Madoff Feeder Funds Consider Lawsuit Against Accused Ponzi Schemer

Jan 8 2009 | 2:17am ET

Are the Bernard Madoff feeder hedge funds villains or victims of the alleged $50 billion Ponzi scheme? One is placing itself squarely in the latter camp, as the Kingate funds, which had more than $2.7 billion invested with Madoff, mull their legal options.

The Kingate funds, run by London-based FIM Advisers, are likely to join the first class-action lawsuit filed against Madoff just days after his arrest. But the firm said it might pursue its own lawsuit against the disgraced financier, either as the sole plaintiff or as a separate class-action suit.

“We can certainly commence a lawsuit on behalf of the funds, but we caution against that at this early stage because not only is that a costly step but it puts the Kingate funds and potentially all of the investors' identities in the limelight,” the Kingate funds’ directors wrote to investors in a letter obtained by MarketWatch. “We lose nothing by waiting and we gain the ability to watch as facts unfold.”

FIM’s vision of itself as an aggrieved party stands in stark contrast to the portrait of fellow Madoff feeder fund, the Ariel Fund, painted by New York University. According to NYU, Ariel was at best negligent, and at worst conspiratorial, in investing the school’s money with Madoff.

The complicated relationships between Bernard L. Madoff Investment Securities, its feeder funds, and those funds’ investors are already creating a complicated tangle of lawsuits, with investors suing both Madoff and the feeder funds, while the feeder funds themselves, like the Kingate funds, consider their own legal options.

The Kingate letter touched on the legal thicket created by the web of relationships by Madoff’s alleged scam.

“A definitional issue is emerging, namely the definition of 'customer' for this purpose,” the letter explained. “Are the two Kingate funds each a customer, meaning each becomes entitled (all other things being satisfied) to US$500,000 each or is the definition applied at the investor level, looking through each fund to each investor such that each is entitled to US$500,000?”

FIM’s Kingate Global Fund had some US$2.73 billion invested with Madoff, while another fund, the Kingate Euro Fund, also had investments with the accused fraudster. The bulk of FIM’s US$4 billion in assets under management were invested with Madoff.

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