Ivy Dodges Breach Claims Tied to Madoff Investments

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By Jo-el J. Meyer

Sept. 16 — The investment management firm Ivy Asset Management won't be held liable for its role in steering a New York multiemployer pension fund to invest in Bernard L. Madoff's now notorious Ponzi scheme, the U.S. District Court for the Southern District of New York ruled.

Granting Ivy Asset's motion to dismiss, Judge Paul G. Gardephe found that the trustees of the Upstate New York Engineers Pension Fund lacked constitutional standing to bring fiduciary breach claims because the fund had reaped millions of dollars in investment returns from the Madoff investment and thus hadn't suffered a financial loss.

Ivy Asset is one of a small handful of investment management firms that were sued under the Employee Retirement Income Security Act for steering union and multiemployer pension funds—primarily funds located in New York—to invest in Bernard L. Madoff Investment Securities LLC (BMIS). Many of the pension funds took legal action against Ivy Asset and others, such as J.P. Jeanneret Associates Inc., after the Department of Labor in 2009 issued guidance instructing plans on what steps they should take in response to the Madoff scandal.

$5.7M Invested, $33M Withdrawn

Ivy served as investment manager for the Upstate New York Engineers Pension Fund throughout the 1990s. At the advice of Ivy, the fund invested $5.7 million in BMIS. The fund saw tremendous investment gains and through the years withdrew more than $33 million from BMIS. In fact, the fund got so prosperous from the BMIS investment that the trustees amended the plan at one point to increase benefits it paid to fund participants.

At the time Madoff's Ponzi scheme was uncovered in 2008, the plan's investment account with BMIS was $51 million. The $51 million was wiped clear after the scheme was discovered.

The fund sued Ivy and its owners, claiming they breached their ERISA fiduciary duties by steering the fund to invest in BMIS when they had reason to know or suspect that Madoff was operating a Ponzi scheme. The fund also sued Bank of New York Mellon Corp., which acquired Ivy in 2000. The defendants asked the court to dismiss the lawsuit on grounds that the fund trustees hadn't sustained an actual injury sufficient to establish constitutional or ERISA standing.

Gardephe agreed with the defendants and dismissed the lawsuit. He found that the trustees suffered no legally cognizable loss because they were essentially seeking fictitious profits. The trustees' net investment in BMIS was $5.7 million, and the trustees recovered that and more when they withdrew nearly $33 million in profits before the Ponzi scheme was discovered, the court found.

The court rejected the trustees' argument that the fund suffered a financial loss because, had Ivy and its owners disclosed to them that they had suspicions in the late 1990s about BMIS, the fund would have terminated its BMIS investment and wouldn't have amended the plan to increase benefits. The court pointed out it was the trustees' decision to amend the plan to increase benefits, and Ivy hadn't advised them to do so.

In addition, the court dismissed the claims against BNY Mellon. The court said the fund trustees hadn't pleaded facts showing that BNY Mellon played an affirmative role in any alleged fiduciary breach.

The trustees were represented by O'Donoghue & O'Donoghue, Washington, and Linsey Law Firm, New York. The defendants were represented by Cleary Gottlieb, New York and Washington.

To contact the reporter on this story: Jo-el J. Meyer in Washington at jmeyer@bna.com

To contact the editor responsible for this story: Phil Kushin at pkushin@bna.com

Text of the opinion is at http://www.bloomberglaw.com/public/document/Trustees_of_the_Upstate_New_York_Engineers_Pension_Fund_v_Ivy_Ass.