Trustee in Madoff case sues insurer

Says MassMutual ignored ‘obvious’ warnings of fraud

By Beth Healy
Globe Staff / December 9, 2010

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The trustee in the Madoff bankruptcy case has sued Massachusetts Mutual Life Insurance Co. and several of its subsidiaries over $3 billion in customer money that its hedge fund unit lost by investing with Bernard Madoff.

In a statement on the lawsuit Tuesday night, the trustee said the Springfield insurer’s Tremont Group Holdings Inc. and related entities ignored “obvious warning signs’’ of fraud with Madoff and failed to perform any meaningful check of the convicted swindler’s operations or professed investment results.

“Tremont blindly relied upon Madoff to drive the funds’ returns and, more importantly, Tremont’s profits,’’ the trustee, Irving Picard, said in the statement about the case, which is under seal in US Bankruptcy Court in Manhattan. Picard is looking to recover fictitious profits, as well as other payments Tremont may have received from Madoff, “to prevent any unjust enrichment’’ by MassMutual, Tremont, and two former Tremont exec utives. He did not say how much money he is looking to recover.

Montieth Illingworth, a spokesman for Tremont, said, “Our position is unchanged, which is that we have done nothing wrong.’’

Tremont had been negotiating a settlement with Picard, according to a MassMutual filing with federal securities regulators. “Tremont and the Trustee have been attempting to reach a mutually acceptable settlement of his claims against the funds. There is no guarantee that Tremont will be successful in negotiating such settlement,’’ the filing says.

Tremont is a so-called feeder fund that places client funds with hedge funds. The firm had entrusted half its $6 billion in assets with Rye Investment Group, in Rye, N.Y., which in turn placed all its money with Madoff. Rye was among the biggest losers in the Ponzi scheme, losing all of the $3.1 billion it had with Madoff. Tremont lost another $200 million, and MassMutual lost $10 million more it had invested directly with Madoff.

Certain Rye funds have filed claims with the trustee, arguing that they should get money back from the insurance fund because they, too, were victims of Madoff.

Ever since the scandal unfolded in December 2008, MassMutual has sought to portray Rye as a distant subsidiary, far removed from the corporate parent. But Picard’s office rebutted that argument, saying MassMutual and its related entities “dominated and controlled’’ Tremont after acquiring the firm in 2001 from Sandra Manzke.

MassMutual spokesman Mark Cybulski said in a statement: “As we have stated all along, MassMutual acted appropriately and any suggestion otherwise is simply false.’’

The Globe reported last year that MassMutual executives were deeply involved in the decision to purchase Tremont and were warned by a consultant that the firm depended on the returns of a single manager — Bernard Madoff. Picard, in his statement, said that when MassMutual’s Oppenheimer Acquisition Corp. acquired Tremont to expand into hedge funds, it was “fully aware of the major role [Madoff] played in the business they were buying.’’

Oppenheimer also was named as a defendant in the lawsuit, along with Manzke and another former Tremont chief executive, Robert Schulman. Lawyers for Manzke and Schulman could not be reached.

Massachusetts Secretary of State William F. Galvin also has an investigation underway into MassMutual’s hedge fund operation and its relationship to Madoff. His office has shared records with Picard, a spokesman said.

In May 2009, Tremont was one of more than 225 former Madoff clients that received letters from Picard demanding “clawbacks,’’ or returns of Madoff gains reaped in the prior six years. With $446 billion in assets under management, MassMutual also is the subject of numerous civil lawsuits brought by Madoff investors.

Beth Healy can be reached at