Accounting behemoth PricewaterhouseCoopers ("PwC") has agreed to pay $55 million to settle a lawsuit that accused it of failing to properly audit a "feeder fund" that invested with convicted Ponzi schemer Bernard Madoff. In a filing in a Manhattan federal court, PwC agreed to an all-cash settlement of $55 million to settle a lawsuit brought by investors in Fairfield Greenwich Group ("Fairfield"), which was the largest of the numerous "feeder funds" that funneled billions of dollars into Madoff's massive fraud. PwC did not admit wrongdoing in agreeing to the settlement, which still must be approved by the presiding federal judge. The settlement comes nearly two months after a Washington state jury tagged another well-known accounting firm, Ernst & Young, for at least $10 million over similar alleged auditing failures at a Madoff feeder fund.
Less than one month after Bernard Madoff was arrested on suspicion of operating the largest Ponzi scheme in history, a lawsuit was filed on behalf of Fairfield investors against various Fairfield funds, Fairfield principals, fund administrator Citco Group, and the Canadian and Dutch offices of PwC. Fairfield, which was a "fund of funds" hedge fund that purported to pool investor funds and invest those funds with various hand-picked hedge funds, had in reality entrusted a significant amount of investor funds with a single fund - Bernard L. Madoff Investment Securities LLC. The lawsuit has been both complex and drawn out, including years of disputes over the issue of class certification, which saw a federal appellate court reverse a district court class certification only to have the district court re-certify the class in 2015.
According to a 202-page complaint filed in September 2009, PwC's Canadian and Dutch subsidiaries audited various Fairfield funds during the period from 2002 to 2007. The complaint alleged that, while PwC claimed that it would conduct tests of physical ownership of selected assets, tests of selected recorded transactions, and directly confirm with selected third parties (i.e. banks and customers) of amounts due to them, PwC misrepresented that the tests had actually taken place when they did not. The complaint also referenced internal PwC documents memorializing conversations with Madoff that PwC alleged "blindly accepted" without any attempts to confirm their veracity. For example, while Madoff claimed that 99% of his trades were electronic and that records were updated daily, Fairfield received delayed paper - not electronic - confirmations.
The PwC settlement is the last of a series of high-dollar settlements in this class action that brings the total recovery to over $270 million. Fairfield agreed to pay $80.25 million in November 2012, while GlobeOp Financial Services agreed to pay $10 million in February 2013. After the New York federal court re-certified the class action, Citco agreed to pay $125 million in March 2015 - leaving only the PwC defendants remaining. While the instant settlement will mark the end of the litigation, the next steps will include a claims process for class members to share in the PwC settlement. Of the $55 million, counsel for the class action members has indicated it intends to seek approximately $19 million in legal fees and expenses.