(CN) – Investors can pursue securities fraud claims against investment fund Beacon Associates and others for sinking client money in Bernard Madoff’s Ponzi scheme, and for allegedly withholding their own suspicions about Madoff from investors while profiting off the fees they generated, a federal judge in Manhattan ruled.
Bank of New York Mellon’s Ivy Asset Management is still on the hook for its alleged role in the fraud, but U.S. District Judge Leonard Sand dismissed claims against the bank itself and several people associated with Ivy and the Beacon fund.
The judge also tossed a number of state-law claims against all defendants.
Beacon had 71 percent of its assets invested with Madoff.
“Between 1995 and 2008, Beacon invested approximately $164 million with Madoff and withdrew approximately $26 million, leaving a net investment of approximately $138 million,” the ruling states.
Lawrence Simon and Howard Wohl, who are both named as defendants, formed Ivy Asset Management in 1983 and were introduced to Madoff in 1987 by a client, according to the 82-page opinion. Soon after, Ivy began investing some of its proprietary fund assets with Madoff.
Judge Sand also allowed claims to move forward against attorneys Joel Danziger and Harris Markhoff, who practiced together at the firm Danziger & Markhoff and founded Beacon Associates.
The two lawyers had immediately hired Ivy as a consultant when starting the fund, agreeing to pay Ivy 50 percent of all management fees Beacon earned and 50 percent of all fees it earned through introducing a third party to Madoff, the judge said.
Ivy’s suspicions of Madoff began to grow in 1997, due to Madoff’s intense secretiveness and investors’ inability to replicate his results using his claimed “split-strike conversion” strategy.
An Ivy employee noted that “‘understanding Madoff is like finding Pluto … you can’t really see it … you do it through inference, its effect on other objects,'” the ruling states.
A day after meeting with Madoff in 1998, and listening to him explain his trading strategy, Wohl proposed that Ivy withdraw all of its proprietary funds from Madoff.
Simon objected, allegedly not wanting to shake investor confidence. But Ivy did limit its proprietary investment in Madoff to 3 percent of the fund’s value, as opposed to the standard 6 to 7 percent, Judge Sand noted.
He said the investors “persuasively” argued that Ivy developed a strategy “through which it would not reveal the full extend of its doubts” to investors.
Ivy completely withdrew its Madoff investments in the fall of 2000, on the cusp of Ivy’s acquisition by Bank of New York, a transaction in which Simon and Wohl made $100 million each.