Madoff victims to sue accountants PwC over feeder fund audits

The Canadian arm of PwC has been named in seven separate lawsuits claiming as much as $2bn in damages for investors who lost almost everything in the largest fraud in history. PwC Canada was auditor to Fairfield Sentry, the feeder fund that placed $7.2bn of investors' money with Madoff, and which became the biggest single casualty.

The firm is facing two class action lawsuits, two claims from individual investors and three "derivative actions" launched by investors on behalf of Fairfield Sentry. Angry Fairfield investors initially only launched proceedings against the hedge fund but have since been broadened their case to include the Dutch custodian bank Citco, Walter Noel and Jeffrey Tucker, the founders of Fairfield Greenwich, the parent hedge fund, as well as PwC Canada.

The most recent lawsuit to name PwC Canada as a defendant was filed just a couple of weeks ago and sources expect several more now that a precedent has been set.

Law firm Boies Schiller & Flexner is currently attempting to consolidate all the lawsuits into one case to take to court.

PwC Canada has been accused of negligence for failing to spot that Fairfield Sentry's $7.2bn of assets simply did not exist. The firm signed off accounts in 2007 that stated 97.3pc of Fairfield Sentry's assets were held in short-term US treasury bills – an asset class that should be safer than cash.

As auditors, PwC would have been required to check that the treasury notes existed. However, Madoff was able to conceal any shortfall because he was not just the "execution agent" for Fairfield Sentry's investment strategy but also the custodian of the money. As such, PwC would have received assurances from Madoff that the treasury notes existed.

Investors argue that his dual role should have been a "red flag" that raised suspicions and persuaded the auditors to verify the claim with the US Treasury. Investors also say that Madoff's unusual habit of liquidating the entire Fairfield Sentry investment and converting it into US treasuries for a few days over every financial year-end should have been another "red flag". Since Madoff pleaded guilty to fraud, it has become clear the funds never existed.

PwC is the second global audit firm to be sued in relation to Madoff. KPMG has been targeted by investors in Tremont Group, which lost $3.3bn. Sources said that PwC is taking the case very seriously and is anticipating more legal action.

Auditors are extremely wary of being caught up in huge fraud cases.

Arthur Andersen, then the world's fifth largest accounting firm, collapsed after becoming embroiled in the downfall of Enron, to which it was auditor. PwC has already been caught up in the Satyam scandal in India where, as auditors, it failed to spot a fraud.

Auditors have insurance and typically settle out of court, with recent deals including £85m from Ernst & Young and Price Waterhouse for BCCI's creditors and an undisclosed nine-figure sum from Coopers to Barings' creditors. Price Waterhosue and Coopers later merged.

PwC Canada said: "PwC Canada provided auditing services to the Fairfield Sentry fund, but was not the auditor for Bernard Madoff Investments where the alleged fraud occurred. PwC Canada's auditing of the fund's financial statements fully complied with professional standards."

Separately, it has emerged that Irving Pickard, the trustee for the liquidation of Bernard Madoff Investment Securities, spent $16m in legal fees for the four months to April 30.