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Unformatted text preview: 1 The Madoff Fraud: How Culpable Were the Auditors? By STEPHEN GANDEL Wednesday, Dec. 17, 2008 The city of Fairfield, Conn., lost money in the Madoff fraud. Attending a meeting in Fairfield on Dec. 15 were (front row, from left) attorneys Robert Morris and Robert Saxl and Tom Bremmer, the city's chief of staff Douglas Healey / AP Add the nation's largest accounting firms to the list of watchdogs and regulators that didn't catch the multibillion-dollar Madoff investment scam . KPMG, PricewaterhouseCoopers, BDO Seidman and McGladrey & Pullen all gave clean bills of health to the numerous funds that invested with Bernard Madoff and his asset- management firm. Clients say the large accounting firms signed off on statements that said the Madoff investment vehicles had billions of dollars in assets as well as an unlikely track record showing years of always-positive returns. The billions have vanished, and the impressive returns now look to have been made up. See the top 10 financial collapses of 2008. "It's surprising that the auditors for these various funds didn't identify that the underlying assets were not there ," says Christopher Wells, a partner at the law firm Proskauer Rose who specializes in hedge funds. "You would think that is something they test." On Tuesday, New York Law School sued BDO Seidman along with the fund it audited, Ascot Partners. Investors in Ascot, which was managed by GMAC chairman J. Ezra 2 Merkin and invested all its money with Madoff, lost a reported $1.8 billion. New York Law School said its endowment fund had $3 million in Ascot. It's the first suit to name an accounting firm in connection with the Madoff case. Lawyers predict lawsuits against the other accounting firms will soon follow. "The fact that they didn't catch the fraud leads me to believe that they blew it," says Scott Berman, a lawyer at Friedman Kaplan Seiler & Adelman who has reached settlements with auditors in similar cases in the past. "I am going to look hard at whether there is liability there." The difference between this case and other hedge fund frauds in which auditors have been held liable is that Madoff was not actually a client of any of the large auditing firms. Madoff's firm used the small New City, N.Y., accounting firm Friehling & Horowitz which reportedly had offices in a strip mall and had only three employees, including a secretary, an accountant and a partner in his seventies who lived in Florida. Industry experts now say that the size of Madoff's accounting firm should have been a giant red flag. Of course, many of the people who invested money with Madoff didn't know they were relying on a rinky-dink accounting firm to watch over their investments. That's because more than half of the $25 billion-plus in losses investors have so far claimed came to Madoff through so-called feeder funds. These funds were set up by outside firms, which would then funnel the money they received from investors to Madoff. Unlike Madoff's, all the firms running feeder funds had well-known accounting firms listed as their...
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- Spring '08