Class Action Suit Against Hedge Fund that Invested in Madoff Feeder Fund Highlights the Standard of Care to which ERISA Fiduciaries are Held

On February 12, 2009, the Pension Fund for Hospital and Health Care Employees (Fund) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Austin Capital Management Ltd. (Austin) for millions of dollars of losses due to allegedly improper investments in securities controlled by Bernard L. Madoff and his company.  Specifically, the complaint claimed that Austin “directed significant amounts of investment, estimated at present to be $184 million, into Madoff-related securities, virtually all of which were lost when the Ponzi scheme became known in December 2008.”  As a result, the complaint alleged that Austin failed to prudently invest the Fund’s assets, in violation of the Employee Retirement Income Security Act of 1974 (ERISA).  Then, on June 12, 2009, Spector Roseman Kodroff & Willis, P.C. (SRKW), a Philadelphia-based law firm, filed a second class action against Austin for more losses due to improper investments in securities controlled by Madoff.  This suit, brought on behalf of the Pittsburgh-based Board of Trustees of the Steamfitters Local 449 Retirement Security Fund and a nationwide class of similar funds, similarly alleged that Austin failed to prudently invest the benefit funds’ assets, in violation of ERISA.  These class actions are two of the many suits that have been brought in recent months against the “feeder funds” that contributed to Madoff’s Ponzi scheme, or funds that invested in such feeder funds.  The case highlights three issues relevant to hedge funds: (1) the question of when an alleged class of plaintiffs bringing suit against a hedge fund will be certified by a court; (2) the standard of care applicable to ERISA fiduciaries; and (3) the standard for consolidation and transfer of MDL cases.  The article analyzes each of those issues in detail.

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