NEPC sued over plan’s Madoff-linked losses

Updated with correction

Town of Fairfield, Conn., today filed suit against its former consultant, NEPC, and accountant KPMG in connection with the $42 million loss sustained by its defined benefit plan from investments in feeder funds that invested in Bernard L. Madoff Securities’ trading strategies.

The suit, filed in Connecticut Superior Court in Bridgeport, alleges that NEPC and KPMG failed to adequately perform the due diligence and auditing duties, respectively, that would have uncovered Bernard L. Madoff’s alleged Ponzi scheme.

The fund seeks an unspecified amount of damages from both parties. The plan terminated NEPC’s contract on Jan. 12.

According to the lawsuit, the $233 million Town of Fairfield plan first invested in American Masters Broad Market Fund, a Madoff feeder fund managed by Rye Investment Management, a subsidiary of Tremont Group Holdings. The plan moved the investment in January 2008 to Maxam Capital Management, founded by Sandra Manzke, the former CEO of Tremont Capital Management, the hedge funds-of-funds unit of Tremont Holdings.

Maxam’s Absolute Return Fund also invested in the same Bernard L. Madoff Securities trading strategy.

The Fairfield lawsuit alleges that NEPC did not recommend that the pension fund move out of the American Masters fund or refrain from investing in the Maxam fund.

KPMG was hired by Rye to audit American Masters for 2005 and maintained that the fund’s financial records were fairly presented.

“Pension advisers and auditors have professional duties to perform and had they done their jobs, they would have uncovered this fraud,” Fairfield’s lead attorney, David S. Golub, said in an interview. Mr. Golub is a partner at Silver Golub & Teitell.

“NEPC did not propose or recommend Madoff or any direct Madoff `feeder’ fund to Fairfield or any of its other clients. And when NEPC was retained by Fairfield in 2006, NEPC recommended that the trustees reduce their exposure to Madoff, but the trustees disregarded such advice,” said Michael P. Manning, NEPC president, in an e-mail response to a request for comment.

“Given these facts, it is disappointing that Fairfield has chosen to sue NEPC. To be clear, NEPC, at all times, fulfilled its responsibility to provide prudent and professional investment advice to the town’s pension funds and their beneficiaries. NEPC will vigorously defend against the suit and is confident that, when all the facts are known, it will prevail,” Mr. Manning wrote.

Daniel Ginsburg, a KPMG spokesman, said KPMG had not received the complaint.

Mr. Golub said the Town of Fairfield will soon file another complaint in Connecticut Superior Court in connection with Madoff losses against Maxam; Ms. Manzke; Tremont and its owner, OppenheimerFunds; and Oppenheimer’s parent, MassMutual, among other parties he declined to name.