Pomerantz Law Firm Sues KPMG and Tremont Group in Madoff Related Derivative Action On Behalf of Rye Select Broad Market XL Fund


NEW YORK, Feb. 4, 2009 (GLOBE NEWSWIRE) -- The Pomerantz firm filed a derivative complaint today, brought by plaintiff 2005 Tomchin Family Charitable Trust, on behalf of the Rye Select Broad Market XL Fund (the "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. Marc Gross, a Partner at Pomerantz, explained the basis of the claims:



   Tremont collected millions of dollars in management fees from the
   Fund while turning a blind eye to numerous red flags indicating that
   Madoff was a fraud and that the Fund's assets were in grave danger.
   Tremont could not have done this, however, without the imprimatur
   received from the Fund's auditor, KPMG, which told the Fund that
   there was nothing to worry about and that its assets were safely
   invested. We hope this case is a major step in recovering the Fund's
   losses caused by these derelictions of duty.

The Complaint, which is the 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.

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. This operation was suspiciously miniscule given the scale and scope of Madoff's alleged activities. As Marc Gross explained, "in light of these facts, and others, KPMG had a duty to probe further."

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. Among other things, the Complaint alleges that these defendants ignored the fact that:



   a) Madoff's claimed investment strategy was incapable of delivering
      the returns he was getting. It is illogical and mathematically
      impossible for a strategy using index call options and index put
      options to have such a low correlation to the market from where
      its returns are supposedly generated. Indeed, Madoff's returns
      were unrealistically consistent, despite the volatile nature of
      Madoff's split-strike conversion method.

   b) The options contracts Madoff would have had to trade did not show
      up on any of the options exchanges. Even if the trading was being
      done over-the-counter ("OTC") -- outside of the exchanges -- a
      good number of those trades would still have to have been offset
      in the listed market, and there was no evidence that they ever
      were.

   c) Family members were running the firm:

      i.  Peter Madoff, Bernard Madoff's brother acted as chief
          compliance officer of the firm; and

      ii. Only Madoff's family was privy to the investment strategy.
          Madoff's was the only multi-billion dollar hedge fund that
          did not have outside, non-family professionals involved in
          the investment process.

   d) Madoff, despite his "success," operated under a veil of secrecy.
      He did not allow outside performance audits by investors, such as
      the Fund.

   e) Madoff had a clear conflict of interest in that, through
      discretionary brokerage agreements, it initiated trades in the
      accounts, executed the trades, and custodied and administered the
      assets. Lack of segregation of duties is a clear red flag.

   f) Investors had no electronic access to their funds accounts at
      Madoff. Thus, Madoff had the ability to manufacture paper trade
      tickets that confirmed fictitious results.

Investors who invested in the Fund are advised to contact Marc I. Gross, Esq., Dan L. Berger, or Jason S. Cowart, at Pomerantz Haudek Block Grossman & Gross LLP at 888-476-6529 or 212-661-1100. Pomerantz has prosecuted securities fraud claims for 70 years, and is regarded as one of the country's premier class action firms. The firm has offices in New York City, Chicago, San Francisco and Columbus, Ohio. Among other accomplishments, the Firm argued the landmark StoneRidge case before the U.S. Supreme Court, which established the contours of third party liability to defrauded investors. It has also served as lead counsel in cases that have recovered hundreds of millions for investors, including cases involving stock market analyst Jack Grubman, Charter Communications, and others. It is presently lead counsel in one of the most egregious stock option backdating cases involving Comverse Technology.



            

Contact Data