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Canadian twist to Madoff Ponzi scheme settled out of court

Bernie Madoff confessed to the Ponzi scheme in 2009.
Bernie Madoff confessed to the Ponzi scheme in 2009. - Postmedia photo illustration

The Canadian lawsuit had alleged PwC should have 'uncovered' Madoff's Ponzi scheme before his confession

An attempt to have the Supreme Court of Canada hear a case involving allegations that the former auditor of three offshore investment funds should have discovered Bernie Madoff’s massive Ponzi scheme has been called off, as a settlement has been struck between the ex-auditor and the funds’ liquidators.

The investment funds — Fairfield Sentry, Fairfield Sigma and Fairfield Lambda — were incorporated in the British Virgin Islands and had parked billions of dollars in assets with Madoff’s investment firm, New York-based Bernard L. Madoff Investment Securities. In 2009, after Madoff had confessed, the three funds were placed into liquidation.

Lawsuits were filed by the Fairfield funds and their liquidators in 2012 against the auditors of the funds’ financial statements for 1999 to 2007, arms of the global accounting firm PricewaterhouseCoopers in both Canada and the Netherlands, as well as a partner at the Canadian operation.

The Canadian lawsuit alleged PwC should have “uncovered” Madoff’s Ponzi scheme before his confession. Since this did not happen, the funds remained invested with Madoff’s firm and claimed they had suffered approximately $2.5 billion in damages, an Ontario appeals court decision said in 2018.

PwC denied the funds suffered any damage around the time of their audits, and alleged the funds had actually withdrawn about $1 billion more from Madoff’s firm than they had invested from approximately the time of the first audit in Canada for 2006 to the discovery of the Ponzi scheme.

Ontario courts dismissed the lawsuit after PwC moved for a summary judgment, which can resolve a case without a full trial. In October 2018, the liquidators applied for leave to appeal to the Supreme Court of Canada.

That attempt has now been shelved. A Supreme Court official told the Financial Post in an email that the application has been discontinued and the file closed.

A statement from PwC’s Canadian arm to the Financial Post said that both it and the PwC network firm in the Netherlands had resolved the claims made “by and against” the liquidators of the Fairfield funds.

According to the statement, the settlement calls for the Fairfield funds to pay PwC approximately $1.6 million in costs awarded by the Ontario courts “out of funds escrowed with the court by the Fairfield Funds as security for costs, the balance of which shall be returned to the Fairfield Funds.”

PwC also said that, under the settlement, the funds’ application for leave to appeal to the Supreme Court would be withdrawn.

The liquidators will receive up to US$2 million to resolve all their claims in the Netherlands and Canada, “with mutual releases being given by all parties,” PwC added. “Neither PwC firm has admitted to any wrongdoing and both firms are entering into the settlement solely for the purpose of bringing this matter to an end and to save further litigation costs.”

Kenneth Krys, a liquidator of the Fairfield funds, said in an email that the liquidators, “mindful that there is inherent risk in successfully reversing decisions on appeal, and there are costs that come with such proceedings, approached PwC regarding the possibility of exploring a global settlement.”

A settlement agreement was executed in April, Krys said, which had the support of the majority of a liquidation committee and was sanctioned by a BVI court.

“The liquidators are not in a position to share the details of the settlement as the terms are subject to confidentiality undertakings,” he added.

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