Principal Financial Group accused the managers of Liongate Capital Management of hiding investments with Bernie Madoff while negotiating to sell half of their London hedge fund to Principal.
Founders Randall Dillard and Jeff Holland, and Head of Research Benjamin Funk sold the stake in March 2013 without disclosing secret investments in the largest of several Madoff "feeder funds,” according to legal filings produced by Principal. It may be seeking as much as $66 million in damages in its London lawsuit.
Principal said it discovered the investments in late June 2015 after staff opened a locked safe at Liongate's offices in the Mayfair neighborhood in London, with the help of the safe's manufacturers. Inside were two files containing purchases spanning almost a decade that included investments in Fairfield Sentry Ltd., a fund linked to Mr. Madoff, Principal said. Messrs. Dillard, Holland and Funk intentionally misled Principal by saying prior to the deal that they had never invested in Madoff funds, the company said in its filings.
Principal sued the men in September 2015, a month before Liongate shut as investors withdrew cash. On Tuesday, Judge Michael Burton said the case is scheduled for trial in October 2018.
A holding in a Madoff fund was "considered in the market to be a sign of imprudent or unwise investment management and existing inadequate due diligence," Principal said. "Knowledge in the industry that a Liongate fund had invested in Madoff funds would lead to existing investors in Liongate funds withdrawing funds and would discourage new investment."
The lawsuit springs from the $42 million investment into Liongate by Principal. Messrs Dillard and Holland each owned 41% and Mr. Funk owned 9% of Liongate. The well-known London hedge fund investor had assets totaling $2 billion when the companies completed the deal.
Messrs. Dillard and Holland, who deny the allegations, said in their filings that Principal's claim about Fairfield Sentry was brought beyond the legal time limit, and that it wasn't a Madoff feeder fund. Mr. Dillard, who said he didn't have access to the safe, denied that it was used for "concealing documents for dishonest purposes.”
Mr. Funk's arguments couldn't be obtained from the court. He denied all of the allegations via his lawyers. Representatives for Principal at law firm Mayer Brown didn't return calls for comment. Mr. Holland, his lawyers at Farrer & Co. and Mr. Dillard declined to comment.
Mr. Madoff, who founded his investment firm in 1960, is serving a 150-year prison sentence in the U.S. after pleading guilty in 2009 to running a $17.5 billion Ponzi scheme that took money from new investors to pay old ones.
Fairfield Sentry, which said it raised funds for Mr. Madoff without knowing he was running a Ponzi scheme, filed for Chapter 15 bankruptcy in New York in June 2010, and later that year, was being liquidated under the supervision of the Commercial Division of the High Court of Justice in the British Virgin Islands.
Fairfield Sentry filed more than 120 so-called clawback lawsuits against banks to try to recover some of the $3.2 billion it transferred to Mr. Madoff after Irving Picard, the trustee liquidating Madoff's former firm, sued it to recover allegedly fraudulent payments to distribute to the victims.
Shortly before completion with Principal, Liongate's investor relations manager uploaded a due diligence questionnaire to a shared data room that stated Liongate "was never invested in Madoff" and "is pleased to explain the obvious reasons as to why Madoff was not an appropriate investment for any prudent fund of hedge fund or finance company," according to Principal's filings.
That followed media interviews in 2009 and 2010 in which Messrs. Holland and Dillard appeared to confirm Liongate had never invested in Madoff funds, Principal said.
The "sellers made the Madoff statements dishonestly, knowing that they were or might be untrue or misleading," Principal said.
Principal also claims that prior to completion of the deal, Messrs. Dillard, Holland and Funk were engaged in a dispute over the division of $38 million held in a Cayman subsidiary of Liongate. They knew this dispute would likely lead to legal proceedings and jeopardize the succession plan for the business, Principal said in the filing.
Principal, which also claims the trio "misappropriated" $18.5 million of Liongate funds, is seeking damages for breach of contract and deceit. That includes the money it paid for Liongate, $1 million in legal fees and almost $4 million for "wasted time" by Principal employees.
Mr. Dillard said in his response that he'd disclosed the dispute with his partners during a May 2013 phone call with Principal, in which he also offered to postpone or terminate the acquisition. He said the $18.5 million transaction didn't amount to misappropriation and didn't benefit the trio "beyond that to which they were lawfully entitled.”