New York Attorney General Andrew M. Cuomo Tuesday sued Ivy Asset Management, LLC, which is owned by Bank of New York Mellon, its former Chief Executive Officer Lawrence Simon, and its former Chief Investment Officer Howard Wohl for deliberately misleading clients about investments tied to Madoff so it could bring in millions of dollars in advisory fees.
According to Cuomo, 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, citing internal e-mails, alleges that while conducting this due diligence, Ivy learned that Madoff was not investing funds as advertised. 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.The lawsuit, folks, is another chilling reminder that people in a position to realize Madoff was running a scam deliberately chose to ignore or overlook what was going on in order to enrich themselves.
Ivy was sold to BNY Mellon Asset Management in 2000. According to the lawsuit, Simon and Wohl each received $100 million from the deal. At its height several years ago, Ivy managed about $15 billion. Earlier this year, Simon’s son Sean, who was running the company, left Ivy. In March Mellon said it was closing down Ivy.
The allegations made by Cuomo are stunning. According to Cuomo, Ivy learned as early as 1997 that there were not enough options to support Madoff’s trading strategy. “This strongly suggested that the trades Madoff had been reporting were not actually being made,” he adds in his press release. The AG also points out that 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. Still, Ivy let things slide, according to the lawsuit.
Cuomo also alleges that 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.The AG also claims that internal documents reveal that Ivy, Simon, and Wohl knew that investing with Madoff was too much of a risk.
The announcement cites an internal Ivy memorandum from 1997 about Madoff that stated, “[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 allegedly wrote “Ah, Madoff, You omitted one possibility - he’s a fraud!”
Did he blow the whistle then? Nah.
When listing managers who should be recommended to a prospective client in 2003, Wohl wrote, “Madoff (NOT!).”
Still, they let things slide. According to Cuomo, internal e-mails reveal that Simon and Wohl intentionally failed to disclose their doubts about Madoff to their clients with heavy Madoff-related investments.
Yet, 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%.”
Folks, you can’t make up this stuff.
Ready for Simon’s response? Seems, he 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, according to the AG’s announcement. Heaven forbid.
Then, according to Cuomo, Simon wrote: “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+ percent 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?”
There is more seemingly self-incriminating evidence. The lawsuit further alleges that 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 supposedly 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.”
In any case, Cuomo is seeking 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.
So much for entrusting money to fiduciaries.
Stephen Taub , who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.
