Madoff Case Puts Focus on Duties of Custodial Banks

Among the far-flung feeder funds, brokerage houses and institutions interconnected in the vast Ponzi scheme perpetuated by Bernard L. Madoff, one little-known local bank is now in the spotlight.

Westport National Bank and its parent company, Connecticut Community Bank, is the type of Main Street bank found in Anytown U.S.A., rather than near Wall Street. It has one main office and nine affiliated branches, all within a small radius stretching from Fairfield to Greenwich.

But to more than 200 individual investors, it was the bank that should have stood sentry over their money. A lawsuit brought by investors who lost a combined $60 million in the Madoff Ponzi scheme seeks to show that the bank failed at its job as the custodial bank in charge of their money.

Though it was one of many institutions entangled with Mr. Madoff and his firm, Bernard L. Madoff Investment Securities, the trial serves as a cautionary tale for any investor on the role and duties of custodial banks. The central question at the heart of the civil case is what obligation, if any, such banks have in determining whether the assets of investors exist at all.

A jury in Hartford finished hearing eight days of evidence last month in the case before Judge Vanessa L. Bryant of the United States District Court for the District of Connecticut. Closing arguments are expected to be heard on Thursday.

Richard Abramowitz, an investor who lost money at the hands of Mr. Madoff, testified that it had been his impression that Westport National would take possession of his assets and verify their existence. “That’s what a custodian is,” said Mr. Abramowitz, a lawyer in Weston, Fla.

The bank, however, said it had no obligation to catch the Madoff fraud and that its custodian contract limited its obligations to “ministerial” duties.

Lawyers for the bank are also hoping to rely on the fact that Mr. Madoff’s multibillion-dollar Ponzi scheme had been perpetuated for years right under the noses of regulators. In fact, the bank’s lawyers have suggested that it would have been difficult for such a small bank to have seen the red flags of the fraud, when the Washington regulators, including the Securities and Exchange Commission, could not.

During testimony, bank officials demurred on several questions posed by the plaintiffs’ lawyers about the ill-fated Madoff accounts. When asked about how the bank maintained accurate records, Richard T. Cummings Jr., the former bank president, simply replied: “I can’t answer that question.”

What due diligence did the bank do to be sure that customers’ assets existed, and were safe? “I don’t know,” said Mr. Cummings, a 36-year veteran of the banking business with a finance degree from Georgetown.

The bank has contended that Mr. Madoff fooled them, along with dozens of other institutions. When the plaintiffs were moving their Madoff accounts to Westport National in 1999, it was “a little bank, just getting started,” and had no ability to audit the Madoff accounts, Tracy A. Miner, a defense lawyer, said in her opening statement.

When the investors’ accounts were transferred to Westport, the bank did not confirm that there were assets in the accounts, and indeed, no assets existed, according to court documents.

Inside the bank’s one-man custodial department, plaintiffs contend that little was being done to determine whether trading information provided by Mr. Madoff’s firm was accurate.

Some of the most damning evidence may come from the testimony given by Dennis Clark, the bank’s former vice president and manager of custody services. Mr. Clark said that he would at times receive three or four “very thick envelopes” from Madoff stuffed with trade confirmations in a single week.

Mr. Clark, who testified in a video deposition before he died last year, said that he sometimes looked at those confirmations out of “curiosity” as to what Madoff might be buying or selling. Other than that, though, he did not review the documents and would simply “put them in a file cabinet.”

Mr. Clark said he did make an effort to look up stock prices listed on monthly statements for the Madoff accounts to verify how big the “pot” would be. (Fees for the bank were based on assets under management — real or imagined.)

But he added that he never verified prices on the puts and calls. Indeed, he did not even understand how those securities were priced, he said. He verified the stock prices because they were “names I recognized,” like United Technologies.

Customers who wanted to take money out of their accounts waited 8 to 10 days to get a check. The Madoff firm would send a check written to Westport National by regular mail, and the bank would then write checks to the investors. The bank had no electronic payment system with the firm, Mr. Clark testified.

The case being heard is a consolidation of three lawsuits with similar claims — a class-action suit and two group cases. Steve Gard, a Jacksonville, Fla., lawyer who represents two plaintiffs, said that the three lawsuits include investors from Connecticut, Florida, Maryland, Massachusetts, New Jersey, New York, Ohio, South Carolina and Texas.

The collection of plaintiffs from nine states had a common connection: they or their relatives were all introduced to Mr. Madoff through Robert L. Silverman, an actuary who ran a pension consulting firm from an office in Westport.

Some investors have said that they mistakenly thought that Mr. Silverman, whose independent company, PSCC Services Inc., received fees based on the net asset value of their Madoff accounts, actually worked for Westport National. Mr. Silverman filed for Chapter 11 bankruptcy in 2011, and filed Chapter 7 proceedings for his firm in 2009. He was not called to testify at the trial, and did not respond to telephone messages left at his Wilton, Conn., home.

During the trial, Mr. Silverman was occasionally referred to by lawyers and witnesses as a “financial adviser,” typically a term of art that describes a broker or adviser who is overseen by securities regulators.

Mr. Silverman, however, was not supervised by any regulatory authority. In fact, in e-mail correspondence with Mr. Cummings, Mr. Clark referred to the fact that having an “unregulated” person like Mr. Silverman as a middleman between the bank and the Madoff investors was beneficial.

“Having a third party between WNB and its customers does have certain advantages,” Mr. Clark wrote in an e-mail. “Many of the communications that PSCCSI has with customers do not need to meet the standards that may be implied for bank communications.” Mr. Clark told Mr. Cummings in the same e-mail that Mr. Silverman “has and still does hold a tight rein on what his customers may and may not know” about their accounts.

Indeed, Mr. Clark himself said in his video deposition that he had received instructions from Mr. Silverman not to “ever, ever, ever contact Madoff.”

On several occasions, as Mr. Clark discussed details of the sham Madoff investments that didn’t in fact exist, a juror in the back row simply shook her head.