One's immediate reaction to this question as a lawyer is that such liability is unlikely, even very unlikely. The reason is that for scores of years there has had to be some connection, some direct relationship, between two parties for one to be liable to the other in this kind of situation. (The needed relationship has sometimes been called "privity.") Only when the needed relationship existed was one person said to have the required "duty of care" towards the other. In the kind of situation existing here, where there is a fund, its investors, and third parties who invested in Madoff but not through the fund, the necessary relationship (or privity) would be said to exist between the fund and its investors, but not between the fund and the third parties who invested but not through the fund. So the fund could be liable only to its investors for negligence, not to third parties. This was a way of limiting the parties to which and thereby the extent to which the fund (or any other entity in a similar position) could be liable.
More recently there have been some inroads on the basic idea. Traditionally, for instance, an accountant was considered in privity with and could be liable to a client for negligence, but was not in privity with and was not liable to a third party who relied on the accountant's work and opinions when buying property from the client. But now there have been some inroads under which, despite the lack of privity or a relationship between the accountant and the third party, the accountant can be liable to the third party if the accountant knew that the third party would rely on his work when dealing with the client. This is sometimes described as the question of foreseeability: it was foreseeable to the accountant that the third party would rely on his work and he therefore can be liable to the third party for negligence.
The Madoff situation presents a true case for again extending liability so that the "culprit" funds, banks and others are liable to third parties for negligence. The basic reason is that banks, funds and other institutions knew or certainly should have known that, if Madoff was a fraud -- as many of them suspected could be the case -- then not only could their own clients get wiped out, but so could thousands of others. (In fact, one major player in Ivy Asset Management even wrote that, if Madoff was fraudulent, the Jewish community could be wiped out financially.) Yet, knowing this, they failed to do the due diligence which would ultimately have saved others as well as their own clients, as discussed below. Instead, they continued to invest clients' money in Madoff so that they themselves could make huge fees.
Even worse, there were funds and other institutions that, while they failed of due diligence in many respects, nonetheless suspected or knew -- repeat knew -- that there was something very wrong with Madoff (e.g., they knew there were not enough options in the world to support his strategy). Yet they too failed to do complete due diligence, which would have led to saving the money of their clients and also of many others (again as explained below). Instead, they kept investing their clients' money in Madoff in order to reap the rich fees that Madoff was paying the funds and banks.
When large funds and banks failed to do the due diligence which would have caused them to eschew Madoff (as did some of their equally huge institutional colleagues) and which would have ultimately caused Madoff to be uncovered, and when they did this so that they could reap riches from Madoff's crooked operation although it was perfectly foreseeable that failure to uncover a fraud would cause disaster to their own clients and others, it seems to me that there is an excellent case for extending the ambit of liability for negligence so that the culprit funds are liable not only to their own investors, but to others as well.
The case for extending it to others is perhaps even stronger in some other situations. One is where funds were created, as a number were, for the express purpose of investing in Madoff. These funds were not only guilty of a failure of due diligence, but they were coconspirators with Madoff. For, in order to reap the rich commissions they knew he was offering, they facilitated the growth of a scam when they had reason to know something was wrong, something was fraudulent, even if they did not know that the precise problem was that Madoff was running a Ponzi scheme. As creations designed to increase the pot of money going to Madoff in order to facilitate and cause expansion of a fraud and to make huge commissions from this pot of money, these institutions should be liable to all investors not just for negligence, but also for being coconspirators in a fraud.
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