Philadelphia Pension Fund Sues for Stock Fraud

Philadelphia, PAWhile everyone appears to be losing financial ground in the economic crisis (and the recent upturn in the stock market will hardly put a dent in the overall damage to stocks and securities), the most damning losses of all come at the heels of securities fraud. Stock fraud is just so maddening, given that it is based on greed and unfairness.

Many suffer from the greed of one. And this has been played out time and again in recent months as a result of the Madoff scandal. The disgraced financier was so well connected and his fraud so widespread that he took a lot of people down with him.

One of the latest groups to admit having been taken by Madoff's illegal scheme is the Pension Fund for Hospital and Health Care Employees-Philadelphia and Vicinity (PFHC). In February, the Fund filed a lawsuit in US District Court in Philadelphia against Austin Capital Management, claiming that Austin lost millions of dollars worth of pension fund investments due to its failure to anticipate the ultimate demise of the Madoff investment firm.

The PFHC Fund claims to have lost $700,000 of an investment worth $10 million with Austin Capital, a firm that describes itself as a hedge fund that invests in other hedge funds, rather than stocks, bonds or other related securities. The PFHC pension fund is worth about $295 million, while it has been reported that Austin Capital had upwards of $2.3 billion under management in 2008.

Adding to the complexity of the situation, Austin had directed a portion of the PFHC investment to Tremont Holdings, which in turn invested with Madoff, according to the lawsuit.

In December, Austin declared that it was 'outraged' over the allegations made against Madoff—allegations that have since landed the vilified moneyman in jail—and while acknowledging the losses related to Madoff, indicated that it was "taking every measure to protect the interests of our investors."

That's the bottom line for investors and especially those who invest pension funds—and the oversight and series of checks and balances are supposed to be greater for pension fund investors than those who simply enjoy playing the stock market. To that end, those parties charged with the management and oversight of pension funds have a fiduciary duty to those investors.

A duty to not only manage the funds wisely, but to also pay attention and head off potential problems down the road that could do serious harm to the funds and their investors.

The Madoff debacle was particularly galling, given the warnings that various parties brought to the attention of the US Securities and Exchange Commission (SEC) only to see their concerns either rebuffed or ignored.

However in the case of the PFHC lawsuit, the plaintiffs listed nine red flags that officials at Austin Capital Management should have caught, but didn't. Those concerns included, but were not limited to Madoff's investment returns (described as 'abnormally smooth'), together with the fact that his monthly account statements "did not support the returns supposedly earned," according to the text of the complaint.

It's been reported that Austin was out $184 million by investing in Madoff-related securities, although it was not identified how much of that loss may have been linked to investments the firm made on behalf of pension funds.

However, in the case of the Pension Fund for Hospital and Health Care Employees of Philadelphia and Vicinity, the loss is $700,000. Some may argue that at the end of the day, a loss of $700,000 when compared to other losses is getting off lightly. However, investors out that money will tell you that the loss is $700,000 too high—an opinion heightened by the fact we're not talking mere losses here, but securities fraud and stock fraud. Stocks and securities are supposed to be managed with the best interests of their investors at heart—even more so if those funds are recipients of pension money.

Thus, the lawsuits—with more on the way.