More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Department of Labor announced Tuesday a settlement with Ivy Asset Management, a unit of the Bank of New York Mellon, in which Ivy will pay $210 million to compensate employee benefit plans and other investors who suffered losses through investments in Bernie Madoff’s Ponzi scheme.
The settlement was reached with Ivy Asset Management LLC, J.P. Jeanneret Associates Inc., Beacon Associates Management Corp., Andover Associates Management Corp., and their current and former owners and officers.
DOL sued Ivy, Jeanneret, Beacon, Andover and their owners and officers on Oct. 21, 2010, for alleged violations of the Employee Retirement Income Security Act. The suit alleged that they “breached their fiduciary duties to a number of benefit plans by recommending, making and maintaining investments with Madoff, thus losing hundreds of millions of dollars in assets needed for the pension and health benefits of thousands of workers.”
Under the settlement agreement, DOL says that Ivy and its principals have agreed to pay a total of $210 million. Jeanneret and its owners, John P. Jeanneret and Paul Perry, have agreed to pay $3 million. Beacon and Andover and their owners, Joel Danziger and Harris Markhoff, have agreed to pay $3.5 million and relinquish a claim of more than $3.3 million for management fees.
The settlement is pending approval by the U.S. District Court for the Southern District of New York and resolves department litigation, actions brought by New York’s attorney general, and several private lawsuits and class actions brought on behalf of plans and other investors that invested with Madoff.
Douglas W. Squasoni, chief restructuring officer and chief investment officer of Ivy Asset Management, said in a statement that “Ivy is pleased to have reached an agreement that allows it to put these matters behind it.”
Phyllis Borzi, assistant secretary for DOL’s Employee Benefits Security Administration, said in the release announcing the settlement, “Nothing can make up for the years-long agony that plan administrators and participants, and individual investors were put through by these defendants and Madoff. But this settlement should go a long way toward making victims financially whole and, hopefully, closing a painful chapter for many workers and families.”
New York Attorney General Eric Schneiderman said in the same statement that the settlement “brings accountability for one of the greatest financial frauds in American history and justice to defrauded investors.” Ivy Asset Management, he said, “violated its fundamental responsibility as an investment adviser by putting its own pecuniary interests ahead of the interests of its clients. An investment adviser should apprise its clients of risks, but Ivy deliberately concealed negative facts it uncovered in its due diligence of Madoff in order to keep earning millions of dollars in fees. As a result, its clients suffered massive and avoidable losses.”
According to DOL, Ivy served as the investment adviser for Jeanneret, Beacon and Andover, and introduced those parties to Madoff. The suit alleged that “Ivy misrepresented and concealed doubts and suspicions about Madoff, including the belief that no investment with Madoff was justified.”
The suit further alleged that “Ivy concealed its suspicions because the investments made by Jeanneret, Beacon, and their plan clients and other investors generated enormous fees for Ivy and contributed significantly to the assets under Ivy’s management.” The department alleged that “Ivy made the decision not to sacrifice those financial benefits by disclosing the true nature of its doubts about Madoff, especially because management did not think the company could escape legal liability for those investments.”
Jeanneret served as the investment manager for more than 70 plans that invested with Madoff through several methods, including its own fund of funds, starting in 1991, DOL says. The department’s suit alleged that “the company and its principals made material misrepresentations and failed to disclose material facts to their ERISA-covered plan clients that invested with Madoff. These included failing to disclose that Ivy had informed Jeanneret that it was unable to perform due diligence on Madoff. Jeanneret also allegedly failed to disclose to its clients that it had entered into a new agreement with Ivy in 2007 that eliminated Madoff from Ivy’s due diligence responsibilities, and failed to disclose that Ivy recommended Jeanneret reduce plan client and investor exposure to Madoff.
The suit went on to further allege that Jeanneret “largely ignored” Ivy’s recommendations to reduce its clients’ Madoff investments and “failed to take prudent steps to investigate irregularities about Madoff and his purported trading, while taking substantial amounts in fees as the investment manager for the plans.”
According to DOL, Jeanneret and its owners and officers “allegedly violated ERISA based on their fee arrangement, which provided for higher fees for Madoff investments than for other types of investments. This arrangement gave them the ability to set their own compensation by exercising their discretion to recommend and make Madoff investments for plans.”