The Argus Group is taking legal action to try to force the liquidation of two investment funds in an attempt to recover some of its life insurance policyholders' assets that were exposed to the Bernard Madoff debacle.

Argus filed a petition in a Cayman Islands court on Friday seeking orders to wind up two Rye Select funds operated by a subsidiary of fund management giant Tremont Capital Management.

The Bermuda-based company said in a letter to holders of life policies issued by Argus International Life Bermuda Ltd. (AILBL) that it wanted to see independent liquidators take control of the funds, so that any monies available could be divided up between creditors and stakeholders.

The Rye funds are operated by Rye Investment Management, a division of Tremont. A class-action lawsuit filed last month in a New York court against Argus, Tremont and Rye, among others, claimed that "Rye had $3.3 billion, virtually all of its assets under management, invested with Madoff".

Trading in the Rye funds was suspended shortly after Mr. Madoff was arrested on suspicion of running a $50 billion Ponzi scheme that has impacted financial institutions and investors in many parts of the world.

As a result, AILBL wrote down the value of its Rye holdings to zero and informed policyholders on January 16 that "unfortunately, this may have caused your policy to have a negative cash surrender value or will cause to do so in the near future".

The life policies in question are designed to double up as an investment vehicle tailored particularly to the needs of US taxpayers. All those who had expressed interest in joining the class-action lawsuit against Argus et al, in the first few days after it was filed, are based in the US, a partner from the law firm that filed the suit told this newspaper last week.

Argus said it filed its legal petition to wind up the funds, after its efforts to address the situation with Rye's managers had proved fruitless.

"Through our legal counsel, we have written to the funds to request further documentation and details of their exposure to this alleged fraud, and an explanation as to how and why this was allowed to occur," Argus' letter to policyholders last Friday stated. "Unfortunately, at the time of writing the funds have chosen not to respond to our communications."

Argus said it believed the best strategy was to make legal efforts to force the liquidation of the funds, so it had filed winding up petitions with Grand Court of the Cayman Islands. If successful, independent liquidators would take steps to recover assets belonging to the funds.

The letter made clear that Argus policyholders were not guaranteed to see any money from the process and that there would be others ahead of them in the queue if there was any money to distribute.

"The assets of the funds, including any sums recovered as a consequence of claims pursued by the liquidators on behalf of the funds, will be distributed in a set priority to firstly pay off the expenses of the liquidation (including the costs incurred by Argus in pursuing the liquidation of the funds), secondly pay the funds' creditors, and thirdly pay any surplus to the funds' shareholders, including Argus."

Argus warned that the process would take "some time". It added: "Argus will divide the recoveries, if any, between affected policyowners pro rata to the losses suffered by each affected policyowner."

Argus has already revealed that some of its pension and investment funds also had slight exposure to Madoff.