New Mexico Teachers Union Sues Madoff-Linked Fund Of Funds

Dec 1 2010 | 10:16am ET

New Mexico's teachers' union has filed another lawsuit against defunct fund of hedge funds firm Austin Capital Management, seeking to recoup losses suffered by its pension in the Bernard Madoff Ponzi scheme.

The National Education Association of New Mexico filed its new lawsuit earlier this month. The union's first lawsuit against Austin was dismissed earlier this year after a judge ruled it overlapped with a lawsuit filed by former New Mexico Educational Retirement Board investment office Frank Foy.

The NEA-NM is suing over losses suffered by the NMERB and the State Investment Council. Under New Mexico law, third parties are permitted to sue for recovery of losses of public money. New Mexico lost some $25 million in the Madoff scam through investments with Austin, which the NEA-NM claims failed to do proper due diligence.

"A key purpose of due diligence—and therefore a critical reason to hire a firm like Austin Capital—is to detect and avoid fraud," the complaint said.

The lawsuit alleges that Peter Schoenheimer, the founder of Austin, which was shut down by parent company KeyCorp. in the wake of the Madoff scandal, had an uncomfortably close relationship with the Madoffs. Schoenheimer's wife published a cookbook with Madoff's wife in 1996 and "the Madoffs and Schoenheimers traveled in the same New York social circles, until Madoff's arrest." A Schoenheimer family member also worked for Cohmad Securities Corp., which was co-owned by Madoff.

"Whether one blames Austin Capital's unwillingness to perform due diligence regarding Madoff on the long-standing relationship company executives had with the fraudster or on the perverse incentives that KeyCorp…. created with their bonus compensation, the firm's obvious failure to act on numerous 'red flags' shows a reckless absence of due diligence," the complaint concludes.

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