When Probing Potential Employers, Examine Past Exposure to Madoff

If you're looking to work at a fund of hedge funds, an additional level of employer due diligence just fell in your lap: Did the firm you're talking to convince all clients to withdraw all their money from Bernard Madoff's Ponzi scheme?

A new lawsuit by New York State's Attorney General poses the threat of similar scrutiny of many other fund management firms that suspected fraud at Madoff but didn't warn clients loudly enough. Formal charges could damage a firm's client relationships and ability to attract assets, affecting employees' jobs and compensation prospects.

Andrew Cuomo charged BNY Mellon's Ivy Asset Management unit and two former top executives at Ivy for not telling clients all they'd learned about Madoff more than 10 years ago. Associated Press reports:

The state sued Ivy and two of its former executives Tuesday, claiming they had "disturbing" evidence years ago that Madoff was lying about his investment methods, but played down those suspicions because they feared losing millions of dollars in management fees.

Ivy's customers, which included several union pension funds, wound up losing $227 million when the scheme collapsed, according to the suit.

The AG's statement says Ivy and its former co-principals - CEO Lawrence Simon and CIO Howard Wohl - "sold (their clients) down the river" by failing to inform them. The company will fight the charges.

'One Wonders if We Ever Escape the Legal Issue'

E-mails released by Simon's lawyer indicate Ivy recommended clients reduce "outsized allocations" to Madoff due to the latter's inadequate disclosure. However, those e-mails do not indicate Ivy told clients about any concrete evidence Madoff was a fraud. AP also quotes an internal e-mail from 1998 in which Simon said:

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?

Those events occurred before BNY Mellon acquired Ivy in 2000. BNY Mellon shut down Ivy this past March and laid off its remaining employees.