Trustee Picard Sues Madoff's Brother, Sons, Niece

We don't have a wall of shame at Fordham, but if we did two of the first on it might be Peter Madoff and Shana Madoff, if the allegations of Irving Picard, liquidator of Bernard Madoff 's enterprise, prove to be true. As a law school that prides itself on training lawyers in the service of others it is painful to read that two alumni are among

"the Family Defendants’ (whose) management responsibilities extended through trading operations, customer relationships, and legal and regulatory compliance. Yet the Family Members were completely derelict in these duties and responsibilities. As a result, they either failed to detect or failed to stop the fraud, thereby enabling and facilitating the Ponzi scheme at BLMIS. Simply put, if the Family Members had been doing their jobs—honestly and faithfully—the Madoff Ponzi scheme might never have succeeded, or continued for so long."

The Securities Investor Protection Corporation (SIPC) appointed Picard trustee to liquidate the fallen house of cards and to recover any assets. That mandated a thorough search for third parties from whom recovery might be made for the defrauded investors.

According to the SIPC Complaint, filed October 2, 2009, Peter - Bernard's brother - and his daughter Shana are graduates of Fordham Law School. Both were highly placed investment professionals who held key positions in Bernard L Madoff Investment Securities, LLC. (BLMIS)

According to the SIPC complaint the Madoffs used the company as a

"personal piggy bank. Each of the Family Defendants took huge sums of money out of BLMIS to fund personal business ventures and personal expenses such as homes, cars, and boats. The Family Defendants’ misappropriations of BLMIS customer funds ranged from the extraordinary (the use of BLMIS customer funds to pay for multi-million dollar vacation homes) to the routine (the use of BLMIS customer funds to pay their monthly credit card charges for restaurants, vacations, and clothing). The means of diverting those customer funds ranged from the simple (merely transferring money to the Family Defendants’ own personal bank accounts) to the complex (fabricating the purchases of securities on the Family Defendants’ personal BLMIS investment advisory account statements and then cashing out of those positions)."

Comment [5] of the preamble of the American Bar Association's Model Rules of Professional Conduct - the template for nearly every state's ethics rules - declares "A lawyer's conduct should conform to the requirements of the law, both in professional service to clients and in the lawyer's business and personal affairs. ". Peter, the former number 2, and compliance officer, like his daughter who succeeded him as compliance officer, faces not only the trustee's effort to strip him of his wealth but also disbarment in New York.

Shana Madoff , the SIPC alleges

"held herself out as Compliance Counsel, in-house Counsel, and Compliance Director of BLMIS. Shana was an experienced investment professional who, along with her father, Peter Madoff, and her uncle, Bernard Madoff, was responsible for overseeing all compliance-related activities at the Company. Shana was a member of the SIFMA Compliance and Legal Division Executive Committee, the FINRA Consultative Committee, STANY, the NASD’s Market Regulation Committee, the SIFMA Self-Regulatory and SRO Committee, and the SIFMA Continuing Education Committee."

There is a lot to be said about the role of the two lawyers, but Shana held herself out as "in house counsel" for the company. She assumed duties to the company to protect the assets of the company which the SIPC alleges paid family members inordinate compensation without business justification.

What is the standard of care that she owed as a fiduciary? One factor is that the lawyer's duty of confidentiality did not bar disclosure of such waste of assets as the SIPC describes. A lawyer is released from the duty of confidentiality and may reveal defalcations of a client, according to ABA Model Rule 1.6 (b):

"(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;

(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services".

Shana Madoff is vulnerable not only for her own alleged looting of the company but also for her failure to act to prevent perpetuation of the massive fraud. She breached a duty to the investors when she certified compliance that could not possibly be a fact to which she could aver as a lawyer who had conducted competent investigation - since the Trustee's interim report shows that BLMIS conducted no trades for over 20 years.

The Madoff family may be stripped of its entire wealth, which the Trustee alleges to be $198 million.

Because she was chief compliance officer every fraud that took place on her watch is something to which Shana Madoff's defalcations may have substantially contributed. She reassured investors that all was well when in fact all was sham.