PricewaterhouseCoopers (Bermuda) partner Scott Watson-Brown met with Bernard Madoff in December 2004 — and the report that he and a US colleague produced from their conversation with the fraudster has now resulted in the firm being added to a class-action lawsuit brought by investors in the US.

According to the plaintiffs from a Bahamas-domiciled Madoff feeder fund, Mr. Watson-Brown and PwC (USA) partner Linda McGowan met with Madoff at his offices in New York

Their visit was to conduct due diligence for at least nine feeder funds audited by the PwC group that, as of December 2008, had approximately $17 billion invested with Madoff.

After the meeting, Mr. Watson-Brown and Ms McGowan produced a report for internal use within PwC in which they said they had a "thorough discussion and inquiry with Bernard Madoff" about his business practices.

The case was highlighted yesterday in the latest edition of the online newsletter OffshoreAlert, authored by David Marchant, a former Royal Gazette business reporter.

The story drew from court documents filed with the US District Court for the Southern District of Florida by investors of Optimal Multiadvisors Ltd.

Court documents show that in a section of the accountants' report headlined "Fraud", they wrote: "No instances or cases reported with clients or internally. Risk of fraud gets close scrutiny from Madoff (personally) as the operation is his business.

"With the general size of operations (staff numbers) and the involvement of family in every area of the business, Madoff closely scrutinises the results and operations with the risk of fraud in mind.

"There is formal monitoring of all mail, faxes and e-mail (both in and out bound). Following the rule for retention and monitoring of e-mail, no outgoing e-mail for traders or any instant messaging is available. BM limited e-mail function as he feels it will be the undoing of many firms. Internet reviews and e-mail reviews are done and internal fines are in place for inappropriate Internet usage."

On being contacted by this newspaper yesterday, Mr. Watson-Brown said he had no comment on the matter.

After victims learned of the meeting and obtained a copy of the report, a complaint they had filed at the US District Court for the Southern District of Florida on January 26, 2009 was amended on October 26 to include PwC (Bermuda) and PwC (USA) as defendants.

"PwC blindly accepted, and never confirmed, verified, or independently ascertained, any of the information provided by Madoff," it was alleged.

"Plaintiffs have sued PwC Bermuda and PwC US here, in part, because Plaintiffs have obtained an internal PwC report concerning the auditing procedures conducted on Madoff by partners from PwC Bermuda and PwC US," it was stated in the amended complaint.

The complaint added: "According to the PwC Madoff Report, PwC Bermuda and PwC US asked Madoff certain critical questions, including, where he kept the billions of dollars in US Treasury Bills which he claimed represented all the monies of Optimal SUS as of December 31 every year. (Madoff had always claimed that when he was not in the market, executing his split strike conversion strategy, he had all the money invested in government securities, and that this was the case every single year-end).

"Madoff replied that the US Treasury Bills were traded through the Government Securities Clearing Corporation and held at Bank of New York. While Madoff was a broker-dealer for stocks, he was not a broker-dealer for government securities and, therefore, could not take custody of US Treasury Bills. None of the PwC Defendants ever contacted GSCC or BONY to confirm the existence of the billions of dollars in US Treasury Bills reported in Optimal SUS's balance sheet at the end of each year.

"The PwC Defendants also never communicated with Madoff's auditors Friehling & Horowitz, nor investigated F&H's credentials."

The complaint alleges that the two PwC partners "did nothing more than meet with Madoff and accept his assertions without any independent verification".

The plaintiffs added that the crux of the allegation was that the defendants "(i) admittedly had serious concerns about the custody of Plaintiffs' assets invested with Madoff, (ii) asked Madoff critical questions about the custody of Plaintiffs' assets, but (iii) failed to investigate further".

The full defendants in the action are: Banco Santander International, Banco Santander SA, HSBC Institutional Trust Services (Ireland) Ltd., HSBC Securities Services (Ireland) Ltd., Optimal Investment Services S. A., PwC (Bermuda), PwC International Ltd., PwC LLP, and Anthony L.M. Inder Rieden, a.k.a. Anthony InderRieden, a Bahamas resident who is the managing director of Euro-Dutch Trust Company (Bahamas) Ltd.; Manuel Echeverría Falla, and Brian Wilkinson, who were all identified as directors of Optimal Multiadvisors.