An attorney for a New Mexico teachers union says two state investment agencies would not have lost tens of millions of dollars in the Bernard Madoff scandal had a Texas-based investment firm done its job.
The National Education Association of New Mexico has sued Austin Capital Management on behalf of the state Educational Retirement Board and the State Investment Council, claiming the firm violated its fiduciary duty and was negligent.
The lawsuit, unsealed Tuesday by a state district court in Santa Fe, claims Austin Capital failed to perform due diligence on its investments with Madoff and missed red flags that had caught the attention of other firms. For example, investment returns reported by Madoff were consistent despite a volatile market, and trading activity didn’t match Madoff’s claims.
The retirement board and investment council lost as much as $25 million in public money due to Austin Capital’s actions, according to the National Education Association’s legal team.
“We feel very strongly that Austin Capital Management didn’t do their homework on Bernie Madoff and that’s why the losses occurred,” John Wertheim, an Albuquerque attorney who represents NEA, said Wednesday. “The facts are pretty simple. There were a number of red flags.”
A spokeswoman for Austin Capital said the firm was aware of the lawsuit and was preparing a written statement.
The investment firm, which is part of financial services company KeyCorp’s asset management division, has been named in similar lawsuits filed across the country, all alleging the company failed to invest prudently.
Wertheim said the New Mexico lawsuit makes a direct connection between Austin Capital and Madoff, who faces up to 150 years in prison for swindling tens of billions of investors dollars in one of history’s biggest frauds.
Madoff pleaded guilty in March to 11 felony counts including securities fraud and perjury.
The lawsuit alleges that Austin Capital chose to ignore the warning signs of fraudulent investments, in part because one of its former executives, Pierre Schoenheimer, had a close relationship with Madoff and his family for years.
According to the lawsuit, Schoenheimer co-founded Austin Capital Radix, a hedge fund that was marketed by Austin Capital, and Schoenheimer’s wife and Madoff’s wife co-wrote a cookbook together in the 1990s.
The lawsuit also states the New Mexico investment entities hired Austin Capital to detect and avoid fraud through the due diligence that the firm advertised in its marketing materials, but that Austin Capital hoped to skirt that responsibility by investing in a hedge fund managed by another firm, Tremont Partners. Tremont, in turn, invested with Madoff.
“Even though they knew all along, in our view, that their money was going to Bernie Madoff, they hid that fact by running the money through Tremont,” Wertheim said.
The lawsuit also alleges that Austin Capital employees were charged with both marketing investment products and due diligence, which Wertheim said made for a “terrible conflict of interest” and “created an incentive to turn a blind eye.”
The lawsuit, brought under the New Mexico Fraud Against Taxpayers Act, seeks up to three times the damages the State Investment Council and Educational Retirement Board lost through the Madoff scam. The state has since ended its relationship with Austin Capital.
Wertheim said he’s cautiously optimistic that his clients will be able to recover damages because KeyCorp has indicated that it’s insured to cover Madoff-related liabilities.
The NEA lawsuit is the second to be filed in New Mexico that names Austin Capital as a defendant with regards to Madoff investment losses.
In the other case, a former investment officer for New Mexico’s educational pension program alleges that political considerations in Gov. Bill Richardson’s administration improperly influenced investment decisions.
Wertheim said it will be up to a state district judge to determine which case moves forward. He said he believes his clients have a “good shot” of having their claims expedited by the court because the investigation by the NEA legal team has not turned up any link between Madoff and political considerations in New Mexico.
Charles Bowyer, executive director of NEA New Mexico, said the association’s lawsuit has nothing to do with any political agenda.
“There was a view that there was this surgical ability to say here’s a place where we believe some money can actually be recovered that will benefit our members,” Bowyer said.
The association represents nearly 9,000 public school teachers and employees from across the state.
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