MassMutual, Hedge Fund Unit Face Suit Over $3.1 Billion in Madoff-Linked Losses

Massachusetts Mutual Life Insurance Co., its hedge-fund subsidiary and other affiliates are facing a class-action lawsuit suit related to the fraud of Bernard L. Madoff, the New York investment adviser who admitted earlier this month to losing about $50 billion of his clients' funds in a massive Ponzi scheme.

Filed in the U.S. District Court for the Southern District of New York, plaintiffs are Arthur E. Lange of Connecticut and Arthur C. Lange of New York, who seek to represent a group of all investors who allegedly lost $3.1 billion dollars as a result of the hedge fund investing their assets with Madoff's investment firm.

Defendants are Massachusetts Mutual; its subsidiary, Oppenheimer Acquisition Corp.; Tremont Group Holdings, a Rye, N.Y.-based investment firm that specializes in hedge funds and a unit of Oppenheimer; Rye Investment Management Group; a division of Tremont; Harry Hodges, Rye's vice president of investor services who was an investment adviser; Rye Select Broad Market Prime Fund, a fund allegedly run by Madoff through his firm, Bernard L. Madoff Investment Securities; Rye Select Broad Market Fund, a fund also allegedly run by Madoff; and Tremont Partners, the Prime Fund's investment manager.

Madoff "organized his scheme so that funds of funds -- namely, hedge funds that invest in other hedge funds, set up private label funds that Madoff secretly ran for them," the suit says.

According to the suit, Tremont, Rye and Hodges breached their fiduciary duties to the plaintiffs and other class members by investing about $3.1 billion of their assets in the Rye Funds, "which used a single undisclosed investment adviser. By putting all of the class' eggs in one basket... Tremont, Rye and Hodges did not act as a reasonable prudent investor would have."

By investing their assets in the Rye Funds, Tremont, Rye and Hodges didn't conduct "adequate due diligence" and ignored "numerous red flags" that Madoff was running a Ponzi scheme, the plaintiffs contend.

The suit alleges breach of fiduciary duty against Tremont, Rye and Hodges and unjust enrichment against MassMutual, Oppenheimer and Tremont Partners.

Mark Cybulski, a spokesman for MassMutual, said the company's affiliated entities "are among the many victims of the illegal activities" perpetrated by Bernard L. Madoff Investment Securities. "We believe the claims are without merit and MassMutual will vigorously defend itself."

Montieth Illingworth, a spokesman for Tremont Group, said the firm and its counsel "are in the process of reviewing and evaluating the various complaints recently filed. It is Tremont's intention to vigorously defend itself against any and all allegations of wrongdoing."

The U.S. Securities and Exchange Commission earlier this month charged Madoff and his investment firm with securities fraud. He admitted the business was insolvent for years and estimated the losses to be at least $50 billion, the SEC said (BestWire, Dec. 16, 2008). Officials with the Justice Department and the Federal Bureau of Investigation arrested and charged Madoff, 70, with one count of securities fraud.

Steven Schwartz, an equity analyst with Raymond James in Chicago, who tracks many publicly traded U.S. life insurers, recently said he thinks a life insurer owning a hedge fund is uncommon in the industry. However, many life insurers invest in hedge funds as a kind of substitute for investing directly in equities, he said.

Some life insurers have investment management subsidiaries but the American Council of Life Insurers doesn't track non-insurance business, said spokesman Jack Dolan recently. "As a result, we don't have data on hedge fund activities."

Schwartz said it looked like none of the publicly traded life insurers his firm follows has exposure to the Madoff scheme.

Last week, MassMutual said it believed its indirect exposure in Madoff managed funds is less than $10 million and that any adverse impact "would be immaterial to its strong financial condition" (BestWire, Dec. 16, 2008).

The suit seeks compensatory and punitive damages and injunctive relief.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)