Shareholders in a hedge fund that lost $32 million as a result of Bernard L. Madoff’s notorious Ponzi scheme have filed a derivative lawsuit on behalf of the fund against its investment manager and executives, saying they should have known investing with Madoff was risky.

The plaintiffs, employee benefit funds for New Jersey carpenters, filed their suit Wednesday in the New York County Supreme Court against Meridian Diversified Fund Management LLC and 10 executives. The plaintiffs are shareholders in Meridian Diversified ERISA Fund Ltd.

The shareholders are being represented by Milberg LLP, Seeger Weiss LLP and Kroll Heineman LLC.

The ruling is a setback for investors like Adele Fox of Tamarac, Fla., an 87-year-old retired school secretary who was widowed in 1986. Mrs. Fox withdrew more than her original capital for living expenses, but still had nearly $3 million on her account statement when the fraud was discovered.

Under Judge Lifland’s ruling, she is not eligible for cash from the Securities Investors Protection Corporation, the industry-financed organization that provides limited protection for customers of failed Wall Street firms.

“My health has been a mess,” Mrs. Fox said on Monday. “I can manage, more or less, but if I have to go into a facility, what would I do? All my life savings, it all went into Madoff and it is all gone.”

In a nearly 500-page report, the Securities and Exchange Commission Inspector General H. David Kotz issued detailed findings on how the SEC failed to uncover Bernie Madoff’s colossal Ponzi scheme.  Kotz noted that the SEC had received six credible warnings about Madoff’s far-reaching fraud over 16 years, but failed each time to act and expose the scheme.  Disturbingly, Kotz further observed that despite three examinations and two investigations, “a thorough and competent investigation or examination was never performed.”

For the many thousands of Madoff victims, the report’s findings of incompetence offered little solace.  Indeed, it only confirmed in their minds what they already believed – that their reliance on the SEC to monitor and police broker-dealers was misplaced.  What was surprising, however, was the extent to which the Inspector General took to task the agency that he was tasked to examine.

You can download the full report (PDF 3.59 mb) from our website.

Stephen A. Weiss, founding partner of Seeger Weiss LLP, has been a leading advocate on behalf of Madoff victims and has been quoted in several news sources, including the New York Times, Bloomberg.com, Reuters, and FOREX Pro, about the claims of defrauded investors.  Watch him in Sky News’ coverage of the Madoff scheme below:

Since the Madoff revelations broke in December 2008, Mr. Weiss and his firm have occupied the forefront of the litigation against Madoff’s investment firm.  Seeger Weiss, along with co-counsel Milberg LLP, has been retained to represent nearly $1 billion in claims from defrauded shareholders around the world.  Madoff’s brand of deception, though similar to a pyramid scheme, proved far more insidious because it relied upon Madoff’s burnished reputation in the highly regulated investment community. Mr. Weiss, who began calling on members of Congress to impose strong regulatory reforms immediately following Madoff’s public admissions, believes that Kotz’s report provides damning evidence for the need for stronger and more effective government enforcement tools.