Foundation socks Merrill with $33M suit over Madoff investment

Just months before his now-infamous Ponzi scheme collapsed, Bernie Madoff snookered a Merrill Lynch adviser who was attempting to perform due diligence on him for a foundation that serves the elderly, according to a lawsuit filed in federal court in Florida last week.

In the complaint, MorseLife Foundation is seeking at least $33 million in damages from Merrill Lynch & Co. Inc., claiming that the New York financial advisory firm was taken in by Mr. Madoff during a face-to-face meeting just several months before his fraudulent investment empire collapsed.

Now in prison for running a $65 billion Ponzi scheme and wiping out the fortunes of a lengthy list investors, he met with the Merrill adviser, John S. Lacy, in July of 2008.

Mr. Lacy, a vice president with Merrill’s global wealth management group in West Palm Beach, along with foundation executives, was part of a group in a due diligence meeting on behalf of MorseLife, which filed the lawsuit last Friday in U.S. district court in Miami.

In its lawsuit, the foundation said it hired Merrill in 2006 to manage a limited amount of the portfolio with Mr. Madoff, according to the lawsuit.

As of July 2008, the portfolio was worth $32.4 million.

After 2006, with the hope of building its relationship with the foundation, Merrill Lynch expanded its services, which included advising MorseLife on its investment policies, strategies, asset allocation risk tolerance and specific investments not managed by Merrill Lynch, the lawsuit claims. MorseLife in its suit is alleging that Merrill Lynch was negligent.

Bill Halldin, a Merrill Lynch spokesman, said Merrill Lynch had nothing to do with the foundation’s decision to invest with Mr. Madoff. “The foundation made the decision to invest [with Madoff] 10-years before it hired Merrill Lynch,” he said. “We had no role in their investment decision as to Madoff.”

“We had no responsibility for the Madoff investments, and it was never held in a Merrill Lynch account,” Mr. Halldin said. “The foundation is trying to find someone to blame for its own investment decisions.”

When asked whether Mr. Lacy, the adviser, did meet with Mr. Madoff last year, Mr. Halldin said the firm would have no other comment about the matter.

Mr. Lacy at first wanted to move some of the foundation’s assets out of Mr. Madoff’s control, but that changed after meeting Mr. Madoff in New York in late July, the lawsuit said.

“Lacy completely reversed his position,” the complaint states. “After the July 15, 2008, meeting with Mr. Madoff in his New York office, Lacy told the representatives of MorseLife who attended the meeting that he ‘did not see a downside’ and would re-characterize the Madoff portfolio as an investment in large-cap stocks hedged with a maximum of 5% potential loss compared to an investment in U.S. Treasury bills.”

The complaint states: “Lacy explained that the Madoff Portfolio was a conservative investment as opposed to a hedge fund or other alternative investment.”

Mr. Lacy’s analysis was “highly favorable” of the foundation’s investment with Mr. Madoff and “was very complimentary” of Mr. Madoff and his firm, Bernard L. Madoff Investment Securities LLC.

The foundation chose to maintain its full investment with Mr. Madoff’s firm as a result of Merrill’s advice, the lawsuit states.

MorseLife, which is based in West Palm Beach, Fla., provides care to seniors through a variety of services.

Between 1995 and 2006, the foundation invested $11.7 million with Mr. Madoff’s firm and took no withdrawals. As of last November, the month before his Ponzi scheme collapsed, the market value of those investments was reported to be $33.5 million. That is now worthless.

The lawsuit was originally filed in July in Palm Beach Country Circuit Court. Merrill is trying to move the matter from federal court to securities arbitration and filed a motion on Monday to that end.

The lawsuit was first reported by The Palm Beach Post.

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