Investor Seeks to Hold Ernst & Young Liable for Madoff Losses 

Court papers show FutureSelect invested about $200 million

Ernst & Young failed to serve as a gatekeeper for a Washington investment firm that sank millions of dollars into Bernard Madoff’s investment firm and should be held liable for its losses, the firm’s lawyer told a jury Wednesday.

“I’m going to prove to you that Ernst & Young had a job. I’m going to prove to you that Ernst & Young didn’t do their job,” said Steven W. Thomas, a lawyer representing FutureSelect Portfolio Management Inc.

Court papers show FutureSelect, of Redmond, Wash., invested approximately $200 million in feeder funds that pooled investors’ cash and funneled it Mr. Madoff’s way, until his arrest in 2008 exposed a massive Ponzi scheme in which investors lost some $17 billion.

In 2010, FutureSelect, which lost all of its investment, filed suit in a court in Washington state against Ernst & Young, one of the feeder funds’ auditors, alleging negligence and seeking to recover millions of dollars in losses.

James Bennett, an attorney for Ernst & Young, on Wednesday told the jury that “Ernst & Young did its job, full stop,” according to a video feed of the trial’s first day provided by Courtroom View Network.

“We regret, we sympathize with anybody who lost money as a result of that fraud. But Ernst & Young is not the cause of those losses,” Mr. Bennett said.

In his opening statement to the jury, Mr. Thomas said the Big Four auditing firm failed to perform such essential auditing tasks as confirming the existence of the securities Mr. Madoff purported to trade for investors.

Nor did it look at the credentials of Mr. Madoff’s auditor, “one man in a little office,” said Mr. Thomas.

Instead, Mr. Thomas said Ernst & Young relied on statements from Mr. Madoff, who is serving a 150-year prison sentence, or his investment firm, which is liquidating, when it blessed various financial statements related to investments overseen by Mr. Madoff as containing accurate information.

“Ernst & Young should have never signed its name and issued that opinion,” Mr. Thomas said.

Mr. Bennett said the fraud went undetected by regulators, banks, sophisticated investors and multiple auditors for several decades. He said the onus was on investors like FutureSelect to research its investments, and he said they could have concluded that the returns that Mr. Madoff’s firm offered “were too good to be true.”

Mr. Thomas acknowledged the many who were duped by Mr. Madoff, including other auditors and FutureSelect’s founder.

“We’re not going to tell you Ernst & Young audits were the only factor” influencing FutureSelect’s decision to invest with the feeder fund. “They weren’t.”

But he said if the auditor had refused to sign off on financial statements related to Madoff investments, that “would have been a huge red flag” that likely would have prevented FutureSelect from sending its investors’ money Mr. Madoff’s way.

“Auditors matter as the gatekeepers, and it’s this reliance by investors like FutureSelect that imposes the public interest responsibility,” Mr. Thomas said. “What Ernst & Young says matters.”

Mr. Bennett said that it was “never Ernst & Young’s job to audit Bernie Madoff, and FutureSelect knew that.” The direct cause of FutureSelect’s losses wasn’t Ernst & Young, he said, but rather was “Bernie Madoff and the fraud he perpetrated.”

Judge Beth M. Andrus of the King County Superior Court in Seattle is presiding over the trial, which is expected to last for about a month.

Source: WSJ – Investor Seeks to Hold Ernst & Young Liable for Madoff Losses

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