The lawsuits are already flying and there will be lots more of them. In the course of some of them, defendants will claim that they can have no liability to plaintiffs because they weren't doing business with them, had no legal duty to the particular persons who are plaintiffs, weren't in so-called "privity with the plaintiffs, the plaintiffs did not "rely on the defendant, etc. All of these words, or ideas, or whatever they are, are simply legalistic ways of saying that X should not be liable to Y because to make X liable to Y is just too much. Maybe X should be liable to A or B, but that is enough, and he should not be liable to Y. Often opening the door to liability to Y is claimed by courts to be opening the door to liability that is just too widespread.
In the Madoff case, feeder funds will put forth this non-liability position if sued by people who did not invest with it. Giant institutions that sniffed out the truth or suspected it, and therefore refused to do business with Madoff but said nothing to the SEC or FINRA, will put forth the same position if sued because they warned nobody. And, in the current state of the law, they likely will succeed by using this defense.
But one wonders whether they should succeed: Or whether, on the other hand, the Madoff case, the cults of crookedness and silence on Wall Street, and the current American culture of dishonesty all counsel that there should be a change in the law in situations where big shots, the rich, those in the know, are aware of the truth or of what might very well be the truth, yet warn nobody and leave all others to twist in the wind. Writers like Joe Nocera, citing the actions of wealthy, sophisticated investment managers who had the knowledge and sophistication to suspect something was wrong, and the ability to investigate, like to pretend that, since these guys suspected something was wrong, all of us should have suspected something was wrong even though most of us lack even a fiftieth or a hundredth of the knowledge and due diligence capability of his wealthy Wall Street buddies. The argument would make a lot more sense if people like his buddies were required to share their suspicions, and the reasons for them, so that the rest of us could stand forewarned instead of ignorant.
Anyway, with so much crookedness going on, one thinks that all the old (very tired) arguments about why huge institutions have no duty or liability to people they, for example, were not doing business with, should be scrapped in favor of creating a duty of such institutions to warn -- at minimum a duty to privately warn government authorities -- when they have serious reason to suspect wrongdoing, and should have liability to the injured whose harm could have been avoided had an institution issued the needed warning (and had the government then acted if the duty to warn is limited to a duty to warn the government so that it can investigate).*
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