Madoff Acounting Firms May Be Liable

As the Madoff scandal unfolds, so are the lawsuits. And various accounting firms, who oversaw the books at Bernard L. Madoff Investment Securities LLC, may be legally vulnerable.

The National Law Journal reports that one Bloomington, Minnesota accounting firm, McGladrey & Pullen LLP, has been hit by lawsuits alleging that it failed to detect problems in two seperate Ponzi schemes -- the $50 billion investment scam by New York financier Bernard Madoff and the $3.5 billion alleged "electronics" scheme by Wayzata, Minnesota businessman Tom Petters.

McGladrey & Pullen was accused of negligence and failure in its professional duty of care in audits of two investment firms that financed the allegedly fraudulent electronics purchasing scheme by Petters in a federal suit in October. Ellerbrock Family Trust v. McGladrey & Pullen, No. 08-cv-5370 (D. Minn.). Petters, founder of Petters Group Worldwide, was indicted last year on 20 counts of fraud, conspiracy and money laundering.

A second lawsuit was filed in Connecticut state court on Jan. 30 by Maxam Capital Management. Maxam accuses its own accountants of negligence for failing to detecting the Madoff fraud, in which Maxam invested all its $280 million assets. Maxam Absolute Fund v. McGladrey & Pullen, No. FBT-cv-09-5021972-5 (Bridgeport, Conn., Super. Ct.).

The article points out that there are three levels of financial reviews: audited, reviewed and compiled. An accounting firm that compiles financial information just plugs numbers into a spreadsheet, but a full-blown audit tries to independently verify financial claims.

In the Madoff case, it has been discovered that the auditors accepted financial statements generated by Madoff's auditor from a very small unknown accounting firm. Accordingly, there is definitly reason to believe that the auditors acted negligently or with some level of knowledge.

With the astronomic size of losses at stake, lawyers will have to be creative in trying expand the scope of liability to as many people as possible.