Don’t Brag About Diligence You Don’t Do

The team at Fairfield Greenwich Group is back in action, filing a motion to dismiss the claims that FGG had committed fraud by investing with Bernie Madoff without performing proper due diligence.

You’ll recall FGG as one of the biggest “bundlers” of Madoff investments, with $7.5 billion in reported losses. The “fund of funds” bragged about its rigorous due-diligence processes, which obviously didn’t work out too well here.

Now Simpson Thacher’s Mark Cunha (Cornell AB ‘77, Stanford JD ‘80) is hoping to get those allegations tossed by Judge Victor Marrero.

The amusing defense, after the jump.

FGG investors, represented by Boies Schiller and others, basically copied a Massachusetts administrative action as a civil suit against FGG, alleging fraud. But not regular fraud, negligence so bad that it can only be called fraud. According to AmLaw Daily, from the amended complaint:

The fraud claims likely would not have been made without the help of Massachusetts’ secretary of the commonwealth, William Galvin, who filed a highly detailed April 1 administrative action against Fairfield Greenwich. Stuart Singer of Boies, Schiller & Flexner, which is co-lead counsel for the plaintiffs with Wolf Popper and Lovell Stewart Halebian, told The Am Law Litigation Daily on Monday that the documents obtained in the Massachusetts case convinced him and his colleagues that this was not merely a case of gross negligence. He said that while the newly filed investors’ complaint does not allege that the Fairfield defendants knew about Madoff’s Ponzi scheme or engaged in a conspiracy to perpetrate it, their suit argues “that the Fairfield Group had promoted investments in Sentry so recklessly that it crosses the line from gross negligence into fraud.”

A novel cause of action requires a novel defense.

FGG’s defense is that surely it couldn’t have committed fraud because its own principals also lost tens of millions of dollars co-investing.  Lawyers at Simpson Thacher argue that Madoff’s scheme eluded all types of regulatory agencies and investment professionals, and as such, that FGG cannot be held responsible for investors that are desperately seeking an avenue to recover their losses without consideration of the legality of such claims.

Put another way, “we couldn’t have been super-grossly negligent because we would have been more careful with our own money.”

Here’s how FGG described its methodology:

FGG’s due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.

We would actually have been somewhat swayed by that defense, if not for the fact that they invested more than half of their funds with Madoff. In our view, a fund of funds that is consolidated 50% (and charging one and ten) in one investment is just lazy, so they don’t get the benefit of the doubt on the diligence, either.

It’s also interesting that the due diligence is at the core of the fraud complaints. The plaintiffs say that despite a lot of bluster about its work, FGG did lousy diligence, if any at all, and wholly failed to monitor the investments, despite claiming it would.

American Lawyer has the defense briefs and information on some of the other counsel involved.

Simpson Thacher partners Mark Cunha, Michael Chepiga, and Peter Kazanoff represent the Fairfield funds. Attorneys for other defendants include Andrew Levander of Dechert (Piedrahita); Glenn Kurtz of White & Case (Noel); Marc Kasowitz of Kasowitz Benson Torres & Friedman (Tucker); and Mark Goodman of Debevoise & Plimpton (Fairfield chief risk officer Amit Vijayvergiya).

Nice to see Kurtz has moved on from that whole Chrysler namecalling debacle.

Related posts:

1. Due Diligence Matters
2. BigLaw Lines up for Madoff Work
3. Diligence So Good It Looks like Insider Trading?
4. Madoff Bumps Dreier from Throne
5. “Mini Madoff” Victims Sue H&K