEC was repeatedly warned about the financier by Massachusetts fraud investigator Harry Markopolos and others.

Elisofon argues that instead of mounting a full investigation in response to the warnings, the SEC violated its own procedures by essentially kicking the tires in reviews that found no major wrongdoing with the money manager's operation.

"If they had exercised even a modicum of care, they would have found a fraud," says Elisofon.

The SEC has declined to comment on its Madoff oversight because the issue is the subject of an internal investigation by agency Inspector General David Kotz.

Several attorneys not involved in the case say the legal strategy represents a long-odds effort at best. But Molchatsky, who says the fraud may force her to sell her suburban New York City home, remains hopeful.

"If the government knew you were being stalked and it didn't stop the stalker, then you should be able to sue the government," she says.

Like Anwar, Inversiones Mar Octava Limitada, the investment firm based in Talcahuano, Chile, raises the legal claim about a fiduciary's duty to investors — but aims it at one of the world's most prominent banks.

"They had invested through Banco Santander, and they ended up with Mr. Madoff without realizing it," says Michael Hanzman, the Florida attorney representing the company.

The federal complaint in the proposed class-action lawsuit charges that the website of Optimal Investment Services, a fund controlled by Banco Santander, stated that it subjected proposed investments to "detailed scrutiny," and based decisions "on a careful analysis of many investment managers."

But the lawsuit charges that carelessness and a "lack of scrutiny" of Madoff "falls far short of the legal duties owed" to the Chilean company and similar investors.

"Indeed, there was a plethora of red flags that would have alerted any reasonable investor that Madoff was running a Ponzi scheme," the lawsuit charges.

Banco Santander and co-defendants in the case say they were fooled by Madoff. The Spanish bank has offered its private banking clients $1.8 billion in shares for losses tied to the alleged Madoff fraud. The bank said last month that 70% of its customers had agreed to accept the compensation offer.

'Any number of red flags'

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