On the eve of closing arguments in one of the first lawsuits to proceed to trial stemming from Bernard Madoff's $65 billion Ponzi scheme, a group of investors suffering collective losses of approximately $60 million have reportedly reached a settlement with a Connecticut bank they claim should have discovered the fraud. Westport National Bank, in Westport, Connecticut, was accused by over 200 investors of negligence in failing to exercise adequate caution in its role as custodian overseeing more than $60 million of Madoff investments. The trial, which began last month, was scheduled to begin closing arguments last week before the sides reached a tentative settlement that could potentially return a fraction of investor losses. The recovery, even if fractional, could be a welcomed event by those investors since their status as indirect investors has prevented any recovery from the bankruptcy trustee overseeing the liquidation of Madoff's brokerage firm.
Westport National Bank ("Westport") is a small regional bank with branches scattered throughout Connecticut. Beginning in 1999, many investors began moving their Madoff accounts to Westport, which agreed to serve as custodian of the accounts. Investors contended that they were under the impression that the bank would take possession, as well as verify the existence, of their assets by virtue of its custodial position. This apparently was not done, as the accounts maintained by the bank were among those lost when Madoff's scheme was revealed in December 2008.
At trial, it was revealed that Westport's custodial department consisted of a single individual, who testified that "thick envelopes" containing trade confirmations were reviewed from time to time only "out of curiosity," and were usually placed directly in a filing cabinet. Testimony from other bank officials was equally damaging, with Westport's former president unable to answer questions about how the bank maintained accurate records for its investors and even confessing he was unsure as to what due diligence was conducted to confirm that customer assets on account with Madoff did in fact exist.
A reported settlement will not end the bank's exposure to Madoff, though. The trustee for Madoff's broker-dealer, Irving Picard, has also filed a lawsuit against Westport seeking $28 million, and the Office of the Comptroller of the Currency previously settled allegations with the bank that unsafe and unsound banking practices existed. The bank has lost over $20 million since 2009, and the Wall Street Journal reports that Westport's liability insurance was cancelled due to an exemption covering bankruptcies like that in the Madoff case.
More Ponzitracker coverage of the Madoff case is here.