NY Law School Leads Litigant Pack in Suits Over Alleged $50B Madoff Fraud

Less than a week after Bernard Madoff's claimed $50 billion hedge fund fraud first came to light, lawsuits are already being filed.

Among the prime targets are apparent victims of the fraud who allegedly didn't do enough to investigate before recommending the massive Ponzi scheme to others. And front and center in this group are other hedge funds that themselves invested in Madoff's enterprise, according to the Associated Press.

"One of the first lawsuits came late Tuesday when New York Law School sued Ascot Partners LP, an investment partnership managed by the chairman of GMAC Financial Services, J. Ezra Merkin," the news agency writes. "The school said it invested $3 million with Ascot in 2006 and that is now worthless due to the 'wrongful conduct' of the defendants."

Allegedly, Ascot never informed investors that it was putting most of their money with Madoff. "They are stunned," attorney Harry Susman of Susman Godfrey, who is representing Ascot investors, tells AP. "Thursday they read about Madoff and thought nothing of it. They woke up Friday morning to learn they were involved."

Other such suits are virtually certain to follow.

"It is clear that there will be extensive litigation around this scandal and that fund-of-funds managers will be exposed to that litigation," professor Steve Thel of Fordham University School of Law tells Fortune magazine.

Such litigation will focus on two issues, Thel says: First, whether managers of hedge funds that invested in Madoff conducted reasonable due diligence. Second, whether they disclosed the nature of the investment to their own investors.

"I am very pessimistic about the ability to recover the investment itself," attorney Michael Tein of Coconut Grove, Fla., tells the National Law Journal, concerning potential litigation against the Madoff firm. "But the fraud is too big for there not to be a problem with banks, brokerage houses, clearinghouses and third party fiduciaries. It's not as if this gentleman kept all his money in-house."

Related coverage:

ABAJournal.com: "Why Wasn’t Madoff’s Alleged $50B Ponzi Scheme Discovered Earlier?"

Barron's: "Funds of Funds: Madoff's Victims or Enablers?"