Bernard Madoff, left, from a picture taken in December

Bernard Madoff, left, from a picture taken in December

A major New Mexico  teachers’ union wants a Texas-based investment firm to pony up to $75 million for the losses New Mexico taxpayers’ experienced thanks to the spectacular fraud perpetrated by Bernie Madoff, according to a lawsuit that was unsealed Tuesday.

The National Education Association of New Mexico (NEA-NM) is taking aim at Austin Capital Management in an effort to recover three times the amount of money the state lost in what officials have called one of the biggest Ponzi schemes in history.

According to the complaint, the Texas firm is guilty of professional negligence because it missed several “red flags” when it invested money from the state’s Educational Retirement Board and State Investment Council into a hedge fund that itself was heavily invested in Bernard L. Madoff Investment Securities, LLC.

All totaled, Austin invested 7.5 percent of its capital into funds controlled by Madoff and its clients, including the ERB and SIC, lost $180 million. The losses posted by the two New Mexico state agencies totaled $25 million combined when Madoff admitted in December to bilking investors of billions of dollars over several decades, according to the 25-page document.

“All of the red flags — mainly the smoothness of (Madoff’s) returns — showed that something was wrong with Madoff,” said John Wertheim, the attorney who filed the complaint for the New Mexico chapter of the NEA. “At the very minimum you would have avoided the investment because something was henky.”

The Educational Retirement Board and State Investment Council hired Austin Capital as a money manager. In essence, the Texas firm was trusted to invest the two agencies’ funds in other hedge funds, Wertheim said. One of those Austin Capital invested in was Tremont Group Holdings, which had invested billions with Madoff, according to the complaint. Published reports have put Tremont’s investment with Madoff at more than $3 billion.

When the Madoff fraud was exposed, hundreds of investors, including the Educational Retirement Board and State Investment Council, lost money.

The complaint charges that Austin missed several clues that all was not right with Madoff’s investment strategy, including Madoff’s “abnormally consistent” returns on investments and his practices were not open and transparent.

Also, according to the complaint, Austin Capital had long-standing business and personal ties to Madoff that made them less than effective watchdogs.

“It appears Austin Capital made a conscious choice to give Madoff in particular a free pass on due diligence, given that past and present executives of Austin Capital have maintained a cozy relationship with Madoff for years,” the complaint reads.

A former Austin Capital executive has maintained a close relationship with Madoff, the complaint says. The wife of the same executive published a vanity cookbook in 1996 with Ruth Madoff, Madoff’s wife.

Wertheim said he felt good about the state NEA’s chances for recovering money, saying that there are only a handful of lawsuits against Austin Capital across the country. Austin Capital also is part of a big Fortune 500 company – KeyCorp – which could pay the liabilities, he said.

It “has the ability to cover liabilities from the Madoff scandal,” Wertheim said of the Ohio-based KeyCorp.

The National Education Association of New Mexico represents 8,000 members who are public school teachers, other public school and higher educational public employees.

The Educational Retirement Board manages a multi-billion-dollar pension portfolio and has 63,698 active members, whose ranks range from bus drivers to university professors, and 31,192 retirees.

The State Investment Council’s main responsibility is to manage New Mexico’s multi-billion-dollar permanent trust funds. It also provides similar investment management services to twenty other state agencies and New Mexico political subdivisions.

The education association’s complaint was filed in the First Judicial District Court in Santa Fe last month, but unsealed Tuesday.

The NEA-NM complaint is the latest lawsuit filed under a 2007 state law that allows a private party — a citizen, association or organization — to sue in court to recover money if it believes taxpayer money was lost because of fraud.

Frank Foy, a former investment officer at the Educational Retirement Board, filed a complaint last year to recover $90 million that was lost because of a bad investment, something he and his attorney have alleged amounts to fraud.

Foy expanded his lawsuit Tuesday by dozens of defendants to its complaint, including Austin Capital and Tremont.

Of Austin, Foy’s complaint on Tuesday specifically called into question the firm’s claims that it had “special diligence and expertise that would protect the State of New Mexico’s investment and provide returns superior to the returns that the state of New Mexico would obtain investing directly in hedge funds.”

Foy has alleged in his complaint that a pay-to-play culture pervaded the state’s investment agencies under Gov. Bill Richardson.

Several defendants, including Richardson, State Investment Officer Gary Bland and Educational Retirement Board Chairman Bruce Malott, have vigorously denied Foy’s allegations.