Rye Select Broad Market XL Fund Investors Lawsuit Against KPMG And Tremont Group In Relation To Madoff Ponzi Scheme - 02/04/2009

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Company Name(s): 
Bernard L. Madoff Investment Securities
Company Name(s): 
KPMG International
Company Name(s): 
Tremont Group Holdings
Case Name: 
Rye Select Broad Market XL Fund Investors Lawsuit Against KPMG And Tremont Group In Relation To Madoff Ponzi Scheme - 02/04/2009
Case Status: 
Lawsuit Filed
Case Status: 
Settlement Proposed
Case Status: 
Settlement Approved
Lawsuit Overview
Type of Lawsuit: 
Shareholder Derivative Action
Date Filed: 
02/04/2009
Class Period Begin: 
05/10/1994
Class Period End: 
12/11/2008
Deadline To File for Lead: 
04/03/2009
Date Settled: 
06/01/2011
Settlement Amount: 
$100,000,000
Deadline to Participate in Settlement: 
08/31/2011
Summary: 

APRIL 2011 - According to the Notice:

Securities and Time Period: (1) limited partnership interests or shares in the Settling Funds held during the period of
May 10, 1994 through December 11, 2008; and (2) limited partnership interests or shares currently held in any of the Settling Funds.

Total Settlement Amount: $100 million in cash, plus interest (“Gross Settlement Fund”). Additional monies are expected to be added to the Gross Settlement Fund from the amounts remaining in Tremont Group Holdings, Inc. after the wind down of its and its subsidiaries’ operations (“Remaining Tremont Funds”) and pursuant to the Settling Defendants’ assignment of certain legal claims (“Assigned Claims”) and litigation interests (the “Fidelity Bond Recovery”) as part of the Settlement.

Statement of the Settlement Class Recovery: Assuming that all Settlement Class Members participate in the Settlement, Plaintiffs’ Settlement Class Counsel estimate that the average recovery per damaged interest or share (before the deduction of Court-awarded attorneys’ fees and expenses and the costs
of notice and administration of the Settlement and excluding Swap Counterparties) that Settlement Class Members will receive will be approximately 5.7% of his or her net investment (i.e., the amount by which his or her contributions to a Settling Fund exceeded his or her redemptions).

Reasons for the Settlement: The Settlement of the Actions, among other things, avoids delay and the substantial costs and risks that both sides would face from continuing the lawsuits, and pays money to the Settlement Class Members and Fund Claimants. See Long-Form Notice at page 5.

FEBRUARY 2009 - On Wednesday, February 04, 2009 an investor in the Rye Select Broad Market XL Fund filed a derivative complaint on behalf of the Rye Select Broad Market XL Fund , alleging that the Fund's general partner, Tremont Partners Inc., other Tremont-related defendants (Tremont Holdings Group, Inc.; Rye Investment Management; Robert Schulman; Stuart Pologe; and Patrick Kelly), and the Fund's auditor, KPMG LLP ("KPMG"), breached professional, fiduciary and contractual duties owed to the Fund.

The Fund, which was reported to have $213 million worth of assets as of December 31, 2007, was a "feeder fund" to Bernard L. Madoff Investment Securities ("Madoff"). Today, it appears to be worth nothing.

The Complaint, which is the reportedly the lawsuit first to assert Madoff-related claims against KPMG, alleges that defendant KPMG ignored its professional obligation to carefully audit the Fund's financial statements, which included the obligation to investigate a collection of "red flags" suggesting that the Fund's assets were being used by Madoff as part of a Ponzi scheme. Specifically, it alleges that KPMG knew that the financial statements prepared by Tremont claimed that the Fund's assets were 100% invested in Treasury Bills every December 31. Yet, KPMG failed to recognize that this was a highly suspicious claim, because Madoff was supposed to be investing the Partnership's assets in a complex split strike strategy, which necessarily required the purchase and sale of a panoply of financial instruments such as stocks and derivatives. If this was actually being done, it would not have been exceedingly difficult, and even less prudent, to convert all of these investments, en mass, to cash at the end of the year. At minimum, this should have compelled KPMG to examine the alleged option trades that took place prior to the purported liquidation to cash, particularly since such trades were conducted exclusively by Madoff's own brokerage firm, so the lawsuit.

The Complaint also alleges that KMPG relied excessively upon representations made by Madoff that were passed along by Tremont, even though there were warning signs indicating the unreliability of those representations. Among other things, Madoff's auditor was Friehling & Horowitz, which had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant. The plaintiff alleges that this operation was suspiciously miniscule given the scale and scope of Madoff's alleged activities. The Complaint also alleges that the Tremont-related defendants breached fiduciary duties they owed to the Fund by ignoring numerous red flags indicating that Madoff's operation was a sham.