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ALBUQUERQUE — The two lawsuits seeking to recover money lost in the Madoff scandal made public yesterday may require the help of a traffic cop.
In this case, a traffic cop who also happens to be a state court judge would do the trick.
Both lawsuits – one filed by Frank Foy, the other by the National Education Association of New Mexico – seek to recover damages from Texas-based Austin Capital Management under a state statute that allows a private party to sue to recover money believed lost because of fraud.
The lawyers who filed the cases also agree that Austin Capital is liable for $25 million, plus damages, that the state lost when New York investor Bernie Madoff admitted to bilking investors of billions of dollars.
The difference of opinion involves whose lawsuit should get first dibs on trying to recover that money.
“The first filed case proceeds,” Victor Marshall, attorney for Foy, the former Educational Retirement Board investment officer, said in an e-mail Wednesday. Foy’s complaint was filed in First Judicial District Court in Santa Fe April 12, compared to the NEA-NM suit, which was filed May 12.
John Wertheim, attorney for the NEA-NM, however, says his client has the stronger case.
“If there is no link that is not a good way to try to collect that money, because you have to have that link. If there is not a link, I do not believe you can collect the losses, whereas in our complaint we have a link between the failure to do due diligence, the failure to do their homework and the losses.”
At stake is up to $75 million in recovered money. The state law in question — the Fraud Against Taxpayers Act — allows a private party to collect up to three times the amount of money that is lost if a fraud is found to have been committed.
Both the Educational Retirement Board and State Investment Council hired Austin Capital as a money manager. The Texas firm was trusted to invest the two agencies’ funds in other hedge funds. 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.
Fraud Against Taxpayers Act
The disagreement between the two attorneys highlights a once-obscure state law passed in 2007 that has grabbed the spotlight over the past six months.
In January, a lawsuit filed last year by Foy was unsealed to reveal that Foy was seeking the recovery of $90 million of taxpayers’ money lost in a bad investment.
Foy said he believes the money was lost due to fraud and has in that earlier complaint alleged that a pay-to-play culture pervaded the state’s investment agencies. The defendants in that suit have vigorously denied the allegations.
Both of the lawsuits made public this week under the Fraud Against Taxpayers Act were presented first to the Attorney General’s Office.
Under the law, the Attorney General has 60 days to decide whether to take up the litigation and prosecute. In both cases, the Attorney General decided against taking that action.
Wertheim said the Attorney General’s office likely passed on litigating his case because of a lack of resources.
Now the two cases are competing to become the complaint of choice to go after recovering the money through the Madoff losses.
Marshall points to the language of the Fraud Against Taxpayers Act to argue that Foy has timing on his side.
The law reads, “When a person brings an action pursuant to this section, no person other than the attorney general on behalf of the state may intervene or bring a related action based on the facts underlying the pending action.”
Wertheim, meanwhile, argues that his firm has done much more investigating, as evidenced by information the suit contains about an ongoing business relationship between Austin Capital and Madoff.
The NEA-NM complaint says that a former Austin Capital executive has maintained a close relationship with Madoff. The wife of that executive published a cookbook in 1996 with Ruth Madoff, Madoff’s wife. A relative of that executive, meanwhile, worked at a corporation that Madoff partly owned and that shared space with Bernard L. Madoff’Investment Securities, which is also named in the complaint.
“I’m pretty confident, as long as as you get someone who has looked at a complex piece of litigation, the answer is fairly obvious” who has the stronger suit, Wertheim said.
That said, Wertheim agreed that the question remains who gets first dibs to try to recover the money.
“Somebody’s got to figure that out and I’m not suggesting that I am not going to take some responsibility for helping the courts figure that out,” Wertheim said.
Marshall agreed that the courts have the authority to settle the question.
